NovaBay Pharmaceuticals Inc

DECEMBER****31, 2023

NOTE1. ORGANIZATION

NovaBay Pharmaceuticals, Inc. (the “Company” or “our,” “we,” or “us”) develops and sells scientifically-created and clinically-proven eyecare, and wound care products. Our leading product, Avenova® Antimicrobial Lid and Lash Solution, or Avenova Spray, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (the “FDA”) for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry eye disease. Because dry eye is a complex condition, we offer a complementary portfolio of scientifically-developed products for each step of the standard at-home treatment regimen, including the Avenova Eye Health Support antioxidant-rich oral supplement, Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health.

Through our former subsidiary DERMAdoctor, LLC (“DERMAdoctor”), the Company offered over30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. Subsequent to* December 31, 2023,on March 25, 2024,we announced that we had sold DERMAdoctor (the “DERMAdoctor Divestiture”). We acquired DERMAdoctor in November 2021 (*the “DERMAdoctor Acquisition”) in order to achieve overall revenue growth, cost reductions and profitability. We were unable to achieve those objectives with DERMAdoctor. The DERMAdoctor Divestiture immediately streamlined our business by reducing our cash burn and allowing us to begin focusing on pursuing newer and stronger growth opportunities that are better aligned with our core eyecare business.

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

The Company was incorporated under the laws of the State of California on* January 19, 2000,as NovaCal Pharmaceuticals, Inc. It hadno* operations until* July 1, 2002,on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007,the Company changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In June 2010,the Company changed the state in which it was incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation. The Company is managed astwo reportable segments: (1) Eyecare and Wound Care and (2) Skincare. As noted above, on March 25, 2024,*we closed the DERMAdoctor Divestiture resulting in the sale of our skincare segment.

Effective* November 15, 2022,the Company effected a1*-for-35 reverse split of our outstanding common stock (“Reverse Stock Split”). 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 the Reverse Stock Split.

GoingConcern

The Company has sustained operating losses for the majority of its corporate history and expects that its2024 expenses will exceed its2024 revenues, as the Company continues to invest in its commercialization efforts. Additionally, the Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern. Additionally, changing circumstances* maycause the Company to expend cash significantly faster than currently anticipated, and the Company may*need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, global pandemics and international conflicts (e.g., the conflicts between Israel and Hamas, Russia and Ukraine, and China and Taiwan).

The Company’s long-term liquidity needs will be largely determined by the success of our commercialization efforts. To address the Company’s current liquidity and capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending onone or more of its sales and marketing programs or restructuring operations to change its overhead structure; (3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (4) entering into license agreements to sell new products; and/or (5) the divestiture of certain business or product lines and related assets. The Company* mayissue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which mayrequire the filing of a Form S-1 or Form S-3 registration statement with the Securities and Exchange Commission (“SEC”). While the Company believes that the proceeds from the2023* Private Placement and2023 Warrant Reprice Transaction (as defined below) and the DERMAdoctor Divestiture improved the Company’s liquidity in the near term, there isno assurance that the Company will be successful in executing additional capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs. Accordingly, the Company continues to evaluate different plans and strategies to address the Company’s capital and liquidity needs, as well as evaluating potential other strategic alternatives and transactions. The accompanying 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 consolidated financial statements donot include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that* may*result from uncertainty related to the Company’s ability to continue as a going concern.

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NOTE*2.* SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basisof Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in U.S. dollars.

Principlesof Consolidation

The accompanying consolidated financial statements include the accounts of NovaBay Pharmaceuticals, Inc. and its former wholly-owned subsidiary, DERMAdoctor, LLC. All intercompany balances and transactions have been eliminated in consolidation. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

Useof 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 consolidated financial statements and accompanying notes. Actual results* maydiffer significantly from those estimates. Significant estimates made by management include, but arenot* limited to, contract liabilities related to product sales such as product returns, assumptions for valuing warrants, assumptions for valuing derivative liabilities, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other contingencies.

These estimates are based on management’s best estimates and judgment. Actual results* may*differ from these estimates. Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions, judgments and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

***Cash,***Cash Equivalents, and Highly Liquid Restricted Cash

The Company considers all highly-liquid instruments with a stated maturity ofthree 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* December 31, 2023and2022,* the Company’s cash and cash equivalents were held in a major financial institution in the United States.

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

The restricted cash amount included in other assets on the 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.

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Concentrationsof Credit Risk and Major Partners

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a major financial institution in the United States.

The Company has a significant amount of its cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of*$250,000.* Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.

During the years ended* December 31, 2023and2022,* revenues from significant product categories were as follows (in thousands):

During the years ended* December 31, 2023and2022,* revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com. Sales of Avenova Spray via Amazon comprised 67% and 73% of total Avenova Spray net revenue during the years ended* December 31, 2023and2022,* respectively. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

As of* December 31, 2023and2022,* accounts receivable from our major distribution partners and major retailers greater than10% were as follows:

• Less than10%

The Company relies onseven contract manufacturers to produce its products. The Company doesnot have any manufacturing facilities and intends to continue to rely onthird parties for the supply of finished goods. Contract manufacturers* mayor may**not* be able to meet the Company’s needs with respect to timing, quantity or quality. In particular, it is possible that the Company* may*suffer from unexpected delays in light of the global supply chain issues.

FairValue of Financial Assets and Liabilities

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant liabilities, and contingent consideration. The Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

The Company follows Accounting Standards Codification (“ASC”)820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. There arethree levels of inputs that* may*be used to measure fair value:

Level1 – quoted prices in active markets for identical assets or liabilities;

Level2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and

Level3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

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Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

See additional information in Note3, “Fair Value Measurements”.

Allowancefor Credit Losses

The Company maintains an allowance for estimated losses resulting from the inability of its customers to meet their financial obligations to the Company. The Company recognizes an allowance for credit losses based on factors such as historical experience, contract terms and general and market business conditions. The Company’s future collection experience can differ significantly from historical collection trends due to such factors as changing customer circumstances and uncertain economic and industry trends. The allowance is re-evaluated on a regular basis and adjusted as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the allowance. Management recorded a reserve for allowance for credit losses of $3 thousand and $19 thousand as of* December 31, 2023and2022,* respectively.

Inventory

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; (2) goods in progress, which are normally filled but unlabeled bottles; and (3) finished goods. The Company utilizes 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 thefirst-in,first-out method. At* December 31, 2023and2022,* management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $627 thousand and $499 thousand, respectively.

