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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33678
NOVABAY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
68-0454536 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2000 Powell Street, Suite 1150, Emeryville, California 94608
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (510) 899-8800
Securities Registered Pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange On Which Registered |
|
Common Stock, par value $0.01 per share |
NBY |
NYSE American |
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
Emerging growth company |
☐ |
|
Non-accelerated filer |
☒ |
Smaller reporting company |
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 5, 2024, there were 4,885,693 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PART II
OTHER INFORMATION
|
Item 1. |
58 | |
|
Item 1A. |
58 | |
|
Item 2. |
59 | |
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Item 3. |
59 | |
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Item 4. |
59 | |
|
Item 5. |
59 | |
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Item 6. |
60 | |
| 62 | ||
Unless the context requires otherwise, all references in this report to “we,” “our,” “us,” the “Company” and “NovaBay” refer to NovaBay Pharmaceuticals, Inc., a Delaware corporation, and, where applicable, also its former wholly-owned subsidiary, DERMAdoctor, LLC, a Missouri limited liability company.
The Company owns live trademark registrations in the U.S., as well as trademark registrations and pending applications in many other countries internationally, with our primary trademarks including “Avenova®”, “CelleRx®”, “PhaseOne®” and “NeutroPhase®”, which are held directly by NovaBay. “DERMAdoctor®”, “Kakadu C®”, “AIN’T Misbehavin’®” and “KP Duty®” are held directly by our former wholly-owned subsidiary DERMAdoctor.
On May 30, 2024, the Company effected a 1-for-35 reverse stock split of its common stock (the “Reverse Stock Split”). The accompanying financial statements and related notes give retroactive effect to this Reverse Stock Split.
PART I
FINANCIAL INFORMATION
|
ITEM 1. |
FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
|
September 30, 2024 |
December 31, 2023 |
|||||||
|
(Unaudited) |
||||||||
|
ASSETS |
||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 776 | $ | 2,924 | ||||
|
Accounts receivable, net of allowance for credit losses ($3 at September 30, 2024 and December 31, 2023) |
704 | 680 | ||||||
|
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($126 and $264 at September 30, 2024 and December 31, 2023, respectively) |
473 | 564 | ||||||
|
Prepaid expenses and other current assets |
326 | 256 | ||||||
|
Current assets, discontinued operations |
— | 2,730 | ||||||
|
Total current assets |
2,279 | 7,154 | ||||||
|
Operating lease right-of-use assets |
1,042 | 1,296 | ||||||
|
Property and equipment, net |
61 | 87 | ||||||
|
Other assets |
495 | 478 | ||||||
|
Other assets, discontinued operations |
— | 19 | ||||||
|
TOTAL ASSETS |
$ | 3,877 | $ | 9,034 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
|
Liabilities: |
||||||||
|
Current liabilities: |
||||||||
|
Accounts payable |
$ | 396 | $ | 906 | ||||
|
Accrued liabilities |
1,147 | 1,169 | ||||||
|
Secured Convertible Notes, net of discounts |
— | 1,137 | ||||||
|
Unsecured Convertible Notes, net of discounts |
51 | — | ||||||
|
Operating lease liabilities |
390 | 368 | ||||||
|
Current liabilities, discontinued operations |
— | 698 | ||||||
|
Total current liabilities |
1,984 | 4,278 | ||||||
|
Warrant liabilities |
— | 334 | ||||||
|
Operating lease liabilities-non-current |
821 | 1,108 | ||||||
|
Total liabilities |
2,805 | 5,720 | ||||||
|
Commitments and contingencies (Note 8) |
||||||||
|
Stockholders’ equity: |
||||||||
|
Preferred stock, $0.01 par value; 5,000 shares authorized; |
||||||||
|
Series B Preferred Stock; 1 and 6 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively |
6 | 275 | ||||||
|
Series C Preferred Stock; 0 and 1 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively |
— | 1,675 | ||||||
|
Common stock, $0.01 par value; 150,000 shares authorized, 4,885 and 321 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively* |
49 | 3 | ||||||
|
Additional paid-in capital* |
183,262 | 176,210 | ||||||
|
Accumulated deficit |
(182,245 | ) | (174,849 | ) | ||||
|
Total stockholders’ equity |
1,072 | 3,314 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 3,877 | $ | 9,034 | ||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOVABAY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Sales: |
||||||||||||||||
|
Product revenue, net |
$ | 2,424 | $ | 2,471 | $ | 7,435 | $ | 8,326 | ||||||||
|
Other revenue, net |
17 | 10 | 37 | 28 | ||||||||||||
|
Total sales, net |
2,441 | 2,481 | 7,472 | 8,354 | ||||||||||||
|
Cost of goods sold |
848 | 819 | 2,493 | 3,353 | ||||||||||||
|
Gross profit |
1,593 | 1,662 | 4,979 | 5,001 | ||||||||||||
|
Operating expenses: |
||||||||||||||||
|
Research and development |
4 | 4 | 32 | 36 | ||||||||||||
|
Sales and marketing |
947 | 1,263 | 3,021 | 3,674 | ||||||||||||
|
General and administrative |
1,703 | 1,093 | 5,611 | 4,385 | ||||||||||||
|
Loss on divestiture of subsidiary |
— | — | 865 | — | ||||||||||||
|
Total operating expenses |
2,654 | 2,360 | 9,529 | 8,095 | ||||||||||||
|
Operating loss |
(1,061 | ) | (698 | ) | (4,550 | ) | (3,094 | ) | ||||||||
|
Non-cash gain on changes in fair value of warrant liabilities |
— | — | 114 | 216 | ||||||||||||
|
Non-cash (loss) gain on change in fair value of embedded derivative liability |
— | — | (18 | ) | 40 | |||||||||||
|
Accretion of interest and amortization of discounts on convertible notes |
(138 | ) | (655 | ) | (871 | ) | (1,156 | ) | ||||||||
|
Extinguishment of Secured Convertible Notes |
(13 | ) | — | (13 | ) | — | ||||||||||
|
Other expense, net |
— | — | (549 | ) | (432 | ) | ||||||||||
|
Net loss from continuing operations |
(1,212 | ) | (1,353 | ) | (5,887 | ) | (4,426 | ) | ||||||||
|
Net loss from discontinued operations (Note 18) |
— | (404 | ) | (124 | ) | (1,106 | ) | |||||||||
|
Net loss |
(1,212 | ) | (1,757 | ) | (6,011 | ) | (5,532 | ) | ||||||||
|
Less: Increase to accumulated deficit due to adjustment to common stock warrant exercise price |
(1,005 | ) | — | (1,005 | ) | — | ||||||||||
|
Less: Increase to accumulated deficit due to adjustment to Preferred Stock conversion price |
— | — | (380 | ) | (1,996 | ) | ||||||||||
|
Net loss attributable to common stockholders |
$ | (2,217 | ) | $ | (1,757 | ) | $ | (7,396 | ) | $ | (7,528 | ) | ||||
|
Basic and diluted net loss per share |
||||||||||||||||
|
Net loss per share from continuing operations* |
$ | (0.60 | ) | $ | (10.10 | ) | $ | (3.90 | ) | $ | (67.89 | ) | ||||
|
Net loss per share from discontinued operations* |
— | (3.01 | ) | (0.07 | ) | (11.69 | ) | |||||||||
|
Net loss per share attributable to common stockholders (basic and diluted)* |
$ | (0.60 | ) | $ | (13.11 | ) | $ | (3.97 | ) | $ | (79.58 | ) | ||||
|
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted)* |
3,710 | 134 | 1,863 | 95 | ||||||||||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOVABAY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(in thousands)
|
Preferred Stock |
Common Stock |
Additional Paid- in |
Accumulated |
Total Stockholders’ Equity |
||||||||||||||||||||||||
|
Shares |
Amount |
Shares* |
Amount* |
Capital* |
Deficit |
(Deficit) |
||||||||||||||||||||||
|
Balance at December 31, 2023 |
7 | $ | 1,950 | 321 | $ | 3 | $ | 176,210 | $ | (174,849 | ) | $ | 3,314 | |||||||||||||||
|
Net loss |
- | - | - | - | - | (3,214 | ) | (3,214 | ) | |||||||||||||||||||
|
Conversion of Series B Preferred Stock to common stock |
(5 | ) | (231 | ) | 537 | 5 | 226 | - | - | |||||||||||||||||||
|
Conversion of Series C Preferred Stock to common stock |
(0 | ) | (234 | ) | 57 | 1 | 233 | - | - | |||||||||||||||||||
|
Adjustment of Series C Preferred Stock conversion price |
- | - | - | - | 380 | (380 | ) | - | ||||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 60 | - | 60 | |||||||||||||||||||||
|
Balance at March 31, 2024 |
2 | $ | 1,485 | 915 | $ | 9 | $ | 177,109 | $ | (178,443 | ) | $ | 160 | |||||||||||||||
|
Net loss |
- | - | - | - | - | (1,585 | ) | (1,585 | ) | |||||||||||||||||||
|
Conversion of Series B Preferred Stock to common stock |
(0 | ) | (37 | ) | 88 | 1 | 36 | - | - | |||||||||||||||||||
|
Conversion of Series C Preferred Stock to common stock |
(1 | ) | (1,442 | ) | 148 | 1 | 1,441 | - | - | |||||||||||||||||||
|
Modification of common stock warrants in connection with 2024 Warrant Reprice Transaction |
- | - | - | - | 69 | - | 69 | |||||||||||||||||||||
|
Issuance of common stock in connection with 2024 Warrant Reprice Transaction, net of offering costs |
- | - | 90 | 1 | 129 | - | 130 | |||||||||||||||||||||
|
Reclassification of December 2023 Warrants from liability |
- | - | - | - | 212 | - | 212 | |||||||||||||||||||||
|
Reclassification of March 2024 Warrants from liability |
- | - | - | - | 100 | - | 100 | |||||||||||||||||||||
|
Reclassification of embedded derivative liability |
- | - | - | - | 242 | - | 242 | |||||||||||||||||||||
|
Shares issued for 35:1 reverse stock split due to rounding feature |
- | - | 107 | 1 | (1 | ) | - | - | ||||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 55 | - | 55 | |||||||||||||||||||||
|
Vesting of director restricted stock awards |
- | - | 0 | 0 | 0 | - | 0 | |||||||||||||||||||||
|
Balance at June 30, 2024 |
1 | $ | 6 | 1,348 | $ | 13 | $ | 179,392 | $ | (180,028 | ) | $ | (617 | ) | ||||||||||||||
|
Net loss |
- | - | - | - | - | (1,212 | ) | (1,212 | ) | |||||||||||||||||||
|
Issuance of common stock and pre-funded warrants in an underwritten registered direct offering, net of issuance cost |
- | - | 1,495 | 15 | 2,843 | - | 2,858 | |||||||||||||||||||||
|
Exercise of pre-funded warrants |
- | - | 2,042 | 21 | - | - | 21 | |||||||||||||||||||||
|
Adjustment to common stock warrant exercise price |
- | - | - | - | 1,005 | (1,005 | ) | - | ||||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 22 | - | 22 | |||||||||||||||||||||
|
Balance at September 30, 2024 |
1 | $ | 6 | 4,885 | $ | 49 | $ | 183,262 | $ | (182,245 | ) | $ | 1,072 | |||||||||||||||
|
Preferred Stock |
Common Stock |
Additional Paid- in |
Accumulated |
Total Stockholders’ Equity |
||||||||||||||||||||||||
|
Shares |
Amount |
Shares* |
Amount* |
Capital* |
Deficit |
(Deficit) |
||||||||||||||||||||||
|
Balance at December 31, 2022 |
14 | $ | 2,973 | 58 | $ | 1 | $ | 165,732 | $ | (158,152 | ) | $ | 10,554 | |||||||||||||||
|
Net loss |
- | - | - | - | - | (1,739 | ) | (1,739 | ) | |||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 75 | - | 75 | |||||||||||||||||||||
|
Balance at March 31, 2023 |
14 | $ | 2,973 | 58 | $ | 1 | $ | 165,807 | $ | (159,891 | ) | $ | 8,890 | |||||||||||||||
|
Net loss |
- | - | - | - | - | (2,036 | ) | (2,036 | ) | |||||||||||||||||||
|
Conversion of Series B Preferred Stock to common stock |
(3 | ) | (121 | ) | 54 | 0 | 121 | - | - | |||||||||||||||||||
|
Conversion of Series C Preferred Stock to common stock |
(1 | ) | (728 | ) | 8 | 0 | 728 | - | - | |||||||||||||||||||
|
Modification of common stock warrants |
- | - | - | - | 285 | - | 285 | |||||||||||||||||||||
|
Adjustment of Series B Preferred Stock conversion price |
- | - | - | - | 1,802 | (1,802 | ) | - | ||||||||||||||||||||
|
Adjustment of Series C Preferred Stock conversion price |
- | - | - | - | 194 | (194 | ) | - | ||||||||||||||||||||
|
Reclassification of May 2023 Warrants |
- | - | - | - | 1,360 | - | 1,360 | |||||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 64 | - | 64 | |||||||||||||||||||||
|
Vesting of director restricted stock awards |
- | - | 0 | 0 | 0 | - | 0 | |||||||||||||||||||||
|
Balance at June 30, 2023 |
10 | $ | 2,124 | 120 | $ | 1 | $ | 170,361 | $ | (163,923 | ) | $ | 8,563 | |||||||||||||||
|
Net loss |
- | - | - | - | - | (1,757 | ) | (1,757 | ) | |||||||||||||||||||
|
Conversion of Series B Preferred Stock to common stock |
(3 | ) | (147 | ) | 66 | 1 | 146 | - | - | |||||||||||||||||||
|
Reclassification of embedded derivative liability |
- | - | - | - | 169 | - | 169 | |||||||||||||||||||||
|
Stock-based compensation expense related to employee and director stock awards |
- | - | - | - | 62 | - | 62 | |||||||||||||||||||||
|
Balance at September 30, 2023 |
7 | $ | 1,977 | 186 | $ | 2 | $ | 170,738 | $ | (165,680 | ) | $ | 7,037 | |||||||||||||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOVABAY PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
Operating activities: |
||||||||
|
Net loss |
$ | (6,011 | ) | $ | (5,532 | ) | ||
|
Net loss from discontinued operations |
124 | 1,106 | ||||||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Depreciation of property and equipment |
32 | 39 | ||||||
|
Stock-based compensation expense related to employee and director stock awards |
137 | 201 | ||||||
|
Non-cash loss on divestiture of subsidiary |
865 | — | ||||||
|
Non-cash expense incurred to obtain consent of Secured Convertible Note holders |
368 | — | ||||||
|
Modification of common stock warrants, included in Other expense, net |
69 | 285 | ||||||
|
Non-cash gain on changes in fair value of warrant liabilities |
(114 | ) | (216 | ) | ||||
|
Non-cash loss (gain) on changes in fair value of embedded derivative liability |
18 | (40 | ) | |||||
|
Non-cash right-of-use amortization |
254 | 222 | ||||||
|
Accretion of interest and amortization of debt discounts on convertible notes |
871 | 1,119 | ||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accounts receivable |
(24 | ) | 913 | |||||
|
Inventory |
83 | (195 | ) | |||||
|
Prepaid expenses and other current assets |
(70 | ) | 82 | |||||
|
Other assets |
(16 | ) | (10 | ) | ||||
|
Accounts payable and accrued liabilities |
(532 | ) | (1,289 | ) | ||||
|
Operating lease liabilities |
(265 | ) | (224 | ) | ||||
|
Net cash used in operating activities, continuing operations |
(4,211 | ) | (3,539 | ) | ||||
|
Investing activities: |
||||||||
|
Proceeds from divestiture of subsidiary |
1,070 | — | ||||||
|
Purchases of property and equipment |
(6 | ) | (16 | ) | ||||
|
Net cash provided by (used in) investing activities, continuing operations |
1,064 | (16 | ) | |||||
|
Financing activities: |
||||||||
|
Proceeds from exercise of warrants and pre-funded warrants |
247 | — | ||||||
|
Proceeds from issuance of common stock and pre-funded warrants in an underwritten registered direct offering, net of issuance costs |
2,858 | — | ||||||
|
Proceeds from issuance of Secured Convertible Notes and May 2023 Warrants, net of discounts |
— | 3,000 | ||||||
|
Payments on Secured Convertible Notes |
(1,990 | ) | (770 | ) | ||||
|
Debt issuance cost |
(115 | ) | (294 | ) | ||||
| Net cash provided by financing activities, continuing operations | 1,000 | 1,936 | ||||||
|
Net decrease in cash, cash equivalents, and restricted cash, continuing operations |
(2,147 | ) | (1,619 | ) | ||||
|
Net decrease in cash and cash equivalents, discontinued operations |
(206 | ) | (279 | ) | ||||
|
Net decrease in cash, cash equivalents, and restricted cash, consolidated |
(2,353 | ) | (1,898 | ) | ||||
|
Cash, cash equivalents and restricted cash, beginning of year, consolidated |
3,606 | 5,846 | ||||||
|
Less: Cash and cash equivalents of discontinued operations, end of period |
— | (293 | ) | |||||
|
Cash, cash equivalents and restricted cash of continuing operations, end of period |
$ | 1,253 | $ | 3,655 | ||||
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
Supplemental disclosure of cash flow information: |
||||||||
|
Interest paid in continuing operations |
$ | 147 | $ | 174 | ||||
|
Interest paid in discontinued operations |
— | 15 | ||||||
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
Supplemental disclosure of non-cash information: |
||||||||
|
Conversions of preferred to common stock |
$ | 1,944 | $ | 995 | ||||
|
Down round feature adjustments related to Preferred Stock |
380 | 1,996 | ||||||
|
Down round feature adjustments related to common stock warrants |
1,005 | — | ||||||
|
Issuance of embedded derivative liability in conjunction with Unsecured Convertible Notes |
224 | — | ||||||
|
Warrant liabilities transferred to equity |
312 | 1,360 | ||||||
|
Derivative liability transferred to equity |
242 | 169 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NovaBay Pharmaceuticals, Inc. (“our,” “we,” “us” or the “Company”) develops and sells scientifically-created and clinically-proven eyecare, and wound care products. Our leading product, Avenova® Antimicrobial Lid and Lash Solution, or Avenova Spray, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (the “FDA”) for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry eye disease. Because dry eye is a complex condition, we offer a complementary portfolio of scientifically-developed products for each step of the standard at-home treatment regimen, including the Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health.
We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating wounds, burns, ulcers and other injuries. The Company currently sells these products through distributors.
Through our former subsidiary DERMAdoctor, LLC (“DERMAdoctor”), the Company offered over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. On March 25, 2024, we announced that we had sold DERMAdoctor (the “DERMAdoctor Divestiture”).
The Company operated in principally two reportable segments: (1) Eyecare and Wound Care and (2) Skincare. As noted above, on March 25, 2024, we closed the DERMAdoctor Divestiture resulting in the sale of our skincare segment.
The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, the Company changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In June 2010, the Company changed the state in which it was incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation.
Effective May 30, 2024, the Company effected a 1-for-35 reverse split of our outstanding common stock (“Reverse Stock Split”) (See Note 12, “Stockholders’ Equity” for further details). Except as otherwise specifically noted, all share numbers, share prices, exercise/conversion prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 1-for-35 Reverse Stock Split.
