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Note 2 - Summary of Significant Accounting Policies | 6 Months Ended
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Jun. 30, 2023
Notes to Financial Statements |
Significant Accounting Policies [Text Block] | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars. In management’s opinion, the unaudited condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. Principles of Consolidation The accompanying consolidated financial statements include the accounts of NovaBay Pharmaceuticals, Inc. and its wholly-owned subsidiary, DERMAdoctor, LLC. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, contract liabilities related to product sales such as product returns, assumptions for valuing warrants, assumptions for valuing derivative liabilities, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other contingencies. These estimates are based on management’s best estimates and judgment. Actual results may differ from these estimates. Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions, judgments and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Unaudited Condensed Consolidated Interim Financial Information The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only recurring adjustments, necessary for a fair presentation. The year-end condensed consolidated balance sheet data was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. The unaudited condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period. The condensed consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023. Change in Accounting and Revision of Prior Period Financial Statements During the third quarter of 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. The Company began expensing these fees as incurred as product cost of goods sold in the Company’s condensed consolidated statements of operations. The Company previously recorded revenue net of these fees. The Company believes that making this change is appropriate and preferable as it is more consistent with the practices of comparable companies as the Company increasingly focuses on commercial growth in its direct to consumer on-line channels. Changes to prior period amounts presented in this report have been made to conform to the current period presentation. See additional information under “Revenue Recognition” below. The changes had no impact on operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statements of operations in the periods presented in this report or in previously issued annual and quarterly financial statements. The changes also did not impact cash or ending cash balances in the Company’s unaudited condensed consolidated balance sheets in the periods presented in this report or in previously issued annual and quarterly financial statements. While reviewing its accounting policy for fulfillment fees during the third quarter of 2022, the Company identified an error in its previously issued financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. During the third quarter of 2022, the Company concluded that these commissions relate to sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s unaudited condensed consolidated statements of operations. The identified error impacted the Company’s previously issued 2022 first and second quarter condensed consolidated financial statements, as well as the 2021 annual consolidated financial statements. Management believes that the impact of these adjustments to correct such error is immaterial to the previously issued consolidated financial statements, based on an evaluation of both quantitative and qualitative factors. However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation. See additional information under “Revenue Recognition” below. The revisions had no impact on operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statements of operations in the periods presented in this report or in previously issued annual consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual consolidated financial statements. Cash, Cash Equivalents, and Restricted Cash The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of June 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents were held in a major financial institution in the United States. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):
|  | June 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Cash and cash equivalents |  | $ | 4,414 |  |  | $ | 5,362 |
Restricted cash included in other assets |  |  | 476 |  |  |  | 484 |
Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows |  | $ | 4,890 |  |  | $ | 5,846 |
The restricted cash amount included in other assets on the condensed consolidated balance sheets represents amounts held as certificates of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord. Concentrations of Credit Risk and Major Partners Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a major financial institution in the United States. The Company has a significant amount of its cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows. During the three and six months ended June 30, 2023 and 2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com. During the three and six months ended June 30, 2023 and 2022, revenues from significant product categories were as follows (in thousands):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Avenova Spray |  | $ | 1,758 |  |  | $ | 2,001 |  |  | $ | 3,695 |  |  | $ | 3,840 |
DERMAdoctor |  |  | 1,076 |  |  |  | 752 |  |  |  | 1,861 |  |  |  | 1,795 |
NeutroPhase |  |  | 1,043 |  |  |  | 509 |  |  |  | 1,043 |  |  |  | 657 |