Propertyand Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets offive toseven years for office and laboratory equipment, three tofive years for computer equipment and software, andfive toseven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.

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

BusinessCombinations, Goodwill and Indefinite-Lived Intangible Assets

We account for*** *business combinations using the acquisition method of accounting, in accordance with ASC805, Business Combinations. The acquisition method requires that identifiable assets acquired and liabilities assumed are recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. Intangible assets are measured at their respective fair values as of the acquisition date. Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.

Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely thannot that the assets are impaired.

Goodwill is evaluated for impairment byfirst performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit* maymore likely thannot* be less than carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, management can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires management to estimate the fair value of the Company’s reporting units using either an income or market approach or a combination thereof.

Management makes critical assumptions and estimates in completing impairment assessments of goodwill and indefinite-lived intangible assets. The Company’s cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.

The Company acquired DERMAdoctor in* November 2021,and since completing this transaction it worked to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that the Company expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability. The Company wasnot* able to achieve these objectives. As a result, management continued to revise its forecast for the future performance of DERMAdoctor branded products. Additionally, subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

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During thefourth quarters of2022 and2023, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC350-20-35-3C. The Company’s annual impairment analysis included a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing the qualitative assessment, the Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill. The Company performed a Step0 goodwill impairment analysis and determined that the fair value of the reporting unit* maymore likely thannot* be less than carrying amount, which necessitated the Company performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC350-20-35-3C, the Company determined that goodwill related to its DERMAdoctor reporting unit was fully impaired as of* December 31, 2023which resulted in goodwill impairment charges of $0.3 million and$4.2 million during the years ended December 31, 2023and2022,* respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations. The impact of the impairments on the consolidated balance sheets as of* December 31, 2023and2022* was a $0.3 million and $4.2 million reduction to the goodwill caption, respectively.

During thefourth quarters of2023 and2022, the Company also performed its indefinite-lived intangible asset impairment assessment. The Company evaluated, on the basis of the weight of the evidence, the significance of all identified events and circumstances that could affect the significant inputs used to determine the fair value of the Company’s indefinite-lived intangible assets, to determine whether it is more likely thannot that the Company’s indefinite-lived intangible assets were impaired. After assessing the totality of events and circumstances, and their potential effect on significant inputs to the fair value calculation, the Company determined that it is more likely thannot that its indefinite-lived intangible assets related to its DERMAdoctor reporting unit were impaired. As such, the Company performed a quantitative impairment test on its indefinite-lived intangible assets. Based on the quantitative impairment test, the Company determined that its indefinite-lived trade name intangible asset should be fully impaired as of* December 31, 2023,which resulted in a $1.1 million and $1.0 million impairment charge being recorded during the years ended December 31, 2023and2022,* respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

Valuationof Contingent Consideration Resulting from a Business Combination

In connection with the DERMAdoctor Acquisition, the Company was subject to paying consideration that was contingent upon the achievement of specified milestone events. The Company recorded this contingent consideration at its fair value on the acquisition date. Each quarter thereafter, the Company revalued the contingent consideration and recorded changes in fair value within the consolidated statements of operations. The DERMAdoctor Acquisition milestone events consisted of financial targets for calendar years2022 and2023 which werenot met. As a result, the liability recorded for potential earn out payments in the Company’s consolidated balance sheets waszero as of* December 31, 2023and2022.* The Company recognized a $0.6 million non-cash gain related to the change in fair value of the contingent consideration for the year ended* December 31, 2022,*which is reflected in the Company’s consolidated statements of operations.

Long-LivedAssets

The Company’s intangible assets that donot 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, are reviewed for impairment in accordance with ASC360,** Property, Plant and Equipment, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally,* mayindicate that an impairment of long-lived assets held for use are present. The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may**not* be fully recoverable or that the useful lives of these assets areno 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 arenot 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.

In connection with the above-mentioned DERMAdoctor reporting unit impairments, discussed in the goodwill and indefinite-lived intangible assets caption above, the Company determined that all of the DERMAdoctor business definite long-lived intangible assets and property and equipment were also impaired. As such, the Company recorded an impairment charge in the years ended* December 31, 2023and2022* of $1.0 million and $1.6 million, respectively, for the impairment of long-lived intangible assets which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations; $0.1 million for the impairment of a right-of-use asset which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations in the year ended* December 31, 2023;and of $2 thousand and $66 thousand, net in the years ended December 31, 2023and2022,* respectively, for property and equipment which is reflected in the general and administrative expenses caption in the Company’s consolidated statements of operations.

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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 typicallynot 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* maybe required for items such as initial direct costs paid or incentives received. Additionally, the Company determined that a right-of-use asset related to the DERMAdoctor business had been fully impaired as of December 31, 2023.Accordingly, the Company recorded an impairment charge of $0.1 million which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations in the year ended December 31, 2023.*

The Company has elected to combine lease and non-lease components as a single component. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use assets and lease liability for leases being greater than if the policy election wasnot applied. Leases include variable components (e.g., common area maintenance) that are paid separately from the monthly base payment based on actual costs incurred and therefore werenot included in the right-of-use assets and lease liability but are reflected as an expense in the period incurred.

The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized in the consolidated balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.

CommonStock Warrants

The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC480, Distinguishing Liabilities from Equity, and ASC815, Derivatives and Hedging (ASC815).

The Company classifies as equity any warrants that (i) require physical share settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement (physical share settlement or net-share settlement). The Company classifies as liabilities any warrants that (i) require net-cash settlement, (ii) give the counterparty a choice of net-cash physical settlement or net-share settlement. In accordance with ASC815, the Company also classifies as liabilities any warrants for which the shares underlying the contract are subject to stockholder approval before the warrant can be exercised.

For warrants that are classified as liabilities, the Company records the fair value of the warrants upon issuance and at each balance sheet date with changes in the estimated fair value recorded as a non-cash gain or loss in the consolidated statements of operations. The fair values of these warrants are determined using the Black-Scholes option pricing model. These values are subject to a significant degree of management’s judgment. See Note3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions” and Note13, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”.

