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, 2022~~March 31, 2023

☐	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~~.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. (Check one):

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 10, 2022,~~May 7, 2023, there were ~~64,988,364~~2,728,824 shares of the ~~registrant's~~registrant’s common stock outstanding.

Table of Contents

NOVABAY PHARMACEUTICALS, INC.

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets: ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~2021~~2022	3

	Condensed Consolidated Statements of ~~Operations and Comprehensive Loss:~~Operations: Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity: Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5

	Condensed Consolidated Statements of Cash Flows: ~~Nine~~Three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	76

	Notes to Condensed Consolidated Financial Statements (unaudited)	87

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4129

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4935

Item 4.	Controls and Procedures	5035

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	5136

Item 1A.	Risk Factors	5136

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5436

Item 3.	Defaults Upon Senior Securities	5436

Item 4.	Mine Safety ~~Disclosure~~Disclosures	5436

Item 5.	Other Information	5436

Item 6.	Exhibits	5537

SIGNATURES		5738

EXHIBIT INDEX		5537

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 its wholly-owned subsidiary, DERMAdoctor, LLC, a Missouri limited liability company.

The Company owns over 4540 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®”, “NeutroPhase®”, “DERMAdoctor®”, “Kakadu C®”, “AIN’T Misbehavin’®”, “KP Duty®”, and the Company licenses depictions of Dr. Audrey Kunin, some of which ~~include NovaBay®,~~are held directly by NovaBay ~~Pharma®, Avenova®, NeutroPhase®, CelleRx®, Aganocide®, AgaDerm®, Neutrox®, Going Beyond Antibiotics®, Kakadu C®, AIN’T Misbehavin’®~~ and ~~KP Duty®~~others by our wholly-owned subsidiary DERMAdoctor.

On November 15, 2022, 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.

Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Inin thousands, except par value amounts)

							March 31,			December 31,
	September 30,			December 31,			2023			2022
	2022			2021			(Unaudited)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,868		$	7,504		$	3,746		$	5,362
Accounts receivable, net of allowance for doubtful accounts ($8 at September 30, 2022 and $0 at December 31, 2021)		2,133			1,668
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($455 and $641 at September 30, 2022 and December 31, 2021, respectively)		4,068			3,220
Accounts receivable, net of allowance for credit losses ($3 and $19 at March 31, 2023 and December 31, 2022, respectively)								1,835			1,973
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($488 and $499 at March 31, 2023 and December 31, 2022, respectively)								3,797			3,437
Prepaid expenses and other current assets		544			778			516			560
Total current assets		10,613			13,170			9,894			11,332
Operating lease right-of-use assets		1,937			411			1,744			1,831
Property and equipment, net		217			193			119			119
Goodwill		4,528			4,528			348			348
Other intangible assets, net		4,928			5,200			2,242			2,280
Other assets		153			476			478			489
TOTAL ASSETS	$	22,376		$	23,978		$	14,825		$	16,399

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Current liabilities:
Accounts payable	$	1,097		$	1,045		$	1,148		$	1,080
Accrued liabilities		2,168			2,092			2,809			2,724
Line of credit		—			105
Operating lease liabilities		445			200			466			453
Total current liabilities		3,710			3,442			4,423			4,257
Operating lease liabilities non-current		1,713			246
Warrant liability		2,827			9,558
Contingent earnout liability		342			561
Operating lease liabilities-non-current								1,512			1,588
Total liabilities		8,592			13,807			5,935			5,845
Commitments & contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; 12 and 14 issued and outstanding at September 30, 2022 and December 31, 2021, respectively		570			680
Common stock, $0.01 par value; 150,000 and 100,000 shares authorized, 64,988 and 47,766 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		650			478
Commitments & contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized;
Series B Preferred Stock; 12 shares issued and outstanding at March 31, 2023 and December 31, 2022								570			570
Series C Preferred Stock; 2 shares issued and outstanding at March 31, 2023 and December 31, 2022								2,403			2,403
Common stock, $0.01 par value; 150,000 shares authorized, 2,035 shares issued and outstanding at March 31, 2023 and December 31, 2022								652			652
Additional paid-in capital		162,510			150,900			165,156			165,081
Accumulated deficit		(149,946	)		(141,887	)		(159,891	)		(158,152	)
Total stockholders' equity		13,784			10,171
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	22,376		$	23,978
Total stockholders’ equity								8,890			10,554
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY							$	14,825		$	16,399

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

~~-3-~~- 3 -

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NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE LOSS~~

(Unaudited)

(Inin thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
Sales:
Product revenue, net	$	3,816		$	2,259		$	10,743		$	7,012		$	3,117		$	3,267
Other revenue, net		10			6			18			19			7			6
Total sales, net		3,826			2,265			10,761			7,031			3,124			3,273

Product cost of goods sold		1,451			712			4,735			2,194			1,188			1,459
Gross profit		2,375			1,553			6,026			4,837			1,936			1,814
Operating expenses:
Research and development		41			10			108			36			26			28
Sales and marketing		1,835			2,061			5,860			5,942			1,653			1,985
General and administrative		956			1,771			5,049			4,527			1,991			2,183
Total operating expenses		2,832			3,842			11,017			10,505			3,670			4,196
Operating loss		(457	)		(2,289	)		(4,991	)		(5,668	)		(1,734	)		(2,382	)
Non-cash loss on modification of common stock warrants		(1,922	)		—			(1,922	)		—
Non-cash gain on changes in fair value of warrant liabilities		2,414			—			4,470			—

Non-cash gain on changes in fair value of warrant liability														—			2,056
Non-cash gain on changes in fair value of contingent liability		—			—			219			—			—			219
Other (expense) income, net		(171	)		—			(178	)		2
Other expense, net														(5	)		(4	)

Loss before provision for income taxes		(136	)		(2,289	)		(2,402	)		(5,666	)
Provision for income taxes		—			—			—			—
Net loss and comprehensive loss	$	(136	)	$	(2,289	)	$	(2,402	)	$	(5,666	)
Net loss													$	(1,739	)	$	(111	)

Less: Increase to accumulated deficit due to adjustment to Series B Preferred Stock conversion price		5,657			—			5,657			—
Net loss attributable to common stockholders	$	(5,793	)	$	(2,289	)	$	(8,059	)	$	(5,666	)

Net loss per share (basic and diluted)	$	(0.10	)	$	(0.05	)	$	(0.15	)	$	(0.13	)
Weighted-average shares of common stock used in computing net loss per share (basic and diluted)		56,133			44,921			53,007			43,100
Net loss per share attributable to common stockholders (basic and diluted)													$	(0.85	)	$	(0.08	)
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted)														2,035			1,431

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

~~-4-~~

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NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands)

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

Equity

Balance at December 31, 2021
14 $ 680 47,766 $ 478 $ 150,900 $ (141,887
)
$ 10,171
Net loss
- - - - - (111
)
(111
)
Reclassification of Private Placement Warrants
- - - - 7,502 - 7,502
Conversion of Series B Preferred Stock to common stock (1
)
(71
)
3,653 36 35 - -
Stock-based compensation expense related to employee and director stock options
- - - - 184 - 184

Balance at March 31, 2022
13 $ 609 51,419 $ 514 $ 158,621 $ (141,998
)
$ 17,746
Net loss
- - - - - (2,155
)
(2,155
)
Conversion of Series B Preferred Stock to common stock (1
)
(39
)
1,974 20 19 - -
Vesting of director restricted stock awards
- - 120 1 (1
)
- -
Stock-based compensation expense related to employee and director stock options
- - - - 154 - 154

Balance at June 30, 2022
12 $ 570 53,513 $ 535 $ 158,793 $ (144,153
)
$ 15,745
Net loss
- - - - - (136 ) (136 )
Modification of common stock warrants - - - - 1,922 - 1,922
Exercise of warrants, net of offering costs - - 11,475 115 171 - 286
Reclassification of common stock warrants to liability - - - - (3,825
)
- (3,825
)
Adjustment of Series B Preferred Stock conversion price - - - - 5,657 (5,657
)
-
Stock-based compensation expense related to employee and director stock options
- - - - (208
)
- (208
)
Balance at September 30, 2022
12 $ 570 64,988 $ 650 $ 162,510 $ (149,946
)
$ 13,784

	Preferred Stock				Common Stock				Additional Paid-		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		in Capital		Deficit			Equity
Balance at December 31, 2022		14	$	2,973		2,035	$	652	$	165,081	$	(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		2,035	$	652	$	165,156	$	(159,891	)	$	8,890

	Preferred Stock						Common Stock				Additional Paid-		Accumulated			Total Stockholders’
	Shares			Amount			Shares		Amount		in Capital		Deficit			Equity
Balance at December 31, 2021		14		$	680			1,365	$	478	$	150,900	$	(141,887	)	$	10,171

Net Loss		-			-			-		-		-		(111	)		(111	)
Reclassification of Series B Private Placement Warrants		-			-			-		-		7,502		-			7,502
Conversion of Series B Preferred Stock to common stock		(1	)		(71	)		104		36		35		-			-
Stock-based compensation expense related to employee and director stock awards		-			-			-		-		184		-			184

Balance at March 31, 2022		13		$	609			1,469	$	514	$	158,621	$	(141,998	)	$	17,746

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

~~-5-~~- 5 -

Table of Contents

Additional

Total

Preferred Stock

Common Stock

Paid-In

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

Equity

Balance at December 31, 2020
- $ - 41,782 $ 418 $ 147,963 $ (136,063
)
$ 12,318
Net loss
- - - - - (1,518
)
(1,518
)
Stock-based compensation expense related to employee and director stock options
- - - - 130 - 130
Stock-based compensation expense related to non-employee stock options
- - - - 53 - 53
Balance at March 31, 2021
- $ - 41,782 $ 418 $ 148,146 $ (137,581
)
$ 10,983
Net loss
- - - - - (1,859
)
(1,859
)
Issuance of warrants
- - - - 13 - 13
Issuance of common stock, net of offering costs
- - 2,673 27 1,749 - 1,776
Vesting of employee restricted stock awards
- - 160 2 (2
)
- -
Stock-based compensation expense related to employee and director stock options
- - - - 242 - 242
Stock-based compensation expense related to non-employee stock options
- - - - 54 - 54
Balance at June 30, 2021
- $ - 44,615 $ 447 $ 150,202 $ (139,440
)
$ 11,209
Net loss
- - - - - (2,289
)
(2,289
)
Vesting of employee restricted stock awards
- - 328 3 217 - 220
Stock-based compensation expense related to employee and director stock options
- - - - 151 - 151
Stock-based compensation expense related to non-employee stock options
- - - - 73 - 73
Balance at September 30, 2021
- $ - 44,943 $ 450 $ 150,643 $ (141,729
)
$ 9,364

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

~~-6-~~

~~Table of Contents~~

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,						Three Months Ended March 31,
	2022			2021			2023			2022

Operating activities:
Net loss	$	(2,402	)	$	(5,666	)	$	(1,739	)	$	(111	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		88			32
Depreciation of property and equipment								13			30
Amortization of intangible assets		272			—			38			91
Stock-based compensation expense for options and stock issued to employees and directors		130			523
Stock-based compensation expense for options and stock issued to non-employees		—			180
Vesting of employee restricted stock awards		—			2
Issuance of warrants to non-employees for services		—			13
Non-cash loss on modifications of common stock warrants		1,922			—
Unrealized gain on changes in fair value of warrant liabilities		(4,470	)		—
Unrealized gain on changes in fair value of contingent liability		(219	)		—
Stock-based compensation expense related to employee and director stock awards								75			184
Non-cash gain on changes in fair value of warrant liability								—			(2,056	)
Non-cash gain on changes in fair value of contingent liability								—			(219	)
Changes in operating assets and liabilities:
Accounts receivable		(465	)		263			138			(632	)
Inventory		(848	)		(361	)		(360	)		(565	)
Prepaid expenses and other current assets		234			(81	)		44			26
Operating lease right-of-use assets		(1,526	)		266			87			(1,920	)
Other asset		(1	)		—
Other assets								3			(8	)
Accounts payable and accrued liabilities		128			262			153			1,182
Operating lease liabilities		1,712			(307	)		(63	)		1,941
Net cash used in operating activities		(5,445	)		(4,874	)		(1,611	)		(2,057	)

Investing activities:
Purchases of property and equipment		(112	)		(44	)		(13	)		(24	)
Net cash used in investing activities		(112	)		(44	)		(13	)		(24	)

Financing activities:
Proceeds from exercise of warrants		1,703			—
Proceeds from common stock issuances, net		—			1,994
Payment on the line of credit		(105	)		—			—			(105	)
Net cash provided by financing activities		1,598			1,994
Net decrease in cash, cash equivalents, and restricted cash		(3,959	)		(2,924	)
Net cash used in financing activities								—			(105	)
Net change in cash, cash equivalents, and restricted cash								(1,624	)		(2,186	)
Cash, cash equivalents and restricted cash, beginning of year		7,979			12,427			5,846			7,979
Cash, cash equivalents and restricted cash, end of period	$	4,020		$	9,503		$	4,222		$	5,793

	Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Supplemental disclosure of cash flow information:
Interest paid	$	12	$	—	$	5	$	4

	Nine Months Ended September 30,				Three Months Ended March 31,
	*2022*		*2021*		2023		2022
Supplemental disclosure of non-cash information:
Warrant liability transferred to equity	$	7,502	$	—	$	—	$	7,502
Adjustment of Series B Preferred Stock conversion price	$	5,657	$	—
Equity transferred to warrant liabilities	$	3,825	$	—
Addition of operating lease, right-of-use asset	$	2,039	$	—		—		2,039
Reassessment of operating lease, right-of-use asset	$	164	$	—
Conversion of Series B Preferred Stock to common stock	$	110	$	—		—		71

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

~~-7-~~
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Table of Contents

NOTE 1. ORGANIZATION

NovaBay Pharmaceuticals, Inc. (the “Company”) develops and sells scientifically-created and clinically-proven eyecare, skincare and ~~skincare~~wound care products. Our leading product, Avenova® Antimicrobial Lid and Lash Solution, (“or Avenova ~~Spray”),~~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 ~~U.S. Food and Drug Administration (“FDA”)~~FDA for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also ~~often prescribed~~available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek eyelid and eyelash ~~mirror.~~mirror by Avenova.

~~We also manufacture and sell~~Through our proprietary form of hypochlorous acid for the wound care market. NeutroPhase and PhaseOne are used for the cleansing and irrigation of post-surgical wounds, minor burns, and superficial abrasions. NeutroPhase and PhaseOne are gentle, non-irritating, and non-sensitizing to skin and new tissue. PhaseOne is distributed through commercial partners in the United States for professional use only, and NeutroPhase is distributed in China by Pioneer Pharma (Hong Kong) Company Ltd.

On ~~November 5, 2021, (~~~~the “Acquisition Closing”), we significantly expanded our business by acquiring~~subsidiary DERMAdoctor, LLC (“DERMAdoctor”) ~~as our wholly-owned subsidiary (the “DERMAdoctor Acquisition”). DERMAdoctor~~, the Company offers over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors. ~~See Note~~We acquired DERMAdoctor in 3,November 2021 ( ~~“Business Combination” below.~~the “DERMAdoctor Acquisition”), and since completing this transaction we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives contemplated by the acquisition, including revenue growth, cost reductions and overall profitability.

The Company also manufactures and sells its proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for the cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries. The Company currently sells these products through distributors.

The Company was incorporated under the laws of the State of California on January 19, 2000, ~~19,~~~~2000,~~as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, 1,~~2002,~~on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, it 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. The Company is managed as two reportable segments: (1) ~~Optical &~~Eyecare and Wound Care and (2) ~~Skin Care.~~Skincare.

Effective November 15, 2022, 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.

Liquidity and Going Concern

Based primarily on the funds available on ~~September 30, 2022,~~March 31, 2023 and the 2023 Private Placement (as defined elsewhere in this Quarterly Report) completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, 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 second quarter of ~~2023.~~2024. The Company has sustained operating losses for the majority of its corporate history and expects that its ~~2022~~2023 expenses will exceed its ~~2022~~2023 revenues, as the Company continues to invest in both its Avenova and DERMAdoctor 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. 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, the continuation of the COVID-19 pandemic and international conflicts (e.g., the conflict between Russia and Ukraine).

The Company’s long-term liquidity needs will be largely determined by the success of 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; and/or (4) entering into license agreements to sell new products. 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”). 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.

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Table of Contents

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.
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 unaudited condensed consolidated financial statements and accompanying notes. These estimates include contract liabilities related to product sales ~~useful lives for property and equipment and related depreciation calculations,~~such as product returns, assumptions for valuing ~~options and~~ warrants, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other ~~contingencies as of~~ ~~September 30, 2022.~~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 ~~interim~~ 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 ~~date~~data was derived from the audited consolidated financial ~~statement~~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, ~~2021,~~2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, which was filed with the SEC on March ~~29, 2022.~~31, 2023.

Change in Accounting and Revision of Prior Period Financial Statements

During the ~~three~~third ~~months ended~~quarter of ~~September 30,~~ 2022,the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. The Company began expensing these fees as incurred as product cost of goods sold in the Company’s condensed consolidated statements of ~~operations and comprehensive loss.~~operations. The Company previously recorded revenue net of these fees. The Company believes that making this change is appropriate and preferable as it is more consistent with the practices of comparable companies as wethe Company increasingly ~~focus~~focuses on commercial growth in our direct to consumer on-line channels. Changes to prior period amounts presented in this report have been made to conform to the current period presentation. See additional information under “Revenue Recognition” below. The changes had no impact on operating loss, net loss ~~and comprehensive loss~~ or net loss per share in the Company’s unaudited condensed consolidated statements of operations ~~and comprehensive loss~~ in the periods presented in this report or in previously issued annual and quarterly ~~Company’s condensed~~ financial statements. The changes also did not impact cash or ending cash balances in the Company’s unaudited condensed consolidated balance sheets in the periods presented in this report or in previously issued annual and quarterly ~~Company’s condensed~~ financial statements.

While reviewing its accounting policy for fulfillment fees during the third quarter of 2022, the Company identified an error in its previously issued financial statements whereby the Company ~~has~~had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. ~~For~~During the ~~three~~third ~~months ended~~quarter of ~~September 30,~~ 2022,the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s unaudited condensed consolidated statements of ~~operations and comprehensive loss.~~operations. The identified error impacted the Company’s previously issued 2022 ~~2021~~first and ~~2020~~second ~~quarterly and~~quarter condensed consolidated financial statements, as well as the 2021 annual consolidated financial statements. Management believes that the impact of ~~this~~ these adjustments to correct such error is immaterial to the previously issued ~~condensed~~ consolidated financial statements, based on an evaluation of both quantitative and qualitative factors. However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation. See additional information under “Revenue Recognition” below. The revisions had no impact on operating loss, net loss ~~and comprehensive loss~~ or net loss per share in the Company’s unaudited condensed consolidated statements of operations ~~and comprehensive loss~~ in the periods presented in this report or in previously issued annual ~~and quarterly Company's condensed~~consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual ~~and quarterly Company’s condensed~~consolidated financial statements.
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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, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company’s cash and cash equivalents were held in a ~~highly-rated,~~ major financial institution in the United States.

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~~Table of Contents~~
The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):

September 30,

December 31,

March 31,

December 31,

2022

2021

2023

2022

Cash and cash equivalents
$ 3,868 $ 7,504 $ 3,746 $ 5,362
Restricted cash included in other assets
152 475 476 484
Total cash, cash equivalents, and restricted cash in the condensed consolidated balance sheets
$ 4,020 $ 7,979
Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows
$ 4,222 $ 5,846

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 ~~highly-rated,~~ major financial institution in the United States.

~~Deposits in this bank~~ ~~may~~ The Company has a significant amount of its cash balances at financial institutions which throughout the year regularly exceed the ~~amount~~federally insured limit of ~~federal insurance provided~~$250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on ~~such deposits. The Company does~~ ~~not~~ ~~believe it is exposed to significant credit risk due to~~ the Company’s financial ~~position~~condition, results of ~~the financial institution in which the deposits are held.~~ operations, and cash flows.

During the three ~~and~~ ~~nine~~months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and ~~Avenova.com. During the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022,~~ ~~revenues also included sales of DERMAdoctor branded products.~~DERMAdoctor.com.

During the three ~~and~~ ~~nine~~months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~2022, revenues from significant product categories were as follows (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

For the three Months Ended March 31,

2022

2021

2022

2021

2023

2022

Avenova Spray
$ 1,939 $ 2,145 $ 5,778 $ 6,358 $ 1,937 $ 1,839
DERMAdoctor
1,319 — 3,115 — 785 1,043
NeutroPhase
— — 657 175 — 148
Other products
558 114 1,193 479 395 237
Total product revenue, net
3,816 2,259 10,743 7,012 3,117 3,267
Other revenue, net
10 6 18 19 7 6
Total sales, net
$ 3,826 $ 2,265 $ 10,761 $ 7,031 $ 3,124 $ 3,273

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~~Table of Contents~~
During the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~2022, sales of Avenova Spray via Amazon comprised ~~70%~~75% and ~~63%, respectively,~~82% of total Avenova Spray net ~~revenue. During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~and~~ ~~2021,~~ ~~sales of Avenova Spray via Amazon comprised 73% and 65%, respectively, of total Avenova Spray net revenue.~~revenue, respectively. No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three ~~and~~ ~~nine~~months ended ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022.

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:

September 30,

December 31,

March 31,

December 31,

Major distribution partner

2022

2021

2023

2022

Avenova Spray Pharmacy Distributor A
24
%
11
%
35
%
30
%
Major U.S. Retailer A
15
%
*
%
Major U.S. Retailer B
12
%
*
%
Major U.S. Retailer C
*
%
15
%
Avenova Spray Pharmacy Distributor B
*
%
13
%
*
%
11
%
Major U.S. Retailer A
20
%
33
%

* Less than 10%

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Table of Contents
The Company relies on seven contract manufacturers to produce its products. The Company does not own any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Contract manufacturers 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 wethe 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, 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”)~~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.
Allowance for ~~Doubtful Accounts~~Credit Losses

The Company ~~charges bad debt expense and records~~maintains an allowance for ~~doubtful accounts when management believes it~~estimated losses resulting from the inability of its customers to ~~be unlikely that specific invoices will be collected.~~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. Management ~~identifies amounts due that are in dispute and believes are unlikely to be collected. At~~ ~~September 30, 2022,~~ ~~management reserved $8 thousand for accounts receivable. There was no~~recorded a reserve for ~~accounts receivable at~~allowance for credit losses of $3 thousand and $19 thousand as of March 31, 2023 and December 31, ~~2021.~~2022, respectively.

