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 June 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 August 9, 2024, there were 4,885,693 shares of the registrant’s common stock outstanding.

NOVABAY PHARMACEUTICALS, INC.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets: June 30, 2024 (unaudited) and December 31, 2023	3
	Condensed Consolidated Statements of Operations: Three and six months ended June 30, 2024 and 2023 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity: Three and six months ended June 30, 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2024 and 2023 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
SIGNATURES		55

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

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)

	June 30, 2024			December 31, 2023
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	751		$	2,924
Accounts receivable, net of allowance for credit losses ($3 at June 30, 2024 and December 31, 2023)		547			680
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($204 and $264 at June 30, 2024 and December 31, 2023, respectively)		700			564
Prepaid expenses and other current assets		255			256
Current assets, discontinued operations		—			2,730
Total current assets		2,253			7,154
Operating lease right-of-use assets		1,128			1,296
Property and equipment, net		68			87
Other assets		476			478
Other assets, discontinued operations		—			19
TOTAL ASSETS	$	3,925		$	9,034
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Liabilities:
Current liabilities:
Accounts payable	$	1,235		$	906
Accrued liabilities		1,297			1,169
Secured Convertible Notes, net of discounts		655			1,137
Unsecured Convertible Notes, net of discounts		41			—
Operating lease liabilities		382			368
Current liabilities, discontinued operations		—			698
Total current liabilities		3,610			4,278
Warrant liabilities		—			334
Operating lease liabilities-non-current		932			1,108
Total liabilities		4,542			5,720
Commitments and contingencies (Note 8)
Stockholders’ (deficit) equity:
Preferred stock, $0.01 par value; 5,000 shares authorized;
Series B Preferred Stock; 1 and 6 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively		6			275
Series C Preferred Stock; 0 and 1 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively		—			1,675
Common stock, $0.01 par value; 150,000 shares authorized, 1,348 and 321 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively*		13			3
Additional paid-in capital*		179,392			176,210
Accumulated deficit		(180,028	)		(174,849	)
Total stockholders’ (deficit) equity		(617	)		3,314
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	3,925		$	9,034

* After giving retroactive effect to a 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.

-3-

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Sales:
Product revenue, net	$	2,387		$	3,523		$	5,011		$	5,855
Other revenue, net		13			11			20			18
Total sales, net		2,400			3,534			5,031			5,873
Cost of goods sold		808			1,795			1,645			2,534
Gross profit		1,592			1,739			3,386			3,339
Operating expenses:
Research and development		9			22			28			32
Sales and marketing		1,019			1,175			2,074			2,411
General and administrative		1,617			1,593			3,908			3,292
Loss on divestiture of subsidiary		—			—			865			—
Total operating expenses		2,645			2,790			6,875			5,735
Operating loss		(1,053	)		(1,051	)		(3,489	)		(2,396	)
Non-cash (loss) gain on changes in fair value of warrant liabilities		(80	)		216			114			216
Non-cash (loss) gain on change in fair value of embedded derivative liability		(83	)		40			(18	)		40
Accretion of interest and amortization of discounts on convertible notes		(300	)		(501	)		(733	)		(501	)
Other expense, net		(69	)		(432	)		(549	)		(432	)
Net loss from continuing operations		(1,585	)		(1,728	)		(4,675	)		(3,073	)
Net loss from discontinued operations (Note 18)		—			(308	)		(124	)		(702	)
Net loss		(1,585	)		(2,036	)		(4,799	)		(3,775	)
Less: Increase to accumulated deficit due to adjustment to Preferred Stock conversion price		—			(1,996	)		(380	)		(1,996	)
Net loss attributable to common stockholders	$	(1,585	)	$	(4,032	)	$	(5,179	)	$	(5,771	)
Basic and diluted net loss per share
Net loss per share from continuing operations*	$	(1.37	)	$	(41.04	)	$	(5.44	)	$	(68.00	)
Net loss per share from discontinued operations*		—			(3.39	)		(0.13	)		(9.42	)
Net loss per share attributable to common stockholders (basic and diluted)*	$	(1.37	)	$	(44.43	)	$	(5.57	)	$	(77.42	)
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted)*		1,155			91			930			75

* After giving retroactive effect to a 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.

-4-

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(Unaudited)

(in thousands)

	Preferred Stock						Common Stock				Additional Paid- in			Accumulated			Total Stockholders’ (Deficit)
	Shares			Amount			Shares*		Amount*		Capital*			Deficit			Equity
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	)

	Preferred Stock						Common Stock				Additional Paid- in		Accumulated			Total Stockholders’ (Deficit)
	Shares			Amount			Shares*		Amount*		Capital*		Deficit			Equity
Balance at December 31, 2022		14		$	2,973			58	$	0	$	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		1		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

* After giving retroactive effect to a 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.