Amendments to warrant terms are recorded as a non-cash gain or loss on modification of common stock warrants. The gain or loss represents the decrease or increase in the fair value of the amended warrants when comparing the value immediately before and after amendment using the Black-Scholes option pricing model. See Note3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

PreferredStock

Terms of the Company’s outstanding Preferred Stock include a Ratchet whereby the applicable conversion price* maybe adjusted (see Note14,* “Stockholders’ Equity”). When this occurs, the Company records a deemed dividend as a reduction to income available to common stockholders. In accordance with ASC820, the deemed dividend is measured as the difference between (1) the fair value of the Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). These fair values are determined using the Black-Scholes option pricing model. These values are subject to a significant degree of management’s judgment. See also Note3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

RevenueRecognition

The Company’s product revenue recognition policies are established in accordance with ASC606, Revenue from Contracts with Customers, in accordance with the followingfive steps:

Revenue is recognized in accordance with the amount of consideration which the Company expects to receive.

Revenue generated from end consumers throughthird-party online retailers, such as Amazon, as well as the Company’s web stores (Avenova.com and DERMAdoctor.com) is recognized on a “sell-through” basis when control of the goods is transferred to the consumer, which generally occurs upon delivery of the products to the party fulfilling the consumer’s order. Revenue is recorded net of any discounts and estimates for refunds and product returns. Fees paid tothird-party online retailers and fulfillment parties are recorded as incurred in the Company’s consolidated statements of operations. Fulfillment and shipping and handling fees are recorded as product cost of goods sold. Selling commissions and advertising and promotion fees are recorded as sales and marketing expenses.

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Revenue generated through major pharmacy distributors is recognized on a “sell-in” basis when control of the goods is transferred to the distributor, which generally occurs upon delivery of the products to the distributor. Revenue is recorded net of consideration for contract liabilities for distributor services, discounts, rebates, and product returns. The Company estimates returns and other contract liabilities based on historical data which is updated quarterly. Payment for product supply is typically due 30 days after delivery to the distributor.

Revenue generated from end consumers through the Company’s partner pharmacies is recognized on a “sell-through” basis when control of the goods is transferred to the consumer.

Revenue generated from Costco is recognized on a “sell-in” basis when control of the goods is transferred to Costco, which generally occurs upon delivery of the products to Costco. Revenue is recorded net of consideration for discounts and product returns. The Company estimates returns based on historical data which is updated quarterly.

Revenue generated from other retailers is recognized on a “sell-through” basis, net of estimated future product returns, when control of the goods is transferred to the retailer, which generally occurs upon delivery of the products to athird-party carrier who is delivering the products to the retailer.

The Company defers recognition for pre-payments until the Company’s performance obligations are satisfied.

Cost of Goods Sold

Cost of goods sold includesthird-party manufacturing costs, shipping and handling costs,third-party fulfillment fees, and other costs associated with products sold. Cost of goods sold also includes any necessary allowances for excess and obsolete inventory as well as lower of cost and estimated net realizable value.

Researchand 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.

PatentCosts

Patent costs are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations.

AdvertisingCosts

Advertising costs are expensed in the period in which the costs are incurred. Advertising costs are included in sales and marketing expenses in the consolidated statements of operations. Advertising expenses were $1.1 million and $2.0 million, respectively, for the years ended* December 31, 2023and2022.*

Stock-BasedCompensation

The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes option pricing model. The Company accounts for RSUs issued to employees and non-employees (directors, consultants and advisory board members) based on the fair market value of the Company’s common stock on the date of issuance. See Note15, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating the expense.

IncomeTaxes

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 thannot that some portion or the entire deferred tax asset willnot be recognized.

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NetLoss per Share

The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”) as shown in the Company’s consolidated statements of operations.

Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive.

For the years ended* December 31, 2023and2022,* the Series B Preferred Stock and 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 didnot 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:

RecentAccounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standard Updates (“ASUs”) to the FASB ASC. We consider the applicability and impact of all ASUs and anynot listed below were assessed and determined to benot applicable or are expected to have a minimal impact on our consolidated financial statements.

In* June 2016,theFASB* issued Accounting Standards Update (“ASU”)2016-13, Financial Instruments—Credit Losses (Topic326*): Measurement of Credit Losses on Financial Instruments*. The amendments in ASU2016-13 require 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. ASU2016-13 is effective for the Company for annual and interim reporting periods beginning* January 1, 2023.The Company adopted the new standard effective January 1, 2023,and the adoption of this guidance didnot* have a material impact on the Company’s consolidated financial statements.

In* December 2023,the FASB issued ASU2023*-09 (“ASU2023-09**”) Income Taxes (Topic740): Improvements to Income Tax Disclosures. ASU2023-09 requires public companies to annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). ASU2023-09 will be effective for the annual reporting periods in fiscal years beginning after* December 15, 2024.The Company is currently evaluating ASU2023*-09 and doesnot expect it to have a material effect on the Company’s consolidated financial statements.

In* November 2023,the FASB issued ASU2023*-07, “Improvements to Reportable Segment Disclosures” (“ASU2023-07**”). ASU2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity’s CODM. ASU2023-07 is effective for our annual periods beginning* January 1, 2024,and for interim periods beginning January 1, 2025,with early adoption permitted. We donot* expect that the updated standard will have a significant impact on our financial statement disclosures.

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NOTE*3.* FAIR VALUE MEASUREMENTS

The following tables presents the Company’s financial instruments measured at fair value on a recurring basis as of* December 31, 2023and2022* (in thousands):

The Company’s cash equivalents and restricted cash held as certificates of deposit are classified within Level1 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Secured Convertible Notes (see Note12, “Secured Convertible Notes”) are carried at proceeds, net of discounts, which management believes approximates fair value. As a result of certain call and put options within the Secured Convertible Notes, the Company recorded a combined embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Secured Convertible Notes. The fair value of the embedded derivative liability was classified within Level2 of the fair value hierarchy because the stock price used in the related Black Scholes valuation model (see subheading “Black Scholes Valuation Models and Assumptions” below) was adjusted for the dilutive effect of the2023 Private Placement. The fair value of the* May 2023Warrants issued in conjunction with the2023* Private Placement as well as the accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the2023 Private Placement used the same stock price and were classified within Level3.

The fair value of the* December 2023Warrants issued in conjunction with the2023* Warrant Reprice Transaction as well as the accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the2023 Warrant Reprice Transaction were classified within Level3.

See Note13, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”, for a reconciliation of the beginning and ending balances for the warrant liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level3) during the years ended* December 31, 2023and2022.*

BlackScholes Valuation Models and Assumptions

The Company utilizes a Black Scholes model for various valuations as outlined throughout this report. The following tables summarize the assumptions utilized for valuations impacting results for the years ended* December 31, 2023and2022.* See also Note15, “Equity-Based Compensation” for related Black Scholes valuation assumptions.