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~~Table of Contents~~
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. ~~We utilize~~The Company utilizes contract manufacturers 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value ~~adjustments~~ of ~~$455~~$488 thousand and ~~$641~~$499 thousand, respectively.

Property and Equipment, net

Property and equipment are stated at cost, less accumulated ~~depreciation and amortization.~~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 lease term.

The costs of normal maintenance, repairs, and minor replacements are expensed as incurred.

~~Business Combinations~~
~~We account forbusiness combinations using the acquisition method~~
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Table 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. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.
The determination of estimated fair value requires us to make significant estimates and assumptions. These fair value determinations require judgment and involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items. As a result, we ~~may~~ ~~record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to~~ ~~one~~ ~~year from the acquisition date) with the corresponding offset to goodwill.~~
~~Transaction costs associated with business combinations are expensed as they are incurred.~~
Contents
Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date. 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. ~~There were no~~
The Company did not record any goodwill or indefinite-lived asset impairment charges ~~as of~~during the ~~September 30, 2022~~ three~~and~~ months ended ~~December~~March 31, ~~2021.~~2023 or 2022.

Valuation of Contingent Consideration Resulting from a Business Combination

In connection with certain acquisitions, including the ~~acquisition of~~ DERMAdoctor weAcquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified milestone events. ~~We record~~The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, ~~we revalue~~the Company revalues these obligations and ~~record~~records increases or decreases in ~~their~~the fair value within ~~our condensed~~the consolidated statement of operations ~~and comprehensive loss~~ until such time as the specified milestone achievement period is complete.

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~~the Company’s results of operations in any given period. Actual results may differ from estimates.

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~~Table~~DERMAdoctor Acquisition milestone events consist of ~~Contents~~
financial targets for calendar years 2022 and 2023. The financial target was not met for the calendar year 2022. Additionally, we do not expect the financial target to be met for the calendar year 2023. As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of March 31, 2023 and December 31, 2022. This amount is subject to change in the event that there are changes to our expectations and related valuation assumptions.
~~Impairment of~~ Long-Lived Assets

The ~~Company accounts for~~Company’s intangible assets that do not have indefinite lives (primarily trade secrets / product formulations) are amortized over their estimated useful lives. All of the Company’s intangible assets subject to amortization and other long-lived assets, ~~other than goodwill and intangible assets, and operating lease right-of-use 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 ~~or right-of-use assets~~ are present. The Company reviews long-lived ~~assets and right-of-use~~ 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 consolidated statements of operations. ~~There were~~ no ~~impairment charges as of~~ ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021.~~

The Company did not record any long-lived asset impairments during the three months ended March 31, 2023 or 2022.
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 for all leases in which it is a lessee or a lessor. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the consolidated balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.
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Table of Contents
~~Comprehensive Income (Loss)~~
~~ASC~~ ~~220,~~~~Comprehensive Income,~~ ~~requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported.~~
Revenue Recognition

Revenue is recognized from the sale of goods in accordance with ASC 606, Revenue from Contracts with Customers~~(“ASC~~ ~~606”~~). Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration to which the Company expects to receive. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:

i.
identify the contract(s) with a customer;

ii.
identify the performance obligations in the contract;

iii.
determine the transaction price;

iv.
allocate the transaction price to the performance obligations in the contract; and

v.
recognize revenue when (or as) the entity satisfies performance obligations.

Revenue is generated through the Company’s webstores, Avenova.com and DERMAdoctor.com, for Avenova and DERMAdoctor products. Such direct to consumer sales are recognized upon fulfillment, which generally occurs upon delivery of the related products to a third-party carrier. Shipping and handling costs are expensed as incurred and included in product cost of goods sold in the ~~condensed~~ consolidated statements of ~~operations and comprehensive loss. We present~~operations. The Company presents revenue net of sales taxes and refunds.

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~~Table of Contents~~
Revenue generated through third-party online retailers, including Amazon, is recognized when control of the goods is transferred to the customer, which generally occurs upon delivery of the products to a third-party carrier.

The Company pays third-party online retailers advertising & promotion fees, selling commissions and fulfillment fees. Advertising & promotion fees are expensed as incurred as sales and marketing expenses within operating expenses in the ~~condensed~~ consolidated statements of ~~operations and comprehensive loss.~~operations. Prior to the third quarter of 2022, the Company recorded revenue net of selling commissions and fulfillment fees. Beginning in the third quarter of 2022, as further described below, the Company began expensing selling commissions as sales and marketing expenses in the ~~condensed~~ consolidated statements of operations ~~and comprehensive loss~~ and fulfillment fees as product cost of goods sold in the ~~condensed~~ consolidated statements of ~~operations and comprehensive loss.~~operations.

Prior to the third quarter of 2022, to determine its accounting for fulfillment fees, the Company evaluated principal versus agent considerations with respect to the obligation to ship its product to the customer. The Company assessed whether the nature of the Company’s obligation is as a principal in providing the fulfillment service or as an agent in promising to arrange for a third party to provide the fulfillment service. The Company concluded that it is an agent with respect to the shipping service as the Company does not control the service itself and, therefore, its obligation is that of a promise to arrange for the service. This determination involved significant judgement. In accordance with this conclusion, prior to the third quarter of 2022, the Company recorded revenue net of fulfillment fees. Beginning in the third quarter of 2022, the Company made an accounting policy change election, as a practical expedient, to account for the shipping fees as a fulfillment activity and began expensing them as incurred within product cost of goods sold in the Company’s ~~condensed~~ consolidated statements of ~~operations and comprehensive loss. We believe~~operations. Management believes the resulting accounting changes are preferable as they conform ~~our~~the Company’s practice to a majority of comparable filers and ~~our~~ other similar sales channels. Changes to amounts presented for prior periods have been made to conform to these changes. These changes did not impact operating loss, net loss ~~and comprehensive loss~~ or loss per share in the Company’s condensed consolidated ~~statement~~statements of operations ~~and comprehensive loss~~ in the periods presented in this report or in previously issued annual ~~and quarterly Company’s condensed~~consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual ~~and quarterly Company’s condensed~~consolidated financial statements.

Prior to the third quarter of 2022, the Company also recorded revenue net of selling commissions. During the third quarter of 2022, the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s ~~condensed~~ consolidated statements of ~~operations and comprehensive loss.~~operations. The Company determined that its treatment prior to the third quarter of 2022 was an error. The identified error impacted the Company's previously issued 2022 and 2021 quarterly, and 2021 and 2020 ~~quarterly and~~ annual consolidated financial statements. Management believes that the impact of this error is immaterial to the previously issued ~~condensed~~ consolidated financial statements, based on an evaluation of both quantitative and qualitative factors. However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation as outlined below. The revisions had no impact on operating loss, net loss ~~and comprehensive loss~~ or net loss per share in the Company’s condensed consolidated statements of operations ~~and comprehensive loss~~ in the periods presented in this report or in previously issued annual ~~and quarterly Company’s condensed~~consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual ~~and quarterly Company’s condensed~~consolidated financial statements.

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Table of Contents
Financial statement line items included in the condensed consolidated statements of operations ~~and comprehensive loss~~ for the three ~~and~~ ~~nine~~ ~~month periods~~months ended ~~September 30,~~March 31, 2022 ~~and~~ ~~2021~~were adjusted for the above changes as follows (in ~~thousands)~~thousands, except per share amounts):

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

As Previously
Reported

Selling
Commissions

Fulfillment
Fees

As Revised

As Previously
Reported

Selling
Commissions

Fulfillment
Fees

As Revised

For the Three Months Ended March 31, 2022

As Previously
Reported

Selling
Commissions

Fulfillment
Fees

As Revised

Sales

Product revenue, net
$ 3,268 $ 265 $ 283 $ 3,816 $ 8,934 $ 851 $ 959 $ 10,743 $ 2,623 $ 298 $ 346 $ 3,267
Product cost of goods sold

Product cost of goods sold
1,168 - 283 1,451 3,776 - 959 4,735 1,113 - 346 1,459
Operating expenses

Sales and marketing
1,570 265 - 1,835 5,009 851 - 5,860 1,687 298 - 1,985

Net loss and comprehensive loss
(136 ) - - (136 ) (2,402 ) - - (2,402 )
Net loss
(111
)
- - (111
)

Net loss per share (basic and diluted)
(0.10 ) - - (0.10 ) (0.15 ) - - (0.15 )
Net loss per share attributable to common stockholders (basic and diluted)
(0.08
)
- - (0.08
)

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

As Previously
Reported

Selling
Commissions

Fulfillment
Fees

As Revised

As Previously
Reported

Selling
Commissions

Fulfillment
Fees

As Revised

Sales

Product revenue, net
$ 1,834 $ 206 $ 219 $ 2,259 $ 5,761 $ 619 $ 632 $ 7,012
Product cost of goods sold

Product cost of goods sold
493 219 712 1,562 632 2,194
Operating expenses

Sales and marketing
1,855 206 2,061 5,323 619 5,942

Net loss and comprehensive loss
(2,289 ) - - (2,289 ) (5,666 ) - - (5,666 )

Net loss per share (basic and diluted)
(0.05 ) - - (0.05 ) (0.13 ) - - (0.13 )
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~~Table of Contents~~
The Company also generates Avenova Spray revenue through major pharmacy distribution partners. Product supply of Avenova Spray is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon delivery to the distributor on a “sell-in” basis. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to ~~significant~~ reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, and product returns. The Company derives its rate of return and other contract liabilities from historical data and updates its ~~return rate assumption~~assumptions quarterly. Payment for product supply is typically due 30 days after control transfers to the distributor.

Revenue for products sales to Costco is recognized upon transfer of control toat the amount of consideration that the Company expects to be entitled to, generally upon delivery to Costco. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to ~~significant~~ reversal, including discounts and product returns. The Company derives its rate of return from historical data and updates its return rate assumption quarterly. Payment for product supply is typically due 30 days after control transfers to Costco.

Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer.

Revenue for product sales to other retailers, such as CVS, is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the products to a third-party carrier, net of estimated future product returns.

-The Company 15may -

~~Table~~be required to defer recognition of ~~Contents~~
revenue for upfront payments until it performs its obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt. Deferred revenue was $307 thousand and $4 thousand as of March 31, 2023 and December 31, 2022, respectively.
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 allowance for excess and obsolete inventory along with 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, including submissions to the Food and Drug Administration (the “FDA”).
Patent Costs

Patent costs, including legal expenses, 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 and comprehensive loss.~~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 and comprehensive loss.~~operations. Advertising expenses were ~~$0.5 million~~$326 thousand and ~~$0.8 million~~$617 thousand for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~ ~~respectively. Advertising expenses were $1.6 million and $2.3 million for the~~ ~~nine~~ ~~months ended~~ ~~September 30,~~ 2022,~~and~~ ~~2021,~~ respectively.
Stock-Based Compensation

The Company’s stock-based compensation includes grants of stock options and ~~restricted stock units (“RSUs”)~~RSUs to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s unaudited condensed consolidated statements of ~~stockholders’ equity~~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. See Note ~~15,~~13, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. 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 as of the date of issuance.
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Table of Contents
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.
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Common Stock ~~Warrant Liabilities~~Warrants

The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging.
~~The Company accounts for common stock purchase warrants issued in connection with share-based compensation arrangements in accordance with the provisions of ASC~~ ~~718,~~~~Stock Compensation,~~ ~~which encompasses the provisions of ASC~~ ~~480,~~~~Distinguishing Liabilities from Equity~~.

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement) or (iii) do not become exercisable until the occurrence of ~~the~~a contingent event. ~~Additionally, for common stock purchase warrants accounted for in accordance with ASC~~ ~~718,~~~~Stock Compensation,~~ ~~the Company classifies as liabilities any contracts where it believes the warrants are deemed to be probable of issuance.~~

For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the condensed consolidated statements of ~~operations and comprehensive loss.~~operations. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate. These values are subject to a significant degree of management’s judgment.
Net Loss per Share

The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”).

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 ~~because~~if their effect would be anti-dilutive.

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The following table sets forth the calculation of basic EPS and diluted EPS (in thousands, except per share amounts):

Three Months Ended September 30,

Nine Months Ended September 30,

Numerator

2022

2021

2022

2021

Net loss
$ (136 ) $ (2,289
)
$ (2,402
)
$ (5,666
)
Less: Increase in accumulated deficit due to Series B Preferred Stock conversion price 5,657 — 5,657 —
Net loss attributable to common stockholders, basic and diluted
$ (5,793
)
$ (2,289
)
$ (8,059
)
$ (5,666
)

Denominator

Weighted average shares outstanding, basic and diluted
56,133 44,921 53,007 43,100
Net loss per share, basic and diluted
$ (0.10
)
$ (0.05
)
$ (0.15
)
$ (0.13
)

Three Months Ended March 31,

Numerator

2023

2022

Net loss
$ (1,739
)
$ (111
)

Denominator

Weighted average shares of common stock outstanding (basic and diluted)
2,035 1,431
Net loss per share attributable to common stockholders (basic and diluted)
$ (0.85
)
$ (0.08
)
For the three months ended March 31, 2023 and 2022, Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) 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 (in thousands):

As of September 30,

Three Months Ended March 31,

2022

2021

2023

2022

Series B Preferred Stock common stock equivalents
64,561 —
Stock options
4,743 3,947 121 126
Stock warrants
2,282 7,082 2,306 1,274
71,586 11,029 2,427 1,400

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Table of Contents
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 Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, which was filed with the SEC on March ~~29, 2022.~~31, 2023. 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.

-In 18June 2016, the FASB issued ASU 2016-

~~Table~~13,Financial Instruments—Credit Losses (Topic 326): Measurement of ~~Contents~~
~~NOTE~~Credit Losses on Financial Instruments (“ASU 3.2016-13”). The amendments in ASU 2016-13 ~~BUSINESS COMBINATION~~
Onrequire a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. ASU ~~November 5, 2021,~~ 2016-13 is effective for the Company ~~completed the DERMAdoctor Acquisition in which NovaBay acquired~~for annual and interim reporting periods beginning ~~100%~~January 1, 2023. ~~of the membership units of DERMAdoctor from the sellers for a closing purchase price of $12.0 million and potential future earnout payments of up to an aggregate of $3.0 million over a period of~~ ~~two~~ ~~calendar years post-closing.~~
The Company ~~funded~~adopted the ~~closing purchase price in part through~~new standard effective January 1, 2023, and the adoption of this guidance did ~~2021~~not ~~Private Placement (see Note~~ ~~14,~~ ~~“Stockholders’ Equity”).~~have a material impact on the Company’s condensed consolidated financial statements.

~~The DERMAdoctor Acquisition is accounted for as a business combination in accordance with ASC~~ ~~805,~~~~Business Combinations~~, which requires that the assets acquired and liabilities assumed be recognized at their estimated fair values as of the Acquisition Closing. Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.
The following table sets forth the final allocation of the purchase price for the DERMAdoctor Acquisition to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from DERMAdoctor (in thousands):

Fair Value

Tangible net assets and liabilities:

Cash and cash equivalents
$ 12
Accounts receivable, net of allowance for doubtful accounts
1,015
Inventory, net of allowance
2,369
Prepaid expenses and other current assets
150
Property and equipment, net
62
Other intangible assets
54
Accounts payable
(200
)
Accrued liabilities
(683
)
Total net assets
2,779
Intangible Assets:

Customer relationships
290
Trade secrets / product formulations
2,890
Trade names
2,080
Total intangible assets
5,260
Net assets acquired
8,039
Purchased consideration
12,561
Goodwill
$ 4,528
~~Goodwill is primarily attributable to assembled workforce, expected synergies and other factors.~~
~~The fair values of the identifiable intangible assets acquired at the date of the DERMAdoctor Acquisition are as follows (in thousands):~~
Intangible Asset

Fair Value

Useful Life
(in years)

Amortization
Method

Customer relationships
$ 290 7
Straight line

Trade secrets / product formulations
2,890 9
Straight line

Trade names
2,080
Indefinite
N/A
Goodwill
4,528
Indefinite
N/A
$ 9,788
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~~Table of Contents~~
~~The valuations of intangible assets incorporate significant unobservable inputs and require significant judgment and estimates, including the amount and timing of future cash flows.~~
~~The Company recognized approximately $1.2 million of transaction costs in the year ended~~ ~~December 31, 2021.~~ ~~These costs are recorded as general and administrative expense in the consolidated statements of operations and comprehensive loss.~~
~~The Company’s management reviews financial results and manages the business on an aggregate basis in accordance with ASC~~ ~~280,~~~~Segment Reporting~~~~. Therefore, financial results are reported in two operating segments: (~~1~~) Optical & Wound Care and (~~2~~) Skin Care (see Note~~ ~~19,~~ ~~“Segment Reporting” below).~~

NOTE 4.3. FAIR VALUE MEASUREMENTS

The Company’s cash equivalents 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 types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities and certificates of deposit.

~~As of~~ ~~December 31, 2021,~~ ~~the~~ ~~November 2021~~ ~~Warrants (as defined in Note~~ 14~~) are classified within Level~~ 3 ~~of the fair value hierarchy as liabilities (see Note~~ ~~13,~~ ~~“Warrant Liability” and Note~~ ~~14,~~ ~~“Stockholders’ Equity”).~~
The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of ~~September 30, 2022~~March 31, 2023 (in thousands):

Fair Value Measurements Using

Quoted Prices
in

Balance at

Active
Markets

Significant
Other

Significant
Unobservable

September 30,

for Identical

Observable

Inputs

2022

Items

Inputs

(Level 3)

(Level 1)

(Level 2)

Assets

Deposit held as a certificate of deposit
$ 152 $ 152 $ — $ —
Total assets
$ 152 $ 152 $ — $ —

Liabilities

Warrant liability

$
2,827 $ — $ — $ 2,827
Contingent earnout liability
342 — — 342
Total liabilities
$ 3,169 $ — $ — $ 3,169

Fair Value Measurements Using

Quoted

Prices in

Active

Significant

Markets

Other

Significant

Balance at

for Identical

Observable

Unobservable

March 31,

Items

Inputs

Inputs

2023

(Level 1)

(Level 2)

(Level 3)

Assets

Restricted cash held as a certificate of deposit
$ 324 $ 324 $ — $ —
Deposit held as a certificate of deposit
152 152 — —
Total assets
$ 476 $ 476 $ — $ —

~~The following is a reconciliation of the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level~~ 3~~) as of~~ ~~September 30, 2022 (~~~~in thousands):~~
Fair value of warrant liability at December 31, 2021
$ 9,558
Decrease in fair value of November 2021 Warrants
(2,056
)
Reclassification of November 2021 Warrants liability to equity
(7,502
)
Fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)
5,241
Decrease in fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)
(2,414
)
Fair value of warrant liability at September 30, 2022
$ 2,827

Fair value of contingent liability at December 31, 2021
$ 561
Decrease in fair value of contingent liability
(219
)
Fair value of contingent liability at September 30, 2022
$ 342
- 20-

~~Table of Contents~~
The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of December 31, ~~2021~~2022 (in thousands):

Fair Value Measurements Using

Quoted

Fair Value Measurements Using

Prices in

Quoted Prices
in

Active

Significant

Balance at

Active
Markets

Significant
Other

Significant
Unobservable

Markets

Other

Significant

December 31,

for Identical

Observable

Inputs

Balance at

for Identical

Observable

Unobservable

2021

Items

Inputs

(Level 3)

December 31,

Items

Inputs

Inputs

(Level 1)

(Level 2)

2022

(Level 1)

(Level 2)

(Level 3)

Assets

Restricted cash held as a certificate of deposit
$ 324 $ 324 $ — $ — $ 332 $ 332 $ — $ —
Deposit held as a certificate of deposit
151 151 — — 152 152 — —
Total assets
$ 475 $ 475 $ — $ — $ 484 $ 484 $ — $ —

Liabilities

Warrant liability
$ 9,558 $ — $ — $ 9,558
Contingent earnout liability
561 — — 561
Total liabilities
$ 10,119 $ — $ — $ 10,119

~~The following is a reconciliation~~
- 15 -
Table of ~~the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level~~ 3~~) as of~~ ~~December 31, 2021 (~~~~in thousands):~~
Fair value of warrant liability at December 31, 2020
$ —
Fair value of November 2021 Warrants issued
14,172
Decrease in fair value of November 2021 Warrants
(4,614
)
Fair value of warrant liability at December 31, 2021
$ 9,558
Contents

NOTE 5.4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in thousands):

September 30,

December 31,

March 31,

December 31,

2022

2021

2023

2022

Prepaid inventory
$ 122 $ 211
Prepaid insurance
$ 149 $ 138 119 146
Prepaid dues and subscriptions
99 43
Prepaid marketing costs
40 24
Prepaid patents
4 12
Tenant allowance 119 - — 11
Prepaid inventory
91 368
Prepaid dues and subscriptions
39 18
Prepaid patents
12 9
Prepaid sales rebates
11 19
Prepaid rent
- 14
Prepaid consultants
- 68
Prepaid marketing costs
14 -
Other
109 144 132 113
Total prepaid expenses and other current assets
$ 544 $ 778 $ 516 $ 560

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NOTE 6.5. INVENTORY

Inventory consisted of the following (in thousands):

September 30,

December 31,

March 31,

December 31,

2022

2021

2023

2022

Raw materials and supplies
$ 1,195 $ 1,179 $ 1,080 $ 1,273
Finished goods
3,328 2,682 3,205 2,663
Less: Reserve for excess and obsolete inventory
(455
)
(641
)
(488
)
(499
)
Total inventory, net
$ 4,068 $ 3,220 $ 3,797 $ 3,437

NOTE 7.6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

September 30,

December 31,

March 31,

December 31,

2022

2021

2023

2022

Office and laboratory equipment
$ 20 $ 20 $ 20 $ 20
Furniture and fixtures
157 157 157 157
Computer equipment and software
479 464 425 412
Production equipment
138 114
Leasehold improvements
152 79 152 152
Total property and equipment, at cost
946 834 754 741
Less: accumulated depreciation and amortization
(729
)
(641
)
Less: accumulated depreciation
(635
)
(622
)
Total property and equipment, net
$ 217 $ 193 $ 119 $ 119

Depreciation ~~and amortization~~ expense was ~~$29~~$13 thousand and ~~$13~~$30 thousand for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~ ~~respectively, and $88 thousand and $32 thousand for the~~ ~~nine~~ ~~months ended~~ ~~September 30,~~ 2022,~~and~~ ~~2021,~~ respectively.

