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Note 14 - Stockholders' Equity
 12 Months Ended
Dec. 31, 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).

 

Reverse Stock Split

 

Effective November 15, 2022, the Company amended its Certificate of Incorporation to effect a 1-for-35 reverse split of its outstanding common stock. The Reverse Stock Split was approved by the Company’s stockholders on November 10, 2022. As a result of the Reverse Stock Split, every 35 shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into 1 share of common stock. Proportionate voting rights and other rights of common stockholders were not affected by the reverse stock split. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share. All stock options outstanding, common stock reserved for issuance under the Company’s equity incentive plans, common stock reserved for issuance under the Series B Preferred Stock and outstanding warrants were adjusted by dividing the number of affected shares of common stock by 35 and, as applicable, multiplying the exercise/conversion price by 35. Except as otherwise specifically noted, all share numbers, share prices, exercise prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 1-for-35 reverse stock split.

 

2022 Warrant Reprice Transaction and September 2022 Warrants

 

On September 9, 2022, the Company entered into the 2022 Warrant Reprice Transaction, which included warrant reprice letter agreements with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants. Pursuant to the terms of the letter agreements, the November 2021 Warrants and certain July 2020 Warrants were amended to: (i) reduce the exercise price; (ii) provide that such warrants would not be exercisable until a later date, which was March 9, 2023; and (iii) in the case of the November 2021 Warrants, extend the termination date to September 11, 2028.

 

As a result of these amendments to the Amended 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 Amended November 2021 Warrants and the Amended July 2020 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

 $3.15  $0.70 

 

The fair value of the Amended November 2021 Warrants and the Amended July 2020 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

 $4.55  $3.50 

 

Additionally, in connection with the 2022 Warrant Reprice Transaction, the Company issued to certain participants in the 2022 Warrant Reprice Transaction that exercised their Amended November 2021 Warrants and their Amended July 2020 Warrants, the September 2022 Warrants to purchase a number of shares of common stock equal to 100% of the number of shares that a participant exercised under its November 2021 Warrant or Amended July 2020 Warrant, as applicable. The September 2022 Warrants are exercisable for an aggregate of 327,860 shares of common stock at an exercise price of $6.30 per share and expire on September 11, 2028.

 

The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $2.1 million. The Company allocated the gross proceeds between the common stock issued for the Amended November 2021 Warrants and the Amended July 2020 Warrants exercised, and the 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 Amended November 2021 Warrants 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 consolidated statements of operations during the year ended December 31, 2022. The remaining $363 thousand was recorded as a reduction of common stock and additional paid in capital in the Company’s consolidated balance sheets.

 

Series C Preferred Stock and Warrants

 

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into the 2022 Private Placement, a private placement transaction with certain accredited investors to sell units that consisted of: (1) 3,250 shares of  Series C Preferred Stock convertible into an aggregate of 516,750 shares of common stock, (2) the Short-Term Warrants exercisable for 515,876 shares of common stock at an exercise price of $6.30 per share, and (3) the Long-Term Warrants exercisable for 515,876 shares of common stock at an exercise price of $6.30 per share. The closing of the 2022 Private Placement was 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. On November 18, 2022, the Company closed the 2022 Private Placement and received gross proceeds of $3.2 million from the sale of the Series C Preferred Stock and the 2022 Warrants.

 

As of December 31, 2022, the 1,031,752 shares of common stock underlying the 2022 Warrants (with 515,876 underlying each of the Short-Term Warrants and the Long-Term Warrants) became exercisable on March 9, 2023 at an exercise price of $6.30 with the Short-Term Warrants expiring on May 20, 2024 and the Long-Term Warrants expiring on November 20, 2024.

 

Series B Preferred Stock and November 2021 Warrants

 

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

 

The November 2021 Warrants were not immediately exercisable upon issuance. In order for the November 2021 Warrants to become exercisable, the Company was required to hold a stockholder meeting to (i) obtain stockholder approval, in accordance with Section 713(a) and (b) of the NYSE American Company Guide, for the issuance of the shares underlying the Series B Preferred Stock and the November 2021 Warrants (the “Share Issuance Proposal”) and (ii) obtain stockholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 150,000,000 shares (the “Authorized Share Increase Proposal”). The Company held a special meeting of stockholders on December 17, 2021 (the “Special Meeting”) at which the Share Issuance Approval was approved by stockholders and, at a subsequent adjournment of the Special Meeting on January 31, 2022, the stockholders approved the Authorized Share Increase Proposal. As a result of these approvals having been given by the stockholders at the Special Meeting, the November 2021 Warrants became exercisable as of January 31, 2022, and will continue to be exercisable for a period of six (6) years from such date.