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Warrant**Liabilities

Various of the Company’s warrants are subject to stockholder approval upon issuance or amendment and prior to exercise. The warrants are recorded as a liability at fair value upon issuance or amendment and continue to be recorded as a liability at fair value at each reporting date until stockholder approval occurs at which time they are transferred to stockholders’ equity at their fair value on the date of approval. Fair value was determined using a Black Scholes model as outlined below.

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Warrant**Modifications

Amendments to warrant terms are recorded as a non-cash gain (or loss) on modification of common stock warrants. The gain or loss represents the decrease or increase in the fair value of the amended warrants when comparing the value immediately before and after amendment using the Black-Scholes option pricing model. Fair value was determined using a Black Scholes model as outlined below.

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Preferred**Stock Conversion Price Adjustments

Terms of the Company’s outstanding Preferred Stock include a Ratchet whereby the applicable conversion price* maybe adjusted (See Note14,* “Stockholders’ Equity”). When this occurs, the Company records a deemed dividend as a reduction to income available to common stockholders. In accordance with ASC820, the deemed dividend is measured as the difference between (1) the fair value of the Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). Fair value was determined using a Black Scholes model as outlined below.

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Bifurcatable**Derivatives

Upon issuance in* May 2023,the Secured Convertible Notes contained a lender’s conversion option which represented an embedded call option requiring bifurcation as an embedded derivative liability at fair value (see Note12,* “Secured Convertible Notes” for additional discussion). Fair value was determined using a Black Scholes model as outlined below.

NOTE*4.* PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

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NOTE*5.* INVENTORY

Inventory consisted of the following (in thousands):

NOTE*6.* PROPERTY AND EQUIPMENT

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

Depreciation expense was $51 thousand and $120 thousand for the years ended* December 31, 2023and2022,* respectively.

During the year ended* December 31, 2022,*the Company disposed of damaged, unusable and fully depreciated property and equipment with a cost of approximately $68 thousand and recognized an immaterial loss on the disposal of these assets in the consolidated statements of operation.

During the years ended* December 31, 2023and2022,* the Company recorded an impairment charge of $2 thousand and $66 thousand, net, respectively, for DERMAdoctor property and equipment which is reflected in the general and administrative caption in the Company’s consolidated statements of operations. See also Note2, “Summary of Significant Accounting Policies”. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

NOTE*7.* GOODWILL

Goodwill is accounted for in accordance with ASC350, Intangibles-Goodwill and Other.The Company doesnot amortize goodwill, but rather tests for impairment annually or more frequently if events or circumstances indicate that an asset* may*be impaired.

During thefourth quarters of2023 and2022, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC350-20-35-3C. The Company’s annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, the Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill. The Company performed a Step0 goodwill impairment analysis and determined that the fair value of the reporting unit was more likely thannot less than the carrying amount, which necessitated the Company performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC350-20-35-3C, the Company determined that goodwill related to its DERMAdoctor reporting unit was impaired by $0.3 million and$4.2 million, respectively, during the years ended* December 31, 2023and2022,* including a full impairment as of* December 31, 2023.As such, the Company has recorded a goodwill impairment charge in each of the years ended December 31, 2023and2022,* which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations. The impairment information is discussed in Note2, “Summary of Significant Accounting Policies”. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

The following table presents details of our goodwill during the years ended* December 31, 2023and2022* (in thousands):

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NOTE*8.* OTHER INTANGIBLE ASSETS

As of* December 31, 2023and2022,* other intangible assets consisted of the following (in thousands):

In each of thefourth quarters of2023 and2022, the Company determined that certain of its indefinite-lived and long-lived amortizable intangible assets related to its DERMAdoctor business were impaired, including fully impaired as of* December 31, 2023.As such, the Company recorded an intangible asset impairment charge of $2.1 million and* $2.6 million in the years ended December 31, 2023and2022, respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations. The impairment information is discussed in Note2, “Summary of Significant Accounting Policies”. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

Amortization expense was $152 thousand and $363 thousand for the years ended* December 31, 2023and2022,* respectively.

NOTE*9.* ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

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NOTE*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* mayenable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it hasnot* recorded any liabilities for these agreements as of* December 31, 2023or2022.*

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 anythird 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 hasnot recorded any liabilities for these agreements as of* December 31, 2023or2022.*

LegalMatters

From time to time, the Company is subject to various legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. The ultimate outcome of any litigation or other legal dispute is uncertain. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. Ifone or more legal matters are resolved against the Company in a reporting period for an amount above expectations, the Company’s financial condition and operating results for that period* maybe adversely affected. As of December 31, 2023and2022,* there wereno legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Any outcome, whether favorable or unfavorable,* maymaterially and adversely affect the Company due to legal costs and expenses, diversion of management attention and other factors. The Company cannot provide assurance that additional contingencies of a legal nature or contingencies having legal aspects willnot* be asserted against it in the future, and these matters could relate to prior, current, or future transactions or events.

Leases

The Company leases office space for its corporate headquarters located in Emeryville, California. The current lease term expires on* July 31, 2027.As of December 31, 2023,the Company also leased 19,136 square feet of space located in Riverside, Missouri, which it utilized for light manufacturing, storage, distribution of products and administrative functions related to its DERMAdoctor operations. The lease commenced on October 1, 2019and expires on December 31, 2024,although it was assigned and divested from the Company as a part of the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

Lease costs for the years ended* December 31, 2023and2022* were as follows (in thousands):

The Company has measured its operating lease liabilities as the present value of minimum least payments using its incremental borrowing rate over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:

Future lease payments under non-cancelable leases as of* December 31, 2023*were as follows (in thousands):

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NOTE*11.* FINANCING ACTIVITIES

See Notes2,* “Summary of Significant Accounting Policies”;3, “Fair Value Measurements”;12, “Secured Convertible Notes”;13, “Common Stock Warrants” and14, “Stockholders’ Equity*”* for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.*

***2023 ***Warrant Reprice Transaction

In* December 2023,** the Company entered into a warrant reprice transaction (the “2023 Warrant Reprice Transaction”) whereby the price terms of certain May 2023Warrants exercisable for 2,528,848 shares of common stock were amended and exercised. The price of the amended and exercised May 2023Warrants was reduced from $1.30 to $0.25. The Company also issued to participants in the2023* Warrant Reprice Transaction, the* December 2023*Warrants exercisable for 2,528,848 shares of common stock.