~~NOTE~~ 8. ~~GOODWILL~~
~~Goodwill is accounted for in accordance with ASC~~ ~~350,~~~~Intangibles-Goodwill and Other.~~ ~~We do~~ ~~not~~ ~~amortize goodwill, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset~~ ~~may~~ ~~be impaired. There were no indications of impairment during the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022.~~ No ~~goodwill impairment was recognized as of~~ ~~September 30, 2022.~~ ~~Goodwill was $4.5 million as of both~~ ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021.~~ ~~For the DERMAdoctor Acquisition, there were~~ no ~~material measurement period adjustments recorded to the fair values of assets acquired and liabilities assumed during the period.~~
- 2216-
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NOTE 9.7. OTHER INTANGIBLE ASSETS

Other intangible assets ~~consisted~~consist of the following (in thousands):

Balance at September 30, 2022

Balance at March 31, 2023

Accumulated

Accumulated

Gross

Amortization

Net

Gross

Amortization

Impairment

Net

Indefinite-lived intangible assets

Trade names
$ 2,080 $ — $ 2,080 $ 2,080 $ — $ (970
)
$ 1,110

Amortizable intangible assets

Customer relationships
$ 290 $ (38
)
$ 252 $ 290 $ (51
)
$ (172
)
$ 67
Trade secrets / product formulations
2,890 (294
)
2,596 2,890 (410
)
(1,415
)
1,065

Total other intangible assets
$ 5,260 $ (332
)
$ 4,928 $ 5,260 $ (461
)
$ (2,557
)
$ 2,242

Balance at December 31, 2021

Accumulated

Gross

Amortization

Net

Indefinite-lived intangible assets

Trade names
$ 2,080 $ — $ 2,080

Amortizable intangible assets

Customer relationships
$ 290 $ (7
)
$ 283
Trade secrets / product formulations
2,890 (53
)
2,837

Total other intangible assets
$ 5,260 $ (60
)
$ 5,200

Balance at December 31, 2022

Accumulated

Gross

Amortization

Impairment

Net

Indefinite-lived intangible assets

Trade names
$ 2,080 $ — $ (970
)
$ 1,110

Amortizable intangible assets

Customer relationships
$ 290 $ (48
)
$ (172
)
$ 70
Trade secrets / product formulations
2,890 (375
)
(1,415
)
1,100

Total other intangible assets
$ 5,260 $ (423
)
$ (2,557
)
$ 2,280
In the fourth quarter of 2022, the Company determined that certain of its indefinite-lived and long-lived amortizable intangible assets related to its DERMAdoctor business were impaired. As such, the Company recorded an intangible asset impairment charge of $2.6 million in the fourth quarter of 2022, which was reflected in the “Goodwill, Intangible and Other Asset Impairment” caption in the Company’s consolidated statements of operations. The Company did not record any intangible asset impairment charges for the three months ended March 31, 2023 or 2022.

Amortization expense was ~~$90~~$38 thousand and $91 thousand for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~$272 thousand for the~~ ~~nine~~2022, ~~months ended~~ ~~September 30, 2022.~~ ~~There was no comparable amortization expense for the~~ ~~three~~ or ~~nine~~ ~~months ended~~ ~~September 30, 2021.~~ respectively. Based on the amortizable intangible assets as of ~~September 30, 2022,~~March 31, 2023, future amortization expenses ~~were~~are expected to be as follows (in thousands):

2022 (remaining 3 months) $ 91
2023
363 $ 114
2024
363 153
2025
363 152
2026
363 153
Thereafter
1,305 560
Total
$ 2,848 $ 1,132

- 23-

~~Table of Contents~~

NOTE ~~10.~~8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

September 30,

December 31,

March 31,

December 31,

2022

2021

2023

2022

Contract liabilities (see Note 16, “Distribution Agreements”)
$ 1,703 $ 1,289
Contract liabilities (see Note 14)
$ 1,864 $ 1,807
Employee payroll and benefits
292 443 402 261
Marketing costs
49 104
Inventory purchases
10 — 14 101
Other
163 360 480 451
Total accrued liabilities
$ 2,168 $ 2,092 $ 2,809 $ 2,724

NOTE ~~11.~~9. LINE OF CREDIT

At the time of the DERMAdoctor Acquisition, DERMAdoctor had a line of credit agreement with Bank Midwest for $500 thousand. ~~The line of credit was terminated and repaid in full on~~ ~~January 6, 2022.~~ ~~The line of credit had an interest rate equal to the Wall Street Journal Prime Rate plus 1.50% with a floor of 5.00%. All borrowings were collateralized by substantially all assets of DERMAdoctor.~~ As of ~~September 30,~~March 31, 2023 and December 31, 2022, there was no outstanding balance on the line of credit as such line of credit was terminated and repaid in full during the ~~first~~quarter ofended March 31, 2022.

- 17 -
Table of Contents

NOTE ~~12.~~10. 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,~~March 31, 2023 or December 31, 2022.

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,~~March 31, 2023 or December 31, 2022.

Legal Matters

As of ~~September 30,~~March 31, 2023 and December 31, 2022, 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.

Leases

The Company leases office space for its corporate headquarters located in Emeryville, California. The initial lease term was scheduled to expire on February 28, 2022, but on January 19, 2022, the Company exercised its option to extend the term and amended the lease to extend the term through July 31, 2027.

The Company ~~also leases~~ ~~two~~ ~~copiers for its corporate headquarters located in Emeryville, California. The lease term~~ is ~~scheduled to expire in~~ ~~November 2022.~~
~~We are~~ also party to a lease for 19,136 square feet of space located in Riverside, Missouri, which ~~we utilize~~it utilizes for light manufacturing, storage, distribution of products and administrative functions. The lease commenced on October 1, 2019 and expires on December 31, 2024.

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~~Table of Contents~~
In calculating the present value of the minimum lease payments, the Company utilized its incremental borrowing rate. The Company has elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only. 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. The 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 components of lease expense for the three ~~and~~ ~~nine~~months ended ~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 were as follows (in thousands):

Lease Costs

Three Months Ended March 31,

Three Months Ended
September 30,

Nine Months Ended
September 30,

2023

2022

Lease Costs

2022

2021

2022

2021

Operating lease cost
$ 120 $ 99 $ 395 $ 298 $ 130 $ 134
Net lease cost
$ 130 $ 134

Other information

Operational cash flow used for operating leases
$ 144 $ 113 $ 399 $ 339 $ 106 $ 111

The Company has measured its operating lease liabilities at its incremental borrowing rate over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:

Three Months Ended March 31,

September 30,
2022

September 30,
2021

2023

2022

Weighted-average remaining lease term (in years)
4.5 0.5 4.0 5.0
Weighted-average discount rate
5
%
12
%
5
%
5
%

- 18 -
Table of Contents
Future lease payments under non-cancelable leases as of ~~September 30, 2022~~March 31, 2023 were as follows (in thousands):

2022 (remaining 3 months)
$ 141
2023
535 $ 437
2024
549 557
2025
431 439
2026
445 444
Thereafter
290
2027
290
Total future minimum lease payments
2,391 2,167
Less imputed interest
(233
)
(189
)
Total
$ 2,158 $ 1,978

Reported as:

Operating lease liability
$ 445
Operating lease liability- non-current
1,713
Operating lease liabilities
$ 466
Operating lease liabilities- non-current
1,512
Total
$ 2,158 $ 1,978

NOTE ~~13.~~11. WARRANT LIABILITY

~~2019~~ ~~Domestic Warrants,~~ ~~2019~~ ~~Foreign Warrants~~See additional discussion of the terms of the Company’s various warrants and ~~2019~~ ~~Ladenburg Warrants~~
~~As further described~~related transactions in Note ~~14,~~12, “Stockholders’ Equity”,. Further, many of the ~~Company issued the~~ ~~2019~~ ~~Domestic Warrants,~~ ~~2019~~ ~~Foreign Warrants and~~ ~~2019~~ ~~Ladenburg Warrants (each as~~defined terms used below are defined in Note 14~~) in the~~ ~~third~~ ~~quarter of~~ ~~2019.~~ ~~The terms of the~~ ~~2019~~ ~~Domestic Warrants,~~ ~~2019~~ ~~Foreign Warrants and~~ ~~2019~~ ~~Ladenburg Warrants all required potential cash-settlement in the event of a specified fundamental transaction. Under ASC~~ ~~480,~~~~Distinguishing Liabilities from Equity~~,the warrants were classified as liabilities because the Company’s potential obligation to cash-settle the warrants was deemed to be beyond the Company’s control. The fair value of outstanding warrants was determined at each reporting date using a Black-Scholes option pricing model with the changes in fair value recorded in the condensed consolidated statements of operations and comprehensive loss.
~~Upon issuance in the~~ ~~third~~ ~~quarter of~~ ~~2019,~~ ~~the fair value of the~~ ~~2019~~ ~~Domestic Warrants,~~ ~~2019~~ ~~Foreign Warrants and~~ ~~2019~~ ~~Ladenburg Warrants was determined to be $3.1 million, $2.0 million and $0.1 million, respectively.~~
- 25-

~~Table of Contents~~
~~In the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~as further described in Note~~ ~~14,~~12, “Stockholders’ Equity”~~, the~~ ~~2019~~ ~~Domestic Warrants and~~ ~~2019~~ Foreign Warrants were exercised at reduced exercise prices. The warrant liabilities associated with these warrants were adjusted to their fair values as of the date of exercise, with the change in fair values recorded in the condensed consolidated statements of operations and comprehensive loss. The fair values were then transferred to equity. As of the date of exercise, the fair value of the ~~2019~~ ~~Domestic Warrants and~~ ~~2019~~ ~~Foreign Warrants was determined to be $4.9 million and $4.2 million, respectively, in accordance with the following key assumptions:~~

2019 Domestic
Warrants

2019 Foreign
Warrants

Expected price volatility
178
%
178
%
Expected term (in years)
4.57 4.57
Risk-free interest rate
0.25
%
0.27
%
Dividend yield
0.00
%
0.00
%
Weighted-average fair value of warrant
$ 1.18 $ 1.54
~~There were no~~ ~~2019~~ ~~Domestic Warrants or~~ ~~2019~~ ~~Foreign Warrants outstanding as of~~ ~~September 30, 2022.~~
~~In the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~as further described in Note~~ ~~14,~~ ~~“Stockholders’ Equity”, the Company amended the~~ ~~2019~~ Ladenburg Warrants. The Company’s potential obligation to cash-settle the warrants if a specified fundamental transaction occurred was amended to apply only in situations within the Company’s control. Pursuant to this change, the ~~2019~~ ~~Ladenburg Warrants were~~ no ~~longer classified as liabilities. The warrant liability associated with the~~ ~~2019~~ Ladenburg Warrants was adjusted to fair value as of the date of the amendment, with the change in fair value recorded in the condensed consolidated statements of operations and comprehensive loss. The fair value was then transferred to equity. The fair value of the ~~2019~~ ~~Ladenburg Warrants was determined to be $0.2 million on the date of amendment in accordance with the following key assumptions:~~
Expected price volatility
186
%
Expected term (in years)
4.05
Risk-free interest rate
0.22
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 1.17
~~The~~ ~~2019~~ ~~Ladenburg Warrants will~~ no ~~longer be adjusted to fair value in reporting periods after the amendment. All~~ ~~2019~~ ~~Ladenburg Warrants remained outstanding as of~~ ~~September 30, 2022.~~.

~~Amended~~ ~~July 2020~~September 2022 Warrants

OnThe September 2022 Warrants were issued by the Company on September 9, 2022, in connection with the 2022 Warrant Reprice ~~Transaction (See Note~~Transaction. The ~~14,~~ ~~“Stockholders’ Equity”), the Company reduced the exercise price of certain~~ ~~July 2020~~ ~~Warrants exercisable for 4,800,000 shares of common stock to~~ ~~$0.18~~ ~~per share and amended certain other of their terms. In connection with the~~ September 2022 ~~Warrant Reprice Transaction, a total of 2,100,000 shares of common stock underlying the Amended~~ ~~July 2020~~ ~~Warrants (as defined in Note~~ 14~~) were exercised immediately after amendment. The remaining Amended~~ ~~July 2020~~ ~~Warrants exercisable for~~ ~~2,700,000~~ ~~shares of common stock are subject to a restriction upon their exercise until the later of (i)~~ ~~March 9, 2023~~ ~~or (ii) the date that the Reverse Stock Split (as defined in Note~~ 20~~), which was approved by Company’s stockholders on~~ ~~November 10, 2022,~~ ~~becomes effective (See Note~~ ~~14,~~ ~~“Stockholder’ Equity” and Note~~ 20 ~~“Subsequent Events”). As a result, under ASC~~ ~~480,~~~~Distinguishing Liabilities from Equity~~,~~the unexercised Amended~~ ~~July 2020~~ Warrants were ~~classified as liabilities on the date of amendment and~~ ~~September 30, 2022.~~ ~~The fair value of the Amended~~ ~~July 2020~~ ~~Warrants was determined to be~~ ~~$0.3~~not ~~million on the date of amendment in accordance with the following key assumptions:~~
Expected price volatility
79.6
%
Expected term (in years)
3.4
Risk-free interest rate
3.58
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 0.10
~~As of~~ ~~September 30, 2022,~~ ~~the fair value of the Amended~~ ~~July 2020~~ ~~Warrants was determined to be $0.1 million in accordance with the following key assumptions:~~
Expected price volatility
79.6
%
Expected term (in years)
3.3
Risk-free interest rate
3.58
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 0.05
- 26-

~~Table of Contents~~
~~November 2021~~ ~~Warrants~~
~~As further described in Note~~ ~~14,~~ ~~“Stockholders’ Equity”, the Company issued the~~ ~~November 2021~~ ~~Warrants in the~~ ~~fourth~~ ~~quarter of~~ ~~2021~~ ~~which were all subsequently amended pursuant~~exercisable prior to the ~~2022~~ ~~Warrant Reprice Transaction (as defined and further described below in Note~~ 14~~). The amended terms~~effective date of ~~the~~ ~~November 2021~~ ~~Warrants included a restriction upon the exercise of the~~ ~~November 2021~~ ~~Warrants until the later of (i)~~ ~~March 9, 2023~~ ~~or (ii) the date that~~ the Reverse Stock Split, which was approved by ~~the Company’s~~Company stockholders on November 10, ~~2022,~~2022. ~~becomes effective (See Note~~ ~~14,~~ ~~“Stockholder’ Equity” and Note~~ 20 ~~“Subsequent Events”).~~
Under ASC 480, Distinguishing Liabilities from Equity, the ~~November 2021~~September 2022 Warrants ~~prior to being amended~~ were classified as liabilities asfrom the date of ~~December 31, 2021,~~ ~~which classification continued until~~issuance through the ~~November 2021~~ ~~Warrants became exercisable. The~~ ~~November 2021~~ ~~Warrants became exercisable subsequent to~~ ~~December 31, 2021,~~ on ~~January 31, 2022~~ ~~when our stockholders met and approved the necessary increase in authorized share capital available to meet the assumed exercise or conversion~~date of ~~the~~ ~~November 2021~~ ~~Warrants and the Series B Preferred Stock. On~~ ~~January 31, 2022,~~ ~~as a result of the stockholder~~ approval of the ~~increase in authorized share capital, the~~ ~~November 2021~~ ~~Warrants became exercisable and~~Reverse Stock Split at which time they were reclassified ~~from a liability~~ to ~~equity because the warrants require physical settlement or net share settlement.~~ equity.

~~Upon issuance, the~~The fair value of the ~~November 2021~~September 2022 Warrants was determined to be ~~$14.2~~$1.4 million as of the date of issuance on September 9, 2022 in accordance with the following key assumptions, which was recorded as a liability:
Expected price volatility
79.6
%
Expected term (in years)
6.0
Risk-free interest rate
3.43
%
Dividend yield
0.0
%
Weighted-average fair value of warrants
$ 4.55
The fair value of the September 2022 Warrants was determined to be $0.5 million as of the date of approval by Company stockholders on November 10, 2022 in accordance with the following key assumptions, at which time the liability was adjusted and reclassified to equity:
Expected price volatility
79.5
%
Expected term (in years)
5.8
Risk-free interest rate
3.93
%
Dividend yield
0.0
%
Weighted-average fair value of warrants
$ 1.40
November 2021 Warrants
The November 2021 Warrants were issued by the Company on November 2, ~~2021:~~2021, in connection with the 2021 Private Placement. The November 2021 Warrants were subsequently amended in September 2022 pursuant to the 2022 Warrant Reprice Transaction.

Expected price volatility
84.9
%
Expected term (in years)
6.2
Risk-free interest rate
1.29
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 0.38
The November 2021 Warrants were not initially exercisable prior to shareholder approval for an increase in authorized share capital which the Company received on January 31, 2022. Under ASC 480,Distinguishing Liabilities from Equity, the November 2021 Warrants were classified as liabilities from the date of issuance through the date of approval at which time they were reclassified to equity.

As of December 31, 2021 the fair value of the November 2021 Warrants was determined to be $9.6 million in accordance with the following key ~~assumptions:~~assumptions, which was recorded as a liability:

Expected price volatility
87
%
87
%
Expected term (in years)
6.0 6.0
Risk-free interest rate
1.31
%
1.31
%
Dividend yield
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.25 $ 8.75
- 19 -
Table of Contents
As of January 31, 2022, the fair value of the November 2021 Warrants was determined to be $7.5 million in accordance with the following key assumptions, at which time the liability was adjusted and reclassified to equity:
Expected price volatility
91
%
Expected term (in years)
6.0
Risk-free interest rate
1.65
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 7.00

OnUnexercised November 2021 Warrants exercisable for 803,574 shares of common stock were amended on September 9, 2022, in connection with the 2022 Warrant Reprice ~~Transaction (See Note~~ ~~14,~~ ~~“Stockholders’ Equity”), the Company reduced the exercise price of all~~Transaction. As a result of the ~~November 2021~~ ~~Warrants to $0.18 per share and amended certain other of their terms. In connection with the~~ ~~2022~~ ~~Warrant Reprice Transaction, a total of 9,375,000 shares of common stock underlying the~~amendment, these November 2021 Warrants were ~~exercised immediately after amendment. As a result, under~~no longer exercisable prior to the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022. Under ASC 480, Distinguishing Liabilities from Equity, the ~~unexercised~~ November 2021 Warrants ~~as amended,~~ were ~~classified~~reclassified as liabilities on the date of amendment and ~~September 30, 2022.~~ remained recorded as liabilities through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.
The fair value of these November 2021 Warrants was determined to be $3.5 million as of the date of amendment on September 9, 2022 in accordance with the following key assumptions, at which time they were reclassified as liabilities:
Expected price volatility
79.6
%
Expected term (in years)
6.0
Risk-free interest rate
3.43
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 4.55
As of November 10, 2022, the fair value of these November 2021 Warrants, as amended, was determined to be ~~$3.5 million on the date of amendment in accordance with the following key assumptions:~~
Expected price volatility
79.6
%
Expected term (in years)
6.0
Risk-free interest rate
3.43
%
Dividend yield
0.00
%
Weighted-average fair value of warrants
$ 0.13
~~As of~~ ~~September 30, 2022,~~ ~~the fair value of the~~ ~~November 2021~~ ~~Warrants, as amended, was determined to be~~ ~~$1.9~~$1.3 million in accordance with the following key ~~assumptions:~~assumptions, at which time they were reclassified to equity:

Expected price volatility
79.6
%
79.5
%
Expected term (in years)
6.0 5.8
Risk-free interest rate
3.43
%
3.93
%
Dividend yield
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.07 $ 1.40

- 27-

~~Table of Contents~~
Amended ~~September 2022~~July 2020 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, ~~(See Note~~ ~~14,~~ ~~“Stockholders’ Equity”),~~ the Company ~~issued~~amended certain July 2020 Warrants. Amended July 2020 Warrants exercisable for 77,145 shares of common stock were no longer exercisable prior to the ~~September 2022~~ ~~Warrants. The~~ ~~September 2022~~ ~~Warrants are subject to an exercise restriction until the later~~effective date of ~~(i)~~ ~~March 9, 2023~~ ~~or (ii) the date that~~ the Reverse Stock Split, which was approved by Company stockholders on November 10, ~~2022,~~2022. ~~becomes effective (See Note~~ ~~14,~~ ~~“Stockholders’ Equity and Note~~ 20 ~~“Subsequent Events”). As a result, under~~Under ASC 480, Distinguishing Liabilities from Equity, ~~the~~these Amended ~~September 2022~~July 2020 Warrants were ~~classified~~reclassified as liabilities on the date of ~~issuance~~amendment and ~~September 30, 2022.~~ remained recorded as liabilities through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.
The fair value of ~~the~~these Amended ~~September 2022~~July 2020 Warrants was determined to be ~~$1.4~~$0.3 million as of the date of ~~issuance~~ amendment on September 9, 2022 in accordance with the following key ~~assumptions:~~assumptions, at which time they were reclassified as liabilities:

Expected price volatility
79.6
%
79.6
%
Expected term (in years)
6.0 3.4
Risk-free interest rate
3.43
%
3.58
%
Dividend yield
0.0
%
0.00
%
Weighted-average fair value of warrants
$ 0.13 $ 3.50

As of ~~September 30,~~November 10, 2022, the fair value of ~~the~~these Amended ~~September 2022~~July 2020 Warrants was determined to be ~~$0.8~~$0.1 million in accordance with the following key ~~assumptions:~~assumptions, at which time they were reclassified to equity:

Expected price volatility
79.6
%
79.5
%
Expected term (in years)
6.0 3.2
Risk-free interest rate
3.43
%
4.15
%
Dividend yield
0.0
%
0.00
%
Weighted-average fair value of warrants
$ 0.07 $ 1.05

- 2820-
Table of Contents

NOTE ~~14.~~12. ~~STOCKHOLDERS’~~STOCKHOLDERS' EQUITY

Common Stock and Preferred Stock

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 of Directors).

Reverse Stock Split
Effective November 15, 2022, 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 November 10, 2022. 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.
2022 Warrant Reprice Transaction, Amended November 2021 Warrants, Amended July 2020 Warrants and September 2022 Warrants

On September 9, 2022,the Company entered into the 2022 Warrant Reprice Transaction, which included warrant reprice letter agreements with each of the holders of the November 2021Warrants ~~(as defined below)~~ and certain holders of the July 2020Warrants. Pursuant to the terms of the letter agreements, the November 2021 Warrants ~~(as defined below) (the~~and certain ~~“2022~~July 2020 Warrants were amended to: (i) reduce the exercise price; (ii) provide that such warrants would not ~~Warrant Reprice Transaction”)~~be exercisable until a later date, which was March 9, 2023; and (iii) in the case of the November 2021 Warrants, extend the termination date to September 11, 2028 (as amended, the “Amended November 2021 Warrants” and the “Amended July 2020 Warrants”, respectively). The Amended November 2021 Warrants are exercisable for an aggregate of 803,574 shares of common stock at an exercise price of $6.30 per share and expire on September 11, 2028. The Amended July 2020 Warrants are exercisable for an aggregate of 77,145 shares of common stock at an exercise price of $6.30 per share and expire on January 22, 2026.