-5-

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

(In thousands)

	Six Months Ended June 30,
	2024			2023
Operating activities:
Net loss	$	(4,799	)	$	(3,775	)
Net loss from discontinued operations		124			702
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		23			26
Stock-based compensation expense related to employee and director stock awards		115			139
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		168			140
Accretion of interest and amortization of debt discounts on convertible notes		726			457
Changes in operating assets and liabilities:
Accounts receivable		133			(481	)
Inventory		(144	)		(81	)
Prepaid expenses and other current assets		1			(83	)
Other assets		2			(5	)
Accounts payable and accrued liabilities		457			166
Operating lease liabilities		(162	)		(127	)
Net cash used in operating activities, continuing operations		(2,150	)		(2,893	)
Investing activities:
Proceeds from divestiture of subsidiary		1,070			—
Purchases of property and equipment		(4	)		(15	)
Net cash provided by (used in) investing activities, continuing operations		1,066			(15	)
Financing activities:
Proceeds from Warrant Exercise		226			—
Proceeds from issuance of Secured Convertible Notes and May 2023 Warrants, net of discounts		—			3,000
Payments on Secured Convertible Notes		(1,200	)		(193	)
Debt issuance cost		(115	)		(294	)
Net cash (used in) provided by financing activities, continuing operations		(1,089	)		2,513
Net decrease in cash, cash equivalents, and restricted cash, continuing operations		(2,173	)		(395	)
Net decrease in cash and cash equivalents, discontinued operations		(206	)		(561	)
Net decrease in cash, cash equivalents, and restricted cash, consolidated		(2,379	)		(956	)
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		—			(16	)
Cash, cash equivalents and restricted cash of continuing operations, end of period	$	1,227		$	4,874

	Six Months Ended June 30,
	2024		2023
Supplemental disclosure of cash flow information:
Interest paid in continuing operations	$	130	$	47
Interest paid in discontinued operations		—		9

	Six Months Ended June 30,
	2024		2023
Supplemental disclosure of non-cash information:
Conversions of preferred to common stock	$	1,944	$	849
Down round feature adjustments related to Preferred Stock		380		1,996
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		—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

-6-

NOTE 1. ORGANIZATION

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’ (Deficit) 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.

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 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 has 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 shall be included in continuing operations in subsequent periods.

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, as the Company continues to invest in its commercialization efforts. Additionally, the Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. 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).

The Company’s long-term liquidity needs will be largely determined by the success of our commercialization efforts. To address the Company’s current liquidity and 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; (3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (4) entering into license agreements to sell new products; and/or (5) the divestiture of certain business or product lines and related assets. 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 Securities and Exchange Commission (“SEC”). While the Company believes that the proceeds from the 2024 Public Offering (as defined in Note 19, “Subsequent Events”), 2024 Warrant Reprice Transaction (as defined in Note 9, “Financing Activities”), and the DERMAdoctor Divestiture improved the Company’s liquidity in the near term, there is no assurance that the Company will be successful in executing additional capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs. Accordingly, the Company continues to evaluate different plans and strategies to address the Company’s capital and liquidity needs, as well as evaluating potential other strategic alternatives and transactions. 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. 

-7-

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 NovaBay Pharmaceuticals, Inc. and its former wholly-owned subsidiary, DERMAdoctor, LLC, as of and for the six months ended June 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 six months ended June 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.

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”).

-8-

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 June 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):

	June 30,		December 31,
	2024		2023
Cash and cash equivalents	$	751	$	3,130
Cash and cash equivalents, discontinued operations		—		(206	)
Restricted cash included in other assets		476		476
Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows	$	1,227	$	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 six months ended June 30, 2024 and 2023, revenues from significant product categories were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Avenova Spray	$	2,125	$	1,758	$	4,221	$	3,695
NeutroPhase		—		1,043		—		1,043
Other products		262		722		790		1,117
Total product revenue, net		2,387		3,523		5,011		5,855
Other revenue, net		13		11		20		18
Total sales, net	$	2,400	$	3,534	$	5,031	$	5,873

During the three and six months ended June 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 74% and 61% of total Avenova Spray net revenue during the three months ended June 30, 2024 and 2023, respectively. Sales of Avenova Spray via Amazon comprised 74% and 68% of total Avenova Spray net revenue during the six months ended June 30, 2024 and 2023, respectively.

As of June 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:

	June 30,			December 31,
Major distribution partner	2024			2023
Major U.S. Retailer A		35	%		22	%
Avenova Spray Pharmacy Distributor A		33	%		14	%
Avenova Spray Pharmacy Distributor B		12	%		*	%
Chongqing Pioneer Pharma Holdings Limited		*	%		36	%

* Less than 10%

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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 the 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 June 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 our 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 June 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 $204 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. 

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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 six months ended June 30, 2024 or June 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 June 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 six months ended June 30, 2024 or June 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.

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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 sheet 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.