The2023 Warrant Reprice Transaction resulted in gross proceeds of approximately $0.6 million. The Company allocated the gross proceeds between the common stock and* December 2023** Warrants issued to participants by applying the relative fair value allocation methodology. The Company allocated $0.2 million in gross proceeds to the common stock and $0.4 million to the December 2023** Warrants which were classified as a liability upon issuance and at December 31, 2023.*

The Company incurred total issuance costs of $0.2 million in conjunction with the2023** Warrant Reprice Transaction. The Company allocated $0.1 million of the issuance costs to the common stock which was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets. The remaining $0.1 million was allocated to the warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended December 31, 2023**.

***2023 ***Private Placement

In* May 2023,the Company closed a private placement (the “2023 Private Placement”) with existing accredited institutional investors of the Company that provided for the issuance and sale of $3.3 million aggregate principal amount of the Secured Convertible Notes and the May 2023*Warrants exercisable for up to 5,076,928 shares of common stock.

The Company received gross proceeds of $3.0 million from the2023 Private Placement. The Company allocated the proceeds from the2023 Private Placement between the* May 2023Warrants, an embedded derivative liability, and the Secured Convertible Notes by applying the residual fair value methodology. The Companyfirst* allocated $1.6 million to the* May 2023*Warrants and $0.2 million to the embedded derivative liability with the residual $1.2 million allocated to the Secured Convertible Notes. The embedded derivative liability was subsequently reclassified to equity upon stockholder approval.

The Company incurred total issuance costs of $0.7 million in conjunction with the2023 Private Placement, including a $0.4 million non-cash loss on the warrant modification. The Company allocated $0.3 million of the issuance costs to the Secured Convertible Notes which was recorded as a discount in the Company’s consolidated balance sheets. The remaining $0.4 million was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended* December 31, 2023.*

***2022 ***Warrant Reprice Transaction

In* September 2022,** the Company entered into a warrant reprice transaction (the “2022 Warrant Reprice Transaction”) whereby certain terms of all November 2021** Warrants exercisable for 1,071,434 shares of common stock and certain July 2020** Warrants exercisable for 137,145 shares of common stock were amended. In connection with the2022* Warrant Reprice Transaction, amended* November 2021** Warrants exercisable for 267,860 shares of common stock and amended July 2020Warrants exercisable for 60,000 shares of common stock were exercised. The Company issued to participants in the2022* Warrant Reprice Transaction, the* September 2022*Warrants exercisable for 327,860 shares of common stock.

The2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $2.1 million. The Company allocated the gross proceeds between the common stock and* September 2022Warrants by applying the relative fair value allocation methodology. The Company allocated $0.7 million in gross proceeds to the common stock and $1.4 million to the September 2022** *Warrants which were classified as a liability upon issuance and later reclassified to equity upon stockholder approval.

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The Company incurred total issuance costs of $0.5 million in conjunction with the2022** Warrant Reprice Transaction. The Company allocated $0.3 million of the issuance costs to the common stock which was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets. The remaining $0.2 million was allocated to the warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended December 31,2022.* *

NOTE*12.* SECURED CONVERTIBLE NOTES

In* May 2023,the Company issued $3.3 million aggregate principal amount Original Issue Discount Senior Secured Convertible Debentures (the “Secured Convertible Notes”) in conjunction with the2023* Private Placement (see Note11, “Financing Activities”). The Secured Convertible Notes were issued with a $300 thousand original issue discount. The Secured Convertible Notes are due* November 1, 2024.*

The Secured Convertible Notes* maybe converted or redeemed for a conversion price equal to $1.30 per share (“Conversion Price”) at any time at the election of the holder up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations. Upon issuance, the Secured Convertible Notes were convertible for up to 2,538,464 shares of common stock. As of December 31, 2023,*the Secured Convertible Notes were convertible for up to 1,454,021 shares of common stock.

Beginning* June 1, 2023,the Company was required to start making a monthly redemption of1/18th of the original principal amount of the Secured Convertible Notes. Each monthly redemption reduces the outstanding principle of the Secured Convertible Note by $183 thousand and maybe made in cash or, under limiting conditions, in stock at the election of the Company. Monthly redemption in cash requires a total payment of $193 thousand. Monthly redemption in stock requires the issuance of shares equal to $193 thousand divided by the lower of (i) $1.30 or (ii)90% of the Company’s common stock’s average volume-weighted average price over 10 trading days prior to the redemption. The conditions allowing for redemption in stock havenot* been met through* December 31, 2023*and the Company has made all monthly redemption payments in cash.

The Secured Convertible Notes also provide for a redemption equal to up to 20% of the gross proceeds received by the Company from any financing completed while the Secured Convertible Notes are outstanding. In connection with the2023 Warrant Reprice Transaction (see Note14, “Stockholders’ Equity”), the Company made such a payment totaling $126 thousand in cash against the Secured Convertible Notes.

If any event of default occurs, the outstanding principal amount of the Secured Convertible Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing thereof become immediately due and payable in cash at the holder’s election. After any event of default, the Secured Convertible Notes will also accrue interest at a rate up to 18% per year. The Secured Convertible Notes are secured obligations of the Company including a security interest, a lien upon and a right of set-off against all of the Company’s assets as collateral security. As of* December 31, 2023,*the Secured Convertible Notes were also secured obligations of DERMAdoctor and DERMAdoctor was a guarantor under the Secured Convertible Notes. DERMAdoctor was released of such obligations in connection with the DERMAdoctor Divestiture.

Upon issuance in* May 2023,the lender’s conversion option under the Secured Convertible Notes represented an embedded call option requiring bifurcation as an embedded derivative liability because the common stock underlying the option required stockholder approval before the option could be exercised. The fair value of the embedded derivative was determined to be $209 thousand as of the date of issuance. After stockholder approval of the underlying common stock, the embedded call optionno* longer required liability treatment and was reclassified to equity. The fair value of the embedded derivative liability was determined to be $169 thousand upon stockholder approval. The change of $40 thousand in fair value between the date of issuance and stockholder approval was recorded as a non-cash gain on change in fair value of embedded derivative liability in the consolidated statements of operations. See also Note3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

The lender’s subsequent financing redemption option and certain events of default also represent embedded call options and the Company’s monthly share redemption option represents an embedded put option. The fair value of these options was determined to be immaterial upon issuance and at each subsequent reporting date.

The Company allocated $1.2 million of gross proceeds from the2023 Private Placement to the Secured Convertible Notes.

The difference between the $1.2 million allocated to the Secured Convertible Notes and the $3.3 million aggregate principal amount represent discounts for the portion of proceeds allocated to the embedded derivative liability and the* May 2023Warrants (See Note13,* “Common Stock Warrants”) as well as the $0.3 million original issue discount. The Company also allocated $0.3 million of debt issuance costs to the Secured Convertible Notes.