 

The conversion by the holders of the Series B Preferred Stock was initially subject to approval of the Share Issuance Proposal. Until the Share Issuance Proposal was approved by stockholders at the Special Meeting, the holders of the Series B Preferred Stock were limited in converting their shares to an aggregate of 19.99% of the outstanding shares of common stock immediately prior to the closing of the 2021 Private Placement. As a result of the Company’s stockholders approving the Share Issuance Proposal at the Special Meeting, this limitation upon conversion of Series B Preferred Stock was no longer applicable to the holders as of December 17, 2021. The Series B Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay. The Series B Preferred Stock does, however, have anti-dilution protection 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 Series B Preferred Stock.

 

The Company allocated the net proceeds 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.

 

In connection with the issuance of the Series B Preferred Stock, the Company recorded a beneficial conversion feature of $0.7 million as a discount to Series B Preferred Stock and an increase to additional paid in capital. The Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statements of operations upon approval of the Share Issuance Proposal in the fourth quarter of 2022.

 

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 consolidated statements of operations 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 consolidated balance sheets.

 

Each share of the Series B Preferred Stock that the Company issued in the 2021 Private Placement had a purchase price of $1,000 per share and was initially convertible at a conversion price of $0.40 into 2,500 shares of common stock, or an aggregate of 37,500,000 shares of common stock (which does not account for the Reverse Stock Split). On September 9, 2022, the 2022 Warrant Reprice Transaction provided for amendments to certain common stock purchase warrants to lower their exercise price to $0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $0.18 per share, which exercise price was lower than the then effective $0.40 conversion price of the Series B Preferred Stock (which does not account for the Reverse Stock Split). This triggered the Series B Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $0.18, and each outstanding share of Series B Preferred Stock became convertible into 5,556 shares of common stock (which does not account for the Reverse Stock Split). As a result of the change, the Company recorded a $5.7 million deemed Series B Preferred Stock dividend. The deemed dividend 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

 $8.05 

 

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

 $2.10 

 

Thereafter, the Company effected the Reverse Stock Split, which resulted in an automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $6.30, and each outstanding shares of Series B Preferred Stock became convertible into 159 shares of common stock.

 

As of December 31, 2022, 3,380 shares of the Series B Preferred Stock had been converted into common stock. Each of the remaining 11,620 shares of the Series B Preferred Stock as of December 31, 2022, is currently convertible into 159 shares of common stock at a conversion price of $6.30.

 

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 (or $6.30 to adjust for the subsequent Reverse Stock Split) 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. As of December 31, 2022, the 803,574 shares of common stock underlying the November 2021 Warrants, as amended, became exercisable on March 9, 2023.

 

Common Stock

 

May 2021 At the Market Offering

 

In the second quarter of 2021, the Company established an at-the-market offering and equity program with Ladenburg (the “2021 ATM Program”). 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.

 

Common Stock Warrants

 

TLF Bio Innovation 2021 Warrants

 

On January 15, 2021, TLF Bio Innovation was granted warrants exercisable for 15,000 shares of common stock (or 429 shares of common stock if accounting for the subsequent Reverse Stock Split) with an exercise price of $0.6718 (or $23.5130 if accounting for the subsequent Reverse Stock Split) (the “TLF Warrants”). The TLF Warrants will expire five years after their issuance. The TLF Warrants are classified as equity.

 

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

 

As of December 31, 2022, there were no 2019 Domestic Warrants, 2019 Foreign Warrants, 2019 Ladenburg Warrants or July 2020 Warrants (each as defined below) outstanding. Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split. 

 

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 2019 Domestic Warrants were issued with an exercise price of $1.15 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.

 

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 consolidated statements of operations during the period. The remaining $0.3 million was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.

 

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 agreement, 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 exercisable nine months after their issuance, for an aggregate of 6,898,566 shares of common stock. The July 2020 Warrants have an exercise price of $1.65 per share and will expire 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.

 

2019 Ladenburg Warrants

 

Ladenburg served as the placement agent for the transaction related to the 2019 Purchase Agreement in exchange for a commission representing six percent (6%) of the gross proceeds, totaling $0.3 million, and common stock purchase warrants exercisable for 167,942 shares of common stock (or 4,799 shares of common stock as adjusted for the subsequent Reverse Stock Split) with an expiration date of August 8, 2024 (the “2019 Ladenburg Warrants”). In addition, the Company reimbursed the Placement Agent $60 thousand for certain expenses. The Company also incurred and paid other offering costs of $0.3 million.

 

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 consolidated balance sheets. See Note 13, “Warrant Liability” for a discussion of the key assumptions used to value the 2019 Ladenburg Warrants.

 

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 (or $34.65 to adjust for the subsequent Reverse Stock Split) 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.

 

June 2019 Private Placement and June 2019 Warrants

 

As of December 31, 2022, there were no June 2019 Warrants (as defined below) outstanding. Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split.

