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Note 14 - Stockholders' Equity
 9 Months Ended
Sep. 30, 2022
Notes to Financial Statements  
Stockholders' Equity Note Disclosure [Text Block]

NOTE 14. STOCKHOLDERS’ EQUITY

 

Common Stock and Preferred Stock

 

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

 

2022 Warrant Reprice Transaction and September 2022 Warrants

 

On September 9, 2022, the Company entered into warrant reprice letter agreements with each of the holders of the November 2021 Warrants (as defined below) and certain holders of the July 2020 Warrants (as defined below) (the “2022 Warrant Reprice Transaction”). 

 

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

 

  

November 2021

Warrants

  

July 2020

Warrants

 

Expected price volatility

  79.6

%

  79.6

%

Expected term (in years)

  5.4   3.4 

Risk-free interest rate

  3.43

%

  3.58

%

Dividend yield

  0.00

%

  0.00

%

Weighted-average fair value of warrants

 $0.09  $0.02 

 

The fair value of the warrants was determined to be $5.2 million immediately after the modification in accordance with the following key assumptions:

 

  

November 2021

Warrants

  

July 2020

Warrants

 

Expected price volatility

  79.6

%

  79.6

%

Expected term (in years)

  6.0   3.4 

Risk-free interest rate

  3.43

%

  3.58

%

Dividend yield

  0.00

%

  0.00

%

Weighted-average fair value of warrants

 $0.13  $0.10 

 

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

 

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

 

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

 

Unissued Series C Preferred Stock and Warrants

 

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with certain accredited investors to sell units that will consist of: (1) a newly designated Series C Non-Voting Convertible Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), (2) a new short-term Series A-1 warrant to purchase common stock that will be exercisable for a period of eighteen (18) months after the date of issuance, and (3) a new long-term Series A-2 warrant to purchase common stock that will be exercisable for a period of six (6) years after the date of issuance (collectively, the “2022 Private Placement”). The closing of the 2022 Private Placement is subject to receiving certain stockholder approvals (as obtained on November 10, 2022), effecting the Reverse Stock Split, as well as the satisfaction of other customary closing conditions. Upon the satisfaction of the conditions and the closing of the 2022 Private Placement, we expect to receive gross proceeds of $3.3 million from the sale of the units. For additional information regarding the 2022 Private Placements, see the Company’s Current Report on Form 8-K filed with the SEC on September 13, 2022.

 

Series B Preferred Stock and November 2021 Warrants

 

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

 

Each share of the Series B Preferred Stock that we issued in the Private Placement has a purchase price of $1,000 per share and was initially convertible at a conversion price of $0.40 into 2,500 shares of common stock, or an aggregate of 37,500,000 shares of common stock. The conversion price was subsequently adjusted to $0.18 as a result of the 2022 Warrant Reprice Transaction as described further below.

 

The Series B Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay. The Certificate of Designation of Preferences, Rights and Limitations for the Series B Preferred Stock does, however, have anti-dilution protection in the event that we sell or grant any common stock or any other securities of our Company, subject to certain limited exceptions, that would entitle the holder thereof to acquire common stock at an effective price per share that is lower than the then applicable conversion price of the Series B Preferred Stock. This anti-dilution protection was triggered in the third quarter of 2022 as a result of the 2022 Warrant Reprice Transaction as described further below.

 

The Company allocated the net proceeds from the 2021 Private Placement between the Series B Preferred Stock and the November 2021 Warrants by applying the residual fair value methodology. The Company first allocated $14.2 million to the November 2021 Warrants, with the residual amount allocated to the Series B Preferred Stock. See Note 13, “Warrant Liability” for further discussion of the key assumptions used to value the November 2021 Warrants.

 

At the time of issuance, the Company recorded a beneficial conversion feature of $0.7 million as a discount to the Series B Preferred Stock and an increase to additional paid in capital. The Company fully amortized the discount related to the beneficial conversion feature as a deemed dividend in the condensed consolidated statements of operations and comprehensive loss upon approval of certain stockholder proposals in the fourth quarter of 2021.

 

The Company incurred total issuance costs of $1.7 million in conjunction with the 2021 Private Placement. The Company allocated $1.6 million of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the year ended December 31, 2021. The remaining $0.1 million was recorded as a reduction of Series B Preferred Stock in the Company’s condensed consolidated balance sheets.

 

On September 9, 2022, the 2022 Warrant Reprice Transaction provided for amendments to certain common stock purchase warrants to lower their exercise price to $0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $0.18 per share, which exercise price was lower than the then effective $0.40 conversion price of the Series B Preferred Stock. This triggered the Series B Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $0.18, and each outstanding share of Series B Preferred Stock became convertible into 5,556 shares of common stock. As a result of the change, the Company recorded a $5.7 million deemed Series B Preferred Stock dividend. The deemed dividend is recorded as a reduction to income available to common shareholders in the basic earnings per shares (EPS) calculation. In accordance with ASC 820, the deemed dividend was measured as the difference between (1) the fair value of the Series B Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and (2) the fair value of the Series B Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature). The fair value of the Series B Preferred Stock was determined to be $6.9 million immediately prior the conversion price adjustment in accordance with the following key assumptions:

 

Expected price volatility

  79.6

%

Expected term (in years)

  1.3 

Risk-free interest rate

  3.64

%

Dividend yield

  0.00

%

Weighted-average fair value of warrants

 $0.23 

 

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

 

Expected price volatility

  79.6

%

Expected term (in years)

  1.3 

Risk-free interest rate

  3.64

%

Dividend yield

  0.00

%

Weighted-average fair value of warrants

 $0.06 

 

As of September 30, 2022, 3,380 shares of the Series B Preferred Stock had been converted into 8,450,000 shares of common stock, which occurred at a conversion price of $0.40 into 2,500 shares of common stock. Each of the remaining 11,620 shares of the Series B Preferred Stock as of September 30, 2022, is currently convertible into 5,556 shares of common stock at a conversion price of $0.18.

 

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

 

2019 Domestic Warrants, 2019 Foreign Warrants, 2019 Ladenburg Warrants and July 2020 Warrants  

 

In the third quarter of 2019, the Company entered into a purchase agreement (the “2019 Purchase Agreement”) for the sale of (i) 4,198,566 shares of common stock and (ii) 4,198,566 common stock purchase warrants exercisable for 4,198,566 shares of common stock (the “2019 Domestic Warrants”) for gross proceeds of $4.2 million. The Company simultaneously entered into a purchase agreement for the sale of (i) 2,700,000 shares of Series A Non-Voting Convertible Preferred Stock and (ii) 2,700,000 common stock purchase warrants exercisable for 2,700,000 shares of common stock (the “2019 Foreign Warrants”) for gross proceeds of $2.7 million. The 2019 Domestic Warrants were issued with an exercise price of $1.15 per share and an expiration date of February 13, 2025.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

May 2021 At-the-Market Offering

 

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

 

TLF Bio Innovation Warrants

 

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

 

The details of all outstanding warrants as of September 30, 2022 were as follows:

 

  

Warrants
(in thousands)

  

Weighted-

Average

Exercise

Price

 

Outstanding at December 31, 2021

  7,082  $1.63 

Warrants granted

  37,500  $0.53 

Warrants exercised

  (11,475

)

 $0.18 

Warrants modified and not exercised

  (30,825

)

 $0.18 

Outstanding at September 30, 2022

  2,282  $1.59 

 

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