As a result of these amendments to the Amended November 2021Warrants and the Amended July 2020Warrants, the Company recorded a non-cash loss on modification of common stock warrants in the amount of $1.9 million. The loss represents the increase in fair value of the Amended November 2021Warrants ~~as amended,~~ and the Amended July 2020Warrants as a result of the modification. The increase in fair value was calculated as the difference in value immediately before and after modification using the Black-Scholes option pricing model. The fair value of the ~~warrants~~Amended November 2021Warrants and the Amended July 2020Warrants was determined to be $3.3 million immediately prior to the modification in accordance with the following key assumptions:

November 2021
Warrants

July 2020
Warrants

November 2021
Warrants

July 2020
Warrants

Expected price volatility
79.6
%
79.6
%
79.6
%
79.6
%
Expected term (in years)
5.4 3.4 5.4 3.4
Risk-free interest rate
3.43
%
3.58
%
3.43
%
3.58
%
Dividend yield
0.00
%
0.00
%
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.09 $ 0.02 $ 3.15 $ 0.70

The fair value of the ~~warrants~~Amended November 2021Warrants and the Amended July 2020Warrants was determined to be $5.2 million immediately after the modification in accordance with the following key assumptions:

November 2021
Warrants

July 2020
Warrants

November 2021
Warrants

July 2020
Warrants

Expected price volatility
79.6
%
79.6
%
79.6
%
79.6
%
Expected term (in years)
6.0 3.4 6.0 3.4
Risk-free interest rate
3.43
%
3.58
%
3.43
%
3.58
%
Dividend yield
0.00
%
0.00
%
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.13 $ 0.10 $ 4.55 $ 3.50

- 21 -
Table of Contents
~~Further,~~Additionally, in connection with the 2022 Warrant Reprice Transaction, the Company ~~in a private placement,~~ issued to certain participants in the 2022 Warrant Reprice Transaction that exercised ~~a portion of~~ their Amended November 2021 Warrants ~~as amended, or~~and their Amended July 2020 Warrants, ~~as applicable,~~ new common stock purchase warrants (the “September 2022 Warrants”) to purchase ~~up to~~ a number of shares of common stock equal to 100% of the number of shares ~~of common stock underlying the portion of the~~that a participant exercised under its November 2021 ~~Warrants, as amended,~~Warrant or Amended July 2020 ~~Warrants,~~Warrant, as ~~applicable, that were exercised by the participant. Pursuant to the~~ ~~2022~~ ~~Warrant Reprice Transaction, the holders of the~~ ~~November 2021~~ ~~Warrants, as amended, exercised their warrants for 9,375,000 shares of common stock and the participating holder of the Amended~~ ~~July 2020~~ ~~Warrants exercised its warrants for~~ ~~2,100,000~~ ~~shares of common stock and each such holder received~~ ~~September 2022~~ ~~Warrants.~~applicable. The September 2022 Warrants ~~will become~~are exercisable on ~~March 9, 2023 (~~~~or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on~~ ~~November 10, 2022),~~ for an aggregate of ~~11,475,000~~327,860 shares of common ~~stock. The~~ ~~September 2022~~ ~~Warrants have~~stock at an exercise price of ~~$0.18~~$6.30 per share and ~~will~~ expire on September 11, 2028.

The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $2.1 million. The Company allocated the gross proceeds between the common stock issued for the Amended November 2021Warrants ~~as amended,~~ and the Amended July 2020Warrants exercised, and the September 2022Warrants issued to participants by applying the relative fair value allocation methodology. The Company allocated $0.7 million in gross proceeds to the common stock issued for the Amended November 2021Warrants ~~as amended,~~ and the Amended July 2020Warrants exercised, and $1.4 million to the September 2022Warrants which ~~are~~were classified as a liability. For additional information regarding the warrant liability and valuation, please see Note ~~13,~~11, “Warrant Liability”.

Ladenburg Thalmann & Co. Inc. (“Ladenburg”) served as the Company’s warrant solicitation agent for the 2022 Warrant Reprice Transaction in exchange for a fee equal to 8% of the total gross proceeds. The Company incurred total issuance costs of $529 thousand in conjunction with the 2022Warrant Reprice Transaction. The Company allocated $166 thousand of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations ~~and comprehensive loss~~ during the thirdquarter ~~ended~~of ~~September 30, 2022.~~ 2022. The remaining ~~$363~~$363 thousand was recorded as a reduction of common stock and additional paid in capital in the Company’s condensed consolidated balance sheets.

- 29-

~~Table of Contents~~
~~Unissued~~ Series C Preferred Stock, Short-Term Warrants and Long-Term Warrants

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with accredited investors (the “2022 Private Placement”), a private placement transaction with certain accredited investors to sell units that ~~will consist~~consisted of: (1) ~~a newly designated Series C Non-Voting Convertible Preferred Stock, par value $0.01 per share (“~~3,250 shares of Series C Preferred ~~Stock”),~~Stock convertible into an aggregate of 516,750 shares of common stock, (2) ~~a new short-term Series~~series A-12 ~~warrant~~warrants to purchase common stock, ~~that will be~~which are exercisable for ~~a period~~515,876 shares of common stock at an exercise price of $6.30 per share through ~~eighteen~~May 20, 2024 ( (18~~) months after~~ the ~~date of issuance,~~“Short-Term Warrants”), and (3) ~~a new long-term Series~~series A-21 ~~warrant~~warrants to purchase common stock, ~~that will be~~which are exercisable for ~~a period~~515,876 shares of common stock at an exercise price of $6.30 per share through ~~six~~November 20, 2028 ( (6~~) years after~~ the ~~date of issuance (collectively,~~“Long-Term Warrants” and, together with the Short-Term Warrants, the “2022 ~~Private Placement”~~Warrants”). The closing of the 2022 Private Placement iswas subject to receiving certain stockholder approvals (as obtained on November 10, 2022), effecting the Reverse Stock Split, as well as the satisfaction of other customary closing conditions. ~~Upon~~ On November 18, 2022, the ~~satisfaction of the conditions and the closing of~~Company closed the 2022 Private Placement ~~we expect to receive~~and received gross proceeds of ~~$3.3~~$3.2 million from the sale of the ~~units. For additional information regarding~~Series C Preferred Stock and the 2022 ~~Private Placements, see~~Warrants.
The Series C Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay. The Series C Preferred Stock does, however, have anti-dilution protection in the ~~Company’s Current Report on Form~~ 8~~-K filed with~~event that the ~~SEC on~~ ~~September 13, 2022.~~Company sells or grants 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 Series C Preferred Stock.

Series B Preferred Stock and November 2021 Warrants

On October 29, 2021, the Company entered into the 2021 Private Placement, including a securities purchase agreement with various institutional investors to sell in a private placement offering ~~(the~~ ~~“2021~~ ~~Private Placement”)~~ (i) an aggregate of 15,000 shares of our newly-created Series B ~~Non-Voting~~ Preferred Stock ~~(the “Series B Preferred Stock”) initially~~ convertible into an aggregate of ~~37,500,000~~1,071,429 shares of common stock, and (ii) ~~warrants (the~~the “November 2021 ~~Warrants”)~~Warrants exercisable for ~~37,500,000~~1,071,429 shares of common stock for net proceeds of $14.9 million. The 2021 Private Placement closed on November 2, 2021.
-The 30November 2021 -

~~Table~~Warrants became exercisable as of ~~Contents~~
~~Each share~~January 31, 2022, and will continue to be exercisable for a period of the Series B Preferred Stock that we issued in the Private Placement has a purchase price of $1,000 per share and was initially convertible at a conversion price of $0.40 into 2,500 shares of common stock, or an aggregate of ~~37,500,000~~six ~~shares of common stock. The conversion price was subsequently adjusted to $0.18 as a result of the~~ (~~2022~~6 ~~Warrant Reprice Transaction as described further below.~~) years from such date.

The Series B Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay. The ~~Certificate of Designation of Preferences, Rights and Limitations for the~~ Series B Preferred Stock does, however, have anti-dilution protection in the event that ~~we sell~~the Company sells or ~~grant~~grants any of its common stock or any other securities, ~~of our Company,~~ 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 Series B Preferred Stock. ~~This anti-dilution protection was triggered in the~~
- ~~third~~22 ~~quarter~~-
Table of ~~2022~~ ~~as a result~~Contents
Each share of the ~~2022~~ ~~Warrant Reprice Transaction as described further below.~~
~~The~~Series B Preferred Stock that the Company ~~allocated the net proceeds from~~issued in the 2021 Private Placement ~~between~~had a purchase price of $1,000 per share and was initially convertible at a conversion price of $0.40 into 2,500 shares of common stock, or an aggregate of 37,500,000 shares of common stock (which does not account for the ~~Series B Preferred~~Reverse Stock ~~and the~~ ~~November 2021~~ ~~Warrants by applying the residual fair value methodology. The Company~~ ~~first~~ ~~allocated $14.2 million to the~~ ~~November 2021~~ ~~Warrants, with the residual amount allocated to the Series B Preferred Stock. See Note~~ ~~13,~~ ~~“Warrant Liability” for further discussion of the key assumptions used to value the~~ ~~November 2021~~ ~~Warrants.~~
At the time of issuance, the Company recorded a beneficial conversion feature of $0.7 million as a discount to the Series B Preferred Stock and an increase to additional paid in capital. The Company fully amortized the discount related to the beneficial conversion feature as a deemed dividend in the condensed consolidated statements of operations and comprehensive loss upon approval of certain stockholder proposals in the ~~fourth~~ ~~quarter of~~ ~~2021.~~
~~The Company incurred total issuance costs of $1.7 million in conjunction with the~~ ~~2021~~ Private Placement. The Company allocated $1.6 million of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the year ended ~~December 31, 2021.~~ ~~The remaining $0.1 million was recorded as a reduction of Series B Preferred Stock in the Company’s condensed consolidated balance sheets.~~
Split). On September 9, 2022, the 2022 Warrant Reprice Transaction provided for amendments to certain common stock purchase warrants to lower their exercise price to $0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $0.18 per share, which exercise price was lower than the then effective ~~$0.40~~$0.40 conversion price of the Series B Preferred ~~Stock.~~Stock (which does not account for the Reverse Stock Split). This triggered the Series B Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to ~~$0.18,~~$0.18, and each outstanding share of Series B Preferred Stock became convertible into 5,556 shares of common ~~stock.~~stock (which does not account for the Reverse Stock Split). As a result of the change, the Company recorded a $5.7 million deemed Series B Preferred Stock dividend. The deemed dividend iswas recorded as a reduction to income available to common shareholders in the basic earnings per ~~shares~~share (EPS) ~~calculation.~~calculation in the third quarter of 2022. In accordance with ASC 820, the deemed dividend was measured as the difference between (1) the fair value of the Series B Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Series B Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). The fair value of the Series B Preferred Stock was determined to be ~~$6.9~~$6.8 million immediately prior the conversion price adjustment in accordance with the following key assumptions:

Expected price volatility
79.6
%
79.6
%
Expected term (in years)
1.3 1.3
Risk-free interest rate
3.64
%
3.64
%
Dividend yield
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.23 $ 8.05

The fair value of the Series B Preferred Stock was determined to be ~~$12.5~~$12.5 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:

Expected price volatility
79.6
%
79.6
%
Expected term (in years)
1.3 1.3
Risk-free interest rate
3.64
%
3.64
%
Dividend yield
0.00
%
0.00
%
Weighted-average fair value of warrants
$ 0.06 $ 2.10
Thereafter, the Company effected the Reverse Stock Split, which resulted in an automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $6.30, and each outstanding share of Series B Preferred Stock became convertible into 159 shares of common stock.

As of ~~September 30, 2022,~~March 31, 2023, 3,380 shares of the Series B Preferred Stock had been converted into ~~8,450,000 shares of common stock, which occurred at a conversion price of $0.40 into 2,500 shares of~~ common stock. Each of the remaining 11,620 shares of the Series B Preferred Stock as of ~~September 30, 2022,~~March 31, 2023, iswas currently convertible into ~~5,556~~159 shares of common stock at a conversion price of ~~$0.18.~~$6.30 at such time. Each share of Series B Preferred Stock is now convertible into 770 shares of common stock at a conversion price of $1.30, as further described in Note 18. “Subsequent Events”.

~~The~~ ~~November 2021~~ ~~Warrants were initially issued with an exercise price of $0.53.~~ On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the November 2021 Warrants were amended to reduce the exercise price to ~~$0.18~~$6.30 and extend the expiration date to September 11, 2028. Additionally, in conjunction with the 2022 Warrant Reprice Transaction, holders of the November 2021 Warrants, as amended, exercised a portion of their warrants at the reduced exercise ~~price for an aggregate of 9,375,000 shares of common stock.~~price. As of ~~September 30, 2022,~~March 31, 2023, ~~the 28,125,000~~November 2021 Warrants exercisable for 803,574 shares of common stock ~~underlying~~remain outstanding.
Common Stock
Common Stock Warrants
In addition to the Amended July 2020 Warrants, the Amended November 2021 Warrants, ~~as amended, will become exercisable on~~the ~~March 9, 2023 (~~September 2022 ~~or such later date on which~~Warrants and the ~~Reverse Stock Split becomes effective as~~2022 Warrants, the ~~applicable stockholder approvals were obtained on~~ ~~November 10, 2022).~~Company also has the following outstanding warrants:

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~~Table of Contents~~
2019 ~~Domestic~~Ladenburg Warrants~~2019~~ ~~Foreign Warrants,~~

In 2019, Ladenburg ~~Warrants and~~ ~~July 2020~~ ~~Warrants~~

~~In the~~ ~~third~~ ~~quarter of~~ ~~2019,~~ ~~the Company entered into a purchase agreement (the~~ ~~“2019~~ ~~Purchase Agreement”) for the sale of (i) 4,198,566 shares of common stock and (ii) 4,198,566 common stock purchase~~was granted warrants exercisable for ~~4,198,566~~4,799 shares of common stock (the “2019 ~~Domestic~~Ladenburg Warrants”) for gross proceeds of $4.2 million. The Company simultaneously entered into a purchase agreement for the sale of (i) 2,700,000 shares of Series A Non-Voting Convertible Preferred Stock and (ii) 2,700,000 common stock purchase warrants exercisable for 2,700,000 shares of common stock (the ~~“2019~~ ~~Foreign Warrants”) for gross proceeds of $2.7 million.~~. The 2019 ~~Domestic~~Ladenburg Warrants bear an exercise price of $34.65 and an expiration date of August 8, 2024.

July 2020 Warrants

In 2020, certain of the Company’s accredited investors were ~~issued~~granted warrants with an exercise price of ~~$1.15 per share and an expiration date~~$57.75 (the “July 2020 Warrants”). A portion of these warrants were subsequently amended as described above to become the Amended ~~February 13, 2025.~~July 2020 Warrants. As of March 31, 2023, outstanding July 2020 Warrants which were not amended are exercisable for 59,960 shares of common stock. The July 2020 Warrants expire on January 22, 2026.

~~The Company allocated the proceeds between the common stock and~~TLF Bio Innovation ~~2019~~2021 ~~Domestic~~ Warrants ~~by applying the relative fair value allocation methodology. The Company~~ ~~first~~ ~~allocated $3.1 million to the~~ ~~2019~~ ~~Domestic Warrants, with the residual amount allocated to the common stock. See Note~~ ~~13,~~ ~~“Warrant Liability” for further discussion of the key assumptions used to value the~~ ~~2019~~ ~~Domestic Warrants.~~

~~Ladenburg served as the placement agent for the transaction in exchange for a commission representing~~In ~~six~~2021, ~~percent (6%) of the gross proceeds, totaling $0.3 million, and 167,942 common stock purchase~~TLF Bio Innovation was granted warrants exercisable for ~~167,942~~429 shares of common stock with an exercise price of ~~$1.25 per share and an expiration date of~~ ~~August 8, 2024 (~~~~the~~ ~~“2019~~ ~~Ladenburg Warrants”). In addition, the Company reimbursed Ladenburg $60 thousand for certain expenses. The Company also incurred and paid other offering costs of $0.3 million.~~

~~The Company incurred total issuance costs of $0.5 million in conjunction with the~~ ~~2019~~ Purchase Agreement. The Company allocated $0.2 million of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the period. The remaining $0.3 million was recorded as a reduction of additional paid-in capital in the Company’s condensed consolidated balance sheets. As the ~~2019~~ Ladenburg Warrants were accounted for as a stock issuance cost, $59 thousand was allocated to the warrant liability and expensed during the period and $65 thousand was recorded as a reduction to additional paid-in capital in the Company’s condensed consolidated balance sheets. See Note ~~13,~~ ~~“Warrant Liability” for further discussion of the key assumptions used to value the~~ ~~2019~~ ~~Ladenburg Warrants.~~

~~During the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~the Company and the holders of the~~ ~~2019~~ ~~Domestic Warrants and the~~ ~~2019~~ Foreign Warrants entered into exercise agreements which resulted in the cash exercise of the warrants at a reduced exercise price of $0.99. The Company received aggregate gross proceeds of approximately $6.8 million from the exercises. The Company incurred and paid other offering costs of $0.2 million. The Company also incurred and paid a $0.2 million fee to China Kington for brokering the transaction, which equaled ~~six~~ ~~percent (6%) of the gross proceeds from the~~ ~~2019~~ ~~Foreign Warrants.~~

~~During the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~the Company and all holders of the~~ ~~2019~~ ~~Domestic Warrants and~~ ~~2019~~ ~~Foreign Warrants entered into warrant repricing letter agreements. Pursuant to the letter agreements, in consideration for the exercise in full of the~~ ~~2019~~ ~~Domestic Warrants and~~ ~~2019~~ ~~Foreign Warrants, the Company agreed to: (~~1~~) reduce the exercise price of the~~ ~~2019~~ ~~Domestic Warrants and the~~ ~~2019~~ ~~Foreign Warrants to $0.99 per share prior to exercise, and (~~2~~) in a private placement, issue new common stock purchase warrants~~$23.513 (the ~~“July 2020~~ ~~Warrants”) to purchase up to a number of shares of common stock, equal to~~ ~~100%~~ ~~of the number of~~ ~~2019~~ ~~Domestic Warrants and~~ ~~2019~~ ~~Foreign Warrants currently held by such holders upon the holders exercising their warrants.~~

~~The~~ ~~July 2020~~ ~~Warrants became initially exercisable~~ ~~nine~~ ~~months after their issuance, for an aggregate of 6,898,566 shares of common stock. The~~ ~~July 2020~~ ~~Warrants had an initial exercise price of $1.65 per share and expiration~~ ~~five~~ ~~and a half years after their issuance. The Company determined that the common stock issued from the exercise of the~~ ~~2019~~ ~~Domestic and~~ ~~2019~~ ~~Foreign Warrants, and the~~ ~~July 2020~~ ~~Warrants to be~~ ~~one~~ ~~unit of account, and therefore did~~ ~~not~~ ~~allocate the proceeds between the common stock and the~~ ~~July 2020~~ ~~Warrants as, the proceeds, even if allocated, would be both recognized in additional paid-in capital.~~

~~During the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~the Company also entered into a reprice agreement with Ladenburg which reduced the exercise price to $0.99 per share and amended certain terms of the~~ ~~2019~~ Ladenburg Warrants. The Company’s potential obligation to cash-settle the warrants if a specified fundamental transaction occurred was amended to apply only in situations within the Company’s control. As further described in Note 13 ~~“Warrant Liability”, the~~ ~~2019~~ ~~Ladenburg Warrants were~~ no ~~longer classified as a liability as a result of this amendment.~~

~~As described above, during the~~ ~~third~~ ~~quarter of~~ ~~2022,~~ ~~pursuant to the~~ ~~2022~~ ~~Warrant Reprice Transaction, certain of the~~ ~~July 2020~~ ~~Warrants held by holders who participated in the~~ ~~2022~~ ~~Warrant Reprice Transaction, which are exercisable for 4,800,000 shares of common stock were amended (collectively, the “Amended~~ ~~July 2020~~ “TLF Warrants”). The ~~Amended~~ ~~July 2020~~ TLF Warrants ~~currently have an exercise price of $0.18 and will become exercisable~~expire on ~~March 9, 2023 (~~January 15, 2026.~~or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on~~ ~~November 10, 2022).~~ ~~The~~ ~~July 2020~~ ~~Warrants held by investors that did~~ ~~not~~ ~~participate in the~~ ~~2022~~ ~~Warrant Reprice Transaction, which are exercisable for 2,098,566 shares of common stock, were~~ ~~not~~ ~~amended and maintain the original exercise price and other original terms (collectively, the “Unamended~~ ~~July 2020~~ ~~Warrants”).~~

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~~May 2021~~ ~~At-the-Market Offering~~Summary of Warrants Outstanding

~~In the~~ ~~second~~ ~~quarter of~~ ~~2021,~~ ~~the Company established an at-the-market offering (the~~ ~~“2021~~ ~~ATM Program”) with Ladenburg. For additional information regarding the offering and equity program, see the Company’s Current Report on Form~~ 8~~-K filed with the SEC on~~ ~~May 14, 2021.~~ ~~During the~~ ~~second~~ ~~quarter of~~ ~~2021,~~ ~~2,672,000 shares of common stock were issued under the~~ ~~2021~~ ~~ATM Program for total net proceeds of $1.8 million, net of offering costs of $0.1 million.~~

~~TLF Bio Innovation Warrants~~

On ~~January 15, 2021,~~ ~~TLF Bio Innovation was granted warrants exercisable for 15,000 shares of the Company’s common stock with an exercise price of $0.6718 per share (the “TLF Warrants”). The TLF Warrants will expire~~ ~~five~~ ~~years after their issuance. The TLF Warrants are classified as equity. All TLF Warrants remained outstanding as of~~ ~~September 30, 2022.~~

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The details of all outstanding warrants as of ~~September 30,~~March 31, 2023 and December 31, 2022 ~~were~~are as follows:

Warrants
(in thousands)

Weighted-
Average
Exercise
Price

Outstanding at December 31, 2021
7,082 $ 1.63
Warrants granted
37,500 $ 0.53
Warrants exercised
(11,475
)
$ 0.18
Warrants modified and not exercised
(30,825
)
$ 0.18
Outstanding at September 30, 2022
2,282 $ 1.59

	Warrants (in thousands)		Weighted- Average Exercise Price
Outstanding at December 31, 2022		2,306	$	7.70
Warrants granted		—	$	—
Warrants expired		—	$	—
Outstanding at March 31, 2023		2,306	$	7.70

~~The~~ ~~September 2022~~ ~~Warrants exercisable for 11,475,000 shares of common stock, the unexercised~~ ~~November 2021~~ ~~Warrants, as amended, for 28,125,000 shares of common stock, and the unexercised Amended~~ ~~July 2020~~ ~~Warrants for 2,700,000 shares of common stock are excluded from the balance of warrants outstanding as of~~ ~~September 30, 2022~~ ~~because they were subject to shareholder approval and were~~ ~~not~~ ~~yet exercisable on that date.~~

NOTE ~~15.~~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 ~~September 30, 2022.~~December 31, 2020.