The discounts and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Secured Convertible Notes, assuming that the Secured Convertible Notes will be redeemed for cash of $193 thousand per month beginning in* June 2023.During the year ended December 31, 2023,the effective interest rate on the Secured Convertible Notes was 173%. During the year ended December 31, 2023,*interest expense recognized, including amortization of the issuance costs and debt discount, was $1.7 million, which was included in other expense, net in the consolidated statements of operations.

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The Secured Convertible Notes are presented as follows as of* December 31, 2023 (*in thousands):

The Secured Convertible Notes, net, are classified as short term in the Company’s consolidated balance sheets.

As of* December 31, 2023,*the Company's contractual maturity of the principal balance of the Secured Convertible Notes was as follows (in thousands):

NOTE*13.* COMMON STOCK WARRANTS

See**Notes2,* “Summary of Significant Accounting Policies”;3, “Fair Value Measurements”;11, “Financing Activities”; and14, “Stockholders’ Equity*”* for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.*

**** December*****2023* Warrants

In* December 2023,in conjunction with the2023* Warrant Reprice Transaction, the Company issued the* December 2023Warrants (the “*** December 2023Warrants**”) exercisable for 2,528,848 shares of common stock for $0.25 per share through* June 21, 2029.*

Upon issuance, the* December 2023Warrants were subject to stockholder approval prior to exercise. Stockholder approval hadnot* occurred as of* December 31, 2023.*These warrants were recorded as a liability at fair value upon issuance and will continue to be recorded as a liability at fair value at each reporting date until stockholder approval occurs.

**** May*****2023* Warrants

In* May 2023,in conjunction with the2023* Private Placement, the Company issued following warrants (combined, the “**** May 2023Warrants**”):

In* December 2023,in conjunction with the2023* Warrant Reprice Transaction, the Company amended all* May 2023Warrants to reduce their exercise prices to $0.25. Immediately after amendment, the following May 2023*Warrants were exercised:

For the amendment in* December 2023,the Company recognized a $0.2 million loss on modification of common stock warrants related to the May 2023*Warrants.

**** November*****2022* Warrants

In* November 2022,in conjunction with the2022* Private Placement, the Company issued following warrants (combined, the “**** November 2022Warrants**”):

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In* May 2023,in conjunction with the2023* Private Placement, the Company amended certain* November 2022*Warrants to reduce their exercise prices from $6.30 to $1.50 as follows:

For the amendment in* May 2023,the Company recognized a $0.1 million loss on modification of common stock warrants related to the November 2022*Warrants.

**** September*****2022* Warrants

In* September 2022,in conjunction with the2022* Warrant Reprice Transaction, the Company issued the* September 2022Warrants (the “*** September 2022Warrants**”) exercisable for 327,860 shares of common stock for $6.30 per share through* September 11, 2028.*

In* May 2023,in conjunction with the2023* Private Placement, the Company amended* September 2022*Warrants exercisable for 238,574 shares of common stock to reduce their exercise prices from $6.30 to $1.50.

For the amendment in* May 2023,the Company recognized a $46 thousand loss on modification of common stock warrants related to the September 2022*Warrants.

**** November*****2021* Warrants

In* November 2021,in conjunction with a private placement transaction, the Company issued the November 2021Warrants (the “*** November 2021Warrants**”) exercisable for 1,071,434 shares of common stock for $18.55 per share through* March 9, 2023.*

In* September 2022,in conjunction with the2022* Warrant Reprice Transaction, the Company amended all* November 2021Warrants to reduce their exercise prices from $18.55 to $6.30 and extend their termination date to September 11, 2028.Immediately after amendment, November 2021*Warrants were exercised for 267,860 shares of common stock.

In* May 2023,in conjunction with the2023* Private Placement, the Company amended* November 2021*Warrants exercisable for 535,716 shares of common stock to reduce their exercise prices from $6.30 to $1.50.

For the amendments in* September 2022and May 2023,the Company recognized a loss on modification of common stock warrants related to the November 2021*Warrants of $1.5 million and $0.1 million, respectively.

**** July*****2020* Warrants

In* July 2020,in conjunction with a private placement transaction, the Company issued the July 2020Warrants (the “*** July 2020Warrants**”) exercisable for 197,105 shares of common stock for $57.75 per share through* January 22, 2026.*

In* September 2022,in conjunction with the2022* Warrant Reprice Transaction, the Company amended certain* July 2020Warrants exercisable for 137,145 shares of common stock to reduce their exercise prices from $57.75 to $6.30. Immediately after amendment, July 2020*Warrants were exercised for 60,000 shares of common stock.

In* May 2023,in conjunction with the2023* Private Placement, the Company amended* July 2020*Warrants exercisable for 77,145 shares of common stock to reduce their exercise prices from $6.30 to $1.50.

For the amendments in* September 2022and May 2023,the Company recognized a loss on modification of common stock warrants related to the July 2020*Warrants of $0.4 million and $14 thousand, respectively.

Summaryof Common Stock Warrant Activity and Outstanding

Activity related to common stock warrants outstanding during the years ended* December 31, 2023and2022* were as follows:

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Common stock warrants outstanding as of* December 31, 2023*were as follows:

Summaryof Common Stock Warrant Liabilities

The following is a reconciliation of the beginning and ending balances for warrant liabilities measured at fair value on a recurring basis (in thousands). See additional information per Note3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions.”

NOTE*14.* STOCKHOLDERS' EQUITY

AuthorizedShare Capital

Under the Company’s Amended and Restated Certificate of Incorporation, as amended, the Company is authorized to issue up to 150,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with rights and preferences as* may*be approved by the Company’s Board of Directors.

PreferredStock

There weretwo series of preferred stock of the Company outstanding during the years ended* December 31, 2023and2022* – the Series B Non-Voting Convertible Preferred Stock (“Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (“Series C Preferred Stock”) (and combined, the “Preferred Stock”). The rights and preferences of the Series B Preferred Stock and Series C Preferred Stock are identical. The Preferred Stock doesnot have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of the Company. Each share of Preferred Stock is convertible into $1,000 of common stock at the conversion price per share applicable at the time of conversion. The Preferred Stock has anti-dilution protection (the “Ratchet”) in the event that the 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 Preferred Stock.