Other products |  |  | 722 |  |  |  | 398 |  |  |  | 1,117 |  |  |  | 635 |
Total product revenue, net |  |  | 4,599 |  |  |  | 3,660 |  |  |  | 7,716 |  |  |  | 6,927 |
Other revenue, net |  |  | 11 |  |  |  | 2 |  |  |  | 18 |  |  |  | 8 |
Total sales, net |  | $ | 4,610 |  |  | $ | 3,662 |  |  | $ | 7,734 |  |  | $ | 6,935 |
During the three months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 61% and 69% of total Avenova Spray net revenue, respectively. During the six months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 68% and 75% of total Avenova Spray net revenue, respectively. No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three and six months ended June 30, 2023 or 2022. As of June 30, 2023 and December 31, 2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:
|  | June 30, |  |  | December 31, |
Major distribution partner |  | 2023 |  |  | 2022 |
Avenova Spray Pharmacy Distributor A |  |  | 28 | % |  |  | 11 | %
Avenova Spray Pharmacy Distributor B |  |  | 27 | % |  |  | 30 | %
Major U.S. Retailer A |  |  | * | % |  |  | 15 | %
* Less than 10% The Company relies on seven contract manufacturers to produce its products. The Company does not own any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Contract manufacturers may or may not be able to meet the Company’s needs with respect to timing, quantity or quality. In particular, it is possible that the Company may suffer from unexpected delays in light of the global supply chain issues. Fair Value of Financial Assets and Liabilities The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, convertible notes, derivative liabilities, warrant liabilities, and contingent consideration. The Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Convertible Notes (as defined below) entered into on April 27, 2023 are carried at cost, which management believes approximates fair value. Additionally, the derivative liability related to certain embedded features contained within the Convertible Notes, restricted cash, warrant liabilities, and contingent consideration are carried at fair value. The Company follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. There are three levels of inputs that may be used to measure fair value: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Allowance for 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. Management recorded a reserve for allowance for credit losses of $3 thousand and $19 thousand as of June 30, 2023 and December 31, 2022, 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 the first-in, first-out method. At June 30, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $446 thousand and $499 thousand, respectively. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures. Leasehold improvements are amortized over the lease term. The costs of normal maintenance, repairs, and minor replacements are expensed as incurred. Goodwill and Indefinite-Lived Intangible Assets Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired. The Company did not record any goodwill or indefinite-lived asset impairment charges during the three and six months ended June 30, 2023 or 2022. Valuation of Contingent Consideration Resulting from a Business Combination In connection with certain acquisitions, including the DERMAdoctor Acquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified milestone events. The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, the Company revalues these obligations and records increases or decreases in the fair value within the consolidated statement of operations until such time as the specified milestone achievement period is complete. Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period. Actual results may differ from estimates. DERMAdoctor Acquisition milestone events consist of financial targets for calendar years 2022 and 2023. The financial target was not met for the calendar year 2022. Additionally, we do not expect the financial target to be met for the calendar year 2023. As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of June 30, 2023 and December 31, 2022. This amount is subject to change in the event that there are changes to our expectations and related valuation assumptions, which are valued using Level 3 fair value inputs. Long-Lived Assets The Company’s intangible assets that do not have indefinite lives (primarily trade secrets / product formulations) are amortized over their estimated useful lives. All of the Company’s intangible assets subject to amortization and other long-lived assets, are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the consolidated statements of operations. The Company did not record any long-lived asset impairments during the three and six months ended June 30, 2023 or 2022. Leases At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received. The Company has elected to combine lease and non-lease components as a single component for all leases in which it is a lessee or a lessor. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the condensed consolidated balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. Revenue Recognition Revenue is recognized from the sale of goods in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration which the Company expects to receive. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:
| i. | identify the contract(s) with a customer;
| ii. | identify the performance obligations in the contract;
| iii. | determine the transaction price;
| iv. | allocate the transaction price to the performance obligations in the contract; and
| v. | recognize revenue when (or as) the entity satisfies performance obligations.
