VIA EDGAR
January 7, 2011
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-3628
| Re: | NovaBay Pharmaceuticals, Inc. Form 10-K for the Fiscal Year Ended December 31, 2009 Filed March 30, 2010 File No. 001-33678 |
Dear Mr. Rosenberg:
On behalf of NovaBay Pharmaceuticals, Inc. (“NovaBay”) we are responding to comments received from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated December 14, 2010, with respect to NovaBay’s Form 10-K listed above (the “Comments”). The numbering of the paragraphs below corresponds to the numbering of the Comments, which for the Staff’s convenience have been incorporated into this response letter.
Our Target Indications and Product Candidates, page 4
1. We note that you have a collaboration and license agreement with Alcon and a collaboration agreement with Galderma. With respect to your agreement with Alcon, please provide draft disclosure for future filings describing the range of royalty rates that may be payable to you and the term of the agreement. With respect to your agreement with Galderma, please provide draft disclosure for future filings describing the range of royalty rates that may be payable to you, aggregate milestones payable under the agreement, and the term and termination provisions of the agreement.
Response:
Alcon agreement:
We filed a redacted copy of our collaboration and licensing agreement with Alcon as an exhibit to our registration statement on Form S-1/A, as filed with the SEC on March 30, 2007, and were granted confidential treatment related to the royalty rates that may be payable to us in the future due to the competitive disadvantage this would place on both NovaBay and our partner if this information were made public. Based on this we do not list the royalty rates in our public filings.
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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On November 4, 2010, we entered into an amended agreement with Alcon that extends the term of that agreement. Pursuant to this amendment, we will be adding the following wording to our Form 10-K for the fiscal year ended December 31, 2010:
“We amended this agreement on November 4, 2010 to extend the funding term of the agreement through December 31, 2015. The amendment also provides a termination provision that requires written notice not less than six (6) months in advance of the next funding date.”
Galderma agreement:
We filed a redacted copy of our collaboration and licensing agreement with Galderma as an exhibit to our quarterly report on Form 10-Q/A for the quarter ended March 31, 2009, as filed with the SEC on August 4, 2009, and were granted confidential treatment related to the royalty rates and aggregate milestones that may be payable to us in the future due to the competitive disadvantage this would place on both NovaBay and our partner if this information were made public.. Based on this, we do not list the potential milestones or royalty rates in our public filings.
Pursuant to the term and termination provisions of the agreement, we plan to add the following paragraph to our Form 10-K for the fiscal year ended December 31, 2010:
“The term of the agreement continues until all royalty obligations on behalf of each Party have expired. Galderma has the right to terminate the agreement in its entirety upon six months’ written notice, or terminate portions of the agreement upon 60 days’ notice, subject to certain provisions. Both parties have the right to terminate the agreement for breach upon 60 days’ notice.”
Intellectual Property, page 7
2. We note that you have one issued foreign patent in China, Hong Kong, Israel, India, Mexico and South Korea. Please provide proposed disclosure for future filings describing the subject matter of this patent and the expiration date of the patent.
Response:
In response to this query we are planning to expand the detail provided as follows:
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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“We are the assignee of record of four issued patents in the U.S. and eight issued patents in foreign countries. In addition to our issued patents, we own or are the exclusive worldwide licensee of 24 patent applications in various stages of prosecution in the U.S. and 56 applications pending in foreign countries and regions including Canada, China, Europe, India, and Japan. Additional applications will enter the foreign national phase once they pass through the international phase of the Patent Cooperation Treaty.
The subject matter of our patents and patent applications covers four types of technologies: methods relating to the manufacture and use of our hypochlorous acid solution NVC-101, compositions of matter of our Aganocide compounds, methods of treating or preventing microbial ailments utilizing NVC-101 and/or our Aganocide compounds, and formulations. In April of 2009 the Company entered into an exclusive worldwide license to patent applications relating to methods of use of N-chlorotaurine. These applications are pending in the U.S. and abroad.