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SeriesB Preferred Stock

The Company issued 15,000 shares of Series B Preferred Stock in* November 2021in connection with a private placement transaction. As of December 31, 2023and2022,* 5,607 and 11,620 shares of Series B Preferred Stock remained outstanding, respectively. As of* December 31, 2023and2022,* outstanding shares of Series B Preferred Stock were convertible into 22,428,000 and 1,847,580 shares of common stock at a conversion price of $0.25 and $6.30, respectively.

In accordance with the Ratchet, the Series B conversion price was reduced as follows during the years ended* December 31, 2023and2022* (see also Notes2, “Summary of Significant Accounting Policies” and3, “Fair Value Measurements”):

Subsequent to* December 31, 2023,on January 29, 2024,the Ratchet of the Series B Preferred Stock expired withno* further impact because greater than 75% of the originally issued 15,000 Series B Preferred Stock had been converted. The Series B Preferred Stock conversion price will remain at $0.25 until all remaining Series B Preferred Stock has been converted.

SeriesC Preferred Stock

We issued 3,250 shares of Series C Preferred Stock in* November 2022in connection with the2022* Private Placement (see Note11, “Financing Activities”). As of* December 31, 2023and2022,* 1,097 and 2,250 shares of Series C Preferred Stock remained outstanding, respectively. As of* December 31, 2023and2022,* outstanding shares of Series C Preferred Stock were convertible into 4,388,000 and 357,750 shares of common stock at a conversion price of $0.25 and$6.30, respectively.

In accordance with the Ratchet, the Series C conversion price was reduced as follows during the years ended* December 31, 2023and2022* (see also Notes2, “Summary of Significant Accounting Policies” and3, “Fair Value Measurements”):

CommonStock

See Notes11, “Financing Activities” and13, “Common Stock Warrants” for a description of common stock and common stock warrant-related transactions during the years ended* December 31, 2023and2022.*

ReverseStock Split

Effective* November 15, 2022,the Company amended its Certificate of Incorporation to effect a1*-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, every35* shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into1 share of common stock. Proportionate voting rights and other rights of common stockholders werenot 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 Preferred Stock and outstanding warrants were adjusted by dividing the number of affected shares of common stock by35 and, as applicable, multiplying the exercise/conversion price by35. 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 this1-for-35 Reverse Stock Split.

NOTE*15.* EQUITY-BASED COMPENSATION

EquityCompensation Plans

In* October 2007,the Company adopted the2007* 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. The2007 Plan expired on* March 15, 2017.Upon expiration, new awards cannot be issued pursuant to the2007* Plan, but outstanding awards continue to be governed by its terms. Stock options granted under the2007 Plan expireno later thanten years from the date of grant. All stock options outstanding under the2007 Plan were fully vested as of* December 31, 2021.*

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In* March 2017,the Company adopted the2017* 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. The2017* Plan doesnot affect awards previously granted under the2007 Plan. Upon adoption, the2017 Plan allowed for awards of up to 66,243 shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on thefirst day of each of the Company’s fiscal years beginning* January 1, 2018through January 1, 2027equal to (i)4% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock as determined by the Board. On March 31, 2023,the number of shares available for future awards under the2017* Plan was increased by 81,417 shares. As of* December 31, 2023,there were 171,424 shares available for future awards under the2017* Plan.

Under the terms of the2017 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, thennot less than 110% of the fair market value of the common stock on the date of grant. The term of awards willnot be longer thanten years or, in the case of ISOs,no longer than five years with respect to holders of more than10% of the Company’s stock. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. The Company issues new shares to satisfy options under the2007 Plan and the2017 Plan.

Summary of Outstanding Equity Awards

The following table summarizes information about the Company’s stock options and restricted stock outstanding at* December 31, 2022,and activity during the year ended December 31, 2023:*

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of* December 31, 2023for options that have an exercise price that is lower than the market price. There wereno stock option awards exercised during the years ended December 31, 2023or2022.*

As of* December 31, 2023,*total unrecognized compensation cost related to unvested stock options and restricted stock was approximately $0.2 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations over the remaining weighted average vesting period of 1.53 years.

EquityAwards 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 Note2, “Summary of Significant Accounting Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.

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During the years ended* December 31, 2023and2022,* the Company granted options to employees and directors to purchase an aggregate of 6,150 and 18,607 shares of common stock, respectively.

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

ExpectedPrice 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.

ExpectedTerm—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-FreeInterest Rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.

DividendYield—The Company hasnot made any dividend payments nor does the Company have plans to pay dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

During each of the years ended* December 31, 2023and2022,* the Company granted 5,148 shares of restricted stock to directors.

For the years ended* December 31, 2023and2022,* the Company recognized stock-based compensation expense of $0.3 million and $0.2 million, respectively, for option awards to employees and directors.

Stock-BasedAwards to Non-Employees

During the year ended* December 31, 2023,the Company granted options to purchase an aggregate of 36,000, shares of common stock to non-employees in exchange for advisory and consulting services. During the year ended December 31, 2022,*the Company didnot grant options to non-employees.

The Company didnot grant restricted stock to non-employees during the years ended* December 31, 2023and2022.*

For the year ended* December 31, 2023,the Company recognized stock-based compensation expense of $40 thousand, as it relates to non-employees. For the year ended December 31, 2022,*the Company recognized a nominal amount of stock-based compensation expense as relates to non-employees.

Summaryof 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):

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NOTE*16.* DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of products sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to. The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.

ProductSales 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 year ended* December 31, 2023 (*in thousands):

The following table presents activities and ending reserve balances for each significant category of discounts and allowance, which constitute variable consideration, for the year ended* December 31, 2022 (*in thousands):

AvenovaSpray Pharmacy Distribution Agreements and Specialty Pharmacies

Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen. The Company has also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program. During each of the years ended* December 31, 2023and2022,* the Company earned $0.1 million in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

Under these product distribution arrangements, the Company had a contract liability balance of $0.7 million and $1.6 million as of* December 31, 2023and2022,* respectively. The contract liability is included in accrued liabilities in the consolidated balance sheets.

Over-the-CounterSales of Avenova Spray

Avenova Spray is offered for sale direct to U.S. customers primarily on Amazon.com, the Company’s website (Avenova.com) and Walmart.com. During the years ended* December 31, 2023and2022,* the revenue generated from Avenova Spray in these channels was $6.1 million and $6.5 million, respectively.

DERMAdoctorBranded Products Distribution Agreements

DERMAdoctor branded products were sold through distribution arrangements withthird parties such as Costco and others. During the years ended* December 31, 2023and2022,* the Company earned $0.7 million and $0.9 million, respectively, in sales revenue for its DERMAdoctor branded products from these distribution agreements.