Potential Asset Sale Transaction and Dissolution
On September 19, 2024, the Company entered into an Asset Purchase Agreement (the “Original Purchase Agreement”) with PRN Physician Recommended Nutriceuticals, LLC, a Delaware limited liability company (“PRN”), pursuant to which PRN will acquire the Company’s eyecare products sold under the Avenova brand and the related assets (the “Avenova Assets”) (collectively, the “Asset Sale Transaction”). On November 5, 2024, the Company entered into an amendment to the Original Purchase Agreement (the “APA Amendment,” and together with the Original Purchase Agreement, the “Purchase Agreement”) that provides for, among other terms, an increase in the base purchase price to $11.5 million from $9.5 million and for PRN to provide the Company with a $1.0 million secured promissory note, as further described below and under Note 19, “Subsequent Events” (the “Bridge Loan”). Pursuant to the Purchase Agreement, the Asset Sale Transaction is subject to certain closing conditions, including stockholder approval. Assuming stockholder approval is received and other closing conditions are met, the Company expects to close the Asset Sale Transaction in the fourth quarter of 2024.
The Asset Sale Transaction would constitute substantially all of the Company’s revenue generating and operating assets; however, PRN would not purchase any of the Company’s other products and assets, including those that relate to the Company’s wound care, urology or dermatology businesses. The Company’s board of directors (the “Board”) unanimously approved the Asset Sale Transaction and further determined that, if the Asset Sale Transaction is completed, the best opportunity available to optimize value to our stockholders is to wind-up the Company’s affairs and pursue a liquidation and dissolution pursuant to a Plan of Complete Liquidation and Dissolution (the “Plan of Dissolution”) under Delaware law that may result in distributions to our stockholders of our remaining asset value (the “Dissolution”).
The Company has called a special meeting of stockholders (the “Special Meeting”) on November 22, 2024 for stockholders to approve (1) the Asset Sale Transaction and (2) the Dissolution subject to the Board’s discretion to proceed with the Dissolution.
On October 29, 2024, the Company announced that the Board determined that an unsolicited and non-binding acquisition proposal from Refresh Acquisitions BidCo LLC (“Refresh”) to purchase the Avenova Assets (the “Refresh Unsolicited Offer”) is a “Superior Proposal” (as defined in the Purchase Agreement). As a result, the Company notified PRN of the Board’s determination and the Company’s intention to terminate the Purchase Agreement pursuant to its terms, unless the Company received a revised proposal from PRN such that the Board determined the Refresh Unsolicited Offer was no longer a Superior Proposal, all in accordance with the process provided in the Purchase Agreement.
On November 5, 2024, the Company and PRN entered into the APA Amendment to the Original Purchase Agreement. The APA Amendment provides for the following primary revisions to the Original Purchase Agreement: (i) an increase in the base purchase price to $11.5 million from $9.5 million; (ii) the removal of debt financing contingencies and related PRN representations, while adding a new PRN representation that it has sufficient funding for the $11.5 million base purchase price; (ii) PRN providing the Company with the Bridge Loan; and (iv) PRN providing the Company with an equity funding commitment letter (the “Equity Commitment Letter”) from Roundtable Healthcare Partners V, L.P. that provides for up to $13.0 million in financing to be used by PRN’s parent company, Acumen Intermediate Holdings, LLC, and contributed to PRN for payment of the purchase price at the closing of the Asset Sale Transaction (with such updated terms, the “Revised PRN Transaction Terms”).
On November 5, 2024, the Company entered into the Bridge Loan that provides for the Company to receive a secured loan of up to $1.0 million from PRN as the lender that will be funded in two tranches of $0.5 million each upon the Company providing written notice to PRN on or after November 22, 2024 and on or after December 6, 2024. The amounts borrowed under the Bridge Loan are required to be used for working capital purposes, will bear interest at a rate of 10% per annum and be secured by all of the Company’s assets as collateral. The Bridge Loan is a short term secured loan that is to be repaid upon the earlier of the closing of the Asset Sale Transaction (to be repaid from the purchase price), immediately upon termination of the Purchase Agreement or February 28, 2025.
For more information on the Asset Sale Transaction (including the Revised PRN Transaction Terms, the APA Amendment and the Bridge Loan), the Refresh Unsolicited Offer and the Dissolution, please see Note 19, “Subsequent Events,” the Company’s Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 20, 2024, October 29, 2024 and November 6, 2024 and the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on October 16, 2024 (as may be supplemented, the “Special Meeting Proxy Statement”).
Discontinued Operations
On March 25, 2024, the Company completed the DERMAdoctor Divestiture for an aggregate sale price of $1.1 million. The Company recognized a loss on the DERMAdoctor Divestiture amounting to $0.9 million in the three-month period ended March 31, 2024, which is recorded in loss on divestiture of subsidiary in the unaudited condensed consolidated statements of operations.
In connection with the DERMAdoctor Divestiture, the Company entered into Transition Services Agreement with New Age Investments, LLC to provide for a customary and orderly transition of the business, including warehousing services provided by New Age Investments, LLC and fulfillment services provided by the Company, which has been included in continuing operations in subsequent periods since entering into the Transition Services Agreement.
Going Concern
The Company has sustained operating losses for the majority of its corporate history and expects that its 2024 expenses will exceed its 2024 revenues. Additionally, the Company expects to continue incurring operating losses and negative cash flows. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of these unaudited condensed consolidated financial statements. Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, global pandemics and international conflicts (e.g., the conflicts between Israel and Hamas, Russia and Ukraine, and China and Taiwan).
On September 16, 2024, the Board unanimously approved the Asset Sale Transaction and the Dissolution, both of which are subject to the approval of the Company’s stockholders. On November 5, 2024, the Company entered into the APA Amendment that provides for, among other terms, an increase in the base purchase price to $11.5 million from $9.5 million and for PRN to provide the Company with the Bridge Loan, as further described below under Note 19, “Subsequent Events.” The Company is holding the Special Meeting on November 22, 2024 to obtain stockholder approval of the Asset Sale Transaction and the Dissolution, pursuant to the Special Meeting Proxy Statement.
To address the Company’s current liquidity and near term capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending on one or more of its sales and marketing programs or restructuring operations to change its overhead structure; and/or (3) the divestiture of certain business or product lines and related assets such as the Asset Sale Transaction and the DERMAdoctor Divestiture. If the Asset Sale Transaction and/or the Dissolution are not completed, we will continue our corporate existence and the Board will continue to explore its options to secure immediate funding for ongoing operations due to significantly reduced available capital and liquidity, the strategic alternatives available to the Company, including returning capital to stockholders or, to the extent any funding or other viable alternatives are not available or if there is not sufficient capital remaining at the time to fund operations, then the Company may need to file for bankruptcy protection or commence a similar state law proceeding. In connection with such strategic options, the Company may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which may require the filing of a Form S-1 or Form S-3 registration statement with the SEC. While the Company believes that the proceeds from the 2024 Public Offering (as defined in Note 9, “Financing Activities”), the 2024 Warrant Reprice Transaction (as defined in Note 9, “Financing Activities”) and the DERMAdoctor Divestiture improved the Company’s liquidity for the first nine months of 2024, there is no assurance that the Company will be successful in completing the Asset Sale Transaction and/or the Dissolution or otherwise executing on alternative capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern. If the Company’s stockholders approve the Dissolution, the Company would consider liquidation to be imminent and apply the liquidation basis of accounting pursuant to the accounting principles generally accepted in the United States (“U.S. GAAP”).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and are expressed in U.S. dollars. In management’s opinion, the unaudited condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its former wholly-owned subsidiary, DERMAdoctor, as of and for the nine months ended September 30, 2024. All significant intercompany balances and transactions have been eliminated in consolidation. As of March 25, 2024, the Company divested its wholly-owned subsidiary pursuant to the DERMAdoctor Divestiture. The financial results for DERMAdoctor have been presented as discontinued operations in the accompanying condensed consolidated financial statements. For the nine months ended September 30, 2024, all gains and losses on disposition, along with the sales, costs and expenses attributable to discontinued operations, have been aggregated in the captions entitled “Loss on divestiture of subsidiary” and “Net loss from discontinued operations” in our unaudited condensed consolidated statements of operations.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these unaudited condensed consolidated financial statements to conform to current period classifications. The prior year amounts have been modified in these unaudited condensed consolidated financial statements to properly report amounts under current operations and discontinued operations (see Note 18, “Divestiture and Discontinued Operations”).
Further, certain prior period operating lease balances on the Condensed Consolidated Statements of Cash Flows originally reported within changes in “Operating lease right-of-use assets” are now within “Non-cash right-of-use amortization” to conform to the current year presentation. These changes had no impact on the Company's net decrease in case, cash equivalents, and restricted cash in the prior year nor any of the subtotal changes of cash from operating, investing, or financing activities.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, contract liabilities related to product sales such as product returns, assumptions for valuing warrants, assumptions for valuing derivative liabilities, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other contingencies.
These estimates are based on management’s best estimates and judgment. Actual results may differ from these estimates. Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions, judgments and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Unaudited Condensed Consolidated Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only recurring adjustments, necessary for a fair presentation.
The year-end condensed consolidated balance sheet data was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. The unaudited condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
The condensed consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 26, 2024 and amended on March 29, 2024 (collectively, the “2023 Annual Report”).
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of September 30, 2024 and December 31, 2023, the Company’s cash and cash equivalents were held in a major financial institution in the United States.
The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):
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September 30, |
December 31, |
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|
2024 |
2023 |
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Cash and cash equivalents |
$ | 776 | $ | 3,130 | ||||
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Cash and cash equivalents, discontinued operations |
— | (206 | ) | |||||
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Restricted cash included in other assets |
477 | 476 | ||||||
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Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows |
$ | 1,253 | $ | 3,400 | ||||
The restricted cash amount included in other assets on the condensed consolidated balance sheets represents amounts held as certificates of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord.
Concentrations of Credit Risk and Major Partners
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a major financial institution in the United States.
The Company has a significant amount of its cash balances at financial institutions which, throughout the year, regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
During the three and nine months ended September 30, 2024 and 2023, revenues from significant product categories were as follows (in thousands):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
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Avenova Spray |
$ | 2,170 | $ | 2,064 | $ | 6,391 | $ | 5,759 | ||||||||
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NeutroPhase |
— | — | — | 1,043 | ||||||||||||
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Other products |
254 | 407 | 1,044 | 1,524 | ||||||||||||
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Total product revenue, net |
2,424 | 2,471 | 7,435 | 8,326 | ||||||||||||
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Other revenue, net |
17 | 10 | 37 | 28 | ||||||||||||
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Total sales, net |
$ | 2,441 | $ | 2,481 | $ | 7,472 | $ | 8,354 | ||||||||
During the three and nine months ended September 30, 2024 and 2023, revenues were derived primarily from sales of Avenova branded products, directly to consumers through Amazon.com and Avenova.com. Sales of Avenova Spray via Amazon comprised 73% and 66% of total Avenova Spray net revenue during the three months ended September 30, 2024 and 2023, respectively. Sales of Avenova Spray via Amazon comprised 74% and 68% of total Avenova Spray net revenue during the nine months ended September 30, 2024 and 2023, respectively.
As of September 30, 2024 and December 31, 2023, accounts receivable from continuing operations from our major distribution partners and major retailers greater than 10% were as follows:
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September 30, |
December 31, |
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|
Major distribution partner |
2024 |
2023 |
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Major U.S. Retailer A |
43 | % | 22 | % | ||||
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Avenova Spray Pharmacy Distributor A |
31 | % | 14 | % | ||||
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Chongqing Pioneer Pharma Holdings Limited |
* | % | 36 | % | ||||
* Less than 10%
The Company relies on one contract manufacturer to produce its products. The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Our contract manufacturer may or may not be able to meet the Company’s needs with respect to timing, quantity or quality. In particular, it is possible that the Company may suffer from unexpected delays in light of global supply chain issues.
Fair Value of Financial Assets and Liabilities
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant liabilities, and contingent consideration. The Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.
The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. There are three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
See additional information in Note 3, “Fair Value Measurements”.
Allowance for Credit Losses
The Company maintains an allowance for estimated losses resulting from the inability of its customers to meet their financial obligations to the Company. The Company recognizes an allowance for credit losses based on factors such as historical experience, contract terms and general and market business conditions. The Company’s future collection experience can differ significantly from historical collection trends due to such factors as changing customer circumstances and uncertain economic and industry trends. The allowance is re-evaluated on a regular basis and adjusted as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the allowance. Management recorded a reserve for allowance for credit losses of $3 thousand as of September 30, 2024 and December 31, 2023.
Inventory
Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; (2) goods in progress, which are normally filled but unlabeled bottles; and (3) finished goods. The Company utilizes a contract manufacturer to produce its products and the price paid to these manufacturers is included in inventory. Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method. At September 30, 2024 and December 31, 2023, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $126 thousand and $264 thousand, respectively.
Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.
The costs of normal maintenance, repairs, and minor replacements are expensed as incurred.
Business Combinations, Goodwill and Indefinite-Lived Intangible Assets
We account for business combinations using the acquisition method of accounting, in accordance with ASC 805, Business Combinations. The acquisition method requires that identifiable assets acquired and liabilities assumed are recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. Intangible assets are measured at their respective fair values as of the acquisition date. Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.
Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired.
Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, management can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires management to estimate the fair value of the Company’s reporting units using either an income or market approach or a combination thereof.
Management makes critical assumptions and estimates in completing impairment assessments of goodwill and indefinite-lived intangible assets. The Company’s cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.
The Company did not record any goodwill or indefinite-lived asset impairment charges during the three or nine months ended September 30, 2024 or September 30, 2023.
Valuation of Contingent Consideration Resulting from a Business Combination
In connection with the DERMAdoctor acquisition, the Company was subject to paying consideration that was contingent upon the achievement of specified milestone events. The Company recorded this contingent consideration at its fair value on the acquisition date. Each quarter thereafter, the Company revalued the contingent consideration and recorded changes in fair value within the condensed consolidated statements of operations. The DERMAdoctor acquisition milestone events consisted of financial targets for calendar years 2022 and 2023 which were not met. As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of September 30, 2024 and December 31, 2023.
Long-Lived Assets
The Company’s intangible assets that do not have indefinite lives, primarily trade secrets and product formulations, are amortized over their estimated useful lives. All of the Company’s intangible assets subject to amortization and other long-lived assets, are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the condensed consolidated statements of operations.
The Company did not record any long-lived asset impairments during the three or nine months ended September 30, 2024 or September 30, 2023.
Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.
The Company has elected to combine lease and non-lease components as a single component. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use assets and lease liability for leases being greater than if the policy election was not applied. Leases include variable components (e.g., common area maintenance) that are paid separately from the monthly base payment based on actual costs incurred and therefore were not included in the right-of-use assets and lease liability but are reflected as an expense in the period incurred.
The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized in the condensed consolidated balance sheets as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.
Common Stock Warrants
The Company accounts for the issuance of common stock purchase warrants issued in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging.
The Company classifies as equity any warrants that (i) require physical share settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement (physical share settlement or net-share settlement). The Company classifies as liabilities any warrants that (i) require net-cash settlement, (ii) give the counterparty a choice of net-cash physical settlement or net-share settlement. In accordance with ASC 815, the Company also classifies as liabilities any warrants during the period which the shares underlying the contract are subject to stockholder approval before the warrant can be exercised.
For warrants that are classified as liabilities, the Company records the fair value of the warrants upon issuance and at each balance sheet date with changes in the estimated fair value recorded as a non-cash gain or loss in the condensed consolidated statements of operations. The fair values of these warrants are determined using the Black Scholes option pricing model. These values are subject to a significant degree of management’s judgment. See Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions” and Note 11, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”.
Amendments to warrant terms are recorded as a non-cash gain or loss on modification of common stock warrants. The gain or loss represents the decrease or increase in the fair value of the amended warrants when comparing the value immediately before and after amendment using the Black Scholes option pricing model. See Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”.
Preferred Stock
Terms of the Company’s outstanding Preferred Stock historically included a Ratchet whereby the applicable conversion price could be adjusted (as defined and described in Note 12, “Stockholders’ Equity”). The applicable Ratchet provisions of the Company’s outstanding Preferred Stock terminated during the quarter ended March 31, 2024. When a conversion price was adjusted under the Ratchet, the Company recorded a deemed dividend as a reduction to income available to common stockholders. In accordance with ASC 820, the deemed dividend was measured as the difference between (1) the fair value of the Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). These fair values were determined using the Black Scholes option pricing model. These values are subject to a significant degree of management’s judgment. See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”.
Revenue Recognition
The Company’s product revenue recognition policies are established in accordance with ASC 606, Revenue from Contracts with Customers, in accordance with the following five steps:
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i. |
identify the contract(s) with a customer; |
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ii. |
identify the performance obligations in the contract; |
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iii. |
determine the transaction price; |
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|
iv. |
allocate the transaction price to the performance obligations in the contract; and |
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v. |
recognize revenue when (or as) the entity satisfies performance obligations. |
Revenue is recognized in accordance with the amount of consideration which the Company expects to receive.
Revenue generated from end consumers through third-party online retailers, such as Amazon, as well as the Company’s web store (Avenova.com) is recognized on a “sell-through” basis when control of the goods is transferred to the consumer, which generally occurs upon delivery of the products to the party fulfilling the consumer’s order. Revenue is recorded net of any discounts and estimates for refunds and product returns. Fees paid to third-party online retailers and fulfillment parties are recorded as incurred in the Company’s condensed consolidated statements of operations. Fulfillment and shipping and handling fees are recorded as product cost of goods sold. Selling commissions and advertising and promotion fees are recorded as sales and marketing expenses.
Revenue generated through major pharmacy distributors is recognized on a “sell-in” basis when control of the goods is transferred to the distributor, which generally occurs upon delivery of the products to the distributor. Revenue is recorded net of consideration for contract liabilities for distributor services, discounts, rebates, and product returns. The Company estimates returns and other contract liabilities based on historical data which is updated quarterly. Payment for products sold is typically due 60 days after delivery to the distributor.
Revenue generated from end consumers through the Company’s partner pharmacies is recognized on a “sell-through” basis when control of the goods is transferred to the consumer.
Revenue generated from other retailers is recognized on a “sell-through” basis, net of estimated future product returns, when control of the goods is transferred to the retailer, which generally occurs upon delivery of the products to a third-party carrier who is delivering the products to the retailer.
The Company defers recognition for pre-payments until the Company’s performance obligations are satisfied.
Cost of Goods Sold
Cost of goods sold includes third-party manufacturing costs, shipping and handling costs, third-party fulfillment fees, and other costs associated with products sold. Cost of goods sold also includes any necessary allowances for excess and obsolete inventory as well as lower of cost and estimated net realizable value.
Research and Development Costs
The Company charges research and development costs to expense as incurred. These costs include all costs associated with research, development and regulatory activities.
Patent Costs
Patent costs are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the condensed consolidated statements of operations.
Advertising Costs
Advertising costs are expensed in the period in which the costs are incurred. Advertising costs are included in sales and marketing expenses in the condensed consolidated statements of operations. Advertising expenses were $0.1 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively. Advertising expenses were $0.5 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Stock-Based Compensation
The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s condensed consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms. For stock options granted, the fair value of the stock options is estimated using a Black Scholes option pricing model. The Company accounts for RSUs issued to employees and non-employees (directors, consultants and advisory board members) based on the fair market value of the Company’s common stock on the date of issuance. See Note 13, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating the expense.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.
Net Loss per Share
The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”) as shown in the Company’s condensed consolidated statements of operations.
Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive.