Revenue is generated through the Company’s webstores, Avenova.com and DERMAdoctor.com, for Avenova and DERMAdoctor products. Such direct to consumer sales are recognized upon fulfillment, which generally occurs upon delivery of the related products to a third-party carrier. Shipping and handling costs are expensed as incurred and included in product cost of goods sold in the consolidated statements of operations. The Company presents revenue net of sales taxes and refunds. Revenue generated through third-party online retailers, including Amazon, is recognized when control of the goods is transferred to the customer, which generally occurs upon delivery of the products to a third-party carrier. The Company pays third-party online retailers advertising & promotion fees, selling commissions and fulfillment fees. Advertising & promotion fees are expensed as incurred as sales and marketing expenses within operating expenses in the consolidated statements of operations. Prior to the third quarter of 2022, the Company recorded revenue net of selling commissions and fulfillment fees. Beginning in the third quarter of 2022, as further described below, the Company began expensing selling commissions as sales and marketing expenses in the consolidated statements of operations and fulfillment fees as product cost of goods sold in the consolidated statements of operations. Prior to the third quarter of 2022, to determine its accounting for fulfillment fees, the Company evaluated principal versus agent considerations with respect to the obligation to ship its product to the customer. The Company assessed whether the nature of the Company’s obligation is as a principal in providing the fulfillment service or as an agent in promising to arrange for a third party to provide the fulfillment service. The Company concluded that it is an agent with respect to the shipping service as the Company does not control the service itself and, therefore, its obligation is that of a promise to arrange for the service. This determination involved significant judgement. In accordance with this conclusion, prior to the third quarter of 2022, the Company recorded revenue net of fulfillment fees. Beginning in the third quarter of 2022, the Company made an accounting policy change election, as a practical expedient, to account for the shipping fees as a fulfillment activity and began expensing them as incurred within product cost of goods sold in the Company’s consolidated statements of operations. Management believes the resulting accounting changes are preferable as they conform the Company’s practice to a majority of comparable filers and other similar sales channels. Changes to amounts presented for prior periods have been made to conform to these changes. These changes did not impact operating loss, net loss or loss per share in the Company’s condensed consolidated statements of operations in the periods presented in this report or in previously issued annual consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual consolidated financial statements. Prior to the third quarter of 2022, the Company also recorded revenue net of selling commissions. During the third quarter of 2022, the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s consolidated statements of operations. The Company determined that its treatment prior to the third quarter of 2022 was an error. The identified error impacted the Company's previously issued 2022 and 2021 quarterly, and 2021 and 2020 annual consolidated financial statements. Management believes that the impact of this error is immaterial to the previously issued consolidated financial statements, based on an evaluation of both quantitative and qualitative factors. However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation as outlined below. The revisions had no impact on operating loss, net loss or net loss per share in the Company’s condensed consolidated statements of operations in the periods presented in this report or in previously issued annual consolidated financial statements. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual consolidated financial statements. Financial statement line items included in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 were adjusted for the above changes as follows (in thousands, except per share amounts):
|  | Three Months Ended June 30, 2022 |  |  | Six Months Ended June 30, 2022 |
|  | As Previously Reported |  |  | Selling Commissions |  |  | Fulfillment Fees |  |  | As Revised |  |  | As Previously Reported |  |  | Selling Commissions |  |  | Fulfillment Fees |  |  | As Revised |
Sales |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product revenue, net |  | $ | 3,043 |  |  | $ | 288 |  |  | $ | 329 |  |  | $ | 3,660 |  |  | $ | 5,666 |  |  | $ | 586 |  |  | $ | 675 |  |  | $ | 6,927 |
Product cost of goods sold |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product cost of goods sold |  |  | 1,495 |  |  |  | - |  |  |  | 329 |  |  |  | 1,824 |  |  |  | 2,608 |  |  |  | - |  |  |  | 675 |  |  |  | 3,283 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sales and marketing |  |  | 1,752 |  |  |  | 288 |  |  |  | - |  |  |  | 2,040 |  |  |  | 3,439 |  |  |  | 586 |  |  |  | - |  |  |  | 4,025 |
Net loss |  |  | (2,155 | ) |  |  | - |  |  |  | - |  |  |  | (2,155 | ) |  |  | (2,266 | ) |  |  | - |  |  |  | - |  |  |  | (2,266 | )
Net loss per share attributable to common stockholders (basic and diluted) |  |  | (1.43 | ) |  |  | - |  |  |  | - |  |  |  | (1.43 | ) |  |  | (1.54 | ) |  |  | - |  |  |  | - |  |  |  | (1.54 | )