 

During the second quarter of 2019, the Company entered into a private placement agreement to sell 1,371,427 shares of common stock and 1,371,427 common stock purchase warrants exercisable for 1,371,427 shares of common stock (the “June 2019 Warrants”) for an aggregate subscription price of $2.4 million. Three accredited investors, Messrs. Xiao Rui Liu, Hai Dong Pang and Ping Huang, subscribed to the private placement for $1.0 million, $0.4 million and $1.0 million, respectively. China Kington served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds, totaling $0.1 million. The Company also paid other offering costs of $27 thousand.

 

The June 2019 Warrants were issued with an exercise price of $0.87 and an expiration date of June 17, 2020. The June 2019 Warrants were callable by the Company if the closing price of the Company’s common stock, as reported on the NYSE American, was $1.00 or greater.

 

During the first quarter of 2020, a total of 228,571 June 2019 Warrants were exercised, resulting in gross proceeds of $199 thousand. The Company paid China Kington a fee of $12 thousand, or six percent (6%) of the gross proceeds, for brokering the exercise transaction.

 

During the second quarter of 2020, a total of 571,428 June 2019 Warrants were exercised, resulting in gross proceeds of $497 thousand. The Company paid China Kington a fee of $29 thousand, or six percent (6%) of the gross proceeds, for brokering the exercise transaction. Also, during the second quarter of 2021, all remaining 571,428 June 2019 Warrants expired unexercised.

 

October 2015 Warrants

 

As of December 31, 2022, there were no October 2015 Warrants (as defined below) outstanding. Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split.

 

In the fourth quarter of 2015, the Company issued 442,802 common stock purchase warrants exercisable for 442,802 shares of common stock in connection with a public offering (the “October 2015 Warrants”). The warrants were issued with an exercise price of $5.00 and an expiration date of October 27, 2020. In February 2016 and May 2019, the exercise price of outstanding October 2015 Warrants was reduced to $1.81 and $0.2061 per share, respectively, pursuant to price protection provisions of the warrants. Also during the fourth quarter of 2021, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $5 thousand.

 

During the fourth quarter of 2020, all remaining 15,320 October 2015 Warrants expired unexercised.

 

March 2015 Warrants

 

As of December 31, 2022, there were no March 2015 Warrants (as defined below) outstanding. Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split.

 

In the first quarter of 2015, the Company issued 649,133 common stock purchase warrants exercisable for 649,133 shares of common stock in connection with a private placement offering (the “March 2015 Warrants”). The exercise price of individual March 2015 Warrants varied between $15.00 and $16.25 per share at the time of issuance. The Company issued 278,200 of the March 2015 Warrants with an expiration date of March 6, 2020, and the remaining 370,933 March 2015 Warrants with an expiration date of September 6, 2015. In October 2015, in connection with a separate financing event, the exercise price of all outstanding March 2015 Warrants was reduced to $5.00 per share and the expiration date of all outstanding warrants expiring on September 6, 2015, was extended to March 6, 2020. In February 2016 and May 2019, the exercise price of all outstanding July 2011 Warrants was reduced to $1.81 and $0.2061 per share, respectively, pursuant to price protection provisions of the warrants.

 

During the first quarter of 2020, a total of 70,000 March 2015 Warrants were exercised, resulting in gross proceeds of $14 thousand. Also in the first quarter of 2020, all remaining 7,419 March 2015 Warrants expired unexercised.

 

July 2011 Warrants

 

As of December 31, 2022, there were no July 2011 Warrants (as defined below) outstanding. Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split.

 

In the third quarter of 2011, the Company issued 139,520 common stock purchase warrants exercisable for 139,520 shares of common stock in connection with a registered direct financing (the “July 2011 Warrants”). The July 2011 Warrants were issued with an exercise price of $33.25 and an expiration date of July 5, 2016. In October 2015, in connection with a separate financing event, the exercise price of outstanding July 2011 Warrants was reduced to $5.00 per share and the expiration date extended to March 6, 2020. In February 2016 and May 2019, the exercise price of outstanding July 2011 Warrants was reduced to $1.81 and $0.2061 per share, respectively, pursuant to price protection provisions of the warrants.

 

In March 2020, a total of 35,107 July 2011 Warrants expired unexercised.

 

The details of all outstanding warrants as of December 31, 2022 were as follows:

 

  

Warrants
(in thousands)

  

Weighted-

Average

Exercise

Price

 

Outstanding at December 31, 2020

  201  $57.13 

Warrants granted

  1  $23.51 

Warrants expired

  —  $— 

Outstanding at December 31, 2021

  202  $57.13 

Warrants granted

  2,431  $8.18 

Warrants exercised

  (327

)

 $6.30 

Warrants expired

  —

 

 $— 

Outstanding at December 31, 2022

  2,306  $7.70