For the three and nine months ended September 30, 2024 and 2023, the Series B Preferred Stock and Series C Preferred Stock (both as defined below) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted” basis would have been anti-dilutive. The Series B Preferred Stock and Series C Preferred Stock were considered anti-dilutive because such securities did not have a contractual obligation to participate in losses of the Company.
The following outstanding preferred stock, stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:
|
Balance at September 30, |
||||||||
|
2024* |
2023* |
|||||||
|
Common stock equivalent of Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) |
15,065 | 135,300 | ||||||
|
Common stock equivalent of Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) |
— | 24,134 | ||||||
|
Stock options |
6,893 | 4,240 | ||||||
|
Stock warrants |
10,836,275 | 210,929 | ||||||
| 10,858,233 | 374,603 | |||||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements that could affect our business, results of operations, financial condition, and liquidity, see Note 2, “Summary of Significant Accounting Policies” included in our 2023 Annual Report. The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position, results of operations and cash flows.
NOTE 3. FAIR VALUE MEASUREMENTS
The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 (in thousands):
|
Fair Value Measurements Using |
||||||||||||||||
|
Quoted |
||||||||||||||||
|
Prices in |
||||||||||||||||
|
Active |
||||||||||||||||
|
Markets |
Significant |
|||||||||||||||
|
for |
Other |
Significant |
||||||||||||||
|
Balance at |
Identical |
Observable |
Unobservable |
|||||||||||||
|
September |
Items |
Inputs |
Inputs |
|||||||||||||
|
30, 2024 |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
|
Assets |
||||||||||||||||
|
Restricted cash held as a certificate of deposit |
$ | 477 | $ | 477 | $ | — | $ | — | ||||||||
|
Fair Value Measurements Using |
||||||||||||||||
|
Quoted |
||||||||||||||||
|
Prices in |
||||||||||||||||
|
Active |
||||||||||||||||
|
Markets |
Significant |
|||||||||||||||
|
for |
Other |
Significant |
||||||||||||||
|
Balance at |
Identical |
Observable |
Unobservable |
|||||||||||||
|
December |
Items |
Inputs |
Inputs |
|||||||||||||
|
31, 2023 |
(Level 1) |
(Level 2) |
(Level 3) |
|||||||||||||
|
Assets |
||||||||||||||||
|
Restricted cash held as a certificate of deposit |
$ | 476 | $ | 476 | $ | — | $ | — | ||||||||
|
Liabilities |
||||||||||||||||
|
Warrant liabilities |
$ | 334 | $ | — | $ | 334 | $ | — | ||||||||
The Company’s restricted cash held as certificates of deposit are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
The Secured Convertible Notes and Unsecured Convertible Notes (see Note 10, “Convertible Notes”) are carried at proceeds, net of discounts, which management believes approximates fair value. As a result of certain call and put options within the Secured Convertible Notes and Unsecured Convertible Notes, the Company recorded an embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount which is netted against the face value of the Secured Convertible Notes and Unsecured Convertible Notes. The fair value of the embedded derivatives were calculated using the Black Scholes valuation model using Level 2 inputs of the fair value hierarchy.
The fair value of the December 2023 Warrants issued in conjunction with the 2023 Warrant Reprice Transaction as well as the accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the 2023 Warrant Reprice Transaction were classified within Level 2.
See Note 11, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”, for a reconciliation of the beginning and ending balances for the warrant liabilities measured at fair value on a recurring basis using significant other observable inputs (Level 2) during the three and nine months ended September 30, 2024 and 2023.
There were no transfers in or out of Level 1, Level 2 or Level 3 assets and liabilities for the three and nine months ended September 30, 2024 and 2023.
Black Scholes Valuation Models and Assumptions
The Company utilizes a Black Scholes model for various valuations as outlined throughout this report. The following tables summarize the assumptions utilized for valuations impacting results for the periods reported. See also Note 13, “Equity-Based Compensation” for related Black Scholes valuation assumptions.
Warrant Liabilities
Various of the Company’s warrants have been subject to stockholder approval upon issuance or amendment and prior to exercise. Warrants requiring stockholder approval are recorded as a liability at fair value upon issuance or amendment and continue to be recorded as a liability at fair value at each reporting date until stockholder approval occurs at which time they are transferred to stockholders’ equity at their fair value on the date of approval. Fair value was determined using a Black Scholes model as outlined below. See Note 11, “Common Stock Warrants” for additional information and the definitions of the Company’s warrants.
|
May 2023 Warrants |
May 2023 Warrants |
December 2023 Warrants |
December 2023 Warrants |
|||||||||||||||||
|
Measurement event |
Issuance |
Stockholder Approval |
Reporting Date |
Stockholder Approval |
||||||||||||||||
|
Date |
May 1, 2023 |
June 9, 2023 |
December 31, 2023 |
May 28, 2024 |
||||||||||||||||
|
Total Value |
$1.6 million |
$1.4 million |
$0.3 million |
$0.2 million |
||||||||||||||||
|
Gain (Loss) |
not applicable |
$0.2 million |
$56 thousand |
$(51 thousand) |
||||||||||||||||
|
Assumptions: |
||||||||||||||||||||
|
Exercise price |
$ | 45.50 | $ | 45.50 | $ | 8.75 | $ | 8.75 | ||||||||||||
|
Market price |
$ |
25.20 | (a) | $ | 23.80 | $ | 7.14 | $ | 4.94 | |||||||||||
|
Volatility |
80.1 | % | 77.6 | % | 79.3 | % | 83.9 | % | ||||||||||||
|
Risk-free rate |
3.60 | - | 4.04 | % | 3.92 | - | 4.59 | % | 3.85 | % | 4.56 | % | ||||||||
|
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
|
Term (years) |
2.1 | - | 5.1 | 2.0 | - | 5.0 | 5.5 | 5.1 | ||||||||||||
|
March |
March |
|||||||
|
2024 |
2024 |
|||||||
|
Warrant |
Warrant |
|||||||
|
Measurement event |
Reporting Date |
Stockholder Approval |
||||||
|
Date |
March 31, 2024 |
May 28, 2024 |
||||||
|
Total Value |
$0.1 million |
$0.1 million |
||||||
|
Gain (Loss) |
$21 thousand |
$(28 thousand) |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 4.90 | $ | 4.90 | ||||
|
Market price |
$ | 3.66 | $ | 4.94 | ||||
|
Volatility |
86.9 | % | 83.9 | % | ||||
|
Risk-free rate |
4.21 | % | 4.56 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (years) |
5.5 | 5.3 | ||||||
|
(a) |
Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. |
Warrant Modifications
Amendments to warrant terms are recorded as a non-cash gain (or loss) on modification of common stock warrants. The gain or loss represents the decrease or increase in the fair value of the amended warrants when comparing the value immediately before and after amendment using the Black Scholes option pricing model. Fair value was determined using a Black Scholes model as outlined below.
|
July 2020, November 2021, September 2022 & November 2022 Warrants |
||||||||||||
|
Measurement event |
Prior to amendment |
After amendment |
||||||||||
|
Date |
April 27, 2023 |
April 27, 2023 |
||||||||||
|
Total Value |
$0.3 million |
$0.5 million |
||||||||||
|
Loss |
not applicable |
$0.2 million |
||||||||||
|
Assumptions: |
||||||||||||
|
Exercise price |
$ | 220.50 | $ | 52.50 | ||||||||
|
Market price |
$ |
25.20 | (a) |
$ |
25.20 | (a) | ||||||
|
Volatility |
80.1 | % | 80.1 | % | ||||||||
|
Risk-free rate |
3.59 | - | 4.73 | % | 3.59 | - | 4.73 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||||||
|
Term (years) |
1.1 | - | 5.6 | 1.1 | - | 5.6 | ||||||
|
May 2023 Warrants |
||||||||||||
|
Measurement event |
Prior to amendment |
After amendment |
||||||||||
|
Date |
December 21, 2023 |
December 21, 2023 |
||||||||||
|
Total Value |
$56 thousand |
$0.2 million |
||||||||||
|
Loss |
not applicable |
$0.1 million |
||||||||||
|
Assumptions: |
||||||||||||
|
Exercise price |
$ | 45.50 | $ | 8.75 | ||||||||
|
Market price |
$ | 8.07 | $ | 8.07 | ||||||||
|
Volatility |
79.3 | % | 79.3 | % | ||||||||
|
Risk-free rate |
3.92 | - | 4.62 | % | 3.92 | - | 4.62 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||||||
|
Term (years) |
1.5 | - | 4.5 | 1.5 | - | 4.5 | ||||||
|
September 2022, November 2022, and May 2023 Warrants |
||||||||||||
|
Measurement event |
Prior to amendment |
After amendment |
||||||||||
|
Date |
June 14, 2024 |
June 14, 2024 |
||||||||||
|
Total Value |
$66 thousand |
$0.1 million |
||||||||||
|
Loss |
not applicable |
$70 thousand |
||||||||||
|
Assumptions: |
||||||||||||
|
Exercise price |
$ | 8.75-52.50 | $ | 2.50 | ||||||||
|
Market price |
$ | 2.51 | $ | 2.51 | ||||||||
|
Volatility |
89.3 | % | 89.3 | % | ||||||||
|
Risk-free rate |
4.27 | - | 5.08 | % | 4.27 | - | 5.08 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||||||
|
Term (years) |
1.0 | - | 4.4 | 1.0 | - | 4.4 | ||||||
|
(a) |
Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. |
Warrant Down Round Feature Adjustment
Terms of the Company’s outstanding 2024 July Warrants included a down round feature adjustment whereby the applicable exercise price was automatically adjusted (see Note 9, “Financing Activities”). When the exercise price was adjusted, the Company recorded a deemed dividend as a reduction to income available to common stockholders. In accordance with ASC 820, the deemed dividend is measured as the difference between (1) the fair value of the 2024 July Warrants immediately prior to the conversion price adjustment and (2) the fair value of the 2024 July Warrants immediately after the conversion price adjustment. Fair value was determined using a Black Scholes model, as outlined below.
|
Series F-1 |
||||||||
|
Measurement event |
Prior to adjustment |
After adjustment |
||||||
|
Date |
September 27, 2024 |
September 27, 2024 |
||||||
|
Total value |
$1.7 million |
$1.9 million |
||||||
|
Deemed dividend |
not applicable |
$0.2 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 1.10 | $ | 0.66 | ||||
|
Market price |
$ |
0.71 | $ | 0.71 | ||||
|
Volatility |
97.1 | % | 97.1 | % | ||||
|
Risk-free rate |
3.55 | % | 3.55 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (in years) |
4.84 | 4.84 | ||||||
|
Series F-2 |
||||||||
|
Measurement event |
Prior to adjustment |
After adjustment |
||||||
|
Date |
September 27, 2024 |
September 27, 2024 |
||||||
|
Total value |
$0.2 million |
$0.6 million |
||||||
|
Deemed dividend |
not applicable |
$0.4 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 1.10 | $ | 0.66 | ||||
|
Market price |
$ | 0.71 | $ | 0.71 | ||||
|
Volatility |
97.1 | % | 97.1 | % | ||||
|
Risk-free rate |
4.64 | % | 4.64 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (in years) |
0.34 | 0.34 | ||||||
|
Series F-3 |
||||||||
|
Measurement event |
Prior to adjustment |
After adjustment |
||||||
|
Date |
September 27, 2024 |
September 27, 2024 |
||||||
|
Total value |
$0.6 million |
$1.0 million |
||||||
|
Deemed dividend |
not applicable |
$0.4 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 1.10 | $ | 0.66 | ||||
|
Market price |
$ | 0.71 | $ | 0.71 | ||||
|
Volatility |
97.1 | % | 97.1 | % | ||||
|
Risk-free rate |
4.10 | % | 4.10 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (in years) |
0.84 | 0.84 | ||||||
Preferred Stock Conversion Price Adjustments
Terms of the Company’s outstanding Preferred Stock historically included a Ratchet whereby the applicable conversion price could be adjusted (see Note 12, “Stockholders’ Equity”). The applicable Ratchet provisions of the Company’s outstanding Preferred Stock terminated during the quarter ended March 31, 2024. When a conversion price was adjusted under the Ratchet, the Company recorded a deemed dividend as a reduction to income available to common stockholders. In accordance with ASC 820, the deemed dividend is measured as the difference between (1) the fair value of the Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). Fair value was determined using a Black Scholes model as outlined below.
|
Series B & C Preferred Stock |
||||||||
|
Measurement event |
Prior to Ratchet |
After Ratchet |
||||||
|
Date |
April 27, 2023 |
April 27, 2023 |
||||||
|
Total value (b) |
$9.6 million |
$11.6 million |
||||||
|
Deemed dividend |
not applicable |
$2.0 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 220.50 | $ | 45.50 | ||||
|
Market price |
$ |
25.20 | (a) |
$ |
25.20 | (a) | ||
|
Volatility |
80.1 | % | 80.1 | % | ||||
|
Risk-free rate |
4.91 | % | 4.91 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (in years) |
0.8 | 0.8 | ||||||
|
Series B & C Preferred Stock |
||||||||
|
Measurement event |
Prior to Ratchet |
After Ratchet |
||||||
|
Date |
December 21, 2023 |
December 21, 2023 |
||||||
|
Total value (b) |
$1.7 million |
$6.8 million |
||||||
|
Deemed dividend |
not applicable |
$5.1 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 45.50 | $ | 8.75 | ||||
|
Market price |
$ | 8.07 | $ | 8.07 | ||||
|
Volatility |
79.3 | % | 79.3 | % | ||||
|
Risk-free rate |
5.43 | % | 5.43 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (years) |
0.3 | 0.3 | ||||||
|
Series C Preferred Stock |
||||||||
|
Measurement event |
Prior to Ratchet |
After Ratchet |
||||||
|
Date |
March 24, 2024 |
March 24, 2024 |
||||||
|
Total value (b) |
$0.5 million |
$0.9 million |
||||||
|
Deemed dividend |
not applicable |
$0.4 million |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 8.75 | $ | 4.90 | ||||
|
Market price |
$ | 4.77 | $ | 4.77 | ||||
|
Volatility |
79.9 | % | 79.9 | % | ||||
|
Risk-free rate |
5.51 | % | 5.51 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (in years) |
0.1 | 0.1 | ||||||
|
(a) |
Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. |
|
(b) |
Includes value of incremental shares underlying preferred stock and adjusted for probability of occurrence. |
Bifurcatable Derivatives
Upon issuance in March 2024, the Unsecured Convertible Notes contained a lender’s conversion option which represented an embedded call option requiring bifurcation as an embedded derivative liability at fair value (see Note 10, “Convertible Notes” for additional discussion). Fair value was determined using a Black Scholes model as outlined below.
|
Unsecured Convertible Notes derivative |
Unsecured Convertible Notes derivative |
|||||||
|
Measurement event |
Issuance |
Shareholder Approval |
||||||
|
Date |
March 25, 2024 |
May 28, 2024 |
||||||
|
Total value |
$0.2 million |
$0.2 million |
||||||
|
Gain (Loss) |
not applicable |
$(82 thousand) |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 4.90 | $ | 4.90 | ||||
|
Market price |
$ | 4.51 | $ | 4.94 | ||||
|
Volatility |
86.9 | % | 83.9 | % | ||||
|
Risk-free rate |
4.54 | % | 4.94 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (years) |
2.0 | 1.8 | ||||||
Upon issuance in May 2023, the Secured Convertible Notes contained a lender’s conversion option which represented an embedded call option requiring bifurcation as an embedded derivative liability at fair value (see Note 10, “Convertible Notes” for additional discussion). Fair value was determined using a Black Scholes model as outlined below.
|
Secured Convertible Notes derivative |
Secured Convertible Notes derivative |
|||||||
|
Measurement event |
Issuance |
Shareholder Approval |
||||||
|
Date |
April 27, 2023 |
June 9, 2023 |
||||||
|
Total value (b) |
$0.2 million |
$0.2 million |
||||||
|
Gain |
not applicable |
$40 thousand |
||||||
|
Assumptions: |
||||||||
|
Exercise price |
$ | 45.50 | $ | 45.50 | ||||
|
Market price |
$ | 25.20 | (a) | $ | 23.80 | |||
|
Volatility |
80.1 | % | 76.9 | % | ||||
|
Risk-free rate |
4.88 | % | 5.41 | % | ||||
|
Dividend yield |
0.0 | % | 0.0 | % | ||||
|
Term (years) |
0.8 | 0.7 | ||||||
|
(a) |
Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. |
|
(b) |
Adjusted for probability of occurrence. |
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
2024 |
2023 |
|||||||
|
Prepaid insurance |
$ | 73 | $ | 66 | ||||
|
Prepaid dues and subscriptions |
63 | 85 | ||||||
|
Prepaid taxes |
49 | 83 | ||||||
|
Prepaid inventory |
25 | 73 | ||||||
|
Other |
116 | 81 | ||||||
|
Prepaid expenses from discontinued operations |
— | (132 | ) | |||||
|
Total prepaid expenses and other current assets |
$ | 326 | $ | 256 | ||||
NOTE 5. INVENTORY
Inventory consisted of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
2024 |
2023 |
|||||||
|
Raw materials and supplies |
$ | 144 | $ | 1,027 | ||||
|
Finished goods |
455 | 2,477 | ||||||
|
Less: Reserve for excess and obsolete inventory |
(126 | ) | (627 | ) | ||||
|
Inventory, net of reserves, from discontinued operations |
— | (2,313 | ) | |||||
|
Total inventory, net |
$ | 473 | $ | 564 | ||||
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
2024 |
2023 |
|||||||
|
Office and laboratory equipment |
$ | 20 | $ | 20 | ||||
|
Furniture and fixtures |
157 | 157 | ||||||
|
Computer equipment and software |
414 | 431 | ||||||
|
Leasehold improvements |
152 | 152 | ||||||
|
Total property and equipment, at cost |
743 | 760 | ||||||
|
Less: accumulated depreciation |
(682 | ) | (673 | ) | ||||
|
Total property and equipment, net |
$ | 61 | $ | 87 | ||||
Depreciation expense related to continuing operations was $9 thousand and $13 thousand for the three months ended September 30, 2024 and 2023, respectively, and $32 thousand and $39 thousand for the nine months ended September 30, 2024 and 2023, respectively. The Company recorded no depreciation expense during the three and nine months ended September 30, 2024 and 2023, and no property and equipment as of September 30, 2024 and December 31, 2023 related to discontinued operations.
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
2024 |
2023 |
|||||||
|
Contract liabilities (see Note 14) |
$ | 751 | $ | 946 | ||||
|
Employee payroll and benefits |
288 | 341 | ||||||
|
Other |
108 | 229 | ||||||
|
Accrued liabilities from discontinued operations |
— | (347 | ) | |||||
|
Total accrued liabilities |
$ | 1,147 | $ | 1,169 | ||||
NOTE 8. COMMITMENTS AND CONTINGENCIES
Indemnification Agreements
As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of September 30, 2024 or December 31, 2023.
In the normal course of business, the Company provides indemnification of varying scope under its agreements with other entities, typically its clinical research organizations, investigators, clinical sites, suppliers, and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2024 or December 31, 2023.
Legal Matters
From time to time, the Company is subject to various legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. The ultimate outcome of any litigation or other legal dispute is uncertain. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters are resolved against the Company in a reporting period for an amount above expectations, the Company’s financial condition and operating results for that period may be adversely affected. As of September 30, 2024 and December 31, 2023, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Any outcome, whether favorable or unfavorable, may materially and adversely affect the Company due to legal costs and expenses, diversion of management attention and other factors. The Company cannot provide assurance that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against it in the future, and these matters could relate to prior, current, or future transactions or events.