Our first issued patent in the U.S. provides coverage for a method of treating burns or promoting wound healing, tissue repair or tissue regeneration using a specific range of formulations of NVC-101. This patent was issued on July 30, 2002 and will expire in 2020 with payment of maintenance fees. Corresponding patents have been issued in China, India, Israel, Hong Kong, Mexico and South Korea. Our second issued patent in the U.S. provides coverage for a method of disinfecting open wounds and burns, promoting wound healing or providing ocular disinfection using a specific range of formulations of NVC-101. This patent was issued on July 1, 2008 and will expire in 2020 with payment of maintenance fees. This application was filed only in the U.S. Our third issued patent in the U.S. provides composition-of-matter coverage of our lead development candidate, NVC-422, and other Aganocide compounds. This patent was issued on December 9, 2008 and will expire in 2026 with payment of maintenance fees. A corresponding patent has been issued in New Zealand, and corresponding applications are pending in Argentina, Australia, Brazil, Canada, China, Europe, Honk Kong, Israel, India, Japan, South Korea, Mexico, New Zealand, Singapore, and Taiwan. Our fourth issued patent in the U.S. provides composition-of-matter coverage of additional Aganocide compounds. This patent was issued on December 7, 2010 and will expire in 2028 with the payment of maintenance fees. A corresponding patent has been issued in Singapore, and corresponding applications are pending in Australia, Brazil, Canada, China, Europe, Honk Kong, Israel, India, Japan, South Korea, Mexico, Taiwan and South Africa.”
Item 7. Management’s Discussion and Analysis
Results of Operations
Comparison of Years Ended December 31, 2009, 2008 and 2007
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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Research and Development, page 33
3. You disclose your target indications and product candidates beginning on page four. Additionally, you disclose on page 33 that you expect to incur increasing research and development expenses in 2010 and in subsequent years, and you expect expenses during 2010 will be related to your common cold, dermatology, and catheter associated urinary tract infections programs. Please provide us proposed disclosure for future filings that includes the following information related to each of your major research and development projects:
| · | The costs incurred during each period presented and to date on the project; |
| · | The nature, timing and estimated costs of the efforts necessary to complete the project; and |
| · | The anticipated completion dates. |
Response:
NovaBay is an early stage company and we are just beginning our product development programs. At this point, NovaBay has not yet begun tracking the expenses related to our various research programs in adequate detail to allow for segregated reporting of each project. As our various research programs are moving into Phase II trials we are beginning to set up tracking on these programs to allow for additional tracking within each program on a go forward basis.
For our 2010 Form 10K, we do not expect to have information to provide this level of detail. We do expect to have this in place by late 2011 or early 2012. We currently expect the future wording to read similar to the following for each project we are currently engaged in:
“NovaBay has incurred direct costs of $xx related to our xx program during the twelve month period ended December 31, xxxx and $xx in direct costs since the inception of the project on [date to follow]. In addition to these direct costs we have allocated significant internal resources to the completion of the project. The project is currently [description of the current status of the project]. We anticipate the completion of the development stage during the year ended December 31,[xxxx] at point we will begin marketing the project.”
Notes to Consolidated Financial Statements
Note 9. Stockholders’ Equity
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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Stock Warrants, page 58
4. In your August 2009 public unit offering, you issued warrants to investors to purchase an aggregate of 1,225,000 shares of common stock at an exercise price of $2.75 per share. Please tell us why you did not classify your warrants issued in this public unit offering as liabilities, and provide us proposed disclosure for future filings to address your accounting treatment of these warrants. Specifically, tell us how you considered ASC 815-40-25-11 through 25-16.
Response:
In determining the treatment of our warrants we followed the guidance in ASC 815-40-25. ASC 815-40-25-4 states; “Contracts shall be initially classified as equity in both of the following situations”;
| ASC 815-40-25-4 criteria | NovaBay response |
| Our Warrant agreement provides for settlement in either shares or net shares. | |
| The agreement does not allow for the recipients to select settlement in cash as an option. |
Based on this criteria we move on to ASC 815-25-10 which states;
“Because any contract provision that could require net cash settlement precludes accounting for a contract as equity of the entity (except for those circumstances in which the holders of the underlying shares would receive cash, as discussed in the preceding two paragraphs and paragraphs 815-40-55-2 through 55-6), all of the following conditions must be met for a contract to be classified as equity”:
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
6
In relations to settlement in unregistered shares the following guidance applies:
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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Based on the information in the tables above we concluded that the shares meet the criteria for equity treatment.
* * * *
In addition, NovaBay acknowledges:
| · | NovaBay is responsible for the adequacy and accuracy of the disclosure in the filing; |
| · | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
| · | NovaBay may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Please do not hesitate to call me at (510) 899-8809, if you have any questions or would like any additional information regarding this matter.
NovaBay Pharmaceuticals, Inc.
By: /s/ Thomas J. Paulson
Thomas J. Paulson
Chief Financial Officer
cc: Ron Najafi, President and Chief Executive Officer
Brett White, Cooley LLP
NOVABAY PHARMACEUTICALS, INC.
5980 Horton Street, Suite 550, Emeryville, CA 94608 T: 510-899-8800
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