Under these distribution arrangements, the Company had a contract liability balance of $0.2 million as of each of* December 31, 2023and2022.* The contract liability is included in accrued liabilities in the consolidated balance sheets.

Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture. See additional information in Note21,* “Subsequent Events”.

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NOTE*17.* EMPLOYEE BENEFIT PLAN

The Company has a401(k) plan covering all eligible employees. The Company provides matching contributions equal to 100% of thefirst 3% of compensation deferred, plus 50% of the next 2% of compensation deferred. The Company contributed $122 thousand and $125 thousand to the plan in the years ended* December 31, 2023and2022,* respectively.

NOTE*18.* INCOME TAXES

For the years ended* December 31, 2023and2022,* loss before provision for income taxes consisted of the following (in thousands):

For the years ended* December 31, 2023and2022,* the federal and state income tax provision is summarized as follows (in thousands):

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant items comprising the Company's deferred taxes as of* December 31, 2023and2022* are as follows (in thousands):

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ASC740, Income Taxes, requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely thannot”. Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currentlynot likely to be realized and, accordingly, has provided a valuation allowance.

The valuation allowance increased by $3.6 million and $1.8 million during the years ended* December 31, 2023and2022,* respectively.

Net operating loss and tax credit carryforwards as of* December 31, 2023,*are as follows (in thousands):

A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the below years are as follows (in thousands):

The entire amount of the unrecognized tax benefits wouldnot impact our effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial for the years ended* December 31, 2023and2022.* The Company files income tax returns in the United States and in California. Other jurisdictions arenot significant. The tax years 2019 -2022 remain open in the federal jurisdiction and 2018 -2022 for California. The Company isnot currently under examination by income tax authorities in federal, state or other jurisdictions.

The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:

NOTE*19.* RELATED PARTY TRANSACTIONS

The following table summarizes information about the Company’s related party revenue and cost of goods sold (in thousands):

Related party accounts receivable were $0.2 million as of* December 31, 2023and2022.*

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NOTE*20.* SEGMENT REPORTING

The Company’sCODM, 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.

The Company is managed intwo segments and aggregates its operational and financial information accordingly: (1) Eyecare & Wound Care and (2) Skincare. The Eyecare & Wound Care segment consists primarily of eyecare products sold under the Avenova brand name as well as wound care products sold under the NeutroPhase and PhaseOne brands. The Skincare segment consists of products sold under the DERMAdoctor brand. Subsequent to* December 31, 2023,on March 25, 2024,we closed the DERMAdoctor Divestiture, resulting in the sale of all of our Skincare segment. See additional information in Note21,* “Subsequent Events”.

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

NOTE*21.* SUBSEQUENT EVENTS

On* January 29, 2024,the Ratchet of the Series B Preferred Stock (see Note14,* “Stockholders’ Equity”) expired withno further impact because greater than75% of the originally issued15,000 Series B Preferred Stock had been converted. The Series B Preferred Stock conversion price will remain at $0.25 until all remaining preferred stock has been converted.

On* March 14, 2024,the Company announced that it had entered into a Membership Unit Purchase Agreement with New Age Investments LLC (“New Age”) whereby New Age would acquire 100% of the membership units (the “Membership Units”) of the Company’s wholly owned subsidiary, DERMAdoctor, LLC (“DERMAdoctor”) for $1.1 million in cash, exclusive of any debt (the “DERMAdoctor Divestiture"). The DERMAdoctor Divestiture closed on March 25, 2024.The Company hasnot* yet finalized its accounting but expects to record a net loss on the of sale of DERMAdoctor in thefirst quarter of2024 as a result of the transaction. As discussed further in Notes7, "Goodwill” and8, "Other Intangible Assets”, the Company recorded goodwill, intangible and other asset impairment charges of $2.6 million and $6.7 million, relating to the DERMAdoctor business for the years ended* December 31, 2023and2022,* respectively.

The closing of the DERMAdoctor Divestiture was subject to certain conditions, which included the Company obtaining the consent of the holders (the “Secured Parties”) of the Secured Convertible Notes, to (i) amend the Security Agreement, dated* April 27, 2023 (the “Security Agreement”), to remove the Membership Units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement (the “Security Agreement Amendment”) and (ii) terminate the Subsidiary Guarantee, dated April 27, 2023 (*the “Subsidiary Guarantee”), which DERMAdoctor entered into in connection with the issuance of the Secured Convertible Notes (the “Subsidiary Guarantee Termination”).

On* March 24, 2024,the Company and the Secured Parties entered into a First Amendment to the Security Agreement to effect the Security Agreement Amendment (the “First Amendment”), and a Consent and Release to effect the Subsidiary Guarantee Termination (the “Subsidiary Guarantee Consent”). As consideration for the Secured Parties executing and delivering the First Amendment and the Subsidiary Guarantee Consent, which reduced the collateral available to secure the obligations under the Secured Convertible Notes, the Company provided each Secured Party the option, at the Secured Party’s election, to receive upon the closing of the DERMAdoctor Divestiture either: (i) a new Series D warrant (the “Series D Warrants”) to purchase shares of the Company’s common stock, or (ii) a new unsecured convertible note convertible into shares of common stock (the “Unsecured Convertible Notes”). Based on the Secured Parties’ elections and as a result of the closing of the DERMAdoctor Divestiture, the Company issued: (A) a Series D Warrant to a Secured Party that is exercisable for an aggregate of 1,000,000 shares of common stock and (B) New Notes tofour* (4) Secured Parties that have an aggregate principal amount of*$525,000* or will be convertible into an aggregate of 3,750,000 shares of common stock. Additional information regarding the Series D Warrants and the New Notes is included in the Current Report on Form8-K filed by the Company on* March 25, 2024.*

On* March 24, 2024,the Ratchet of the Series C Preferred Stock (see Note14,* “Stockholders’ Equity”) was further triggered as a result of the Company entering into the First Amendment that provides for the issuance of the Series D Warrants and the Unsecured Convertible Notes, which will have an exercise price and conversion price, respectively, of $0.14 per share. Accordingly. the conversion price of each share of Series C Preferred Stock, which were each $0.25 per share convertible into 4,000 shares of common stock, has been automatically adjusted downward to now be $0.14 per share convertible into 7,143 shares of common stock. Therefore, based on the Series C Preferred Stock currently outstanding, there will be an additional 2,787,841 shares of common stock issuable upon conversion.

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