Leases
The Company leases office space for its corporate headquarters located in Emeryville, California. The current lease term expires on July 31, 2027.
Lease costs for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands):
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Operating lease – expense |
$ | 100 | $ | 100 | $ | 300 | $ | 300 | ||||||||
|
Operating lease from discontinued operations – expense |
— | 30 | — | 91 | ||||||||||||
|
Operating lease – included in operating cash flow |
117 | 113 | 310 | 301 | ||||||||||||
|
Operating lease from discontinued operations – included in operating cash flow |
— | 33 | — | 97 | ||||||||||||
The Company has measured its operating lease liabilities as the present value of minimum lease payments using its incremental borrowing rate over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate for operating leases from continuing operations are summarized as follows:
|
September 30, 2024 |
September 30, 2023 |
|||||||
|
Weighted-average remaining lease term (in years) |
2.8 | 3.6 | ||||||
|
Weighted-average discount rate |
5 | % | 5 | % | ||||
Future lease payments under non-cancelable leases as of September 30, 2024 were as follows (in thousands):
|
2024 |
$ |
117 | ||
|
2025 |
439 | |||
|
2026 |
444 | |||
|
2027 |
290 | |||
|
Total future minimum lease payments |
1,290 | |||
|
Less: Imputed interest |
(79 | ) | ||
|
Total |
$ | 1,211 | ||
|
Reported as: |
||||
|
Operating lease liability |
$ | 390 | ||
|
Operating lease liability – non-current |
821 | |||
|
Total |
$ | 1,211 |
NOTE 9. FINANCING ACTIVITIES
See Notes 2, “Summary of Significant Accounting Policies”; 3, “Fair Value Measurements”; 10, “Convertible Notes”; 11, “Common Stock Warrants” and 12, “Stockholders’ Equity” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.
2024 Public Offering
On July 26, 2024, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Ladenburg Thalmann & Co., Inc., as the sole underwriter (the “Underwriter”), relating to the issuance and sale in a public offering (the “2024 Public Offering”) of: (i) 1,158,566 shares of common stock and 2,041,814 pre-funded warrants, in lieu of shares of common stock (the “July 2024 Pre-Funded Warrants”), (ii) 3,200,380 Series F-1 warrants to purchase up to 3,200,380 shares of common stock (the “Series F-1 Warrants”), (iii) 3,200,380 Series F-2 warrants to purchase up to 3,200,380 shares of common stock (the “Series F-2 Warrants”) and (iv) 3,200,380 Series F-3 warrants to purchase up to 3,200,380 shares of common stock (the “Series F-3 Warrants”, and together with the Series F-1 Warrants and Series F-2 Warrants, the “July 2024 Warrants”).
The Series F-1 Warrants had an exercise price of $1.10 per share at issuance, were exercisable immediately upon issuance, and will expire on the five-year anniversary of the date of issuance. The Series F-2 Warrants had an exercise price of $1.10 per share at issuance, were exercisable immediately upon issuance, and will expire on the six-month anniversary of the date of issuance. The Series F-3 Warrants had an exercise price of $1.10 per share at issuance, were exercisable immediately upon issuance, and will expire on the one-year anniversary of the date of issuance. The July 2024 Pre-Funded Warrants were immediately exercisable at a nominal exercise price of $0.01 per share and could be exercised at any time until the July 2024 Pre-Funded Warrants were exercised in full. As of September 30, 2024, all of the July 2024 Pre-Funded Warrants had been exercised, resulting in the Company issuing 2,041,814 shares of common stock. In connection with such exercises, the Company received net proceeds of approximately $20 thousand.
The July 2024 Warrants include a down round feature adjustment where the exercise price was automatically reset to a price equal to the lesser of (i) the then exercise price and (ii) 90% of the volume weighted average prices for the five (5) trading days immediately preceding the date that is sixty calendar days after issuance of the July 2024 Warrants as applicable. Such down round feature adjustment was triggered on September 27, 2024, resulting in a reduced exercise price of $0.66.
The exercise price and number of shares of common stock issuable upon exercise of the July 2024 Warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the common stock and the exercise price. Subject to limited exceptions, a holder may not exercise any portion of its July 2024 Warrants to the extent that the holder would beneficially own more than 4.99% (or, at the election of the holder prior to the date of issuance, 9.99%) of the Company’s outstanding common stock after exercise.
In addition, the Company granted the Underwriter a 45-day option to purchase up to 477,272 additional shares of common stock and/or 477,272 Series F-1 Warrants to purchase up to 477,272 shares of common stock, 477,272 Series F-2 Warrants to purchase up to 477,272 shares of common stock and 477,272 Series F-3 Warrants to purchase up to 477,272 shares of common stock, or any combination thereof, as determined by the Underwriter, at the public offering price, less underwriting discounts and commissions, in each case solely to cover over-allotments, if any.
The Underwriter partially exercised this option on July 26, 2024, for (i) 336,832 shares of common stock, (ii) 336,832 Series F-1 Warrants to purchase up to 336,832 shares of common stock, (iii) 336,832 Series F-2 Warrants to purchase up to 336,832 shares of common stock and (iv) 336,832 Series F-3 Warrants to purchase up to 336,832 shares of common stock.
The 2024 Public Offering closed on July 29, 2024, and the Company received gross proceeds of $3.9 million, without taking into account any underwriting discounts and commissions. A portion of the proceeds were used towards repaying the Secured Convertible Notes, which were repaid in full during the third quarter of 2024.
2024 Warrant Reprice Transaction
In June 2024, the Company entered into a warrant reprice transaction (the “2024 Warrant Reprice Transaction”) with certain existing holders of (i) warrants issued in September 2022 to purchase common stock, (ii) Series A-1 warrants issued in November 2022 to purchase common stock, (iii) Series B-1 Warrants issued in May 2023 to purchase common stock, and (iv) Series B-2 Warrants issued in May 2023 to purchase common stock (collectively (i) through (iv), the “Existing Warrants”). The participants agreed to exercise a portion of their Existing Warrants at a reduced exercise price of $2.50. Existing Warrants were exercised for an aggregate of 90,381 shares of common stock, resulting in gross proceeds of approximately $0.2 million.
The Company also issued participants in the 2024 Warrant Reprice Transaction a new June 2024 Warrant to purchase a number of shares of common stock equal to 100% of the shares of common stock exercised. The June 2024 Warrants are substantially similar to the Existing Warrants, except that the June 2024 Warrants will (i) be initially exercisable on the six-month anniversary of the date of issuance; (ii) have an exercise price of $2.57; and (iii) have a term of five (5) years and six (6) months from the date of the closing of the 2024 Warrant Reprice Transaction.
The Company incurred total issuance costs of $96 thousand in conjunction with the 2024 Warrant Reprice Transaction. The Company incurred a $69 thousand non-cash loss on the modification of common stock warrants which was recorded in “Other expense, net” during the nine months ended September 30, 2024.
2024 Subsidiary Guarantee Termination
On March 24, 2024, in connection with completing certain required conditions to close the DERMAdoctor Divestiture, the Company and the holders of the Secured Convertible Notes entered into a First Amendment (the “First Amendment”) to the Company’s Security Agreement, dated April 27, 2023 (the “Security Agreement”), to remove the Membership Units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement, and a Consent and Release (the “Subsidiary Guarantee Consent”), to terminate the Subsidiary Guarantee, dated April 7, 2023 (the “Subsidiary Guarantee”) (collectively, the “2024 Subsidiary Guarantee Termination”). To obtain the secured parties’ consent that resulted in the reduction of the collateral available to secure the obligations under the Secured Convertible Notes and as consideration for the secured parties taking the necessary actions to execute and deliver the First Amendment and the Subsidiary Guarantee Consent, the Company provided each secured party the option, at the Secured Party’s election, to receive only upon the closing of the DERMAdoctor Divestiture either a March 2024 Warrant (see Note 11, “Common Stock Warrants”) or an Unsecured Convertible Note (see Note 10 “Convertible Notes”).
The Company issued, based on the secured parties’ elections, (i) a March 2024 Warrant to a secured party that is exercisable for an aggregate of 1,000,000 shares of common stock (28,572 shares post-Reverse Stock Split) and (ii) Unsecured Convertible Notes to four secured parties that have an aggregate principal amount of $525 thousand or will be convertible into an aggregate of 3,750,000 shares of common stock (107,146 shares post-Reverse Stock Split).
The Company incurred total issuance costs of $130 thousand in conjunction with the 2024 Subsidiary Guarantee Termination. The Company allocated $19 thousand of the issuance costs to the Unsecured Convertible Notes which was recorded as a discount in the Company’s condensed consolidated balance sheets. The remaining $111 thousand was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s unaudited condensed consolidated statements of operations, during the nine months ended September 30, 2024.
2023 Warrant Reprice Transaction
In December 2023, the Company entered into a warrant reprice transaction (the “2023 Warrant Reprice Transaction”) whereby the price terms of certain May 2023 Warrants exercisable for 2,528,848 shares of common stock (72,256 shares post-Reverse Stock Split) were amended and exercised. The price of the amended and exercised May 2023 Warrants was reduced from $1.30 ($45.50 post-Reverse Stock Split) to $0.25 ($8.75 post-Reverse Stock Split). The Company also issued to participants in the 2023 Warrant Reprice Transaction, the December 2023 Warrants exercisable for 2,528,848 shares of common stock (72,256 shares post-Reverse Stock Split).
The 2023 Warrant Reprice Transaction resulted in gross proceeds of approximately $0.6 million. The Company allocated the gross proceeds between the common stock and December 2023 Warrants issued to participants by applying the relative fair value allocation methodology. The Company allocated $0.2 million in gross proceeds to the common stock and $0.4 million to the December 2023 Warrants. The December 2023 Warrants were initially classified as liabilities from the date of issuance until Company stockholder approval on May 28, 2024, at which time they were reclassified to equity.
The Company incurred total issuance costs of $0.2 million in conjunction with the 2023 Warrant Reprice Transaction. The Company allocated $0.1 million of the issuance costs to the common stock which was recorded as a reduction of additional paid-in capital in the Company’s condensed consolidated balance sheets. The remaining $0.1 million was allocated to the warrant liability and expensed as “Other expense, net” in the Company’s unaudited condensed consolidated statements of operations.
2023 Private Placement
In May 2023, the Company closed a private placement (the “2023 Private Placement”) with existing accredited institutional investors of the Company that provided for the issuance and sale of $3.3 million aggregate principal amount of the Secured Convertible Notes and the May 2023 Warrants exercisable for up to 5,076,928 shares of common stock (145,056 shares post-Reverse Stock Split).
The Company received gross proceeds of $3.0 million from the 2023 Private Placement. The Company allocated the proceeds from the 2023 Private Placement between the May 2023 Warrants, an embedded derivative liability, and the Secured Convertible Notes by applying the residual fair value methodology. The Company first allocated $1.6 million to the May 2023 Warrants and $0.2 million to the embedded derivative liability with the residual $1.2 million allocated to the Secured Convertible Notes. The embedded derivative liability was subsequently reclassified to equity upon stockholder approval.
The Company incurred total issuance costs of $0.7 million in conjunction with the 2023 Private Placement, including a $0.4 million non-cash loss on the warrant modification. The Company allocated $0.3 million of the issuance costs to the Secured Convertible Notes which was recorded as a discount in the Company’s condensed consolidated balance sheets. The remaining $0.4 million was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s unaudited condensed consolidated statements of operations.
NOTE 10. CONVERTIBLE NOTES
Unsecured Convertible Notes
In March 2024, the Company issued $525 thousand aggregate principal amount unsecured convertible notes (the “Unsecured Convertible Notes”) in conjunction with the 2024 Subsidiary Guarantee Termination. The 2024 Subsidiary Guarantee Termination was executed with certain holders of the Secured Convertible Notes in order to close the DERMAdoctor Divestiture (see additional discussion in Note 9, “Financing Activities” and Note 18, “Divestiture and Discontinued Operations”). The Unsecured Convertible Notes are due March 25, 2026 and bear no stated interest.
The Unsecured Convertible Notes may be converted or redeemed for a conversion price equal to $0.14 per share ($4.90 per share post-Reverse Stock Split) at any time at the election of the holder up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations. Upon issuance and as of September 30, 2024, the Unsecured Convertible Notes were convertible for up to 3,750,000 shares of common stock (107,146 shares post-Reverse Stock Split).
Upon issuance in March 2024, the lender’s conversion option under the Unsecured Convertible Notes represented an embedded call option requiring bifurcation as an embedded derivative liability because the common stock underlying the option required stockholder approval before the option could be exercised. The fair value of the embedded derivative was determined to be $159 thousand as of March 31, 2024 in accordance with a Black Scholes valuation model. See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”. Upon stockholder approval on May 28, 2024, the embedded call option no longer required liability treatment and was reclassified to equity. The fair value of the embedded derivative liability was determined to be $242 thousand as of May 28, 2024. The change of $83 thousand in fair value between March 31, 2024 and May 28, 2024 was recorded as a non-cash loss on change in fair value of embedded derivative liability in the unaudited condensed consolidated statements of operations. See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”.
The discount to the note recorded for the embedded derivative liability upon issuance and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Unsecured Convertible Notes, assuming that the Unsecured Convertible Notes will be redeemed for cash of $525 thousand at time of maturity as of March 25, 2026. During both the three and nine months ended September 30, 2024, the effective interest rate on the Unsecured Convertible Notes was 144%. During the three and nine months ended September 30, 2024, interest expense recognized, including amortization of the issuance costs and debt discount, was $20 thousand and $35 thousand, respectively, which was included in other expense, net in the unaudited condensed consolidated statements of operations.
Secured Convertible Notes
In May 2023, the Company issued $3.3 million aggregate principal amount Original Issue Discount Senior Secured Convertible Debentures (the “Secured Convertible Notes”) in conjunction with the 2023 Private Placement (see Note 9, “Financing Activities”). The Secured Convertible Notes were issued with a $300 thousand original issue discount. The Secured Convertible Notes were originally due November 1, 2024 and were repaid in full during the third quarter of 2024 from the proceeds of the 2024 Public Offering. The Company paid $13 thousand more than the carrying amount of the Secured Convertible Notes, resulting in a loss on extinguishment that was expensed as “Extinguishment of Secured Convertible Notes” in the unaudited condensed consolidated statements of operations. Upon full repayment, the Company was released from any further obligations under the Secured Convertible Notes with the lenders.
Prior to being paid off, the Secured Convertible Notes could be converted or redeemed for a conversion price equal to $1.30 per share ($45.50 per share post-Reverse Stock Split) at any time at the election of the holder up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations. Upon issuance, the Secured Convertible Notes were convertible for up to 2,538,464 shares of common stock (72,528 shares post-Reverse Stock Split).
Beginning June 1, 2023, the Company was required to start making a monthly redemption of 1/18th of the original principal amount of the Secured Convertible Notes. Each monthly redemption reduced the outstanding principle of the Secured Convertible Note by $183 thousand and could be made in cash or, under limiting conditions, in stock at the election of the Company. Monthly redemption in cash required a total payment of $193 thousand. Monthly redemption in stock required the issuance of shares equal to $193 thousand divided by the lower of (i) $45.50 or (ii) 90% of the Company’s common stock’s average volume-weighted average price over 10 trading days prior to the redemption. The conditions allowing for redemption in stock were not met and the Company made all monthly redemption payments in cash.
The Secured Convertible Notes also provided for a redemption equal to up to 20% of the gross proceeds received by the Company from any financing completed while the Secured Convertible Notes were outstanding. In connection with the 2023 Warrant Reprice Transaction (see Note 12, “Stockholders’ Equity”), the Company made such a payment totaling $126 thousand in cash against the Secured Convertible Notes. In connection with the 2024 Warrant Reprice Transaction (see Note 12, “Stockholders’ Equity”), the Company made such a payment totaling $45 thousand in cash against the Secured Convertible Notes. In connection with the 2024 Public Offering (see Note 12, “Stockholders’ Equity”), the Company repaid the remaining balance of the Secured Convertible Notes with a payment totaling $433 thousand in cash.
Upon issuance in May 2023, the lender’s conversion option under the Secured Convertible Notes represented an embedded call option requiring bifurcation as an embedded derivative liability because the common stock underlying the option required stockholder approval before the option could be exercised. The fair value of the embedded derivative was determined to be $209 thousand as of the date of issuance. After stockholder approval of the underlying common stock, the embedded call option no longer required liability treatment and was reclassified to equity. The fair value of the embedded derivative liability was determined to be $169 thousand upon stockholder approval. The change of $40 thousand in fair value between the date of issuance and stockholder approval was recorded as a non-cash gain on change in fair value of embedded derivative liability in the consolidated statements of operations. See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”.
The lender’s subsequent financing redemption option and certain events of default also represented embedded call options and the Company’s monthly share redemption option represented an embedded put option. The fair value of these options was determined to be immaterial upon issuance and at each subsequent reporting date.
The Company allocated $1.2 million of gross proceeds from the 2023 Private Placement to the Secured Convertible Notes.
The difference between the $1.2 million allocated to the Secured Convertible Notes and the $3.3 million aggregate principal amount represented discounts for the portion of proceeds allocated to the embedded derivative liability and the May 2023 Warrants (See Note 11, “Common Stock Warrants”) as well as the $0.3 million original issue discount. The Company also allocated $0.3 million of debt issuance costs to the Secured Convertible Notes.
The discounts and debt issuance costs were amortized to interest expense using the effective interest rate method over the term of the Secured Convertible Notes. The effective interest rate on the Secured Convertible Notes was 173%. During the three and nine months ended September 30, 2024, interest expense recognized, including amortization of the issuance costs and debt discount, was $12 thousand and $0.8 million, respectively, which was included in other expense, net in the unaudited condensed consolidated statements of operations.
NOTE 11. COMMON STOCK WARRANTS
See Notes 2, “Summary of Significant Accounting Policies”; 3, “Fair Value Measurements”; 9, “Financing Activities”; and 12, “Stockholders’ Equity” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.
July 2024 Pre-Funded Warrants
In July 2024, in conjunction with the 2024 Public Offering, the Company issued 2,041,814 pre-funded warrants (in lieu of shares of common stock (see additional discussion in Note 9, “Financing Activities”). The July 2024 Pre-Funded Warrants were classified as a component of permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, were immediately exercisable, did not embody an obligation for us to repurchase our shares, and permitted the holders to receive a fixed number of shares of common stock upon exercise.
As of September 30, 2024, all of the July 2024 Pre-Funded Warrants had been exercised, resulting in the Company issuing 2,041,814 shares of common stock. In connection with such exercises, the Company received net proceeds of approximately $20 thousand.
July 2024 Warrants
In July 2024, in conjunction with the 2024 Public Offering, the Company issued new common stock purchase warrants (collectively the “July 2024 Warrants”).
|
● |
July 2024 Series F-1 Warrants exercisable for 3,537,212 shares of common stock for an initial exercise price of $1.10 per share through July 30, 2029 (“July 2024 Series F-1 Warrants”); and |
|
|
● |
July 2024 Series F-2 Warrants exercisable for 3,537,212 shares of common stock for an initial exercise price of $1.10 per share through January 29, 2025 (“July 2024 Series F-2 Warrants”); and |
|
|
● |
July 2024 Series F-3 Warrants exercisable for 3,537,212 shares of common stock for an initial exercise price of $1.10 per share through July 29, 2025 (“July 2024 Series F-3 Warrants”). |
The July 2024 Warrants down round feature adjustment was triggered on September 27, 2024, resulting in a reduced exercise price of $0.66. As a result of the reduced exercise price, a deemed dividend of $1.0 million was recognized in accordance with a Black Scholes valuation model. See Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions”.