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 ~~2,318,486~~66,243 shares 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 than provided for in Section 4(a)(i) of the 2017 Plan as determined by the Board. On March ~~6, 2022,~~31, 2023, the number of shares available for future awards under the 2017 Plan was increased by ~~1,910,634~~81,417 shares. As of ~~September 30, 2022,~~March 31, 2023, there were ~~3,049,127~~180,143 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, not 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 option exercises ~~for awards issued~~ under the 2007 Plan and the 2017 Plan.

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~~Stock Option~~ Summary of Outstanding Equity Awards

The following table summarizes information about the Company’s ~~stock options~~equity awards outstanding at ~~September 30, 2022~~March 31, 2023 and activity during the period ended ~~September 30, 2022:~~March 31, 2023:

(in thousands, except years and per share data)

Awards

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life (years)

Aggregate
Intrinsic
Value

Outstanding at December 31, 2021
4,449 $ 1.39 7.6 $ 460
Options granted
626 $ 0.28
Restricted stock units granted
180 $ —
Restricted stock units vested
(120
)
$ —
Options forfeited/cancelled
(362
)
$ 3.50
Restricted stock units cancelled
(30
)
$ —
Outstanding at September 30, 2022
4,743 $ 1.07 7.8 $ 135

Vested and expected to vest at September 30, 2022
3,492 $ 1.42 7.4 $ 20

Vested at September 30, 2022
2,068 $ 2.06 6.3 $ —

Exercisable at September 30, 2022
2,068 $ 2.06 6.3 $ —

(in thousands, except years and per share data)	Awards			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2022		132		$	37.99		7.5	$	69

Options granted		4		$	1.80
Options forfeited/cancelled		(5	)	$	59.45
Restricted stock units cancelled		(7	)		—
Outstanding at March 31, 2023		124		$	38.34		7.3	$	48

Vested and expected to vest at March 31, 2023		95		$	49.23		6.9	$	9

Vested at March 31, 2023		66		$	65.02		6.1	$	—

Exercisable at March 31, 2023		66		$	65.02		6.1	$	—

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Table of Contents

The aggregate intrinsic value in the table above 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, 2022~~March 31, 2023 for options that have a quoted market price in excess of the exercise price. There were no stock option awards exercised during the three ~~and~~ ~~nine~~months ended ~~September 30,~~ March 31, 2023 and 2022.The Company received no cash payments for the exercise of stock options during the three ~~and~~ ~~nine~~months ended ~~September 30,~~ March 31, 2023 and 2022.

As of ~~September 30, 2022,~~March 31, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately ~~$0.6~~$0.3 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations ~~and comprehensive loss~~ over the remaining weighted average vesting period of ~~2.30~~2.06 years.

~~Stock Option~~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~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021,~~2022, the Company granted options to employees and directors to purchase an aggregate of ~~626,000~~3,650 and ~~291,000~~9,486 shares of common stock, respectively.

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~~Table of Contents~~

The weighted-average assumptions used in determining the value of options are as follows:

	Nine Months Ended September 30,						Three Months Ended March 31,
Assumption	2022			2021			2023			2022
Expected price volatility		158.04	%		163.95	%		154.49	%		160.47	%
Expected term (in years)		6.45			6.19			6.66			6.45
Risk-free interest rate		2.29	%		0.92	%		3.41	%		1.63	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	0.27		$	0.71		$	2.37		$	10.21

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—~~We have~~The Company has not made any dividend payments nor ~~do we~~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~~three months ended ~~September 30,~~ March 31, 2023 and 2022,the Company ~~granted 180,000 shares of~~did not grant restricted stock to ~~employees and directors. During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~the Company granted 1,228,359 shares of restricted stock to employees and directors.~~employees.

For the three months ended ~~September 30, 2022,~~ ~~the Company recognized a reversal of stock-based compensation expense of $208 thousand for stock-based awards to employees and directors. For the~~ ~~three~~ ~~months ended~~ ~~September 30, 2021,~~ ~~the Company recognized stock-based compensation expense $151 thousand for stock-based awards to employees and directors. For the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~March 31, 2023 and ~~2021,~~2022, the Company recognized stock-based compensation expense of ~~$130~~$75 thousand and ~~$523~~$184 thousand, respectively, for stock-based awards to employees and directors.

~~Stock-Based Awards to Non-Employees~~

~~During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~and~~ ~~2021,~~ ~~the Company did~~ ~~not~~ ~~grant options exercisable for shares of common stock to non-employees in exchange for advisory and consulting services.~~

When the Company grants stock options, the stock options are recorded at their fair value on the grant date and recognized over the respective service or vesting period. The fair value of the stock options that are granted is calculated using the Black-Scholes option pricing model.

~~In addition, during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~and~~ ~~2021,~~ ~~the Company did~~ ~~not~~ ~~grant restricted stock to non-employees.~~

~~For the~~ ~~three~~ ~~months ended~~ ~~September 30, 2022,~~ ~~the Company recognized no stock-based compensation expense as compared to a stock-based compensation expense of $73 thousand for the~~ ~~three~~ ~~months ended~~ ~~September 30, 2021,~~ ~~related to non-employee stock option grants. For the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022,~~ ~~the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $180 thousand for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~related to non-employee stock option grants.~~

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Table of Contents

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,				Three Months Ended March 31,
	2022			2021		2022		2021		2023		2022
Research and development	$	5		$	2	$	14	$	8	$	6	$	4
Sales and marketing		12			53		37		118		15		12
General and administrative		(225	)		169		79		576		54		168
Total stock-based compensation expense	$	(208	)	$	224	$	130	$	702	$	75	$	184

NOTE ~~16.~~14. DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of product 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~~three months ended ~~September 30, 2022~~March 31, 2023 (in thousands):

Chargebacks, Discounts for Prompt Payment

Other Customer Fees

Rebates

Total

Balance at December 31, 2021
$ 1,150 $ 83 $ 56 $ 1,289
Provision related to sales made in:

Current period
$ 613 $ 60 $ 326 $ 999
Payments and customer credits issued
$ (189 ) $ (55 ) $ (341 ) $ (585 )
Balance at September 30, 2022
$ 1,574 $ 88 $ 41 $ 1,703

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~~Table of Contents~~

~~Contract Assets and Liabilities~~

~~We receive payments from our distribution partners established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We~~ ~~may~~ ~~be required to defer recognition of revenue for upfront payments until we perform our obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt.~~

~~The following table presents contract assets and liabilities reported in the condensed consolidated balance sheets (in thousands):~~

September 30,

December 31,

2022

2021

Contract assets
$ 11 $ 19

Contract liabilities - current
$ 1 $ 54
Total contract liabilities
$ 1 $ 54

	Product Returns, Discounts for Prompt Payment			Other Customer Fees			Rebates			Total
Balance at December 31, 2022	$	1,673		$	53		$	81		$	1,807
Provision related to sales made in current period		254			21			401			676
Payments and customer credits issued		(188	)		(8	)		(423	)		(619	)
Balance at March 31, 2023	$	1,739		$	66		$	59		$	1,864

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. ~~We have~~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, 2022~~March 31, 2023, ~~and~~ ~~2021,~~the Company earned ~~$0.2 million and $0.3 million, respectively,~~$92 thousand in net sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements. The Company ~~earned~~incurred a net sales ~~revenue~~loss of ~~$0.1 million and $0.7 million~~$199 thousand during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 ~~and~~ ~~2021,~~ ~~respectively,~~ for its Avenova Spray product from these distribution and partner pharmacy agreements.

Under ~~the prescription Avenova Spray~~these product distribution arrangements, the Company had a ~~reserve~~contract liability balance of ~~$1.4~~$1.5 million as of March 31, 2023 and ~~$0.9~~$1.6 million at ~~September 30, 2022~~ ~~and~~as of December 31, ~~2021,~~2022. ~~respectively.~~ The ~~reserve~~contract liability is included in accrued liabilities in the condensed consolidated balance sheets. The Company also recorded a prepayment of ~~$11 thousand and $19~~$8 thousand for rebates related to these distribution agreements as of ~~September 30, 2022~~March 31, 2023, ~~and~~with no such prepayment recorded as of December 31, ~~2021,~~2022, ~~respectively,~~ that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance ~~sheets. See~~sheets (see Note 5,4, “Prepaid Expenses and Other Current Assets”).

Over-the-Counter Sales of Avenova Spray

Avenova Spray ~~was launched online on~~ ~~June 1, 2019~~ is offered for sale direct to U.S. ~~customers. Avenova Spray is offered~~customers primarily ~~for sale~~ on Amazon.com, the Company’s website (Avenova.com) ~~and Walmart.com. Avenova Spray was launched at~~, Walmart.com, select CVS stores and online on ~~CVS.com in~~ ~~February 2021.~~ ~~These channels provide the Company with more stable pricing and provide customers with easy access to our product.~~CVS.com. During the three ~~and~~ ~~nine~~months ended ~~September 30,~~ March 31, 2023 and 2022,the revenue generated from over-the-counter Avenova Spray was $1.6 million and ~~$5.1 million, respectively. During the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~the revenue generated from over-the-counter Avenova Spray was $1.6 million and $5.0~~$1.8 million, respectively.

DERMAdoctor Products Distribution Agreements

DERMAdoctor products are ~~available~~sold through ~~wholesale~~ distribution ~~relationships~~arrangements with third parties such as Costco ~~Amazon~~ and others. ~~The~~During the three months ended March 31, 2023 and 2022, the Company earned $0.1 million and $0.2 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements.

Under these distribution arrangements, the Company had a ~~reserve~~contract liability balance of $0.3 million as of March 31, 2023, and ~~$0.4~~$0.2 million as of ~~September 30, 2022,~~ ~~and~~ December 31, ~~2021,~~2022. ~~respectively.~~ The contract liability is included in accrued liabilities in the condensed consolidated balance sheets.

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Table of Contents

NOTE ~~17.~~15. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan covering all eligible employees. The Company ~~was~~ ~~not~~ ~~required to contribute to the plan and made no contributions during the period ended~~ ~~December 31, 2021.~~ ~~The Company made an election to change the terms of the~~ ~~401~~~~(k) plan such that, beginning on~~ ~~January 1, 2022,~~ ~~the Company made~~provides matching contributions equal to 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred. ~~During~~The Company contributed $32 thousand and $46 thousand to the plan during the three ~~and~~ ~~nine~~months ended ~~September 30, 2022,~~March 31, 2023 ~~the Company matching contribution was $15 thousand~~ and ~~$101 thousand, respectively, with no comparable expenditures in the~~ ~~2021~~2022, ~~period.~~respectively.

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~~Table of Contents~~

NOTE ~~18.~~16. RELATED PARTY TRANSACTIONS

Related Party Revenue

The following table summarizes information about the Company’s related party revenue and cost of goods sold ~~during the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~and~~ ~~2021,~~ ~~respectively~~ (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Related party revenue:
NeutroPhase	$	—	$	—	$	657	$	175	$	—	$	148
Total related party revenue	$	—	$	—	$	657	$	175	$	—	$	148

Cost of goods sold:
NeutroPhase	$	—	$	—	$	648	$	131	$	—	$	(134	)
Total related party expenses	$	—	$	—	$	648	$	131	$	—	$	(134	)

~~There was no related~~Related party accounts receivable ~~as of~~ ~~September 30, 2022~~ ~~compared to $0.1~~was zero and $0.2 million as of March 31, 2023 and December 31, ~~2021.~~2022, respectively.

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~~Table of Contents~~

NOTE ~~19.~~17. SEGMENT REPORTING

The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.

Prior to the DERMAdoctor Acquisition in November 2021, (~~see Note~~ 3, ~~“Business Combination”),~~ the Company was managed as a single segment ~~primarily~~ focused on commercializing Avenova Spray in the United States. After the DERMAdoctor Acquisition, the Company began managing and aggregating its operational and financial information in accordance with two reportable segments: (1) ~~Optical &Wound~~Eyecare & Wound Care and (2) ~~Skin Care.~~Skincare. The ~~Optical~~Eyecare & Wound Care segment consists of products historically sold by NovaBay prior to the DERMAdoctor Acquisition. The ~~Skin Care~~Skincare segment consists of products acquired in the DERMAdoctor Acquisition and skincare products subsequently sold under the DERMAdoctor brand.

Select financial information for each segment is as ~~follows (in thousands):~~follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2022

2021

2022

2021

Net sales

Optical & Wound Care
$ 2,507 $ 2,265 $ 7,646 $ 7,031
Skin Care
1,319 — 3,115 —
Consolidated
$ 3,826 $ 2,265 $ 10,761 $ 7,031
Operating loss

Optical & Wound Care
$ (257
)
$ (2,289
)
$ (3,605
)
$ (5,668
)
Skin Care
(200
)
— (1,386
)
—
Consolidated
$ (457
)
$ (2,289
)
$ (4,991
)
$ (5,668
)

	Three Months					Three Months
	Ended		Percentage			Ended		Percentage
	March 31,		of Total Sales,			March 31,		of Total Sales,
	2023		Net			2022		Net
Eyecare & Wound Care	$	2,339		75	%	$	2,230		68	%
Skincare		785		25	%		1,043		32	%
Total sales, net	$	3,124		100	%	$	3,273		100	%

The Company’s reportable segments are strategic business units that offer different products. Each segment is managed independently because they require different operations and markets to distinct classes

	Three Months						Three Months
	Ended			Percentage			Ended			Percentage
	March 31,			of Total			March 31,			of Total
	2023			Operating Loss			2022			Operating Loss
Eyecare & Wound Care	$	(1,335	)		77	%	$	(2,039	)		86	%
Skincare		(399	)		23	%		(343	)		14	%
Total operating loss	$	(1,734	)		100	%	$	(2,382	)		100	%

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Table of ~~customers. Operating costs included in~~ ~~one~~ ~~segment~~ ~~may~~ ~~benefit other segments, and therefore these segments are~~ ~~not~~ designed to measure operating income or loss directly related to the products included in each segment. Management will continually evaluate the alignment of product development organizations, sales organizations, and inter-segment commissions for segment reporting purposes, which ~~may~~ ~~result in changes to segment allocations in future periods.~~

Contents

NOTE ~~20.~~18. SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the filing date of this Form 10-Qwith the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of ~~September 30, 2022,~~ March 31, 2023,and events which occurred subsequently but were not recognized in the financial statements. Except as described below there were no other subsequent events which required recognition, adjustment to or disclosure in the unaudited condensed consolidated financial statements.

2023 Private Placement

On ~~October 3, 2022,~~April 27, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with existing accredited institutional investors (the “Purchasers”) of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $3.3 million aggregate principal amount (the “Aggregate Principal Amount”) of Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 (the “Debentures”) that may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), (ii) a new long-term Series B-1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B-2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”). The 2023 Private Placement closed on May 1, 2023 (the “Private Placement Closing”) and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. Ladenburg served as the Company’s exclusive placement agent in the 2023 Private Placement and received a ~~notification from~~fee equal to 8% of the ~~NYSE American LLC Exchange (“NYSE American”) stating~~total gross proceeds and were reimbursed for certain related expenses in an aggregate amount of $55 thousand.

Due to the number of shares of common stock thatmay be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is ~~not~~required to obtain stockholder approval for the issuance of these shares of common stock in ~~compliance~~accordance with Section ~~1003~~713~~(f)(v)~~(a) and 713(b) of the NYSE American Company Guide ~~because~~(the “Stockholder Approval”). The Company is required to promptly hold a meeting of stockholders within sixty (60) days following the ~~Company’s~~Private Placement Closing to seek the Stockholder Approval and the Company intends to submit a proposal for consideration of stockholders at the 2023 Annual Meeting of Stockholders. Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock ~~were determined~~is currently limited a holder’s pro rata share of 19.99% of the Company’s outstanding shares of Common Stock, or into an aggregate of 438,669 shares (the “Issuable Maximum”) and the 2023 Warrants are not exercisable.

At any time after issuance, the Debentures are convertible by the ~~NYSE American staff~~holder, in whole or in part, into shares of common stock at a conversion price equal to ~~have been selling~~$1.30 per share (“Conversion Price”), subject to limitations upon conversion including the Issuable Maximum. Under the terms of the Debentures, the Company is required to make a monthly redemption of the Debentures (“Monthly Redemption”) beginning on June 1, 2023 equal to 1/18th of the Aggregate Principal Amount multiplied by 1.10 in cash; or, as provided in the Debenture, in shares of common stock at the election of the Company with a conversion rate equal to the lower of (i) the Conversion Price or (ii) 90% of the Company’s average volume-weighted average price over 10 trading days.

If any event of default occurs, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash. Commencing five days after the occurrence of any event of default that results in the eventual acceleration of the Debentures, the interest rate on the Debentures shall accrue at an interest rate equal to the lesser of 18% per annum and the maximum rate permitted under applicable law. The Debentures are secured obligations of the Company and DERMAdoctor pursuant to the terms of the Security Agreement, dated April 27, 2023 (the “Security Agreement”). Under the terms of the Security Agreement the holders of the Debentures were granted a security interest, a lien upon and a right of set-off against all of the Company’s and DERMAdoctor’s assets as collateral security for the complete, timely payment, performance and discharge of the obligations under the Debentures. To further secure the Company’s obligations under the Debenture, DERMAdoctor also executed a ~~low~~Subsidiary Guarantee (the “Subsidiary Guarantee”), pursuant to which DERMAdoctor is a guarantor of the Company’s obligations owed to the Debenture holders.

Warrant Amendments

In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $6.30 to $1.30 per share pursuant to Warrant Amendment Agreements entered into by the Company.

Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock

Onthe consummation of the ~~November 10, 2022,~~ 2023 Private Placement, the ~~Company’s stockholders approved an amendment to~~Conversion Price of the ~~Company’s Amended~~Debentures and ~~Restated~~the exercise price of the 2023 Warrants at $1.30 per share triggered this anti-dilution protection in the Series B Certificate of ~~Incorporation, as amended,~~Designation and the Series C Certificate of Designation. The conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each $6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to ~~effect a reverse stock split~~$1.30 convertible into 770 shares of ~~all~~Common Stock, resulting in an additional 7,863,570 shares of common stock ~~issued and outstanding or held in treasury at a ratio of~~ ~~not~~ ~~less than~~ 1~~-for-10 and~~ ~~not~~ ~~more than~~ 1~~-for-35 (the “Reverse Stock Split”). In addition to the approval related to the Reverse Stock Split, the Company’s stockholders also approved a proposal that~~ ~~may~~ ~~be required to comply with the continued listing rules~~issuable upon conversion of the ~~NYSE American Company Guide, including pursuant to Section~~ ~~713~~ ~~of the NYSE American Company Guide (collectively, the “Stockholder Approvals”). As further discussed in Note~~ ~~14,~~ ~~“Stockholders’ Equity” above, such Stockholder Approvals, as well as effecting the Reverse~~outstanding Series B Preferred Stock ~~Split, are necessary in order for the~~ ~~September 2022~~ ~~Warrants, the~~ ~~November 2021~~ ~~Warrants, as amended,~~ and ~~the Amended~~ ~~July 2020~~ ~~Warrants to be exercisable, as well as to satisfy a closing condition of the~~ ~~2022~~ ~~Private Placement.~~Series C Preferred Stock.

On ~~November 14, 2022,~~ ~~the Company announced that its Board of Directors has approved the filing of an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect a~~ 1~~-for-35 reverse stock split of all outstanding common stock shares of the Company. The Company also announced that it anticipated that the~~ 1~~-for-~~35 ~~reverse stock split will be effective as of~~ ~~4:15~~ ~~p.m. New York City Time on Tuesday,~~ ~~November 15, 2022~~ ~~and the Company’s common stock will begin trading on a split-adjusted basis on Wednesday,~~ ~~November 16, 2022.~~

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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. This discussion contains forward-looking statements that involve risks and uncertainties,~~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, ~~2021,~~2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March ~~29, 2022.~~31, 2023. Words such as ~~"expects," "anticipated," "will,"~~ "“expects,”“anticipated,”“will,”“may," ” “"goals,~~" "plans," "believes," "estimates," "concludes,"~~”“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” and 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.~~statements after the date of this report, even if new information becomes available in the future.

Overview

~~At NovaBay Pharmaceuticals, we~~We are ~~passionate about scientifically created and clinically proven eyecare and skincare products. Our~~a company is focused on ~~three major markets: Eyecare, Skincare,~~the development and ~~Wound Care.~~

~~Eyecare:~~commercialization of scientifically-created and clinically-proven eyecare, skincare and wound care products.

Our leading product, Avenova ~~Antimicrobial Lid and Lash Solution,~~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 ~~U.S. Food and Drug Administration~~FDA for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also ~~often prescribed~~available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include our Novawipes, ~~by Avenova, Avenova~~ Lubricant Eye Drops, ~~Avenova~~ Moist Heating Eye Compress, i-Chek lash mirror, and the ~~i-Chek eyelid and eyelash mirror.~~Eye Health Support Oral Supplement with MaquiBright.

~~Skincare~~:

Through our subsidiary DERMAdoctor, ~~offers~~LLC (“DERMAdoctor”), we offer over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors. We ~~expect to grow commercial sales of~~acquired DERMAdoctor ~~branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings.~~

~~The acquisition of DERMAdoctor, LLC (“DERMAdoctor”) occurred on~~in November 5, 2021, and ~~it now operates as our wholly-owned subsidiary. For additional information regarding~~since completing the DERMAdoctor Acquisition ~~see Note 3 “Business Combination”~~we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that we expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability. We have not been able to achieve these objectives to date, as DERMAdoctor’s product revenue declined in 2022 compared to 2021, while operating costs relating to these products remained substantially the ~~Notes~~same. We are working to ~~Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.~~

~~The DERMAdoctor Acquisition was funded, in part, through the sale of an aggregate of 15,000 shares of Series B Preferred Stock~~achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and ~~the November 2021 Warrants (each as defined in Note 14, “Stockholders’ Equity” in the Notes~~its business to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report) for an aggregate purchase price of $15.0 million. For additional information regarding the Series B Preferred Stockaddress our capital and the November 2021 Warrants, see Note 13, “Warrant Liability” and Note 14, “Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

~~Wound Care:~~liquidity needs.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care ~~market. Consisting of higher concentrations of hypochlorous acid,~~market with our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for ~~the~~ cleansing and irrigation as part of ~~intraoperative pocket lavage, before subcutaneous closure, stage I to IV pressure injuries, stasis~~surgical procedures, as well as treating certain wounds, burns, ulcers ~~leg ulcers, diabetic foot ulcers, first-degree~~ and ~~second-degree burns, post-surgical wounds, grafted and donor sites, minor burns, superficial abrasions, wounds, and moistening absorbent wound dressings.~~other injuries. We currently sell these products through distributors.