The Company also generates Avenova Spray revenue through major pharmacy distribution partners. Product supply of Avenova Spray is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon delivery to the distributor on a “sell-in” basis. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, and product returns. The Company derives its rate of return and other contract liabilities from historical data and updates its assumptions quarterly. Payment for product supply is typically due 30 days after control transfers to the distributor. Revenue for products sales to Costco is recognized upon transfer of control at the amount of consideration that the Company expects to be entitled to, generally upon delivery to Costco. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to reversal, including discounts and product returns. The Company derives its rate of return from historical data and updates its return rate assumption quarterly. Payment for product supply is typically due 30 days after control transfers to Costco. Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer. Revenue for product sales to other retailers is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the products to a third-party carrier, net of estimated future product returns. The Company may be required to defer recognition of revenue for upfront payments until it performs its obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt. Deferred revenue was $4 thousand as of June 30, 2023 and December 31, 2022, which is recorded within Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets. Cost of Goods Sold Cost of goods sold includes third-party manufacturing costs, shipping and handling costs, third-party fulfillment fees, and other costs associated with products sold. Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value. Research and Development Costs The Company charges research and development costs to expense as incurred. These costs include all costs associated with research, development and regulatory activities, including submissions to the FDA. Patent Costs Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the condensed consolidated statements of operations. Advertising Costs Advertising costs are expensed in the period in which the costs are incurred. Advertising costs are included in sales and marketing expenses in the condensed consolidated statements of operations. Advertising expenses were $0.3 million and $0.4 million for the three months ended June 30, 2023 and 2022, respectively. Advertising expenses were $0.6 million and $1.0 million for the six months ended June 30, 2023 and 2022, respectively. Stock-Based Compensation The Company’s stock-based compensation includes grants of stock options and RSUs to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s unaudited condensed consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes option pricing model. See Note 13, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for RSUs issued to employees and non-employees (directors, consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance. Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized. Common Stock Warrants The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. The Company classifies as equity any contracts 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 assets or liabilities any contracts that (i) require net-cash settlement, (ii) give the counterparty a choice of net-cash physical settlement or net-share settlement or (iii) do not become exercisable until the occurrence of a contingent event. For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the condensed consolidated statements of operations. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate. These values are subject to a significant degree of management’s judgment. Net Loss per Share The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”). Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive. The following table sets forth the calculation of basic EPS and diluted EPS (in thousands, except per share amounts):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
Numerator |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net loss |  | $ | 2,036 |  |  | $ | (2,155 | ) |  | $ | (3,775 | ) |  | $ | (2,266 | )
Less: Retained earnings reduction due to preferred stock down round feature triggered |  |  | (1,996 | ) |  |  | - |  |  |  | (1,996 | ) |  |  | - |
Net loss attributable to common stockholders (basic and diluted) |  | $ | (4,032 | ) |  | $ | (2,155 | ) |  | $ | (5,771 | ) |  | $ | (2,266 | )
Denominator |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares of common stock outstanding (basic and diluted) |  |  | 3,176 |  |  |  | 1,507 |  |  |  | 2,609 |  |  |  | 1,469 |
Net loss per share (basic and diluted) |  | $ | (1.27 | ) |  | $ | (1.43 | ) |  | $ | (2.21 | ) |  | $ | (1.54 | )
For the three and six months ended June 30, 2023 and 2022, Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Convertible Preferred Stock (the “Series C Preferred Stock”) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted” basis would have been anti-dilutive. The Series B Preferred Stock and Series C Preferred Stock were considered anti-dilutive because such securities did not have a contractual obligation to participate in losses of the Company. The following outstanding preferred stock, stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive (in thousands):
|  | As of June 30, |
|  | 2023 |  |  | 2022 |
Series B Preferred Stock |  |  | 7,050 |  |  |  | 830 |
Series C Preferred Stock |  |  | 845 |  |  |  | — |
Stock options |  |  | 115 |  |  |  | 127 |
Stock warrants |  |  | 7,382 |  |  |  | 1,274 |
|  |  | 15,392 |  |  |  | 2,231 |
Recent Accounting Pronouncements For information regarding recent accounting pronouncements that could affect our business, results of operations, financial condition, and liquidity, see Note 2, “Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023. The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position, results of operations and cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 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. ASU 2016-13 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 did not have a material impact on the Company’s condensed consolidated financial statements.

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