June 2024 Warrants
In June 2024, in conjunction with the 2024 Warrant Reprice Transaction, the Company issued new common stock purchase warrants (the “June 2024 Warrants”) exercisable for 90,381 shares of common stock for $2.57 per share through December 17, 2029.
March 2024 Warrant
In March 2024, the Company executed the First Amendment and Subsidiary Guarantee Consent as part of the 2024 Subsidiary Guarantee Termination with holders of the Secured Convertible Notes (see Note 10, “Convertible Notes”) in order to close the DERMAdoctor Divestiture (see additional discussion in Note 9, “Financing Activities” and Note 18, “Divestiture and Discontinued Operations”). In exchange for the consent of each holder, the option, at the holder’s election, to receive upon the closing of the DERMAdoctor sale either, a new common stock warrant (the “March 2024 Warrant”), or a new unsecured convertible note (see additional discussion in Note 18, “Divestiture and Discontinued Operations”). One holder elected the option to receive a March 2024 Warrant exercisable for 1,000,000 shares of common stock (28,572 shares post-Reverse Stock Split) for $0.14 per share ($4.90 per share post-Reverse Stock Split).
The March 2024 Warrant was initially classified as a liability from the date of issuance until Company stockholder approval on May 28, 2024, at which time it was reclassified to equity.
December 2023 Warrants
In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company issued new common stock purchase warrants (the “December 2023 Warrants”) exercisable for 2,528,848 shares of common stock (72,256 shares post-Reverse Stock Split) for $0.25 per share ($8.75 per share post-Reverse Stock Split) through June 21, 2029.
The December 2023 Warrants were initially classified as liabilities from the date of issuance until Company stockholder approval was received on May 28, 2024, at which time it was reclassified to equity.
May 2023 Warrants
In May 2023, in conjunction with the 2023 Private Placement, the Company issued the following new common stock purchase warrants (collectively, the “May 2023 Warrants”):
|
● |
May 2023 Series B-1 Warrants exercisable for 2,538,464 shares of common stock (72,528 shares post-Reverse Stock Split) for an initial exercise price of $1.30 per share ($45.50 per share post-Reverse Stock Split) through June 9, 2028 (“May 2023 B-1 Warrants”); and |
|
|
● |
May 2023 Series B-2 Warrants exercisable for 2,538,464 shares of common stock (72,528 shares post-Reverse Stock Split) for an initial exercise price of $1.30 per share ($45.50 per share post-Reverse Stock Split) through June 9, 2025 (“May 2023 B-2 Warrants”). |
In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company amended certain May 2023 Warrants to reduce their exercise prices to $0.25 ($8.75 post-Reverse Stock Split). Immediately after amendment, the following May 2023 Warrants were exercised (while any unexercised May 2023 Warrants maintained an exercise price of $1.30 ($45.50 post-Reverse Stock Split)):
|
● |
May 2023 B-1 Warrants exercisable for 634,616 shares of common stock (18,132 shares of post-Reverse Stock Split); and |
|
|
● |
May 2023 B-2 Warrants exercisable for 1,894,232 shares of common stock (54,120 shares post-Reverse Stock Split). |
In June 2024, in conjunction with the 2024 Warrant Reprice Transaction, the Company amended certain May 2023 Warrants to reduce their exercise prices to $2.50. Immediately after amendment, the following May 2023 Warrants were exercised (while any unexercised May 2023 Warrants maintained an exercise price of $8.75):
|
● |
May 2023 B-1 Warrants exercisable for 54,396 shares of common stock; and |
|
|
● |
May 2023 B-2 Warrants exercisable for 18,408 shares of common stock. |
For the amendments in December 2023 and June 2024, the Company recognized a loss on modification of common stock warrants related to the May 2023 Warrants of $170 thousand and $47 thousand, respectively.
November 2022 Warrants
In November 2022, in conjunction with the 2022 Private Placement, the Company issued the following common stock purchase warrants (collectively, the “November 2022 Warrants”):
|
● |
November 2022 Series A-1 Warrants exercisable for 515,876 shares of common stock (14,741 shares post-Reverse Stock Split) for an initial exercise price of $6.30 per share ($220.50 per share post-Reverse Stock Split) through November 20, 2028 (“November 2022 A-1 Warrants”); and |
|
|
● |
November 2022 Series A-2 Warrants exercisable for 515,876 shares of common stock (14,741 shares post-Reverse Stock Split) for an initial exercise price of $6.30 per share ($220.50 per share post-Reverse Stock Split) through May 20, 2024 (“November 2022 A-2 Warrants”). |
In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain November 2022 Warrants to reduce their exercise prices from $6.30 ($220.50 post-Reverse Stock Split) to $1.50 ($52.50 post-Reverse Stock Split) as follows:
|
● |
November 2022 A-1 Warrants exercisable for 436,510 shares of common stock (12,473 shares post-Reverse Stock Split); and |
|
|
● |
November 2022 A-2 Warrants exercisable for 436,510 shares of common stock (12,473 shares post-Reverse Stock Split). |
In May 2024, all November 2022 Series A-2 Warrants for 14,741 shares of common stock remained unexercised and expired.
In June 2024, in conjunction with the 2024 Warrant Reprice Transaction, the Company amended certain November 2022 Warrants to reduce their exercise prices from $52.50 to $2.50 as follows:
|
● |
November 2022 A-1 Warrants exercisable for 12,473 shares of common stock. |
For the amendments in May 2023 and June 2024, the Company recognized a loss on modification of common stock warrants related to the November 2022 Warrants of $74 thousand and $16 thousand, respectively.
September 2022 Warrants
In September 2022, in conjunction with the warrant reprice transaction (the “2022 Warrant Reprice Transaction”), the Company issued new common stock purchase warrants (the “September 2022 Warrants”) exercisable for 327,860 shares of common stock (9,371 shares post-Reverse Stock Split) for an initial exercise price of $6.30 per share ($220.50 per share post-Reverse Stock Split) through September 11, 2028.
In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain September 2022 Warrants exercisable for 238,574 shares of common stock (6,819 shares post-Reverse Stock Split) to reduce their exercise prices from $6.30 ($220.50 post-Reverse Stock Split) to $1.50 ($52.50 post-Reverse Stock Split).
In June 2024, in conjunction with the 2024 Warrant Reprice Transaction, the Company amended certain September 2022 Warrants exercisable for 5,104 shares of common stock to reduce their exercise prices from $52.50 to $2.50.
For the amendments in May 2023 and June 2024, the Company recognized a loss on modification of common stock warrants related to the September 2022 Warrants of $28 thousand and $6 thousand, respectively.
November 2021 Warrants
In November 2021, in conjunction with a private placement transaction, the Company issued new common stock purchase warrants (the “November 2021 Warrants”) exercisable for 1,071,434 shares of common stock (30,616 shares post-Reverse Stock Split) for an initial exercise price of $18.55 per share ($649.25 per share post-Reverse Stock Split) through March 9, 2023.
In September 2022, in conjunction with the 2022 Warrant Reprice Transaction, the Company amended all November 2021 Warrants to reduce their exercise prices from $18.55 ($649.25 post-Reverse Stock Split) to $6.30 ($220.50 post-Reverse Stock Split) and extend their termination date to September 11, 2028. Immediately after amendment, November 2021 Warrants were exercised for 7,654 shares of common stock.
In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain November 2021 Warrants exercisable for 535,716 shares of common stock (15,308 shares post-Reverse Stock Split) to reduce their exercise prices from $6.30 ($220.50 post-Reverse Stock Split) to $1.50 ($52.50 post-Reverse Stock Split).
For the amendments in September 2022 and May 2023, the Company recognized a loss on modification of common stock warrants related to the November 2021 Warrants of $1.5 million and $0.1 million, respectively.
July 2020 Warrants
In July 2020, in conjunction with a private placement transaction, the Company issued new common stock purchase warrants (the “July 2020 Warrants”) exercisable for 197,105 shares of common stock (5,635 shares post-Reverse Stock Split) for an initial exercise price of $57.75 per share ($2,021.25 per share post-Reverse Stock Split) through January 22, 2026.
In September 2022, in conjunction with the 2022 Warrant Reprice Transaction, the Company amended certain July 2020 Warrants exercisable for 137,145 shares of common stock (3,921 shares post-Reverse Stock Split) to reduce their exercise prices from $57.75 ($2,021.25 post-Reverse Stock Split) to $6.30 ($220.50 post-Reverse Stock Split). Immediately after amendment, July 2020 Warrants were exercised for 60,000 shares of common stock (1,715 shares post-Reverse Stock Split).
In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain July 2020 Warrants exercisable for 77,145 shares of common stock (2,206 shares post-Reverse Stock Split) to reduce their exercise prices from $6.30 ($220.50 post-Reverse Stock Split) to $1.50 ($52.50 post-Reverse Stock Split).
For the amendments in September 2022 and May 2023, the Company recognized a loss on modification of common stock warrants related to the July 2020 Warrants of $0.4 million and $9 thousand, respectively.
Summary of Common Stock Warrant Activity and Outstanding
Activity related to common stock warrants outstanding at September 30, 2024 and 2023 were as follows:
|
Warrants |
Weighted- Average Exercise Price |
|||||||
|
Outstanding at December 31, 2022 |
65,886 | $ | 269.54 | |||||
|
Warrants granted |
145,056 | $ | 45.50 | |||||
|
Warrants exercised |
— | $ | — | |||||
|
Warrants expired |
— | $ | — | |||||
|
Outstanding at September 30, 2023 |
210,942 | $ | 76.23 | |||||
|
Outstanding at December 31, 2023 |
210,946 | $ | 50.96 | |||||
|
Warrants granted |
10,730,589 | $ | 0.69 | |||||
|
Pre-funded Warrants granted |
2,041,814 | $ | 0.01 | |||||
|
Warrants exercised |
(90,381 | ) | $ | 2.50 | ||||
|
Pre-funded Warrants exercised |
(2,041,814 | ) | $ | 0.01 | ||||
|
Warrants expired |
(14,879 | ) | $ | 88.87 | ||||
|
Outstanding at September 30, 2024 |
10,836,275 | $ | 1.41 | |||||
Common stock warrants outstanding as of September 30, 2024 were as follows:
|
Series |
Exercise Price* |
Expiration Date |
Warrants* |
||||||
|
July 2020 Warrants |
$ | 2,021.25 |
January 22, 2026 |
1,714 | |||||
|
July 2020 Warrants |
$ | 52.50 |
January 22, 2026 |
2,206 | |||||
|
TLF Warrants |
$ | 822.96 |
January 15, 2026 |
13 | |||||
|
November 2021 Warrants |
$ | 220.50 |
September 11, 2028 |
7,654 | |||||
|
November 2021 Warrants |
$ | 52.50 |
September 11, 2028 |
15,308 | |||||
|
September 2022 Warrants |
$ | 220.50 |
September 11, 2028 |
2,552 | |||||
|
September 2022 Warrants |
$ | 52.50 |
September 11, 2028 |
1,715 | |||||
|
November 2022 A-1 Warrants |
$ | 220.50 |
November 20, 2028 |
2,268 | |||||
|
December 2023 Warrants |
$ | 8.75 |
June 21, 2029 |
72,256 | |||||
|
March 2024 Warrant |
$ | 4.90 |
March 24, 2029 |
28,572 | |||||
|
June 2024 Warrants |
$ | 2.57 |
December 17, 2029 |
90,381 | |||||
|
July 2024 F-1 Warrants |
$ | 0.66 |
July 30, 2029 |
3,537,212 | |||||
|
July 2024 F-2 Warrants |
$ | 0.66 |
January 29, 2025 |
3,537,212 | |||||
|
July 2024 F-3 Warrants |
$ | 0.66 |
July 29, 2025 |
3,537,212 | |||||
|
Outstanding at September 30, 2024 |
10,836,275 | ||||||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
Summary of Common Stock Warrant Liabilities
The following is a reconciliation of the beginning and ending balances for warrant liabilities measured at fair value on a recurring basis (in thousands). See additional information per Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Models and Assumptions.”
|
Warrant liabilities as of December 31, 2023 |
$ | 334 | ||
|
Decrease in fair value of December 2023 Warrant liability during period |
(122 | ) | ||
|
Fair value of March 2024 Warrant upon issuance |
92 | |||
|
Increase in fair value of March 2024 Warrant liability during period |
8 | |||
|
Reclassification of December 2023 Warrant liability to equity during period |
(212 | ) | ||
|
Reclassification of March 2024 Warrant liability to equity during period |
(100 | ) | ||
|
Warrant liabilities as of September 30, 2024 |
$ | — |
NOTE 12. STOCKHOLDERS’ EQUITY
Authorized Share Capital
Under the Company’s Amended and Restated Certificate of Incorporation, as amended, the Company is authorized to issue up to 150,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with rights and preferences as may be approved by the Company’s Board.
Reverse Stock Split
Effective May 30, 2024, the Company amended its Certificate of Incorporation to effect a 1-for-35 reverse split of its outstanding common stock. The Reverse Stock Split was approved by the Company’s stockholders on May 28, 2024. As a result of the Reverse Stock Split, every 35 shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into 1 share of common stock. Proportionate voting rights and other rights of common stockholders were not affected by the reverse stock split. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share. All stock options outstanding, common stock reserved for issuance under the Company’s equity incentive plans, common stock reserved for issuance under the Series B Preferred Stock and outstanding warrants were adjusted by dividing the number of affected shares of common stock by 35 and, as applicable, multiplying the exercise/conversion price by 35. Except as otherwise specifically noted, all share numbers, share prices, exercise prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 1-for-35 reverse stock split.
Preferred Stock
There were two series of preferred stock of the Company outstanding during the three and nine months ended September 30, 2024 and 2023 – the Series B Non-Voting Convertible Preferred Stock (“Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (“Series C Preferred Stock”) (and combined, the “Preferred Stock”). The rights and preferences of the Series B Preferred Stock and Series C Preferred Stock are nearly identical. The Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of the Company. Each share of Preferred Stock is convertible into $1,000 of common stock at the conversion price per share applicable at the time of conversion. Until the expiration of such term (as described in more detail below), the Preferred Stock had anti-dilution protection (the “Ratchet”) in the event that the Company sold or granted any of its common stock or any other securities, subject to certain limited exceptions, that would entitle the holder thereof to acquire common stock at an effective price per share that is lower than the then applicable conversion price of the Preferred Stock.
Series B Preferred Stock
The Company issued 15,000 shares of Series B Preferred Stock in November 2021 in connection with a private placement transaction. As of September 30, 2024 and 2023, 131 and 6,150 shares of Series B Preferred Stock remained outstanding, respectively. As of September 30, 2024 and 2023, outstanding shares of Series B Preferred Stock were convertible into 527,275 shares of common stock (15,065 shares post-Reverse Stock Split) and 4,735,500 shares of common stock (135,300 shares post-Reverse Stock Split) at a conversion price of $0.25 ($8.75 post-Reverse Stock Split) and $1.30 ($45.50 post-Reverse Stock Split), respectively.
In accordance with the Ratchet, the Series B Preferred Stock conversion price was reduced as follows (see also Notes 2, “Summary of Significant Accounting Policies” and 3, “Fair Value Measurements”):
|
● |
In September 2022, from $14.00 ($490.00 post-Reverse Stock Split) to $6.30 ($220.50 post-Reverse Stock Split), as a result of the 2022 Warrant Reprice Transaction, resulting in a $5.7 million deemed dividend. |
|
|
● |
In April 2023, from $6.30 ($220.50 post-Reverse Stock Split) to $1.30 ($45.50 post-Reverse Stock Split), as a result of the 2023 Private Placement, resulting in a $1.8 million deemed dividend. |
|
|
● |
In December 2023, from $1.30 ($45.50 post-Reverse Stock Split) to $0.25 ($8.75 post-Reverse Stock Split), as a result of the 2023 Warrant Reprice Transaction, resulting in a $4.5 million deemed dividend. |
On January 29, 2024, the Ratchet of the Series B Preferred Stock expired with no further impact because greater than 75% of the originally issued 15,000 Series B Preferred Stock had been converted into common stock. The Series B Preferred Stock conversion price will remain at $0.25 ($8.75 post-Reverse Stock Split) until all remaining Series B Preferred Stock has been converted.
Series C Preferred Stock
The Company issued 3,250 shares of Series C Preferred Stock in November 2022 in connection with the 2022 Private Placement (see Note 9, “Financing Activities”). As of September 30, 2024 and 2023, zero and 1,097 shares of Series C Preferred Stock remained outstanding, respectively. As of September 30, 2023, outstanding shares of Series C Preferred Stock were convertible into 844,690 shares of common stock (24,134 shares post-Reverse Stock Split) at a conversion price of $1.30 ($45.50 post-Reverse Stock Split).
In accordance with the Ratchet, the Series C Preferred Stock conversion price was reduced as follows (see also Notes 2, “Summary of Significant Accounting Policies” and 3, “Fair Value Measurements”):
|
● |
In April 2023, from $6.30 ($220.50 post-Reverse Stock Split) to $1.30 ($45.50 post-Reverse Stock Split), as a result of the 2023 Private Placement, resulting in a $194 thousand deemed dividend. |
|
|
● |
In December 2023, from $1.30 ($45.50 post-Reverse Stock Split) to $0.25 ($8.75 post-Reverse Stock Split), as a result of the 2023 Warrant Reprice Transaction, resulting in a $0.5 million deemed dividend. |
|
|
● |
In March 2024, from $0.25 ($8.75 post-Reverse Stock Split) to $0.14 ($4.90 post-Reverse Stock Split), as a result of the 2024 First Amendment and the Subsidiary Guarantee Consent, resulting in a $0.4 million deemed dividend. |
On March 27, 2024, the Ratchet of the Series C Preferred Stock expired with no further impact because greater than 75% of the originally issued 3,250 Series C Preferred Stock had been converted into common stock.
Common Stock
See Note 9, “Financing Activities” and Note 11, “Common Stock Warrants” for a description of common stock and common stock warrant-related transactions during the three and nine months ended September 30, 2024 and 2023.
NOTE 13. EQUITY-BASED COMPENSATION
Equity Compensation Plans
In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board. The 2007 Plan expired on March 15, 2017. Upon expiration, new awards cannot be issued pursuant to the 2007 Plan, but outstanding awards continue to be governed by its terms. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. All stock options outstanding under the 2007 Plan were fully vested as of December 31, 2021.
In March 2017, the Company adopted the 2017 Omnibus Incentive Plan (the “2017 Plan”), which was approved by stockholders on June 2, 2017, to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), RSUs and other share-based awards to employees, directors, and consultants, as determined by the Board. The 2017 Plan does not affect awards previously granted under the 2007 Plan. Upon adoption, the 2017 Plan allowed for awards of up to 66,243 shares (1,892 shares post-Reverse Stock Split) of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the first day of each of the Company’s fiscal years beginning January 1, 2018 through January 1, 2027 equal to (i) 4% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock as determined by the Board. On June 21, 2024, the number of shares available for future awards under the 2017 Plan was increased by 12,219 shares. As of September 30, 2024, there were 13,650 shares available for future awards under the 2017 Plan.