Although NeutroPhase and PhaseOne compete in a crowded wound cleanser market, we believe our NeutroPhase and PhaseOne solutions have distinct competitive advantages because they are made without the toxic chemicals found in other products. NeutroPhase and PhaseOne are gentle, non-irritating, and non-sensitizing to skin and new tissue. PhaseOne is distributed through commercial partners in the United States, and NeutroPhase is distributed in China by Pioneer Pharma (Hong Kong) Company Ltd.

Recent Developments

~~2022 Warrant Reprice Transaction~~2023 Private Placement

On ~~September 9, 2022,~~April 27, 2023, the Company entered into ~~certain letter agreements~~a Securities Purchase Agreement (the “Purchase Agreement”) with existing accredited institutional investors of the Company that provided for the issuance and ~~completed~~sale in a private placement (the “2023 Private Placement”) of (i) $3.3 million aggregate principal amount of Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 (the “Debentures”), which may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), (ii) a new long-term Series B-1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B-2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”). The 2023 Private Placement closed on May 1, 2023 (the “Private Placement Closing”) and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions ~~with each~~were amended to lower the exercise price of the ~~holders~~previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $6.30 to $1.30 per share pursuant to Warrant Amendment Agreements entered into by the November 2021 Warrants and certain holders of the July 2020 Warrants (as defined in Note 14, “Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report)(the “Warrant Reprice Transaction”). The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $2.1 million.Company.

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~~Table of Contents~~

~~Pursuant~~Due to the letter agreements, the Company agreed to: (1) reduce the exercise price of all of the November 2021 Warrants and the July 2020 Warrants held by participants in the 2022 Warrant Reprice Transaction to $0.18 per share; (2) amend all of the November 2021 Warrants and the July 2020 Warrants held by participants in the 2022 Warrant Reprice Transaction to provide that such warrants would not be exercisable until the later of (i) March 9, 2023 and (ii) the date on which certain stockholder approvals, including for the Company to complete the Reverse Stock Split (as defined in Note 20, “Subsequent Events” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report), are obtained and become effective; and (3) extend the termination date of all of the November 2021 Warrants to September 11, 2028. Further, in connection with the 2022 Warrant Reprice Transaction, the Company, in a private placement, issued to certain participants in the 2022 Warrant Reprice Transaction that exercised a portion of their November 2021 Warrants, as amended, or their Amended July 2020 Warrants (as defined in Note 14, “Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report), as applicable, new common stock purchase warrants (the “September 2022 Warrants”) to purchase up to a number of shares of common stock, equal to 100% of the number of shares of common stock ~~underlying the portion~~that may be issued upon conversion or redemption of the ~~November 2021~~Debentures and the exercise of the 2023 Warrants, ~~as amended,~~the Company is required to obtain stockholder approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide (the “Stockholder Approval”) and the Company expects to seek the Stockholder Approval at its 2023 Annual Meeting of Stockholders. Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of 19.99% of the Company’s outstanding shares of Common Stock, or the Amended July 2020 Warrants, as applicable, exercised. The September 2022 Warrants will become exercisable on March 9, 2023 (or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on November 10, 2022), forinto an aggregate of ~~11,475,000~~438,669 shares (the “Issuable Maximum”), and none of the 2023 Warrants will be exercisable until the Stockholder Approval is obtained.

Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock

The Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series B Preferred Stock (the “Series B Certificate of Designation”) and the Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series C Preferred Stock (the “Series C Certificate of Designation”) provides for anti-dilution protections in the event that the Company grants any right to reprice any Company security or issue a new Company security that would entitle the holder to acquire Common Stock at an effective price per share that is lower than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock, which is referred to as “full-ratchet” anti-dilution protection. As a result of the consummation of the 2023 Private Placement the Conversion Price of the Debentures and the exercise price of the 2023 Warrants at $1.30 per share triggered this anti-dilution protection in the Series B Certificate of Designation and the Series C Certificate of Designation. As a result, the conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each $6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to now be $1.30 convertible into 770 shares of Common Stock resulting in an additional 7,863,570 shares of common ~~stock. The September 2022 Warrants have an exercise price~~stock issuable upon conversion of ~~$0.18 per share~~the outstanding Series B Preferred Stock and ~~will expire on September 11, 2028.~~ Series C Preferred Stock.

For additional information regarding the ~~2022 Warrant Reprice Transaction,~~2023 Private Placement, the ~~November 2021~~Debentures, the 2023 Warrants, ~~as amended,~~ the ~~Amended July 2020 Warrants~~warrant amendments and the ~~September 2022 Warrants,~~other related agreements and transactions, as well as the antidilution adjustment to the Series B Preferred Stock and Series C Preferred Stock, see Note ~~13, “Warrant Liability” and Note 14, “Stockholders’ Equity”~~18, “Subsequent Events” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on ~~September 13, 2022.~~

~~2022 Private Placement~~

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with certain accredited investors to sell, pursuant to the securities purchase agreement, units that will consist of: (1) a newly designated Series C Non-Voting Convertible Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), (2) a new short-term Series A-1 warrant to purchase common stock that will be exercisable for a period of eighteen (18) months after the date of issuance (“Series A-1 Warrants”), and (3) a new long-term Series A-2 warrant to purchase common stock that will be exercisable for a period of six (6) years after the date of issuance (“Series A-2 Warrants”) (collectively, the “2022 Private Placement”). In the 2022 Private Placement we intend to sell 3,250 shares of Series C Preferred Stock initially convertible into 18,057,000 shares of common stock at a conversion price of $0.18, Series A-1 Warrants exercisable to purchase up to an aggregate of 18,055,557 shares of Company common stock at an exercise price of $0.18 per share and Series A-2 Warrants exercisable to purchase up to an aggregate of 18,055,557 shares of Company common stock at an exercise price of $0.18 per share. The closing of the 2022 Private Placement is subject to receiving certain stockholder approvals (as obtained on November 10, 2022), effecting the Reverse Stock Split, as well as the satisfaction of other customary closing conditions.

Upon the satisfaction of the conditions and the closing of the 2022 Private Placement, we expect to receive gross proceeds of $3.3 million. For additional information regarding the 2022 Private Placements, see the Company’s Current Report on Form 8-K filed with the SEC on September 13, 2022.

~~NYSE Notice~~

On October 3, 2022, the Company received a notification from the NYSE American LLC Exchange (“NYSE American”) stating that the Company is not in compliance with Section 1003(f)(v) of the NYSE American Company Guide because the Company’s shares of common stock were determined by the NYSE American staff to have been selling for a low price per share for a substantial period of time. As set forth in the written notice, the Company’s continued listing is predicated on it effecting a reverse stock split of its common stock or otherwise demonstrating sustained price improvement within a reasonable period of time, which the NYSE American staff determined to be no later than April 3,27, 2023.

On November 10, 2022, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect the Reverse Stock Split. The Company anticipates that after the Reverse Stock Split is effective that it will result in an increase to its per share market price of its common stock, which the Company believes will satisfy the condition to effect a reverse stock split set forth in the NYSE American’s notification.

Financial Overview and Outlook

Our net loss attributable to common stockholders was $8.1 million for the nine months ended September 30, 2022, or $0.15 per share, as compared to a net loss attributable to common stockholders of $5.7 million for the nine months ended September 30, 2021, or $0.13 per share. As of September 30, 2022, we had an accumulated deficit of $150 million and net cash used in operating activities of $5.4 million for the nine months ended September 30, 2022.

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 eyecare and skincare products. ~~Additionally,~~Our net losses were $1.7 million and $111 thousand for the ~~Company expects to continue incurring operating losses~~three months ended March 31, 2023 and ~~negative cash flows until revenues reach a level sufficient to support ongoing growth~~2022, respectively. As of March 31, 2023, we had an accumulated deficit of $159.9 million, total current assets of $9.9 million and operations. Based primarily on our cash and cash equivalents at September 30, 2022, we believe that our existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund our existing operations and meet our planned operating expenses into at least the second quartertotal assets of 2023. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern. To address this, the Company has and continues to evaluate different plans and strategic transactions to fund its operations, which recently included completing the 2022 Warrant Reprice Transaction and entering into the 2022 Private Placement to raise up to approximately $5.3 million in aggregate gross proceeds. For additional information regarding the Company’s going concern determination and plans to fund operations, see “Financial Condition, Liquidity and Capital Resources” below.$14.8 million.

We expect to grow commercial sales of Avenova branded products and expect to grow commercial sales of our DERMAdoctor branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings under both brand names.

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~~Table of Contents~~

Critical Accounting ~~Policies and~~ Estimates ~~and Change in Accounting~~~~and Revision of Prior Period Financial Statements~~

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 related to revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes, earnout contingency, and common stock warrant liability.~~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.

~~During the three months ended September~~

- 30 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. The Company began expensing these fees as incurred as product cost-

Contents

~~Additional information regarding the change in accounting, revision of prior period condensed consolidated financial statements and~~While our ~~other~~ 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, ~~which~~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 ~~incorporated herein by reference. For information regarding recent accounting pronouncements~~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 ~~affect our business, results~~impact any such impairments recorded such as those recorded in the fourth quarter of ~~operations, financial condition, and liquidity, see~~2022 as further described in Note 2, “Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, ~~2021, which was filed with~~2022.

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 ~~SEC~~end of each quarter and record increases or decreases in their fair value within our 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 ~~March 29, 2022. The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position,~~our results of operations ~~and cash flows.~~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.

~~-43-~~

~~Table~~

Estimates of ~~Contents~~

Future Product Returns

The Company records revenue in an amount that reflets 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 at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model when deemed appropriate. These values are subject to a significant degree of management’s judgment.

Results of Operations

Comparison of the Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~(dollars in thousands)

	Three Months Ended September 30,						Dollar			Percent			Three Months Ended March 31,						Dollar			Percent
(in thousands)	2022			2021			Change			Change
													2023			2022			Change			Change
Statement of Operations
Sales:
Product revenue, net	$	3,816		$	2,259		$	1,557			69	%	$	3,117		$	3,267		$	(150	)		(5	%)
Other revenue, net		10			6			4			67	%		7			6			1			17	%
Total sales, net		3,826			2,265			1,561			69	%		3,124			3,273			(149	)		(5	%)

Product cost of goods sold		1,451			712			739			104	%		1,188			1,459			(271	)		(19	%)
Gross profit		2,375			1,553			822			53	%		1,936			1,814			122			7	%
Operating expenses:

Research and development		41			10			31			310	%		26			28			(2	)		(7	%)
Sales and marketing		1,835			2,061			(226	)		(11	%)		1,653			1,985			(332	)		(17	%)
General and administrative		956			1,771			(815	)		(46	%)		1,991			2,183			(192	)		(9	%)
Total operating expenses		2,832			3,842			(1,010	)		(26	%)		3,670			4,196			(526	)		(13	%)
Operating loss		(457	)		(2,289	)		1,832			(80	%)		(1,734	)		(2,382	)		648			(27	%)

Non-cash loss on modification of common stock warrants		(1,922	)		—			(1,922	)		(100	%)
Non-cash gain on changes in fair value of warrant liabilities		2,414			—			2,414			100	%
Other expense		(171	)		—			(171	)		(100	%)
Non-cash gain on changes in fair value of warrant liability														—			2,056			(2,056	)		(100	%)
Non-cash gain on changes in fair value of contingent liability														—			219			(219	)		(100	%)
Other expense, net														(5	)		(4	)		(1	)		25	%

Loss before provision for income taxes		(136	)		(2,289	)		2,153			(94	%)
Provision for income taxes		—			—			—			—
Net loss and comprehensive loss	$	(136	)	$	(2,289	)	$	2,153			(94	%)
Net loss													$	(1,739	)	$	(111	)	$	(1,628	)		1467	%

~~Impact~~

- 31 -

Table of ~~DERMAdoctor Acquisition~~

The closing of the DERMAdoctor Acquisition took place on November 5, 2021 (see Note 3, “Business Combination” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report). Accordingly, the above results and those discussed below for the three months ended September 30, 2022 include the financial results of DERMAdoctor, with no comparable results for the three months ended September 30, 2021. For the three months ended September 30, 2022, this includes product revenue, net, of $1.3 million, product cost of goods sold of $0.7 million, $0.6 million in sales and marketing costs and $0.2 million in general and administrative costs.

Contents

Effect of Change in Accounting and Revision of Prior Period Financial Statements

As discussed further in Note 2, “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial ~~Statement~~Statements in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. While reviewing its accounting policy for fulfillment fees, the Company identified an immaterial error in its previously issued ~~condensed~~ consolidated financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. For the three months ended September 30, 2022, the Company began expensing them as incurred as sales and marketing expenses within the Company’s condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2022, the result of these changes was an increase of $548 thousand in product revenue, net, which was offset by an increase of $283 thousand in product cost of goods sold and $265 thousand in sales and marketing expenses. Changes and revisions to prior period amounts presented in this report have been made to conform to the current period presentations. For the three months ended ~~September 30, 2021,~~March 31, 2022, the result of these changes and revisions was an increase of ~~$425~~$644 thousand in product revenue, net, which was offset by an increase of ~~$219~~$346 thousand in product cost of goods sold and ~~$206~~$298 thousand in sales and marketing expenses. These changes and revisions ~~that were applied during the three month periods ended September 30, 2022 and 2021~~ did not impact operating loss, net loss ~~and comprehensive loss~~ or net loss per share in the Company’s unaudited condensed consolidated statement of operations in the periods presented in this report or in previously issued annual and ~~comprehensive loss during either of those periods.~~quarterly Company consolidated financial statements. The changes and revisions also did not impact cash or ending cash balances in the Company’s unaudited condensed consolidated balance sheets as of ~~September 30, 2022, September 30, 2021~~the dates presented in this report or in previously issued annual and quarterly Company consolidated financial statements.

Total ~~Sales,~~ Net ~~Product~~Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, ~~increased~~decreased by ~~$1.6 million,~~$150 thousand, or ~~69%~~5%, to ~~$3.8~~$3.1 million for the three months ended ~~September 30, 2022,~~March 31, 2023, from ~~$2.3~~$3.3 million for the three months ended ~~September 30, 2021.~~

The increase in product revenue, net, was primarily the result of $1.3 million from the sale of DERMAdoctor products during the three months ended September 30, 2022 with no comparable revenue from DERMAdoctor products during the three months ended September 30, 2021 as DERMAdoctor was not acquired until November 2021.March 31, 2022.

Revenue from Avenova Spray ~~decreased by $0.2~~increased $0.1 million from $1.8 million for the three months ended ~~September 30,~~March 31, 2022 ~~from $2.1 million for the three months ended September 30, 2021~~ to $1.9 million for the three months ended ~~September 30, 2022.~~March 31, 2023. The decrease was due to a decrease in physician dispensed Avenova Spray units sold and a decrease in Avenova Spray units sold through the pharmacy channels. This decrease in prescription Avenova Spray units was partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels. Additionally, the Company recorded an increase of $0.1 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

~~Additionally, the Company recorded $0.3 million in product revenue, net, from the sale of PhaseOne branded wound care products during the three months ended September 30,~~ 2022 ~~with no comparable~~ result ~~for the three months ended September 30, 2021.~~

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~~Table of Contents~~

~~Product cost of goods sold~~increased by 104%, to $1.5 million for the three months ended September 30, 2022, from $0.7 million for the three months ended September 30, 2021. This increase was primarily due to $0.7 million in product cost of goods sold recognized from the sale of DERMAdoctor products for the three months ended September 30, 2022 with no comparable product cost of goods sold of DERMAdoctor products for the three months ended September 30, 2021 as DERMAdoctor was not acquired until November 2021 and product cost of goods sold associated with the increase in wound care products sold during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Gross profit increased by 53%, to $2.4 million for the three months ended September 30, 2022, from $1.6 million for the three months ended September 30, 2021, which is a result of the increase in total sales, net, offset by the increase in the product cost of goods sold.

~~Research and Development~~

~~Research and development expenses increased by $31 thousand to $41 thousand for the three months ended September 30, 2022, from $10 thousand for the three months ended September 30, 2021.~~

~~Sales and marketing~~

Sales and marketing expenses decreased by $0.2 million, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The decrease was primarily due to lower digital advertising and related consulting costs incurred in the three month period ended September 30, 2022. Additionally, results for the three month period ended September 30, 2021 include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended September 30, 2022. As previously disclosed, going forward, the Company anticipates focusing sales and marketing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset. The decreases in digital marketing, consulting and CelleRx costs were partially offset by $0.6 million in sales and marketing costs incurred for DERMAdoctor products during the three months ended September 30, 2022, with no comparable expenditures in the 2021 period as DERMAdoctor was not acquired until November 2021.

~~General and administrative~~

General and administrative expenses decreased by $0.8 million, or 46%, to $1.0 million for the three months ended September 30, 2022, from $1.8 million for the three months ended September 30, 2021. This decrease was primarily a result of a lower variable compensation and non-cash stock-based compensation expenses recorded in the 2022 period.

Additionally, during the three months ended September 30, 2021, we incurred legal costs in anticipation of the Company’s acquisition of DERMAdoctor with no comparable cost incurred in the 2022 period. Offsetting the decrease in the 2022 period was $0.2 million in DERMAdoctor general and administrative costs and $0.1 million from the amortization of intangibles related to the DERMAdoctor Acquisition recorded in the three months ended September 30, 2022, with no comparable expenses in the 2021 period as DERMAdoctor was not acquired until November 2021.

~~Non-cash loss on modification of common stock warrants~~

During the three months ended September 30, 2022, the Company recorded a $1.9 million non-cash loss on modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period. For additional information regarding the 2022 Warrant Reprice Transaction and their valuation, please see Note 13, “Warrant Liability” and Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

~~Non-cash gain on changes in fair value of warrant liabilities~~

The Company recorded a non-cash gain on changes in fair value of warrant liabilities of $2.4 million for the three months ended September 30, 2022 with no comparable result in the prior year period. For additional information regarding the warrant liability and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

~~Other expense, net~~

Other expense, net, was $171 thousand for the three months ended September 30, 2022, with no comparable expense in the 2021 period. The expense in 2022 was primarily due to $166 thousand related to the issuance of the September 2022 Warrants. For additional information, please see Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

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~~Table of Contents~~

~~Comparison of the Nine Months~~~~Ended September 30, 2022 and 2021~~

Nine Months Ended
September 30,

Dollar

Percent

(in thousands)

2022

2021

Change

Change

Statement of Operations

Sales:

Product revenue, net
$ 10,743 $ 7,012 $ 3,731 53
%
Other revenue, net
18 19 (1
)
(5
%)
Total sales, net
10,761 7,031 3,730 53
%

Product cost of goods sold
4,735 2,194 2,541 116
%
Gross profit
6,026 4,837 1,189 25
%
Operating Expenses:
Research and development
108 36 72 200
%
Sales and marketing
5,860 5,942 (82
)
(1
%)
General and administrative
5,049 4,527 522 12
%
Total operating expenses
11,017 10,505 512 5
%
Operating loss
(4,991
)
(5,668
)
677 (12
%)

Non-cash loss on modification of common stock warrants (1,922 ) — (1,922 ) (100 %)
Non-cash gain on changes in fair value of warrant liabilities 4,470 — 4,470 100
%
Non-cash gain on changes in fair value of contingent liability
219 — 219 100
%
Other (expense) income
(178
)
2 (180
)
(9,000
%)

Loss before provision for income taxes
(2,402
)
(5,666
)
3,264 (58
%)
Provision for income taxes
— — — —
Net loss and comprehensive loss
$ (2,402
)
$ (5,666
)
$ 3,264 (58
%)

~~Impact of DERMAdoctor Acquisition~~

The closing of the DERMAdoctor Acquisition took place on November 5, 2021 (see Note 3, “Business Combination” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report). Accordingly, the above results and those discussed below for the nine months ended September 30, 2022 include the financial results of DERMAdoctor, with no comparable results for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, this includes product revenue, net, of $3.1 million, product cost of goods sold of $1.9 million, $1.8 million in sales and marketing costs and $0.9 million in general and administrative costs, with no comparable operating results for the nine months ended September 30, 2021.

~~Effect of Change in Accounting and Revision of Prior Period Financial Statements~~

As discussed further in Note 2, “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial Statement in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. While reviewing its accounting policy for fulfillment fees, the Company identified an immaterial error in its previously issued condensed consolidated financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. For the three months ended September 30, 2022, the Company began expensing them as incurred as sales and marketing expenses within the Company’s condensed consolidated statements of operations and comprehensive loss. Changes and revisions to prior period amounts presented in this report have been made to conform to the current period presentations. For the nine months ended September 30, 2022, the result of these changes and revisions was an increase of $1.8 million in product revenue, net, which was offset by an increase of $1.0 million in product cost of goods sold and $0.9 million in sales and marketing expenses. For the nine months ended September 30, 2021, the result of these changes and revisions was an increase of $1.3 million in product revenue, net, which was offset by an increase of $0.6 million in product cost of goods sold and $0.6 million in sales and marketing expenses. These changes and revisions that were applied during the nine month periods ended September 30, 2022 and 2021 did not impact operating loss, net loss and comprehensive loss or net loss per share in the Company’s condensed consolidated statement of operations and comprehensive loss during either of those periods. The changes and revisions also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets as of September 30, 2022, September 30, 2021 or in previously issued annual and quarterly Company financial statements.

~~Total Sales, Net, Product Cost of Goods Sold and Gross Profit~~

~~Product revenue, net, increased by $3.7 million, or 53%, to $10.7 million for the nine months ended September 30, 2022, from $7.0 million for the nine months ended September 30, 2021.~~

The increase in product revenue, net, was primarily the result of $3.1 million from the sale of DERMAdoctor products during the nine months ended September 30, 2022 with no comparable revenue from DERMAdoctor products during the nine months ended September 30, 2021.