Under the terms of the 2017 Plan, the exercise price of NQSOs, ISOs and SARs may not be less than 100% of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than 10% of the Company’s stock, then not less than 110% of the fair market value of the common stock on the date of grant. The term of awards will not be longer than ten years or, in the case of ISOs, no longer than five years with respect to holders of more than 10% of the Company’s stock. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. The Company issues new shares to satisfy options under the 2007 Plan and the 2017 Plan.
Summary of Outstanding Equity Awards
The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2023, and activity during the nine months ended September 30, 2024:
|
(in thousands, except years |
Awards* |
Weighted- Average Exercise Price* |
Weighted- Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value |
||||||||||||
|
Outstanding at December 31, 2023 |
4 | $ | 1,145.87 | 7.3 | $ | 1 | ||||||||||
|
Restricted stock units granted |
5 | $ | — | |||||||||||||
|
Options forfeited/cancelled |
(2 | ) | $ | 535.07 | ||||||||||||
|
Outstanding at September 30, 2024 |
7 | $ | 470.76 | 8.5 | $ | 4 | ||||||||||
|
Vested and expected to vest at September 30, 2024 |
7 | $ | 474.75 | 8.5 | $ | 4 | ||||||||||
|
Vested and exercisable at September 30, 2024 |
1 | $ | 2,122.83 | 4.7 | $ | — | ||||||||||
|
* |
After giving retroactive effect to the 1-for-35 Reverse Stock Split that became effective May 30, 2024. |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of September 30, 2024 for options that have an exercise price that is lower than the market price. There were no stock option awards exercised during the three and nine months ended September 30, 2024 and 2023.
As of September 30, 2024, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $0.1 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations over the remaining weighted average vesting period of 1.3 years.
Equity Awards to Employees and Directors
The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black Scholes option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2, “Summary of Significant Accounting Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.
During the nine months ended September 30, 2024 and 2023, the Company granted options to employees and directors to purchase an aggregate of zero and 6,150 shares of common stock (177 shares post-Reverse Stock Split), respectively.
The weighted-average assumptions used in determining the value of options were as follows:
|
Assumption |
For the Nine Months Ended September 30, 2023 |
|||
|
Expected price volatility |
152.99 | % | ||
|
Expected term (in years) |
6.81 | |||
|
Risk-free interest rate |
3.47 | % | ||
|
Dividend yield |
0.00 | % | ||
|
Weighted-average fair value of options granted during the period |
$ | 58.57 | ||
Expected Price Volatility—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock.
Expected Term—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.
Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.
Dividend Yield—The Company has not made any dividend payments nor does the Company have plans to pay dividends in the foreseeable future.
Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
During the nine months ended September 30, 2024, the Company granted 5,148 shares of restricted stock to employees and directors. During the nine months ended September 30, 2023, the Company granted 5,148 shares of restricted stock (150 shares post-Reverse Stock Split) to employees and directors.
For the three months ended September 30, 2024 and 2023, the Company recognized stock-based compensation expense of $22 thousand and $59 thousand, respectively, for option awards to employees and directors. For the nine months ended September 30, 2024 and 2023, the Company recognized stock-based compensation expense of $124 thousand and $194 thousand, respectively, for option awards to employees and directors.
Stock-Based Awards to Non-Employees
During the three and nine months ended September 30, 2024, the Company did not grant options to non-employees in exchange for advisory and consulting services. During the three and nine months ended September 30, 2023, the Company granted 36,000 options (1,032 options post-Reverse Stock Split) to non-employees. These options were cancelled in June 2024.
The Company did not grant restricted stock to non-employees during the three and nine months ended September 30, 2024 and 2023.
For the three and nine months ended September 30, 2024 the Company recognized stock-based compensation expense of zero and $13 thousand, respectively, as it relates to non-employees. For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation expense of $3 thousand and $7 thousand, respectively, as it relates to non-employees.
Summary of Stock-Based Compensation Expense
A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Research and development |
$ | 3 | $ | 5 | $ | 12 | $ | 16 | ||||||||
|
Sales and marketing |
8 | 18 | 48 | 49 | ||||||||||||
|
General and administrative |
11 | 39 | 77 | 136 | ||||||||||||
|
Total stock-based compensation expense |
$ | 22 | $ | 62 | $ | 137 | $ | 201 | ||||||||
NOTE 14. DISTRIBUTION AGREEMENTS
Transactions under the Company’s major distribution agreements are recognized upon transfer of control of products sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to. The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.
Product Sales Discounts and Allowances
The following table presents activities and ending reserve balances for each significant category of discounts and allowance, which constitute variable consideration, for the nine months ended September 30, 2024 (in thousands):
|
Chargebacks, Discounts for Prompt Payment |
Other Customer Fees |
Rebates |
Total |
|||||||||||||
|
Balance at December 31, 2023 |
$ | 913 | $ | 12 | $ | 21 | $ | 946 | ||||||||
|
Less discontinued operations |
(218 | ) | — | — | (218 | ) | ||||||||||
|
Continuing operations balance at December 31, 2023 |
695 | 12 | 21 | 728 | ||||||||||||
|
Provision related to sales made in: |
||||||||||||||||
|
Current period |
39 | 36 | 77 | 152 | ||||||||||||
|
Payments and customer credits issued |
(14 | ) | (36 | ) | (79 | ) | (129 | ) | ||||||||
|
Balance at September 30, 2024 |
$ | 720 | $ | 12 | $ | 19 | $ | 751 | ||||||||
Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies
Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen. The Company has also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program. During the three months ended September 30, 2024 and 2023, the Company earned $153 thousand and $232 thousand, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements. During the nine months ended September 30, 2024 and 2023, the Company earned $385 thousand and $519 thousand, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.
Under these product distribution arrangements, the Company had a contract liability balance of $0.8 million and $0.7 million as of September 30, 2024 and December 31, 2023, respectively. The contract liability is included in accrued liabilities in the condensed consolidated balance sheets.
Over-the-Counter Sales of Avenova Spray
Avenova Spray is offered for sale direct to U.S. customers primarily on Amazon.com, the Company’s website (Avenova.com) and Walmart.com. During the three months ended September 30, 2024 and 2023, the revenue generated from Avenova Spray in these channels was $1.8 million and $1.6 million, respectively. During the nine months ended September 30, 2024 and 2023, the revenue generated from Avenova Spray in these channels was $5.4 million and $4.5 million, respectively.
NOTE 15. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering all eligible employees. The Company provides matching contributions equal to 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred. The Company contributed $24 thousand to the 401(k) plan from continuing operations in each of the three months ended September 30, 2024 and 2023. The Company contributed $73 thousand and $70 thousand to the 401(k) plan from continuing operations in the nine months ended September 30, 2024 and 2023, respectively. The Company contributed $8 thousand and $25 thousand to the 401(k) plan from discontinued operations in the three and nine months ended September 30, 2023, respectively.
NOTE 16. RELATED PARTY TRANSACTIONS
The following table summarizes information about the Company’s related party revenue and cost of goods sold (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Chongqing Pioneer Pharma Holdings Limited: |
||||||||||||||||
|
Revenue |
$ | — | $ | — | $ | — | $ | 1,043 | ||||||||
|
Cost of goods sold |
— | 28 | — | 923 | ||||||||||||
NOTE 17. SEGMENT REPORTING
The Company operates as one reportable segment, Eyecare and Wound Care, which is described in further detail below. This is based on the objectives of the business and how our chief operating decision maker (“CODM”), the President and Chief Executive Officer, monitors operating performance and allocates resources.
Change in Reportable Segments
The Company previously operated in principally two reportable segments, (1) Eyecare and Wound Care and (2) Skincare. During the nine months ended September 30, 2024, in connection with the previously announced strategic shift and upon the DERMAdoctor Divestiture, the Company has ceased to operate the Skincare segment. As a result, the Company changed the level of detail at which our CODM regularly reviews and manages the businesses, resulting in a change to our reportable segments.
We now manage and report our operating results through one reportable segment: Eyecare and Wound Care. This change allows us to better align our business models, resources, and cost structure to the specific current and future growth of our business, while maintaining the necessary information and transparency to our stockholders. Our historical segment information has been recast to conform to the current segment structure.
NOTE 18. DIVESTITURE AND DISCONTINUED OPERATIONS
On March 12, 2024, the Company entered into an agreement to sell 100% of the membership units of DERMAdoctor for a closing purchase price of $1.1 million. The sale of the membership units closed, and the DERMAdoctor Divestiture occurred, on March 25, 2024. In order to close the sale, the Company was required to obtain the consent of the holders of the Secured Convertibles Notes (see Note 10, “Convertible Notes”) issued in May 2023 to (i) amend the Security Agreement to remove the Membership Units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement and (ii) terminate the Subsidiary Guarantee, which DERMAdoctor entered into in connection with the issuance of the Secured Convertible Notes.
On March 24, 2024, the Company and the secured parties entered into a First Amendment to the Security Agreement, to effect an amendment to the Security Agreement and a Consent and Release to terminate the Subsidiary Guarantee. To obtain the secured parties’ consent and as consideration for the secured parties taking the necessary actions to execute and deliver the First Amendment and the Subsidiary Guarantee Consent, the Company provided each secured party the option, at the secured party’s election, to receive only upon the closing of the DERMAdoctor Sale Transaction either: a March 2024 Warrant or the Unsecured Convertible Notes (see Note 10 “Convertible Notes”).
The accounting requirements for reporting the DERMAdoctor business as discontinued operations were met during the first quarter of 2024. Accordingly, the condensed consolidated financial statements and notes to the condensed consolidated financial statements reflect the results of the DERMAdoctor business as a discontinued operation for the periods presented.
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the condensed consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the condensed consolidated balance sheets as of December 31, 2023, and consist of the following (in thousands):
|
Balance at December 31, 2023 |
||||
|
ASSETS |
||||
|
Current assets: |
||||
|
Cash and cash equivalents |
$ | 206 | ||
|
Accounts receivable, net of allowance for credit losses ($0 at December 31, 2023) |
79 | |||
|
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($363 at December 31, 2023) |
2,313 | |||
|
Prepaid expenses and other current assets |
132 | |||
|
Total current assets, discontinued operations |
2,730 | |||
|
Other assets |
19 | |||
|
Total assets, discontinued operations |
$ | 2,749 | ||
|
LIABILITIES |
||||
|
Liabilities: |
||||
|
Current liabilities: |
||||
|
Accounts payable |
$ | 224 | ||
|
Accrued liabilities |
347 | |||
|
Operating lease liabilities |
127 | |||
|
Total current liabilities, discontinued operations |
698 | |||
|
Total liabilities, discontinued operations |
$ | 698 | ||
In accordance with the provisions of ASC 205-20, the Company has not included in the results of continuing operations the results of operations of the discontinued operations in the unaudited condensed consolidated statements of operations. The results of DERMAdoctor’s operations for the nine months ended September 30, 2024 and 2023 have been reflected as discontinued operations in the unaudited condensed consolidated statements of operations and consist of the following (in thousands):
|
Nine Months Ended |
||||||||
|
2024 |
2023 |
|||||||
|
Sales: |
||||||||
|
Product revenue, net |
$ | 717 | $ | 2,645 | ||||
|
Total sales, net |
717 | 2,645 | ||||||
|
Cost of goods sold |
493 | 1,566 | ||||||
|
Gross profit |
224 | 1,079 | ||||||
|
Operating expenses |
||||||||
|
Research and development |
2 | 28 | ||||||
|
Sales and marketing |
292 | 1,413 | ||||||
|
General and administrative |
48 | 749 | ||||||
|
Total operating expenses |
342 | 2,190 | ||||||
|
Operating loss |
(118 | ) | (1,111 | ) | ||||
|
Other expense, net |
(6 | ) | 5 | |||||
|
Net loss from discontinued operations |
$ | (124 | ) | $ | (1,106 | ) | ||
In accordance with the provisions of ASC 205-20, the Company has not included in the results of continuing operations the results of operations of the discontinued operations in the unaudited condensed consolidated statements of cash flows. The results of DERMAdoctor for the nine months ended September 30, 2024 and 2023 have been reflected as discontinued operations in the unaudited condensed consolidated statements of cash flows and consist of the following (in thousands):
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
Operating activities: |
||||||||
|
Net loss from discontinued operations |
$ | (124 | ) | $ | (1,106 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Amortization of intangible assets |
— | 114 | ||||||
|
Non-cash right-of-use amortization |
— | 83 | ||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accounts receivable |
(262 | ) | 144 | |||||
|
Inventory |
183 | 139 | ||||||
|
Prepaid expenses and other current assets |
(4 | ) | 146 | |||||
|
Other assets |
15 | (8 | ) | |||||
|
Accounts payable and accrued liabilities |
63 | 299 | ||||||
|
Operating lease liabilities |
(31 | ) | (89 | ) | ||||
|
Net cash used in operating activities, discontinued operations |
(160 | ) | (278 | ) | ||||
|
Investing activities: |
||||||||
|
Cash transferred to New Age Investments, LLC |
(46 | ) | — | |||||
|
Purchases of property and equipment |
— | (1 | ) | |||||
|
Net cash used in investing activities, discontinued operations |
(46 | ) | (1 | ) | ||||
|
Net decrease in cash and cash equivalents, discontinued operations |
$ | (206 | ) | $ | (279 | ) | ||
NOTE 19. SUBSEQUENT EVENTS
The Company has evaluated all subsequent events through the filing date of this Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the unaudited condensed consolidated financial statements as of September 30, 2024, and events which occurred subsequently but were not recognized in the unaudited condensed consolidated financial statements. Except as described below, there were no subsequent events which required recognition, adjustment to or disclosure in the unaudited condensed consolidated financial statements.
Asset Sale Transaction--Amendment to Asset Purchase Agreement and Bridge Loan
On November 5, 2024, the Company and PRN entered into the APA Amendment to the Original Purchase Agreement. The Purchase Agreement, consistent with the Original Purchase Agreement, continues to provide for the sale of the Avenova Assets to PRN, subject to meeting certain closing conditions including receiving stockholder approval of the Asset Sale Transaction. The APA Amendment provides for the Revised PRN Transaction Terms, including the following primary revisions to the Original Purchase Agreement: (i) an increase in the base purchase price to $11.5 million from $9.5 million; (ii) the removal of debt financing contingencies and related PRN representations, while adding a new PRN representation that it has sufficient funding for the $11.5 million purchase price; (iii) PRN providing the Company with the Bridge Loan; and (iv) PRN providing the Company with the Equity Commitment Letter.
On November 5, 2024, the Company also entered into the Bridge Loan that provides for the Company receiving a secured loan of up to $1.0 million from PRN as lender that will be funded in two tranches of $0.5 million each upon the Company providing written notice to PRN on or after November 22, 2024 and on or after December 6, 2024. The amounts borrowed under the Bridge Loan are required to be used for working capital purposes, will bear interest at a rate of 10% per annum and be secured by all of the Company’s assets as collateral. The Bridge Loan is a short term secured loan that is to be repaid upon the earlier of the closing of the Asset Sale Transaction (to be repaid from the purchase price), immediately upon termination of the Purchase Agreement or February 28, 2025. If any Event of Default (as defined in the Bridge Loan) occurs, the outstanding principal amount of the Bridge Loan, plus any accrued and unpaid interest, shall become immediately due and payable with the interest rate on the outstanding principal amount of the Bridge Loan increasing to 12% per annum.
For more information regarding the Asset Sale Transaction (including the Revised PRN Transaction Terms, the APA Amendment and the Bridge Loan) and the Dissolution, please see the Company’s Current Reports on Form 8-K filed with the SEC on September 20, 2024, October 29, 2024 and November 6, 2024 and the Special Meeting Proxy Statement and related supplements.
|
ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion contains forward-looking statements that involve risks and uncertainties. The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report, and with our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2024, as amended on March 29, 2024 (the “2023 Annual Report”). Words such as “expects,” “anticipated,” “will,” “may,” “goals,” “plans,” “believes,” “estimates,” “concludes,” determines,” variations of these words, and similar expressions are intended to identify these forward-looking statements. As a result of many factors, including those set forth under the section entitled “Risk Factors” of this report, our 2023 Annual Report and our Special Meeting Proxy Statement (as defined below), as well as in other sections in our SEC filings, our actual results may differ materially from those anticipated in these forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements after the date of this report, even if new information becomes available in the future.
Overview
We are a company focused on the development and sale of scientifically-created and clinically-proven eyecare and wound care products. Our leading product, Avenova® Antimicrobial Lid and Lash Solution, or Avenova Spray, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (the “FDA”) for sale in the United States. Avenova Spray is available direct to consumers, primarily through online distribution channels, and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry eye disease. Because dry eye is a complex condition, we offer a complementary portfolio of scientifically-developed products for each step of the standard at-home treatment regimen, including the Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health.
We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating wounds, burns, ulcers and other injuries. The Company currently sells these products through distributors.
Through our former subsidiary DERMAdoctor, LLC (“DERMAdoctor”), the Company offered over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. On March 25, 2024, we announced the closing of the sale of DERMAdoctor (the “DERMAdoctor Divestiture”). We acquired DERMAdoctor in November 2021 in order to achieve overall revenue growth, cost reductions and profitability. We were unable to achieve those objectives with DERMAdoctor. Therefore, we determined to divest DERMAdoctor and consummate the DERMAdoctor Divestiture, having incurred historical losses including the loss of $124 thousand for the nine months ended September 30, 2024. The DERMAdoctor Divestiture streamlined our business by reducing our cash burn and allowing us to focus on our core business.
Recent Developments
Potential Asset Sale Transaction and Dissolution
On September 19, 2024, the Company entered into an Asset Purchase Agreement (the “Original Purchase Agreement”) with PRN Physician Recommended Nutriceuticals, LLC, a Delaware limited liability company (“PRN”), pursuant to which PRN will acquire the Company’s eyecare products sold under the Avenova brand and the related assets (the “Avenova Assets”) (collectively, the “Asset Sale Transaction”). On November 5, 2024, the Company entered into an amendment to the Original Purchase Agreement (the “APA Amendment,” and together with the Original Purchase Agreement, the “Purchase Agreement”) that provides for, among other terms, an increase in the base purchase price to $11.5 million from $9.5 million and for PRN to provide the Company with a $1.0 million secured promissory note (the “Bridge Loan”). Pursuant to the Purchase Agreement, the Asset Sale Transaction is subject to certain closing conditions, including stockholder approval. Assuming stockholder approval is received and other closing conditions are met, the Company expects to close the Asset Sale Transaction in the fourth quarter of 2024.
The Asset Sale Transaction would constitute substantially all of the Company’s revenue generating and operating assets; however, PRN would not purchase any of the Company’s other products and assets, including those that relate to the Company’s wound care, urology or dermatology businesses. The Board unanimously approved the Asset Sale Transaction and further determined that, if the Asset Sale Transaction is completed, the best opportunity available to optimize value to our stockholders is to wind-up the Company’s affairs and pursue a liquidation and dissolution pursuant to the Plan of Dissolution under Delaware law that may result in distributions to our stockholders of our remaining asset value (the “Dissolution”). If the Asset Sale Transaction and/or the Dissolution are not completed, we will continue our corporate existence and the Board will continue to explore its options to secure immediate funding for ongoing operations due to significantly reduced available capital and liquidity, the strategic alternatives available to the Company including to return capital to stockholders or, to the extent funding or any other viable alternatives are not available, then the Company may need to file for bankruptcy protection or commence a similar state law proceeding.
The Company has called a special meeting of stockholders (the “Special Meeting”) on November 22, 2024 to approve (1) the Asset Sale Transaction and (2) the Dissolution subject to the Board’s discretion to proceed with the Dissolution.