Revenue from Avenova Spray decreased by $0.6 million for the nine months ended September 30, 2022, from $6.4 million for the nine months ended September 30, 2021 to $5.8 million for the nine months ended September 30, 2022. The decrease reflects an unanticipated increase in expired Avenova Spray units returned from retail pharmacies for product purchased prior to the launch of our over-the-counter Avenova Spray product in 2019 and the beginning of the COVID-19 pandemic in 2020. The decrease was also due to an overall decrease in physician dispensed units sold and units sold through the pharmacy channels. These decreases were partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels. Additionally, the Company recorded an increase of $0.5 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

~~Additionally, product revenue, net,~~Revenue from DERMAdoctor branded skincare products decreased $0.2 million from $1.0 million for the three months ended March 31, 2022 to $0.8 million for the three months ended March 31, 2023, primarily from wholesale customers.

Revenue from the Company’s ~~NeutroPhase and PhaseOne branded~~ wound care products was ~~$0.8~~$0.1 million ~~higher~~ during ~~the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.~~both quarters.

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~~Table of Contents~~

~~Product cost~~Cost of goods sold~~increased~~ decreased by ~~$2.5 million,~~$271 thousand, or ~~116%~~19%, to ~~$4.7~~$1.2 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023 from ~~$2.2~~$1.5 million for the ~~nine~~three months ended ~~September 30, 2021. This increase was~~March 31, 2022 primarily due to ~~$1.9 million~~the overall decrease in product cost of goods sold recognized from the sales of DERMAdoctor products for the nine months ended September 30, 2022, with no comparable product cost of goods sold for the nine months ended September 30, 2021 and product cost of goods sold associated with the increase in wound care products sold during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.revenue.

Gross profit increased by ~~$1.2 million, to $6.0 million for~~$122 thousand in spite of the ~~nine months ended September 30, 2022, from $4.8 million for~~decrease in product revenue. This is primarily the ~~nine months ended September 30, 2021, which is a result~~impact of the increase in ~~total sales, net, offset by the increase~~expired Avenova Spray units returned from retail pharmacies in the 2022 period as well as product ~~cost of goods sold.~~

~~Research~~ and ~~Development~~

~~Research and development expenses increased by $72 thousand to $108 thousand for the nine months ended September 30, 2022, from $36 thousand for the nine months ended September 30, 2021.~~channel mix.

Sales and ~~Marketing~~marketing

Sales and marketing expenses decreased by ~~$0.1~~$0.3 million, or 1%17%, to ~~$5.8~~$1.7 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, from ~~$5.9~~$2.0 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The decrease was due primarily to continued lower digital advertising and related consulting costs incurred in the nine month period ended September 30, 2022. Additionally, results for the nine month period ended September 30, 2021 include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the nine months ended September 30, 2022. As previously disclosed, going forward, the Company anticipates focusing sales and marketing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset. These decreases were partially offset by $1.8 million in sales and marketing costs incurred for ~~DERMAdoctor~~the Company’s Avenova Spray and other Avenova branded optical products ~~during~~in the ~~nine~~three months ended ~~September 30, 2022, with no comparable expenditures in~~March 31, 2023 compared to the ~~2021 period.~~three months ended March 31, 2022.

General and ~~Administrative~~administrative

General and administrative expenses ~~increased by $0.5~~decreased $0.2 million ~~or 12%,~~ to ~~$5.0~~$2.0 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, from ~~$4.5~~$2.2 million for the ~~nine months ended September 30, 2021.~~

~~Results for~~comparable period in 2022. The change is primarily the ~~nine months ended September 30, 2022 include $0.9 million in DERMAdoctor general and administrative costs and $0.3 million from the amortization~~result of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period. Additionally, during the nine months ended September 30, 2021, the Company received an insurance reimbursement for costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer which reduced general and administrative costs in the 2021 period. Partially offsetting these increases was a decrease in variable compensation ~~and~~costs, including non-cash stock-based compensation ~~expenses~~expense, recorded in the ~~2022 period as compared to the 2021 period.~~comparable periods.

~~Non-cash loss on modification~~

- 32 -

Table of ~~common stock warrants~~

During the nine months ended September 30, 2022, the Company recorded a $1.9 million non-cash loss on modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period. For additional information regarding the 2022 Warrant Reprice Transaction, please see Note 13, “Warrant Liability” and Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

Contents

Non-cash gain on changes in fair value of warrant ~~liabilities~~liability

Adjustments to the fair value of warrant ~~liabilities~~liability resulted in a gain of ~~$4.5~~$2.1 million for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2022 with no comparable adjustment for the current year period. For additional information regarding the warrant ~~liabilities~~liability and their valuation, please see Note ~~13,~~11, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

Non-cash gain on changes in fair value of contingent liability

Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 with no comparable adjustment for the ~~nine months ended September 30, 2021.~~current year period. This contingent liability ~~relates~~related to potential future contingent consideration of earn out payments that ~~may~~could have become payable as part of the DERMAdoctor Acquisition if specified milestone events ~~are~~were achieved. As of March 31, 2023, the Company does not anticipate that any such earn out payments will be made.

~~Other (expense)~~~~income, net~~

The other expense, net, was $178 thousand for the nine months ended September 30, 2022 and other income, net, of $2 thousand for the nine months ended September 30, 2021, respectively. The expense in 2022 was primarily due to $166 thousand related to the issuance of the September 2022 Warrants. For additional information, please see Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

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~~Table of Contents~~

Financial Condition, Liquidity and Capital Resources

As of ~~September 30, 2022,~~March 31, 2023, our cash and cash equivalents were ~~$3.9~~$3.7 million, compared to ~~$7.5~~$5.4 million as of December 31, 2021. Our cash and cash equivalents include approximately $2.1 million in aggregate gross proceeds received from the 2022 Warrant Reprice Transaction (see Note 14, “Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding the 2022 Warrant Reprice Transaction) that was completed in September 2022. Based primarily on the funds available on ~~September 30, 2022,~~March 31, 2023 and the 2023 Private Placement completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, 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 second quarter of ~~2023. The Company has~~2024. We have sustained operating losses for the majority of ~~its~~our corporate history and ~~expects~~expect that ~~its 2022~~our 2023 expenses will exceed ~~its 2022~~our 2023 revenues, as ~~the Company continues~~we continue to invest in both ~~its~~ Avenova and DERMAdoctor commercialization efforts. Additionally, ~~the Company expects~~we expect 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~~we have determined that ~~its~~our planned operations raise substantial doubt about ~~its~~our ability to continue as a going concern. Additionally, changing circumstances may cause ~~the Company~~us to expend cash significantly faster than currently anticipated, and ~~the Company~~we may need to spend more cash than currently expected because of circumstances beyond ~~its~~our control that impact the broader economy such as periods of inflation, supply chain issues, the continuation of the COVID-19 pandemic and international ~~conflicts (e.g., the conflict between Russia and Ukraine).~~conflicts.

~~The Company’s~~Our long-term liquidity needs will be largely determined by the success of commercialization efforts. To address ~~the Company’s~~our current liquidity and capital needs, ~~the Company has~~we have and ~~continues~~continue 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~~our sales and marketing programs or restructuring operations to change ~~its~~our overhead structure; (3) out-licensing rights to certain of ~~its~~our products or product candidates, pursuant to which ~~the Company~~we would receive cash milestones or an upfront fee; and/or (4) entering into license agreements to sell new products. ~~The Company~~We 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. In the absence of ~~the Company’s completion of the 2022 Private Placement and~~ one or more additional transactions and/or substantial revenue growth from ~~its~~our commercialization efforts, there will be substantial doubt about ~~the Company's~~our ability to continue as a going concern within one year after the date these unaudited condensed consolidated financial statements are issued, and ~~the Company~~we will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying unaudited condensed consolidated financial statements have been prepared assuming ~~the Company~~we 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. ~~The~~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~~our ability to continue as a going concern.

Cash Used in Operating Activities

Net cash used in operating activities was ~~$5.4~~$1.6 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, which consisted primarily of a net loss of ~~$2.4~~$1.7 million, ~~non-cash loss~~adjusted by depreciation and amortization expenses of $1.9 million on modification of common stock warrants, non-cash gain of $4.5 million on the change in fair value of warrant liability, non-cash gain of $0.2 million on the change in fair value of contingent liability,$51 thousand, stock-based compensation expenses of ~~$0.1 million,~~$75 thousand, and a net ~~decrease~~change of ~~$0.8 million~~$2 thousand in our net operating assets and liabilities.

Net cash used in operating activities was ~~$4.9~~$2.1 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, which consisted primarily of a net loss of ~~$5.7~~$111 thousand, adjusted primarily by non-cash gain of $2.1 million on the change in fair value of warrant liability, non-cash gain of $219 thousand on the change in fair value of contingent liability, stock-based compensation expenses of ~~$0.7 million,~~$184 thousand, and a net ~~change~~increase of ~~$42~~$24 thousand in our net operating assets and liabilities.

Cash Used in Investing Activities

Net cash used in investing activities for the purchase of property and equipment was ~~$112~~$13 thousand and ~~$44~~$24 thousand, for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

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~~Net~~ Cash ~~Provided by~~Used in Financing Activities

~~Net~~There was no cash used in, or provided by, financing activities ~~for~~during the ~~nine~~three months ended ~~September 30,~~March 31, 2023.

For the three months ended March 31, 2022, net cash used in financing activities consisted of ~~$1.6 million was primarily related to the proceeds received in the 2022 Warrant Reprice Transaction partially offset by the~~a repayment of the DERMAdoctor line of credit, which was ~~terminated in the first quarter of 2022.~~

Net cash provided by financing activities was $2.0 million for the nine months ended September 30, 2021. The Company received net proceeds of $1.8 million raised from the Company’s 2021 ATM program pursuant to an ATM Agreement, dated May 14, 2021, with Ladenburg.subsequently terminated.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, ~~2021,~~2022, we had net operating loss carryforwards for federal and state income tax purposes of ~~$125.9~~$133.0 million and ~~$106.8~~$111.0 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 ~~$31.0~~$38.1 million that will ~~carryforward~~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, ~~2021,~~2022, we also had tax credit carryforwards for federal income tax purposes of ~~$1.3~~$0.5 million and ~~$0.3~~$0.1 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in ~~2026.~~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.

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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, costs savings 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 March 31, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of ~~September 30, 2022.~~SEC Regulation S-K.

Seasonality

Avenova Branded Products

~~Consistent~~In recent years, as our focus and revenue mix have shifted in favor of Avenova products sold directly to the consumer without insurance reimbursement, we have not noted any material seasonal impacts on our overall eyecare business, with ~~our peers in~~demands consistent throughout the ~~United States pharmaceutical industry,~~year.

Prior to this shift, while focused on prescription Avenova Spray, prescriptions for Avenova Spray ~~experience~~experienced seasonality with the first quarter of each year typically being the lowest revenue quarter. This annual phenomenon iswas 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 consistent throughout the year.~~began.

Dermatology/Skincare Products

Our DERMAdoctor products are sold through wholesale distribution relationships with third parties such as Costco and others; therefore, we may receive periodic large orders that result in large chunks of revenue that are received in irregular intervals during the year. Historically sales of DERMAdoctor products that contain sunscreen and antiperspirants are higher in the summer seasons and sales of DERMAdoctor products that contain moisturizers are higher in the fall and winter months. In addition, DERMAdoctor products will typically experience an uptick in sales during the fourth quarter around the holidays of each country in which its products are sold, particularly in the United States and China.

Contractual Obligations

Our contractual cash commitments as of ~~September 30, 2022~~March 31, 2023 were as follows (in thousands):

Contractual Obligations	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Facility leases	$	532	$	1,446	$	412	$	—	$	2,390	$	538	$	952	$	656	$	—	$	2,146
Equipment leases		1		—		—		—		1
Equipment lease												8		13		—		—		21
Total	$	533	$	1,446	$	412	$	—	$	2,391	$	546	$	965	$	656	$	—	$	2,167

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Our commitments as of ~~September 30, 2022~~March 31, 2023 consisted primarily of facility operating leases and an operating lease for ~~two copiers.~~one copier.

The total commitment for the facility leases ~~as of September 30, 2022 was $2.3~~were $2.1 million due over the leases’ terms ~~compared to $0.5 million~~ as of ~~December~~March 31, ~~2021.~~2023.

~~We had an operating lease for two copiers as of September 30, 2022.~~ The total commitment for the copier lease ~~as of September 30, 2022~~ was $1$22 thousand due over the ~~lease~~leases’ terms ~~compared to $13 thousand~~ as of ~~December~~March 31, ~~2021. The copier lease term is scheduled to expire in November 2022.~~2023.

See Note ~~12,~~10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding these leases.

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, 2022~~March 31, 2023 were held in cash and cash equivalents.

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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, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 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 March 31, 2023, our Chief Executive Officer and our Chief Financial Officer concluded that ~~as of the end of the period covered by this report,~~ our disclosure controls and procedures were effective to ensure, at the reasonable assurance level, ~~to ensure~~ 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~~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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal ~~Controls~~Control Over Financial Reporting

There ~~was~~were no ~~change~~changes in our internal ~~controls~~control over financial reporting during the quarter ended ~~September 30, 2022, that~~March 31, 2023, which has materially affected, or isare reasonably likely to materially affect, our internal ~~controls~~control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The “Legal Matters” section of Note ~~12.~~10, “Commitments and Contingencies” toin the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

While, as a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, we are not required to provide updated quarterly information under this Item, we are providing the below disclosure as additional material risks we face.

For ~~additional~~ 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 Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, which was filed with the SEC on March ~~29, 2022.~~31, 2023.

~~Risks~~Risk Relating to ~~Owning Our Common Stock~~the Debentures

~~There~~We have debt, which is ~~uncertainty about~~secured by all of our ~~ability to continue as~~assets, and defaulting on such debt may have a ~~going concern.~~material adverse effect on the Company.

~~We have sustained operating losses for~~The Debentures represent outstanding secured convertible notes of the ~~majority~~Company. Pursuant to the Security Agreement and Subsidiary Guarantee, all of our ~~corporate history~~assets, including our accounts receivable and ~~expect that our 2022 expenses will exceed our 2022 revenues,~~general intangibles, including all inventory, machinery, equipment, furniture and fixtures and the products and proceeds of all the foregoing, have been pledged as ~~we continue~~collateral to invest in our Avenova and DERMAdoctor commercialization efforts. Our operating cash flow is not sufficient to support our ongoing operations, and we expect to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. We expect thatsecure the net proceeds from the 2022 Warrant Reprice Transaction may only provide adequate working capital into at least the second quarter of 2023, or into at least the fourth quarter of 2023, assuming the completionrepayment of the 2022 Private Placement. As such, additional funding or substantial revenue growth will be needed in both the short- and long-term in order to pursue our business plan. These circumstances raise doubt about our ability to continue as a going concern, which depends on our ability to raise capital to fund our current operations.

Debentures. If we are unable to ~~comply with~~repay these Debentures or if another type of event of default occurs, a decision by the ~~continued listing requirements~~holders of the ~~NYSE American~~Debentures to foreclose on their security interest would materially and ~~satisfy the obligations set forth in the Deficiency Letter, then~~adversely affect our ~~common stock would be delisted from the NYSE American, which would limit investors~~’ ~~ability to effect transactions in our common stock and subject us to additional trading restrictions.~~

Our common stock is currently listed on the NYSE American. In order to maintain our listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of stockholders’ equity and a minimum number of public stockholders. In addition to these objective standards, NYSE American may delist the securities of any issuer for other reasons involving the judgment of NYSE American. For example, the NYSE American Company Guide (the “Company Guide”) provides that the NYSE American may suspend or remove from listing any common stock selling for a substantial period of time at a low price per share, if the issuer shall fail to effect a reverse split of such shares within a reasonable time after being notified that NYSE American deems such action to be appropriate under all the circumstances.

On October 3, 2022, we received a notification (“Deficiency Letter”) from the NYSE American stating that we are not in compliance with certain NYSE American continued listing standards. Specifically, the Deficiency Letter indicated that the Company is not in compliance with Section 1003(f)(v) of the Company Guide because the NYSE American staff determined that our common stock has been selling for a low price per share for a substantial period of time. Pursuant to Section 1003(f)(v) of the Company Guide and as provided in the Deficiency Letter, the Company’s continued listing is predicated on it effecting the Reverse Stock Split of its common stock or otherwise demonstrating sustained price improvement within a reasonable period of time, which the NYSE American staff determined to be no later than April 3, 2023. The Deficiency Letter further stated that as a result of the foregoing, the Company has become subject to the procedures and requirements of Section 1009 of the Company Guide, which could, among other things, result in the initiation of delisting proceedings, unless we cure the deficiency in a timely manner.

Our Board of Directors has unanimously approved, and has recommended that our stockholders approve, an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect the Reverse Stock Split, which stockholders subsequently approved on November 10, 2022. However, we cannot assure you that the Reverse Stock Split will be sufficient to enable the Company to maintain its listing on the NYSE American. Therefore, there is a continued risk that our common stock will be delisted if action is not taken to the satisfaction of the NYSE American.

If the NYSE American delists our common stock from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect the common stock would qualify to be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:

●

~~a limited availability of market quotations for our securities;~~

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●

~~reduced liquidity for our securities;~~

●

~~substantially impair our ability to raise additional funds;~~

●

~~result in a loss of institutional investor interest and a decreased ability to issue additional securities or obtain additional financing in the future;~~

●

a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;

●

~~a limited amount of news and analyst coverage; and~~

●

potential breaches of representations or covenants of our agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements, which, regardless of merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations.

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock is listed on the NYSE American, our common stock qualifies as a covered securities under such statute. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If we were no longer listed on the NYSE American, our common stock would not be a covered security and we would be subject to regulation in each state in which we offer our securities.

~~Risks Related to the 2022 Warrant Reprice Transaction and 2022 Private Placement~~future.

~~As a result~~The issuance of ~~the warrants that we issued~~our Common Stock in connection with the 2022 Warrant Reprice Transaction and the securities we expect to issue in the 2022 Private Placement, our stockholders will experience significant dilution as a result of the issuance of shares of our common stock upon future exercise of the related warrants, and if issued, the conversion of the ~~Series C Preferred Stock.~~

When exercisable, the November 2021 Warrants, as amended, and the Amended July 2020 Warrants, will be exercisable for 30,825,000 underlying shares of common stock and the September 2022 Warrants will be exercisable for 11,475,000 underlying shares of common stock. In addition, upon completion of the 2022 Private Placement, 3,250 shares of Series C Preferred Stock will be issued and will be immediately convertible into 18,057,000 shares of common stock (subject to potential increase or other adjustment in the number of shares due to applicable anti-dilution adjustments), the Series A-1 Warrants will be exercisable for 18,055,557 underlying shares of common stock and the Series A-2 Warrants will be exercisable for 18,055,557 underlying shares of common stock. Accordingly, as a result of the 2022 Warrant Reprice Transaction and, if completed, the 2022 Private Placement, an aggregate of 96,468,114 shares of common stock could become issuable, subject to potential increase in the number of shares due to applicable anti-dilution adjustments. Also, an additional 35,510,720 shares of common stock became issuable upon conversion of the Series B Preferred Stock as a result of the automatic anti-dilution adjustment that occurred pursuant to of the Certificate of Designation for the Series B Preferred Stock. Accordingly, upon the conversion or exercise (as applicable) of some or all of the securities issued in the 2022 Warrant Reprice Transaction, or to be issued in the 2022 Private Placement, the percentage ownership and voting power held by our existing stockholders will be significantly reduced and our stockholders will experience significant dilution.

In addition, if the Reverse Stock Split is effected, there will be a significant number of additional authorized shares of common stock that we may issue in the future, which our Board of Directors will have discretion to issue in the future, including, without limitation, in connection with future capital raise transactions and financings, except to the extent prohibited or limited for a period of time by the terms of the 2022 Private Placement. Stockholders will not have a right to approve any such issuances or transactions, unless required by our governing documents or applicable law, and any such issuance of our common stock in the future may be dilutive to stockholders.

If we offer common stock or other securities in the future and the price that we sell those securities for is less than the current conversion price of our Series B Preferred Stock that was recently adjusted or, when and if issued, the Series C Preferred Stock, then we will be required to issue additional shares of common stock to the holders of the Series B Preferred Stock and/or Series C Preferred Stock, as the case may be, upon conversion, which will be dilutive to all of our other stockholders.

The Certificate of Designation for the Series B Preferred Stock contains, and the Certificate of Designation for the Series C Preferred Stock is expected to contain, anti-dilution provisions that require the lowering of the conversion price, as then in effect, to the purchase price of equity or equity-linked securities issued by us in subsequent offerings, if lower than the current conversion price. A reduction in the conversion price of either series of preferred stock will result in a greater number of shares of common stock being issuable upon conversion of such preferred stock for no additional consideration, causing greaterDebentures would cause substantial dilution, to our stockholders. For example, as described above, the consummation of the 2022 Warrant Reprice Transactions triggered the anti-dilution protection in the Series B Certificate of Designation, and as a result there are now an additional 35,510,720 shares of common stock that are issuable upon conversion of the shares of Series B Preferred Stock outstanding as of the date of this prospectus. Furthermore, as there is no floor on the conversion price, we cannot determine the total number of shares issuable upon conversion. In addition, it is possible that when the Reverse Stock Split becomes effective, we may not have a sufficient number of authorized and available shares to satisfy the conversion of the Series B Preferred Stock and/or Series C Preferred Stock, as the case may be, if we enter into a future transaction that reduces the applicable conversion price.

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~~Risks Relating to the Proposed Reverse Stock Split~~

~~The proposed Reverse Stock Split, if effected, may not increase our stock price,~~ and could ~~lead to a decrease in our overall market capitalization.~~

~~We expect that~~materially affect the ~~Reverse Stock Split, if effected, will increase the per share~~ trading price of our common ~~stock. However,~~shares.

There is an aggregate principal amount of $3.3 million outstanding under the ~~market price per share~~Debentures. To the extent we or the holders of the Debentures converts the Debentures into our ~~common stock after the Reverse~~Common Stock, ~~Split may not rise (or remain constant) in proportion~~including for more shares of Common Stock than we currently anticipate due to the ~~reduction~~monthly redemption provision in the ~~number of shares of common stock outstanding before~~Debentures and the ~~Reverse Stock Split. We cannot predict the effect of the Reverse Stock Split on the per share~~ trading price of our ~~common stock, and the history~~Common Stock potentially declining, substantial amounts of reverse stock splits for other companies is varied, particularly since some investors may view a reverse stock split negatively. In many cases, the market price of a company’s shares declines after a reverse stock split, or the market price of a company’s shares immediately after a reverse stock split does not reflect a proportionate or mathematical adjustment to the market price based on the ratio of the reverse stock split. Accordingly, our ~~total market capitalization after the Reverse~~Common Stock ~~Split, if approved and effective, may~~will be ~~lower than our total market capitalization before the Reverse Stock Split, and it is possible that the Reverse Stock Split may not~~issued. Such issuances could result in ~~a per share trading price that would attract investors who do not trade in lower priced stocks.~~

~~Even if the Reverse Stock Split is implemented, the per share trading price of~~substantial decreases to our common stock may decrease due to factors unrelated to the Reverse Stock Split. Other factors, such as our financial results, market conditions and the market perception of our business, may adversely affect the per share trading price of our common stock. As a result, we cannot assure you that the Reverse Stock Split, if completed, will result in the benefits that we anticipate, that the per share trading price of our common stock will increase following the Reverse Stock Split or that the per share trading price of our common stock will not decrease in the future.