On October 29, 2024, the Company announced that the Board determined that an unsolicited and non-binding acquisition proposal from Refresh Acquisitions BidCo LLC (“Refresh”) to purchase the Avenova Assets (the “Refresh Unsolicited Offer”) was a “Superior Proposal” (as defined in the Purchase Agreement). As a result, the Company notified PRN of the Board’s determination and the Company’s intention to terminate the Purchase Agreement pursuant to its terms, unless the Company received a revised proposal from PRN such that the Board determined the Refresh Unsolicited Offer was no longer a Superior Proposal, all in accordance with the process provided in the Purchase Agreement.
Subsequent to this Board determination, in accordance with the process in the Purchase Agreement, the Company negotiated in good faith with PRN, and, as a result of these negotiations, PRN proposed amending the terms of the Original Purchase Agreement by entering into the APA Amendment, which provides for the following primary revisions to the Original Purchase Agreement: (i) an increase in the base purchase price to $11.5 million from $9.5 million; (ii) the removal of debt financing contingencies and related PRN representations, while adding a new PRN representation that it has sufficient funding for the $11.5 million purchase price; (iii) PRN providing the Company with the Bridge Loan; and (iv) PRN providing the Company with an equity funding commitment letter (the “Equity Commitment Letter”) from Roundtable Healthcare Partners V, L.P. that provides for up to $13.0 million in financing to be used by PRN’s parent company, Acumen Intermediate Holdings, LLC, and contributed to PRN for payment of the purchase price at the closing of the Asset Sale Transaction (with such updated terms, the “Revised PRN Transaction Terms”). On November 4, 2024, after considering the Revised PRN Transaction Terms, the Board determined that the Refresh Unsolicited Offer was no longer a “Superior Proposal” and that it was advisable and in the best interests of stockholders to enter into the APA Amendment and the Bridge Loan.
On November 5, 2024, the Company entered into the APA Amendment and the Bridge Loan. The Bridge Loan provides for the Company to receive a secured loan of up to $1.0 million from PRN as lender that will be funded in two tranches of $0.5 million each upon the Company providing written notice to PRN on or after November 22, 2024 and on or after December 6, 2024. The amounts borrowed under the Bridge Loan are required to be used for working capital purposes, will bear interest at a rate of 10% per annum and be secured by all of the Company’s assets as collateral. The Bridge Loan is to be repaid upon the earlier of the closing of the Asset Sale Transaction (to be repaid from the purchase price), immediately upon termination of the Purchase Agreement or February 28, 2025. If the Asset Sale Transaction is not consummated, the Purchase Agreement is terminated and the Company is required to repay the full amount borrowed pursuant to the Bridge Loan, the Company may not have the necessary capital resources available at the time to repay the Bridge Loan absent the Company raising additional capital.
For more information regarding the Asset Sale Transaction (including the Revised PRN Transaction Terms, the APA Amendment and the Bridge Loan) and the Dissolution, please see the Company’s Current Reports on Form 8-K filed with the SEC on September 20, 2024, October 29, 2024 and November 6, 2024 and the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on October 16, 2024 (as may be supplemented, the “Special Meeting Proxy Statement”).
2024 Public Offering
On July 26, 2024, the Company entered into the Underwriting Agreement with Ladenburg, as the sole underwriter, relating to the issuance and sale in a public offering (the “2024 Public Offering”) of: (i) 1,158,566 shares of common stock and 2,041,814 July 2024 Pre-Funded Warrants, in lieu of shares of common stock, (ii) 3,200,380 Series F-1 Warrants, (iii) 3,200,380 Series F-2 Warrants, and (iv) 3,200,380 Series F-3 Warrants. The 2024 Public Offering closed on July 29, 2024, and the Company received gross proceeds of $3.9 million, without taking into account any underwriting discounts and commissions. A portion of the proceeds were used towards repaying the Secured Convertible Notes, which were repaid in full during the third quarter of 2024.
DERMAdoctor Divestiture
On March 12, 2024, we entered into a Membership Unit Purchase Agreement (the “DERMAdoctor Purchase Agreement”) by and among: (i) New Age Investments, LLC; (ii) DERMAdoctor; and (iii) the Company that provided for the sale of 100% of the membership units (the “Membership Units”) of DERMAdoctor.
Upon the closing of the DERMAdoctor Divestiture on March 25, 2024 as contemplated by the DERMAdoctor Purchase Agreement, the Company sold the Membership Units to New Age Investments, LLC for a purchase price of $1.1 million. For additional information regarding the DERMAdoctor Divestiture, see also Note 18, “Divestiture and Discontinued Operations” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Amendment to the Security Agreement and Consent to Terminate the Subsidiary Guarantee
The closing of the DERMAdoctor Divestiture was subject to certain conditions, which included the Company obtaining the consent of the holders (the “Secured Parties”) of the Company’s Original Discount Senior Secured Convertible Debentures due November 1, 2024 (see Note 10, “Convertible Notes”), to (i) amend the Security Agreement, dated April 27, 2023 (the “Security Agreement”), to remove the Membership Units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement and (ii) terminate the Subsidiary Guarantee, dated April 27, 2023, which DERMAdoctor entered into in connection with the issuance of the Secured Convertible Notes.
On March 24, 2024, the Company and the Secured Parties entered into a First Amendment to the Security Agreement to effect the Security Agreement Amendment, and a Consent and Release to effect the 2024 Subsidiary Guarantee Termination. As consideration for the Secured Parties executing and delivering the First Amendment and the Subsidiary Guarantee Consent, which reduced the collateral available to secure the obligations under the Secured Convertible Notes, the Company provided each Secured Party the option, at the Secured Party’s election, to receive upon the closing of the DERMAdoctor Divestiture either: (i) a new Series D common stock purchase warrant (the “March 2024 Warrant”), or (ii) a new unsecured convertible note convertible into shares of common stock (the “Unsecured Convertible Notes”). Based on the Secured Parties’ elections and as a result of the closing of the DERMAdoctor Divestiture, the Company issued: (A) a March 2024 Warrant to a Secured Party that is exercisable for an aggregate of 1,000,000 shares of common stock (28,572 shares post-Reverse Stock Split) and (B) Unsecured Convertible Notes to four (4) Secured Parties that have an aggregate principal amount of $525,000 or will be convertible into an aggregate of 3,750,000 shares of common stock (107,146 shares post-Reverse Stock Split).
The Company incurred total issuance costs of $130 thousand in conjunction with the 2024 Subsidiary Guarantee Termination. The Company allocated $19 thousand of the issuance costs to the Unsecured Convertible Notes which was recorded as a discount in the Company’s unaudited condensed consolidated balance sheet as of September 30, 2024. The remaining $111 thousand was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s unaudited condensed consolidated statements of operations, during the nine months ended September 30, 2024. For additional information regarding the March 2024 Warrant and the Unsecured Convertible Notes that we issued, see also Notes 9, “Financing Activities”; 10, “Convertible Notes”; 11, “Common Stock Warrants”; and 12, “Stockholders’ Equity” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
NYSE American Notices
On April 18, 2024, the Company received a notification (“Initial Deficiency Letter”) from the NYSE American LLC Exchange (“NYSE American”) stating that the Company is not in compliance with Section 1003(a)(ii) and 1003(a)(iii) of the NYSE American Company Guide (requiring stockholders’ equity of $4.0 million or more if the Company has reported losses from continuing operations and/or net losses in three of the four most recent fiscal years and $6.0 million or more if the Company has reported losses from continuing operations and/or net losses in its five most recent fiscal years, respectively).
On May 28, 2024, the Company received a letter (“Additional Deficiency Letter”) from NYSE American stating that the Company is not in compliance with the minimum stockholders’ equity requirements of Section 1003(a)(i) of the NYSE American Company Guide. Section 1003(a)(i) of the NYSE American Company Guide requires a listed company to maintain stockholders’ equity of $2.0 million or more if the listed company has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years. The Company reported stockholders’ equity of $160 thousand as of March 31, 2024 and has had losses from continuing operations and net losses in each of the last three fiscal years.
Therefore, the Company has become subject to the procedures and requirements of Section 1009 of the NYSE American Company Guide and was required to submit a plan of compliance by May 18, 2024 addressing how it intends to regain compliance with Section 1003(a)(ii) and 1003(a)(iii) of the NYSE American Company Guide by October 18, 2025. On June 4, 2024, the Company received notice from the NYSE American that it had accepted the Company’s plan of compliance and granted a plan period through October 18, 2025. During the plan period, the Company will be subject to quarterly monitoring for compliance with the plan. If the Company does not regain compliance with the NYSE American’s listing standards by October 18, 2025, or if the Company does not make progress consistent with its plan, then the NYSE American may initiate delisting procedures.
Additionally, the Asset Sale Transaction (to the extent completed) may cause the NYSE American to delist our shares of common stock and the Company may not meet NYSE American’s continued listing requirements. To the extent the NYSE American does not delist our shares after completion of the Asset Sale Transaction and the Board determines to effect the Dissolution, the Company plans to request that our common stock stop trading on the NYSE American on the effective date of the Dissolution or as soon thereafter as is reasonably practicable.
Financial Overview and Outlook
We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue to commercialize our products. Our net losses were $2.2 million and $1.8 million for the three months ended September 30, 2024 and 2023, respectively. In addition, our net losses were $7.4 million and $7.5 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $182.2 million, total current assets of $2.3 million and total assets of $3.9 million.
To date, our plan to grow commercial sales of Avenova branded products primarily through an expansion of domestic market penetration of our online channels as well expanded product offerings through partnerships with other eyecare product providers has been unsuccessful. However, in an effort to maximize stockholder value, our Board unanimously determined to pursue the Asset Sale Transaction and the Dissolution, both of which are subject to stockholder approval at the Special Meeting. See “Potential Asset Sale Transaction and Dissolution” above for additional information regarding the Asset Sale Transaction and the Dissolution.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. In preparing these unaudited condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.
While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results as discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
We review goodwill, indefinite-lived intangible assets and long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that any such asset may be impaired, that the carrying amount of any such asset may not be fully recoverable or that the useful life of the asset, if applicable, is no longer appropriate. Management uses judgement in making critical assumptions and estimates in determining when an impairment assessment should be recorded, if more frequent than annually, or in the completion of any such assessment. This includes cash flow projections that look several years into the future and assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates. Changes in judgments with respect to these assumptions and estimates could impact any such impairments recorded such as those recorded in the fourth quarter of 2023 as further described in Note 2, “Summary of Significant Accounting Policies” included in our 2023 Annual Report.
Valuation of Contingent Consideration Resulting from a Business Combination
We revalue any outstanding contingent obligations to pay future consideration related to business combinations at the end of each quarter and record increases or decreases in their fair value within our unaudited condensed consolidated statements of operations. Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. See additional information in Note 2, “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Estimates of Future Product Returns
The Company records revenue in an amount that reflects the consideration which the Company expects to receive. Accordingly, revenue is reduced for estimated future product returns. The Company’s estimates for returns are updated quarterly based on historical data of actual returns. Actual future returns experience may differ significantly from historical data and could result in significant future adjustments, including a reduction of revenue recognized.
Common Stock Warrant Liabilities
For warrants that are classified as liabilities, the Company records the fair value of the warrants upon issuance and at each balance sheet date with changes in the estimated fair value recorded as a non-cash gain or loss in the unaudited condensed consolidated statements of operations. The fair values of these warrants are determined using the Black Scholes option pricing model. These values are subject to a significant degree of management’s judgment.
Results of Operations
Comparison of the Three Months Ended September 30, 2024 and 2023 (dollars in thousands)
|
Three Months Ended September 30, |
Dollar |
Percent |
||||||||||||||
|
2024 |
2023 |
Change |
Change |
|||||||||||||
|
Statement of Operations |
||||||||||||||||
|
Sales: |
||||||||||||||||
|
Product revenue, net |
$ | 2,424 | $ | 2,471 | $ | (47 | ) | (2 | )% | |||||||
|
Other revenue, net |
17 | 10 | 7 | 70 | % | |||||||||||
|
Total sales, net |
2,441 | 2,481 | (40 | ) | (2 | )% | ||||||||||
|
Cost of goods sold |
848 | 819 | 29 | 4 | % | |||||||||||
|
Gross profit |
1,593 | 1,662 | (69 | ) | (4 | )% | ||||||||||
|
Operating expenses |
||||||||||||||||
|
Research and development |
4 | 4 | — | 0 | % | |||||||||||
|
Sales and marketing |
947 | 1,263 | (316 | ) | (25 | )% | ||||||||||
|
General and administrative |
1,703 | 1,093 | 610 | 56 | % | |||||||||||
|
Total operating expenses |
2,654 | 2,360 | 294 | 12 | % | |||||||||||
|
Operating loss |
(1,061 | ) | (698 | ) | (363 | ) | 52 | % | ||||||||
|
Accretion of interest and amortization of discounts on convertible notes |
(138 | ) | (655 | ) | 517 | (79 | )% | |||||||||
|
Extinguishment of Secured Convertible Notes |
(13 | ) | — | (13 | ) | (100 | )% | |||||||||
|
Net loss from continuing operations |
(1,212 | ) | (1,353 | ) | 141 | (10 | )% | |||||||||
|
Net loss from discontinued operations |
— | (404 | ) | 404 | (100 | )% | ||||||||||
|
Net loss |
$ | (1,212 | ) | $ | (1,757 | ) | $ | 545 | (31 | )% | ||||||
Impact of DERMAdoctor Divestiture
The financial results of DERMAdoctor beginning from January 1, 2024 through the closing of the DERMAdoctor Divestiture on March 25, 2024 in the table above and as set forth in this report have been aggregated in the captions entitled “Loss on divestiture of subsidiary” and “Net loss from discontinued operations” for the nine months ended September 30, 2024 (see Note 18, “Divestiture and Discontinued Operations” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report). The discussions below and throughout this section apply only to results from continuing operations except as otherwise noted.
Total Net Sales and Cost of Goods Sold
Product revenue, net, decreased $0.1 million, or 2%, to $2.4 million for the three months ended September 30, 2024, from $2.5 million for the three months ended September 30, 2023.
Revenue from eyecare products, including Avenova Spray, was $2.4 million for both the three months ended September 30, 2024 and September 30, 2023.
Revenue from the Company’s wound care products decreased to a nominal amount for the three months ended September 30, 2024, from $0.1 million for the three months ended September 30, 2023.
Cost of goods sold remained consistent for the three months ended September 30, 2024 and September 30, 2023 at $0.8 million.
Sales and marketing
Sales and marketing expenses decreased $0.4 million, or 25%, to $0.9 million for the three months ended September 30, 2024, from $1.3 million for the three months ended September 30, 2023. The decrease was due primarily to continued digital marketing efficiencies and a decrease in related consulting costs incurred in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.
General and administrative
General and administrative expenses increased $0.6 million, or 56%, to $1.7 million for the three months ended September 30, 2024, from $1.1 million for the three months ended September 30, 2023, due primarily to an increase in legal costs related to non-recurring strategic initiatives, including the 2024 Public Offering, the Asset Sale Transaction and the Dissolution, ongoing during the three months ended September 30, 2024.
Accretion of interest and amortization of discounts on convertible notes
Accretion of interest and amortization of discounts on convertible notes was $0.1 million for the three months ended September 30, 2024 and $0.7 million for the three months ended September 30, 2023.
Extinguishment of Secured Convertible Notes
Extinguishment of Secured Convertible Notes was $13 thousand for the three months ended September 30, 2024, with no comparable activity for the three months ended September 30, 2023.
Comparison of the Nine Months Ended September 30, 2024 and 2023 (dollars in thousands)
|
Nine Months Ended September 30, |
Dollar |
Percent |
||||||||||||||
|
2024 |
2023 |
Change |
Change |
|||||||||||||
|
Statement of Operations |
||||||||||||||||
|
Sales: |
||||||||||||||||
|
Product revenue, net |
$ | 7,435 | $ | 8,326 | $ | (891 | ) | (11 | )% | |||||||
|
Other revenue, net |
37 | 28 | 9 | 32 | % | |||||||||||
|
Total sales, net |
7,472 | 8,354 | (882 | ) | (11 | )% | ||||||||||
|
Cost of goods sold |
2,493 | 3,353 | (860 | ) | (26 | )% | ||||||||||
|
Gross profit |
4,979 | 5,001 | (22 | ) | * | % | ||||||||||
|
Operating expenses |
||||||||||||||||
|
Research and development |
32 | 36 | (4 | ) | (11 | )% | ||||||||||
|
Sales and marketing |
3,021 | 3,674 | (653 | ) | (18 | )% | ||||||||||
|
General and administrative |
5,611 | 4,385 | 1,226 | 28 | % | |||||||||||
|
Loss on divestiture of subsidiary |
865 | — | 865 | 100 | % | |||||||||||
|
Total operating expenses |
9,529 | 8,095 | 1,434 | 18 | % | |||||||||||
|
Operating loss |
(4,550 | ) | (3,094 | ) | (1,456 | ) | 47 | % | ||||||||
|
Non-cash gain on changes in fair value of warrant liabilities |
114 | 216 | (102 | ) | (47 | )% | ||||||||||
|
Non-cash (loss) gain on change in fair value of embedded derivative liability |
(18 | ) | 40 | (58 | ) | (145 | )% | |||||||||
|
Accretion of interest and amortization of discounts on convertible notes |
(871 | ) | (1,156 | ) | 285 | (25 | )% | |||||||||
|
Extinguishment of Secured Convertible Notes |
(13 | ) | — | (13 | ) | (100 | )% | |||||||||
|
Other expense, net |
(549 | ) | (432 | ) | (117 | ) | 27 | % | ||||||||
|
Net loss from continuing operations |
(5,887 | ) | (4,426 | ) | (1,461 | ) | 33 | % | ||||||||
|
Net loss from discontinued operations |
(124 | ) | (1,106 | ) | 982 | (89 | %) | |||||||||
|
Net loss |
$ | (6,011 | ) | $ | (5,532 | ) | $ | (479 | ) | 9 | % | |||||
*Less than 1%.
Impact of DERMAdoctor Divestiture
The financial results of DERMAdoctor beginning from January 1, 2024 through the closing of the DERMAdoctor Divestiture on March 25, 2024 in the table above and as set forth in this report have been aggregated in the captions entitled “Loss on divestiture of subsidiary” and “Net loss from discontinued operations” for the nine months ended September 30, 2024 (see Note 18, “Divestiture and Discontinued Operations” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report). The discussions below and throughout this section apply only to results from continuing operations except as otherwise noted.
Total Net Sales and Cost of Goods Sold
Product revenue, net, decreased $0.9 million, or 11%, to $7.4 million for the nine months ended September 30, 2024, from $8.3 million for the nine months ended September 30, 2023.
Revenue from eyecare products, including Avenova Spray, increased $0.5 million to $7.2 million for the nine months ended September 30, 2024, from $6.7 million for the nine months ended September 30, 2023. The increase was due to an overall increase in Avenova branded products sold through online channels.
Revenue from the Company’s wound care products decreased $1.3 million to $0.3 million for the nine months ended September 30, 2024, from $1.6 million for the nine months ended September 30, 2023. The decrease was due primarily to a large one-time order of the NeutroPhase branded wound care product in the nine months ended September 30, 2023, with no comparable order in the nine months ended September 30, 2024.
Cost of goods sold decreased $0.9 million, or 26%, to $2.5 million for the nine months ended September 30, 2024, from $3.4 million for the nine months ended September 30, 2023. Such decrease was due primarily to the decrease in wound care products (which has lower margins) slightly offset by an increase in eyecare products (which has higher margins) sold during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.
Sales and marketing
Sales and marketing expenses decreased $0.7 million, or 18%, to $3.0 million for the nine months ended September 30, 2024, from $3.7 million for the nine months ended September 30, 2023. The decrease was due primarily to continued digital advertising efficiencies and a decrease in related consulting costs incurred in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.
General and administrative
General and administrative expenses increased $1.2 million, or 28%, to $5.6 million for the nine months ended September 30, 2024, from $4.4 million for the nine months ended September 30, 2023, was due primarily to an increase in legal costs primarily related to non-recurring strategic initiatives, including the DERMAdoctor Divestiture, the 2024 Public Offering, the Asset Sale Transaction and the Dissolution, ongoing during the nine months ended September 30, 2024.
Loss on divestiture of subsidiary
As a result of the closing of the DERMAdoctor Divestiture on March 25, 2024, we incurred a loss of $0.9 million for the nine months ended September 30, 2024 with no comparable activity for the nine months ended September 30, 2023. For additional information regarding the loss on divestiture of this subsidiary, please see Note 18, “Divestiture and Discontinued Operations”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.
Non-cash gain on change in fair value of warrant liabilities
Adjustments to the fair value of warrant liabilities resulted in a gain of $114 thousand for the nine months ended September 30, 2024 and $216 thousand for the nine months ended September 30, 2023. The warrant liabilities for the December 2023 Warrants and the March 2024 Warrant were reclassified to equity during the nine months ended September 30, 2024, and will no longer require fair value adjustments which will impact our results of operations. For additional information regarding warrant liabilities and their valuation, please see Note 11, “Common Stock Warrants”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.
Non-cash (loss) gain on changes in fair value of embedded derivative liability
Adjustments to the fair value of embedded derivative liability resulted in a loss of $18 thousand for the nine months ended September 30, 2024 and gain of $40 thousand for the nine months ended September 30, 2023. For additional information regarding the embedded derivative liability and its valuation, please see Note 3, “Fair Value Measurements”.
Accretion of interest and amortization of discounts on convertible notes
Accretion of interest and amortization of discounts on convertible notes was $0.9 million for the nine months ended September 30, 2024 and $1.2 million for the nine months ended September 30, 2023.
Extinguishment of Secured Convertible Notes
Extinguishment of Secured Convertible Notes was $13 thousand for the nine months ended September 30, 2024, with no comparable activity for the nine months ended September 30, 2023.
Other expense, net
Other expense, net was $0.5 million for the nine months ended September 30, 2024 and $0.4 million for the nine months ended September 30, 2023. Expenses were related primarily to separate and unrelated financing events recorded during the respective periods.
Financial Condition, Liquidity and Capital Resources
As of September 30, 2024, our cash and cash equivalents were $0.8 million, compared to $2.9 million as of December 31, 2023. Our cash and cash equivalents as of September 30, 2024 includes $2.9 million of net proceeds from the 2024 Public Offering, $0.2 million of net proceeds from the 2024 Warrant Reprice Transaction and $1.1 million of net proceeds from the DERMAdoctor Divestiture. Our cash and cash equivalents as of December 31, 2023 includes $0.6 million of net proceeds from the 2023 Warrant Reprice Transaction and $2.8 million of net proceeds from the 2023 Private Placement (both as defined in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report). Under the terms of the Secured Convertible Notes issued in the 2023 Private Placement, we were required to make a monthly redemption of the principal amount of the Secured Convertible Notes (“Monthly Redemption”) over an 18-month period, which began on June 1, 2023 in an amount equal to $193 thousand per month, unless such Monthly Redemption is eligible under the terms of the Secured Convertible Notes to instead be settled through the issuance of our common stock. We paid the Monthly Redemption in cash every month until the Secured Convertible Notes were repaid in full during the third quarter of 2024.
On March 25, 2024, the Company issued Unsecured Convertible Notes to four (4) Secured Parties that have an aggregate principal amount of $525,000 or will be convertible into an aggregate of 3,750,000 shares of common stock (107,146 shares post-Reverse Stock Split). The principal amount of the Unsecured Convertible Notes does not accrue interest and is payable to the Secured Parties upon maturity in March 2026, unless earlier converted into common stock. For additional information regarding the 2023 Private Placement, the Secured Convertible Notes and the Unsecured Convertible Notes, see Note 9 “Financing Activities, Note 10 “Convertible Notes,” and Note 12 “Stockholders’ Equity” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
On September 16, 2024, the Board unanimously approved the Asset Sale Transaction and Dissolution, both of which are subject to the approval of the Company’s stockholders. On November 5, 2024, the Company entered into the APA Amendment that provides for, among other terms, an increase in the base purchase price to $11.5 million from $9.5 million and for PRN to provide the Company with the Bridge Loan. The Bridge Loan provides for the Company to receive funding in two tranches of $0.5 million each upon the Company providing written notice to PRN on or after November 22, 2024 and on or after December 6, 2024. The amounts borrowed under the Bridge Loan are required to be used by the Company for working capital purposes, will bear interest at a rate of 10% per annum and be secured by all of the Company’s assets as collateral. The Bridge Loan is a short term secured loan which is to be repaid upon the earlier of the closing of the Asset Sale Transaction (to be repaid from the purchase price), immediately upon termination of the Purchase Agreement or February 28, 2025. The Company is holding the Special Meeting on November 22, 2024 to obtain stockholder approval of the Asset Sale Transaction and the Dissolution, pursuant to the Special Meeting Proxy Statement.
Based primarily on the funds available on September 30, 2024, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations and meet its planned operating expenses into at least the first quarter of 2025. The Company has sustained operating losses for the majority of its corporate history and expects that its 2024 expenses will exceed its 2024 revenues. Additionally, the Company expects to continue incurring operating losses and negative cash flows. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of these unaudited condensed consolidated financial statements. Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, global pandemics and international conflicts (e.g., the conflicts between Israel and Hamas, Russia and Ukraine, and China and Taiwan).
To address the Company’s current liquidity and near term capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending on one or more of its sales and marketing programs or restructuring operations to change its overhead structure; and/or (3) the divestiture of certain business or product lines and related assets such as the Asset Sale Transaction and the DERMAdoctor Divestiture. If the Asset Sale Transaction and/or the Dissolution are not completed, we will continue our corporate existence and the Board will continue to explore its options to secure immediate funding for ongoing operations due to significantly reduced available capital, the strategic and alternatives available to the Company, including returning capital to stockholders or, to the extent any funding or other viable alternatives are not available or there is not sufficient capital remaining at the time to fund operations, then, the Company may need to file for bankruptcy protection or commence a similar state law proceeding. In connection with such strategic options, the Company may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which may require the filing of a Form S-1 or Form S-3 registration statement with the SEC. While the Company believes that the proceeds from the 2024 Public Offering and the DERMAdoctor Divestiture improved the Company’s liquidity in the first nine months of 2024, there is no assurance that the Company will be successful in completing the Asset Sale Transaction and/or the Dissolution or otherwise executing on alternative capital-raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern. If the Company’s stockholders approve the Dissolution, the Company would consider liquidation to be imminent and apply liquidation basis of accounting pursuant to U.S. GAAP.
Cash Used in Operating Activities
Net cash used in operating activities from continuing operations was $4.2 million for the nine months ended September 30, 2024, which consisted primarily of a net loss from continuing operations of $6.0 million, adjusted by depreciation and amortization expenses of $32 thousand, stock-based compensation expenses related to employee and director stock awards of $0.1 million, non-cash loss on divestiture of $0.9 million, non-cash expense for consent of Secured Convertible Note holders of $0.4 million, non-cash loss on modifications of warrants of $69 thousand, non-cash gain on changes in fair value of warrant liabilities of $0.1 million, non-cash loss on changes in fair value of embedded derivative liability of $18 thousand, non-cash right-of-use amortization of $0.3 million, accretion of interest and amortization of debt discounts on convertibles notes of $0.9 million, and a net decrease of $0.8 million in our net operating assets and liabilities of continuing operations.
Net cash used in operating activities from continuing operations was $3.5 million for the nine months ended September 30, 2023, which consisted primarily of a net loss from continuing operations of $5.5 million, adjusted by depreciation and amortization expenses of $39 thousand, stock-based compensation expenses of $0.2 million, non-cash loss on modifications of warrants of $0.3 million, non-cash gain on changes in fair value of warrant liabilities of $0.2 million, non-cash gain on changes in fair value of embedded derivative liability of $40 thousand, non-cash right-of-use amortization of $0.2 million, accretion of interest and amortization of debt discounts on convertibles notes of $1.1 million, and a net decrease of $0.7 million in our net operating assets and liabilities of continuing operations.
Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities from continuing operations was $1.1 million for the nine months ended September 30, 2024, which included the DERMAdoctor Divestiture proceeds of $1.1 million and purchase of property and equipment in a nominal amount. Net cash used in investing activities for the purchase of property and equipment from continuing operations was $16 thousand for the nine months ended September 30, 2023.
Cash Provided by Financing Activities
Net cash provided by financing activities from continuing operations was $1.0 million for the nine months ended September 30, 2024, which included repayment of $2.0 million for the Secured Convertible Notes through September 30, 2024, net proceeds of $2.9 million from the 2024 Public Offering transaction, and the net proceeds of $0.2 million from the 2024 Warrant Repice transaction.
Net cash provided by financing activities from continuing operations was $1.9 million for the nine months ended September 30, 2023, which included the net proceeds of $2.8 million received in the 2023 Private Placement of the Secured Convertible Notes and the May 2023 Warrants and repayment of $0.8 million for the Monthly Redemption through September 30, 2023 on the Secured Convertible Notes.
Net Operating Losses and Tax Credit Carryforwards
As of December 31, 2023, we had net operating loss carryforwards for federal and state income tax purposes of $139.3 million and $117.4 million, respectively. The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $44.4 million that will carry forward indefinitely but are subject to an 80% limitation for years following December 31, 2021. The state net operating loss carryforwards will begin to expire in 2028. As of December 31, 2023, we also had tax credit carryforwards of $0.5 million for federal income tax purposes and $0.1 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2031. The state tax credits have an indefinite carryover period.
Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.
Inflation
Our costs are subject to fluctuations, particularly due to changes in the price of raw and packing materials and the cost of labor, transportation and operating supplies. Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, cost-saving projects and sourcing decisions, while maintaining and improving margins and market share. Failure to manage these fluctuations could adversely impact our results of operations or cash flows.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements at September 30, 2024 or December 31, 2023 as defined in Item 303(a)(4)(ii) of Regulation S-K.
Seasonality
Avenova Branded Products
Consistent with our peers in the United States pharmaceutical industry, prescriptions for Avenova Spray experience seasonality with the first quarter of each year typically being the lowest revenue quarter. This annual phenomenon is due to consumers facing the need to satisfy health insurance deductibles and changes to copays as each new insurance year begins. Sales of Avenova Spray through non-prescription channels, along with the other Avenova branded products, experience less seasonality with demands, with more consistent sales throughout the year.
NeutroPhase and PhaseOne Branded Wound Care Products
Our NeutroPhase and PhaseOne branded products are sold through wholesale distribution relationships with third parties such as Chongqing Pioneer Pharma Holdings Limited and Phase One Health; therefore, we receive periodic large orders that result in large chunks of revenue that are received in irregular intervals during the year.
Contractual Obligations
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. Information regarding our obligations under lease and convertible note arrangements are provided in Note 8 “Commitments and Contingencies,” and Note 10 “Convertible Notes” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk consists principally of interest rate risk on our cash and cash equivalents. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in interest rates, particularly because our current liquid assets at September 30, 2024 were held in cash and cash equivalents.
Our investment policy restricts our investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital, assurance of liquidity needs, best available return on invested capital, and minimization of capital taxation. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our cash and cash equivalents in short-term marketable securities, including money market mutual funds, Treasury bills, Treasury notes, certificates of deposit, commercial paper, and corporate and municipal bonds. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of our investment portfolio, we believe we have minimal interest rate risk arising from our investments. As of September 30, 2024 and December 31, 2023, a 10% change in interest rates would have had an immaterial effect on the value of our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We do not hold any instruments for trading purposes.
With most of our focus on the domestic U.S. market, we have not had any material exposure to foreign currency rate fluctuations.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Based upon that evaluation at September 30, 2024, our Chief Executive Officer and our Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure, at the reasonable assurance level, that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the current quarter which has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
|
ITEM 1. |
LEGAL PROCEEDINGS |
From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. As of September 30, 2024, there were no matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.
|
ITEM 1A. |
RISK FACTORS |
For information regarding factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A included in our 2023 Annual Report, under Part II, Item 1A included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, which was filed with the SEC on May 9, 2024, and in the risk factors related to the Asset Sale Transaction and the Dissolution in the Special Meeting Proxy Statement (as may be supplemented). We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide updated quarterly information under this Item.
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
|
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
|
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not Applicable.
|
ITEM 5. |
OTHER INFORMATION |
Rule 10b5-1 Trading Arrangements
During the nine months ended September 30, 2024, none of our directors or Section 16 officers adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each such term is defined in Item 408 of Regulation S-K.
|
ITEM 6. |
EXHIBITS |
The following exhibits are filed with or incorporated by reference into this report.
EXHIBIT INDEX
|
Incorporation by Reference |
Filed Herewith |
|||||
|
Exhibit Number |
Exhibit Description |
Form |
File Number |
Exhibit/ Form 8-K Item Reference |
Filing Date |
|
|
2.1 |
8-K |
001-3678 |
2.1 |
9/28/2021 |
||
|
2.2 |
8-K |
001-33678 |
2.1 |
3/14/2024 |
||
|
2.3 |
8-K |
001-33678 |
2.1 |
9/20/2024 |
||
| 2.4 | Amendment No. 1 to Asset Purchase Agreement, dated as of November 5, 2024, between PRN Physician Recommended Nutriceuticals, LLC and NovaBay Pharmaceuticals, Inc. | 8-K | 001-33678 | 2.1 | 11/6/2024 | |
|
2.5 |
Plan of Complete Liquidation and Dissolution of NovaBay Pharmaceuticals, Inc. |
8-K |
001-33678 |
2.2 |
9/20/2024 |
|
|
3.1 |
Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc. |
10-K |
001-33678 |
3.1 |
3/21/2018 |
|
|
3.2 |
Amendment to the Amended and Restated Certificate of Incorporation, dated June 4, 2018 |
8-K |
001-33678 |
3.1 |
6/4/2018 |
|
|
3.3 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated May 27, 2020 |
8-K |
001-33678 |
3.1 |
5/28/2020 |
|
|
3.4 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated May 24, 2021 |
8-K |
001-33678 |
3.1 |
5/24/2021 |
|
|
3.5 |
8-K |
001-33678 |
3.1 |
2/1/2022 |
||
|
3.6 |
Amendment to Amended and Restated Certificate of Incorporation, as amended, dated November 14, 2022 |
8-K |
001-33678 |
3.1 |
11/18/2022 |
|
|
3.7 |
Amendment to Amended and Restated Certificate of Incorporation, as amended, dated May 30, 2024 |
8-K |
001-33678 |
3.1 |
5/31/2024 |
|
|
3.8 |
8-K |
001-33678 |
3.1 |
11/1/2021 |
||
|
3.9 |
8-K |
001-33678 |
3.2 |
11/18/2022 |
||
|
3.10 |
8-K |
001-33678 |
3.1 |
6/14/2023 |
||
|
4.1 |
8-K |
001-33678 |
4.1 |
5/18/2020 |
||
|
4.2 |
8-K |
001-33678 |
4.1 |
7/21/2020 |
||
|
4.3 |
8-K |
001-33678 |
4.1 |
9/13/2022 |
||
|
4.4 |
8-K |
001-33678 |
4.2 |
9/13/2022 |
||
|
4.5 |
8-K |
001-33678 |
4.3 |
9/13/2022 |
||
|
4.6 |
8-K |
001-33678 |
4.4 |
9/13/2022 |
||
|
4.7 |
8-K |
001-33678 |
4.5 |
9/13/2022 |
||
|
4.8 |
Form of Original Issue Discount Secured Senior Convertible Debenture |
8-K |
007-33678 |
4.1 |
4/27/2023 |
|
|
4.9 |
8-K |
001-33678 |
4.2 |
4/27/2023 |
||
|
4.10 |
8-K |
001-33678 |
4.3 |
4/27/2023 |
||
|
4.11 |
8-K |
001-33678 |
4.4 |
4/27/2023 |
||
|
4.12 |
8-K |
001-33678 |
4.1 |
12/21/2023 |
||
|
4.13 |
8-K |
001-33678 |
4.2 |
3/25/2024 |
||
|
4.14 |
8-K |
001-33678 |
4.1 |
6/14/2024 |
||
|
4.15 |
8-K |
001-33678 |
4.3 |
3/25/2024 |
||
|
4.16 |
8-K |
001-33678 |
4.4 |
3/25/2024 |
||
|
4.17 |
8-K |
001-33678 |
4.1 |
7/29/2024 |
||
|
4.18 |
8-K |
001-33678 |
4.2 |
7/29/2024 |
||
|
4.19 |
8-K |
001-33678 |
4.3 |
7/29/2024 |
||
|
10.1 |
8-K |
001-33678 |
4.3 |
7/29/2024 |
||
|
10.2 |
8-K |
001-33678 |
10.1 |
7/29/2024 |
||
| 10.3 | Secured Promissory Note, dated as of November 5, 2024, between NovaBay Pharmaceuticals, Inc., as borrower, and PRN Physician Recommended Nutriceuticals, as lender. | 8-K | 001-33678 | 10.1 | 11/6/2024 | |
|
31.1 |
X |
|||||
|
31.2 |
X |
|||||
|
32.1 |
X |
|||||
|
32.2 |
X |
|||||
|
101.INS |
Inline XBRL Instance Document |
X |
||||
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
X |
||||
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
X |
||||
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
X |
||||
|
101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document |
X |
||||
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
X |
||||
|
104 |
The Cover Page Interactive Data File, formatted in Inline XBRL (included within the Exhibit 101 attachments) |
X |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Date: November 7, 2024 |
||
|
By: |
/s/ Justin Hall |
|
|
Justin Hall Chief Executive Officer, General Counsel and Director (principal executive officer) |
||
|
Date: November 7, 2024 |
||
|
By: |
/s/ Tommy Law |
|
|
Tommy Law Interim Chief Financial Officer (principal financial officer) |
||
Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Justin Hall, certify that:
1. I have reviewed this Form 10-Q of NovaBay Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 7, 2024
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/s/ Justin Hall |
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Justin Hall |
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Chief Executive Officer, General Counsel and Director (principal executive officer) |
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Exhibit 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Tommy Law, certify that:
1. I have reviewed this Form 10-Q of NovaBay Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 7, 2024
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/s/ Tommy Law |
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Tommy Law |
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Interim Chief Financial Officer |
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(principal financial officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NovaBay Pharmaceuticals, Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2024 (the Report), I, Justin Hall, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 7, 2024
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/s/ Justin Hall |
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Justin Hall |
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Chief Executive Officer, General Counsel and Director |
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This Certification is made solely for the purpose of 18 USC Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NovaBay Pharmaceuticals, Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2024 (the Report), I, Tommy Law, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 7, 2024
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/s/ Tommy Law |
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Tommy Law |
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Interim Chief Financial Officer |
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This Certification is made solely for the purpose of 18 USC Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.