~~The proposed Reverse Stock Split, if approved by stockholders and effected, may decrease the liquidity of our common stock.~~

The liquidity of our common stock may be harmed by the proposed Reverse Stock Split, given the reduced number of shares that would be outstanding after the Reverse Stock Split, particularly if the per share trading price does not increase proportionately as a result of the Reverse Stock Split. While our Board of Directors believes that a higher stock price may help generate the interest of new investors, the Reverse Stock Split may not result in a per-share price that will attract certain types of investors, such as institutional investors or investment funds, and such share price may not satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not improve as a result of a Reverse Stock Split and could be adversely affect by a higher per share price. Accordingly, the Reverse Stock Split may not increase marketability of our common stock. In addition, investors might consider the increased proportion of unissued authorized shares to issued shares to have an anti-takeover effect under certain circumstances, because the proportion allows for dilutive issuances that could prevent certain stockholders from changing the composition of the Board of Directors or render tender offers for a combination with another entity more difficult.

~~The proposed Reverse Stock Split, if effected, may result in some stockholders owning~~ “~~odd lots~~” ~~that may be more difficult to sell or require greater transaction costs per share to sell.~~

If the proposed Reverse Stock Split is implemented, it will increase the number of stockholders who own “odd lots” of less than 100 shares of common stock. A purchase or sale of less than 100 shares of common stock may result in incrementally higher trading costs through certain brokers, particularly “full service” brokers. Therefore, those stockholders who own less than 100 shares of our common stock following the Reverse Stock Split may be required to pay higher transaction costs if they sell their shares of common stock.

~~The proposed Reverse Stock Split, if effected, will result in a significant increase in our authorized common stock and may result in future~~ dilution to our ~~stockholders.~~

The Reverse Stock Split will reduce the number of outstanding shares of our common stock without a proportionate reduction in the number of shares of authorized but unissued common stock in the Company’s Amended and Restated Certificate of Incorporation, as amended,, which will give the Company a significantly larger number of authorized shares, as a percentage of total outstanding shares, available for future issuance without further stockholder action, except as may be required by applicable laws or the rules of any stock exchange on which our common stock is listed. The issuance of additional shares of common stock may have a dilutive effect on the ownership of existing ~~stockholders.~~

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~~ITEM 1B.~~

~~UNRESOLVED STAFF COMMENTS~~

~~Not Applicable.~~shareholders.

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

None.

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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
Membership Unit Purchase Agreement dated September 27, 2021, by and among the Company, DERMAdoctor, the Founders and the Sellers (as defined therein)
8-K
001-3678
2.1
9/28/2021

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
8-K
001-33678
3.1
6/04/2018

3.3
Amendment to the Amended and Restated Certificate of Incorporation, as amended
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
Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated January 31, 2022
8-K
001-33678
3.1
2/1/2022

3.6
Certificate of Designation for the Series B Preferred Stock
8-K
001-33678
3.1
11/1/2021

3.7
Amended and Restated Bylaws
10-K
001-33678
3.7
3/29/2022

3.8**
Form of Certificate of Designation for the Series C Preferred Stock
8-K
001-33678
3.1
9/13/2022

4.1
Form of Warrant pursuant to the Services Agreement with TLF Bio Innovation Lab, LLC, dated May 13, 2020
8-K
001-33678
4.1
5/18/2020

4.2
Form of July 2020 Warrant
8-K
001-33678
4.1
7/21/2020

4.3
Form of November 2021 Warrant
8-K
001-33678
4.1
11/01/2021

4.4
Form of Amended July 2020 Warrant
8-K
001-33678
4.1
9/13/2022

4.5
Form of November 2021 Warrant (as amended)
8-K
001-33678
4.2
9/13/2022

4.6
Form of September 2022 Warrant (2020 participants)
8-K
001-33678
4.3
9/13/2022

4.7
Form of September 2022 Warrant for (2021 participants)
8-K
001-33678
4.4
9/13/2022

4.8**
Form of Series A-1 Long-Term Warrant
8-K
001-33678
4.5
9/13/2022

4.9**
Form of Series A-2 Short-Term Warrant
8-K
001-33678
4.6
9/13/2022

10.1*
Form of 2020 Reprice Letter Agreement, dated September 9, 2022
8-K
001-33678
10.1
9/13/2022

10.2*
Form of 2021 Reprice Letter Agreement, dated September 9, 2022
8-K
001-33678
10.2
9/13/2022

10.3*
Form of Securities Purchase Agreement, dated September 9, 2022
8-K
001-33678
10.3
9/13/2022

10.4**
Form of Registration Rights Agreement
8-K
001-33678
10.4
9/13/2022

10.5
Form of Participant Voting Commitment
8-K
001-33678
10.5
9/13/2022

10.6
Form of Additional Voting Commitment
8-K
001-33678
10.6
9/13/2022

10.7
Form of Leak-Out Agreement
8-K
001-33678
10.7
9/13/2022

	Incorporation by Reference					Filed Herewith
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Form 8-K Item Reference	Filing Date
2.1	Membership Unit Purchase Agreement dated September 27, 2021, by and among the Company, DERMAdoctor, the Founders and the Sellers (as defined therein)	8-K	001-3678	2.1	9/28/2021
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	8-K	001-33678	3.1	6/04/2018
3.3	Amendment to the Amended and Restated Certificate of Incorporation, as amended	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	Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated January 31, 2022	8-K	001-33678	3.1	2/1/2022
3.6	Certificate of Designation for the Series B Preferred Stock	8-K	001-33678	3.1	11/1/2021
3.7	Amendment to Amended and Restated Certificate of Incorporation, as amended, dated November 14, 2022	8-K	001-33678	3.1	11/18/2022
3.8	Certificate of Designation for the Series C Preferred Stock	8-K	001-33678	3.2	11/18/2022
3.9	Amended and Restated Bylaws	10-K	001-33678	3.7	3/29/2022
4.1	Description of Securities	10-K	001-33678	3.1	3/31/2023
4.2	Form of Warrant pursuant to the Services Agreement with TLF Bio Innovation Lab, LLC, dated May 13, 2020	8-K	001-33678	4.1	5/18/2020
4.3	Form of July 2020 Warrant	8-K	001-33678	4.1	7/21/2020
4.4	Form of Amended July 2020 Warrant	8-K	001-33678	4.1	9/13/2022
4.5	Form of Amended November 2021 Warrant	8-K	001-33678	4.2	9/13/2022
4.6	Form of September 2022 Warrant (2020 participants)	8-K	001-33678	4.3	9/13/2022
4.7	Form of September 2022 Warrant (2021 participants)	8-K	001-33678	4.4	9/13/2022
4.8	Form of Series A-1 Long-Term Warrant	8-K	001-33678	4.5	9/13/2022
4.9	Form of Series A-2 Short-Term Warrant	8-K	001-33678	4.6	9/13/2022
4.10	Form of Original Issue Discount Secured Senior Convertible Debenture	8-K	001-33678	4.1	4/27/2023
4.11	Form of Series B-1 Long-Term Common Stock Warrant	8-K	001-33678	4.2	4/27/2023
4.12	Form of Series B-2 Short-Term Common Stock Warrant	8-K	001-33678	4.3	4/27/2023
4.13	Form of Warrant Amendment Agreement	8-K	001-33678	4.4	4/27/2023
10.1	Form of Securities Purchase Agreement*	8-K	001-33678	10.1	4/27/2023
10.2	Form of Security Agreement*	8-K	001-33678	10.2	4/27/2023
10.3	Form of Subsidiary Guarantee	8-K	001-33678	10.3	4/27/2023
10.4	Form of Voting Commitment	8-K	001-33678	10.4	4/27/2023
10.5	Form of Registration Rights Agreement	8-K	001-33678	10.5	4/27/2023
31.1	Certification of the Principal Executive Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)					X
31.2	Certification of the Principal Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)					X
32.1	Certification by the Chief Executive Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)					X
32.2	Certification by the Chief Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)					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

~~-55-~~

~~Table of Contents~~

~~31.1~~	~~Certification of the Principal Executive Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)~~	X
~~31.2~~	~~Certification of the Principal Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)~~	X
~~32.1~~	~~Certification by the Chief Executive Officer~~ ~~of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)~~	X
~~32.2~~	~~Certification by the Chief Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18~~ ~~U.S.C. 1350)~~	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

* Certain confidential portions of this exhibit were omitted by means of marking such portions with brackets because the confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.

** These documents are not currently effective and will be entered into and become effective only if the 2022 Private Placement is completed.

~~-56-~~- 37 -

Table of Contents

SIGNATURES

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 14, 2022~~May 11, 2023

By:

/s/ Justin Hall

Justin Hall

Chief Executive Officer, General Counsel and Director

(principal executive officer)

Date: ~~November 14, 2022~~May 11, 2023

By:

/s/ ~~Andrew Jones~~ Tommy Law

~~Andrew Jones~~Tommy Law

Interim Chief Financial Officer

(principal financial officer)

~~-57-~~- 38 -

											Additional						Total
	Preferred Stock						Common Stock				Paid-In			Accumulated			Stockholders’
	Shares			Amount			Shares		Amount		Capital			Deficit			Equity
Balance at December 31, 2021		14		$	680			47,766	$	478	$	150,900		$	(141,887	)	$	10,171
Net loss		-			-			-		-		-			(111	)		(111	)
Reclassification of Private Placement Warrants		-			-			-		-		7,502			-			7,502
Conversion of Series B Preferred Stock to common stock		(1	)		(71	)		3,653		36		35			-			-
Stock-based compensation expense related to employee and director stock options		-			-			-		-		184			-			184

Balance at March 31, 2022		13		$	609			51,419	$	514	$	158,621		$	(141,998	)	$	17,746
Net loss		-			-			-		-		-			(2,155	)		(2,155	)
Conversion of Series B Preferred Stock to common stock		(1	)		(39	)		1,974		20		19			-			-
Vesting of director restricted stock awards		-			-			120		1		(1	)		-			-
Stock-based compensation expense related to employee and director stock options		-			-			-		-		154			-			154

Balance at June 30, 2022		12		$	570			53,513	$	535	$	158,793		$	(144,153	)	$	15,745
Net loss		-			-			-		-		-			(136	)		(136	)
Modification of common stock warrants		-			-			-		-		1,922			-			1,922
Exercise of warrants, net of offering costs		-			-			11,475		115		171			-			286
Reclassification of common stock warrants to liability		-			-			-		-		(3,825	)		-			(3,825	)
Adjustment of Series B Preferred Stock conversion price		-			-			-		-		5,657			(5,657	)		-
Stock-based compensation expense related to employee and director stock options		-			-			-		-		(208	)		-			(208	)
Balance at September 30, 2022		12		$	570			64,988	$	650	$	162,510		$	(149,946	)	$	13,784

	Three Months Ended September 30,				Nine Months Ended September 30,				For the three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Avenova Spray	$	1,939	$	2,145	$	5,778	$	6,358	$	1,937	$	1,839
DERMAdoctor		1,319		—		3,115		—		785		1,043
NeutroPhase		—		—		657		175		—		148
Other products		558		114		1,193		479		395		237
Total product revenue, net		3,816		2,259		10,743		7,012		3,117		3,267
Other revenue, net		10		6		18		19		7		6
Total sales, net	$	3,826	$	2,265	$	10,761	$	7,031	$	3,124	$	3,273

	Three Months Ended September 30, 2022										Nine Months Ended September 30, 2022
	As Previously Reported			Selling Commissions		Fulfillment Fees		As Revised			As Previously Reported			Selling Commissions		Fulfillment Fees		As Revised			For the Three Months Ended March 31, 2022
																					As Previously Reported			Selling Commissions		Fulfillment Fees		As Revised
Sales
Product revenue, net	$	3,268		$	265	$	283	$	3,816		$	8,934		$	851	$	959	$	10,743		$	2,623		$	298	$	346	$	3,267
Product cost of goods sold
Product cost of goods sold		1,168			-		283		1,451			3,776			-		959		4,735			1,113			-		346		1,459
Operating expenses
Sales and marketing		1,570			265		-		1,835			5,009			851		-		5,860			1,687			298		-		1,985

Net loss and comprehensive loss		(136	)		-		-		(136	)		(2,402	)		-		-		(2,402	)
Net loss																						(111	)		-		-		(111	)

Net loss per share (basic and diluted)		(0.10	)		-		-		(0.10	)		(0.15	)		-		-		(0.15	)
Net loss per share attributable to common stockholders (basic and diluted)																						(0.08	)		-		-		(0.08	)

	Three Months Ended September 30, 2021										Nine Months Ended September 30, 2021
	As Previously Reported			Selling Commissions		Fulfillment Fees		As Revised			As Previously Reported			Selling Commissions		Fulfillment Fees		As Revised

Sales
Product revenue, net	$	1,834		$	206	$	219	$	2,259		$	5,761		$	619	$	632	$	7,012
Product cost of goods sold
Product cost of goods sold		493					219		712			1,562					632		2,194
Operating expenses
Sales and marketing		1,855			206				2,061			5,323			619				5,942

Net loss and comprehensive loss		(2,289	)		-		-		(2,289	)		(5,666	)		-		-		(5,666	)

Net loss per share (basic and diluted)		(0.05	)		-		-		(0.05	)		(0.13	)		-		-		(0.13	)

	Three Months Ended September 30,						Nine Months Ended September 30,
Numerator	*2022*			*2021*			*2022*			*2021*
Net loss	$	(136	)	$	(2,289	)	$	(2,402	)	$	(5,666	)
Less: Increase in accumulated deficit due to Series B Preferred Stock conversion price		5,657			—			5,657			—
Net loss attributable to common stockholders, basic and diluted	$	(5,793	)	$	(2,289	)	$	(8,059	)	$	(5,666	)

Denominator
Weighted average shares outstanding, basic and diluted		56,133			44,921			53,007			43,100
Net loss per share, basic and diluted	$	(0.10	)	$	(0.05	)	$	(0.15	)	$	(0.13	)

	As of September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Series B Preferred Stock common stock equivalents		64,561		—
Stock options		4,743		3,947		121		126
Stock warrants		2,282		7,082		2,306		1,274
		71,586		11,029		2,427		1,400

	Fair Value
Tangible net assets and liabilities:
Cash and cash equivalents	$	12
Accounts receivable, net of allowance for doubtful accounts		1,015
Inventory, net of allowance		2,369
Prepaid expenses and other current assets		150
Property and equipment, net		62
Other intangible assets		54
Accounts payable		(200	)
Accrued liabilities		(683	)
Total net assets		2,779
Intangible Assets:
Customer relationships		290
Trade secrets / product formulations		2,890
Trade names		2,080
Total intangible assets		5,260
Net assets acquired		8,039
Purchased consideration		12,561
Goodwill	$	4,528

			Fair Value Measurements Using
			Quoted Prices in
	*Balance at*		Active Markets		Significant Other		Significant Unobservable
	*September 30,*		*for Identical*		*Observable*		*Inputs*
	*2022*		*Items*		*Inputs*		*(Level 3)*
			*(Level 1)*		*(Level 2)*
Assets
Deposit held as a certificate of deposit	$	152	$	152	$	—	$	—
Total assets	$	152	$	152	$	—	$	—

Liabilities
Warrant liability	$	2,827	$	—	$	—	$	2,827
Contingent earnout liability		342		—		—		342
Total liabilities	$	3,169	$	—	$	—	$	3,169

			Fair Value Measurements Using
			Quoted
			Prices in
			Active		Significant
			Markets		Other		Significant
	*Balance at*		*for Identical*		*Observable*		*Unobservable*
	*March 31,*		*Items*		*Inputs*		*Inputs*
	*2023*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Assets
Restricted cash held as a certificate of deposit	$	324	$	324	$	—	$	—
Deposit held as a certificate of deposit		152		152		—		—
Total assets	$	476	$	476	$	—	$	—

Fair value of warrant liability at December 31, 2021	$	9,558
Decrease in fair value of November 2021 Warrants		(2,056	)
Reclassification of November 2021 Warrants liability to equity		(7,502	)
Fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)		5,241
Decrease in fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)		(2,414	)
Fair value of warrant liability at September 30, 2022	$	2,827

Fair value of contingent liability at December 31, 2021	$	561
Decrease in fair value of contingent liability		(219	)
Fair value of contingent liability at September 30, 2022	$	342

Fair value of warrant liability at December 31, 2020	$	—
Fair value of November 2021 Warrants issued		14,172
Decrease in fair value of November 2021 Warrants		(4,614	)
Fair value of warrant liability at December 31, 2021	$	9,558

	Balance at September 30, 2022							Balance at March 31, 2023
			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Impairment			Net
Indefinite-lived intangible assets
Trade names	$	2,080	$	—		$	2,080	$	2,080	$	—		$	(970	)	$	1,110

Amortizable intangible assets
Customer relationships	$	290	$	(38	)	$	252	$	290	$	(51	)	$	(172	)	$	67
Trade secrets / product formulations		2,890		(294	)		2,596		2,890		(410	)		(1,415	)		1,065

Total other intangible assets	$	5,260	$	(332	)	$	4,928	$	5,260	$	(461	)	$	(2,557	)	$	2,242

	Balance at December 31, 2021
			Accumulated
	Gross		Amortization			Net
Indefinite-lived intangible assets
Trade names	$	2,080	$	—		$	2,080

Amortizable intangible assets
Customer relationships	$	290	$	(7	)	$	283
Trade secrets / product formulations		2,890		(53	)		2,837

Total other intangible assets	$	5,260	$	(60	)	$	5,200

	Balance at December 31, 2022
			Accumulated
	Gross		Amortization			Impairment			Net
Indefinite-lived intangible assets
Trade names	$	2,080	$	—		$	(970	)	$	1,110

Amortizable intangible assets
Customer relationships	$	290	$	(48	)	$	(172	)	$	70
Trade secrets / product formulations		2,890		(375	)		(1,415	)		1,100

Total other intangible assets	$	5,260	$	(423	)	$	(2,557	)	$	2,280

2022 (remaining 3 months)	$	91
2023		363	$	114
2024		363		153
2025		363		152
2026		363		153
Thereafter		1,305		560
Total	$	2,848	$	1,132

Lease Costs									Three Months Ended March 31,
	Three Months Ended September 30,				Nine Months Ended September 30,				2023		2022
Lease Costs	2022		2021		2022		2021
Operating lease cost	$	120	$	99	$	395	$	298	$	130	$	134
Net lease cost									$	130	$	134

Other information
Operational cash flow used for operating leases	$	144	$	113	$	399	$	339	$	106	$	111

							Three Months Ended March 31,
	September 30, 2022			September 30, 2021			2023			2022
Weighted-average remaining lease term (in years)		4.5			0.5			4.0			5.0
Weighted-average discount rate		5	%		12	%		5	%		5	%

	2019 Domestic Warrants			2019 Foreign Warrants
Expected price volatility		178	%		178	%
Expected term (in years)		4.57			4.57
Risk-free interest rate		0.25	%		0.27	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrant	$	1.18		$	1.54

Expected price volatility		186	%
Expected term (in years)		4.05
Risk-free interest rate		0.22	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	1.17

Expected price volatility		79.6	%
Expected term (in years)		3.4
Risk-free interest rate		3.58	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	0.10

Expected price volatility		79.5	%
Expected term (in years)		5.8
Risk-free interest rate		3.93	%
Dividend yield		0.0	%
Weighted-average fair value of warrants	$	1.40

Expected price volatility		84.9	%
Expected term (in years)		6.2
Risk-free interest rate		1.29	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	0.38

	November 2021 Warrants			July 2020 Warrants			November 2021 Warrants			July 2020 Warrants
Expected price volatility		79.6	%		79.6	%		79.6	%		79.6	%
Expected term (in years)		5.4			3.4			5.4			3.4
Risk-free interest rate		3.43	%		3.58	%		3.43	%		3.58	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Weighted-average fair value of warrants	$	0.09		$	0.02		$	3.15		$	0.70

	Warrants (in thousands)			Weighted- Average Exercise Price
Outstanding at December 31, 2021		7,082		$	1.63
Warrants granted		37,500		$	0.53
Warrants exercised		(11,475	)	$	0.18
Warrants modified and not exercised		(30,825	)	$	0.18
Outstanding at September 30, 2022		2,282		$	1.59

	Chargebacks, Discounts for Prompt Payment			Other Customer Fees			Rebates			Total
Balance at December 31, 2021	$	1,150		$	83		$	56		$	1,289
Provision related to sales made in:
Current period	$	613		$	60		$	326		$	999
Payments and customer credits issued	$	(189	)	$	(55	)	$	(341	)	$	(585	)
Balance at September 30, 2022	$	1,574		$	88		$	41		$	1,703

	Nine Months Ended September 30,						Dollar			Percent
(in thousands)	2022			2021			Change			Change
Statement of Operations
Sales:
Product revenue, net	$	10,743		$	7,012		$	3,731			53	%
Other revenue, net		18			19			(1	)		(5	%)
Total sales, net		10,761			7,031			3,730			53	%

Product cost of goods sold		4,735			2,194			2,541			116	%
Gross profit		6,026			4,837			1,189			25	%
Operating Expenses:
Research and development		108			36			72			200	%
Sales and marketing		5,860			5,942			(82	)		(1	%)
General and administrative		5,049			4,527			522			12	%
Total operating expenses		11,017			10,505			512			5	%
Operating loss		(4,991	)		(5,668	)		677			(12	%)

Non-cash loss on modification of common stock warrants		(1,922	)		—			(1,922	)		(100	%)
Non-cash gain on changes in fair value of warrant liabilities		4,470			—			4,470			100	%
Non-cash gain on changes in fair value of contingent liability		219			—			219			100	%
Other (expense) income		(178	)		2			(180	)		(9,000	%)

Loss before provision for income taxes		(2,402	)		(5,666	)		3,264			(58	%)
Provision for income taxes		—			—			—			—
Net loss and comprehensive loss	$	(2,402	)	$	(5,666	)	$	3,264			(58	%)