Executive Summary / Key Takeaways

• Radical Strategic Pivot: NovaBay Pharmaceuticals has undergone a complete transformation, divesting all its product lines (Avenova eyecare, DERMAdoctor skincare, PhaseOne wound care) to become an acquisition vehicle, signaling a decisive shift from operational growth to value creation through M&A.
• New Leadership, New Capital: The recent $6 million investment from David E. Lazar, who now serves as CEO, provides critical capital and expertise for this M&A-focused strategy, explicitly replacing a prior plan for liquidation and dissolution.
• Lean Operations & Cash Runway: Post-divestitures, NovaBay's continuing operations are minimal (wound care product export to China), significantly reducing operating expenses and extending its cash runway through at least August 14, 2026, providing a stable base for the new strategy.
• Uncertainty and Opportunity: While the M&A strategy presents significant upside potential for value creation, it introduces inherent execution risks and an uncertain timeline, demanding close investor scrutiny of future acquisition targets and integration plans.
• Special Dividend Expected: The company anticipates declaring a special cash dividend to stockholders during the third quarter of 2025, reflecting a return of capital from the divestitures and new investment.

A New Chapter: NovaBay's Metamorphosis into an Acquisition Vehicle

NovaBay Pharmaceuticals, Inc. (NYSE:NBY) stands at a pivotal juncture, having shed its historical identity as a developer and seller of eyecare, wound care, and skincare products to embark on a transformative journey as a strategic acquisition vehicle. This radical pivot, underscored by recent divestitures and a significant capital infusion under new leadership, marks a profound shift from organic product-driven growth to a strategy centered on M&A for future value creation. The company, initially incorporated in 2000, has a history of adapting to market dynamics, from its early focus on Avenova to a brief, ill-fated expansion into skincare, culminating in its current, streamlined form.

Historically, NovaBay's core technological differentiation lay in its proprietary hypochlorous acid formulations, particularly for its Avenova Lid & Lash Solution. This product was recognized as the #1 doctor-recommended antimicrobial lid and lash solution, offering superior microbial removal compared to other hypochlorous acid sprays. This technological edge translated into strong customer loyalty and recurring revenue, especially through its "Subscribe & Save" program on Amazon (AMZN), where subscription sales accounted for approximately 24% of online Avenova revenue in the first half of 2024. The company also introduced the Avenova Allograft, a prescription-only product utilizing BioStem Technologies (BSEM)' patented six-step BioREtain process, which preserved the natural integrity of placental tissue for cornea and conjunctiva repair. This offered a distinct advantage in a global market estimated at over $400 million, growing at nearly 10% annually through 2030. These innovations, while now divested, highlight NovaBay's past capability in identifying and leveraging differentiated technologies in niche markets.

The decision to divest its once-promising Avenova eyecare business (January 17, 2025), PhaseOne wound care trademarks (January 8, 2025), and DERMAdoctor skincare segment (March 12, 2024) was a direct response to a challenging capital market environment and the unmet e-commerce projections for DERMAdoctor post-pandemic. Management explicitly stated that the DERMAdoctor divestiture aimed to reduce operating expenses and extend the cash runway. This strategic streamlining has left NovaBay with significantly reduced assets and operations, primarily consisting of manufacturing wound care products for export to China as its sole continuing reportable segment.

The M&A Mandate and New Leadership

The most compelling aspect of NovaBay's current narrative is its explicit embrace of an M&A-led growth strategy. This direction was solidified on August 19, 2025, with a $6 million securities purchase agreement with private investor David E. Lazar, who simultaneously assumed the role of Chief Executive Officer and a director. This investment is explicitly "in lieu of pursuing the liquidation and dissolution of NovaBay," a path stockholders had approved on April 16, 2025. The proceeds from Lazar's investment are earmarked for "strategic investment and/or acquisition," signaling a clear intent to build a new business through external growth. Justin Hall, the former CEO, has transitioned to Vice President of Business Development, a role that aligns with the new M&A focus, leveraging his experience to identify potential targets.

This strategic pivot is a high-stakes gamble. While it offers the potential for transformative growth and value creation, it introduces significant execution risk. The success of this strategy hinges entirely on the new management team's ability to identify, acquire, and integrate businesses that can generate sustainable revenue and profitability. Lazar's stated expertise in "capital restructuring and reverse merger expertise" suggests a focus on potentially undervalued assets or companies that can be rapidly integrated and scaled.

Financial Re-Anchoring and Liquidity

NovaBay's financial position has been fundamentally re-anchored by the recent divestitures and the new investment. The company's cash and cash equivalents surged to $5.3 million as of June 30, 2025, a substantial increase from $430 thousand at December 31, 2024. This boost was primarily driven by net proceeds of $10.5 million from the Avenova Asset Divestiture and $0.5 million from the PhaseOne Divestiture. Additionally, the company received a final $134 thousand from the Avenova escrow on July 21, 2025. This cash influx is crucial, as it provides the necessary capital for the announced M&A strategy and extends the company's liquidity runway.

Management believes that existing cash and cash equivalents will be sufficient to meet planned operating expenses at least through August 14, 2026. This extended runway is vital, providing the company with time to execute its new M&A strategy without immediate liquidity pressures. The company's operating expenses for continuing operations, primarily general and administrative costs, increased to $1.891 million for Q2 2025 (from $1.617 million in Q2 2024) and $4.592 million for H1 2025 (from $3.908 million in H1 2024), largely due to non-recurring strategic initiatives and severance costs related to the divestitures. These figures reflect the costs associated with the transition rather than ongoing operational expenses of a scaled business.

A notable financial development for stockholders is the expectation of a special cash dividend during the third quarter of 2025. This signals a commitment to returning capital to shareholders, likely from the proceeds of the divestitures and the new investment, before embarking on new ventures.

Competitive Landscape and Positioning: A Blank Slate

NovaBay's competitive positioning is effectively reset. While its former Avenova business competed with large players like Johnson & Johnson (JNJ) and Bausch Health (BHC) in eyecare, and DERMAdoctor faced AbbVie (ABBV) and Procter & Gamble (PG) in skincare, the current NovaBay is a shell company with a mandate to acquire.

Historically, NovaBay's strengths lay in its niche focus and proprietary hypochlorous acid technology, which differentiated its Avenova products from broader market offerings. For instance, Avenova's gross margins for eyecare products were consistently around 65% in Q2 2024, significantly higher than the 49% reported in Q2 2023 when lower-margin wound care products dominated the mix. This demonstrated NBY's ability to generate strong product-level profitability in its specialized segments.

However, its smaller scale meant it consistently lagged larger competitors in overall revenue growth, operational execution, and R&D investment. Competitors like JNJ and ABBV benefit from extensive R&D budgets, global distribution networks, and diversified revenue streams, allowing for superior financial health and market share capture.

The new NovaBay, under David Lazar, is not competing on product innovation or market share in existing segments. Instead, its competitive advantage will be its ability to identify and execute value-accretive acquisitions. Lazar's expertise in capital restructuring and reverse mergers suggests a focus on opportunities that larger, more traditional pharmaceutical companies might overlook or find too complex. The company's current lean structure and cash position provide flexibility, but the challenge will be to acquire assets that can quickly establish a new competitive moat and generate sustainable, profitable growth.

Outlook, Risks, and the Path Forward

The outlook for NovaBay is one of profound uncertainty coupled with significant potential. The immediate future hinges on the successful execution of its M&A strategy. The company's stated intent to pursue "strategic investment and/or acquisition" is broad, leaving investors to await details on the specific industries or assets it plans to target. The timeline for these acquisitions and their integration remains unknown, and the success of such ventures is inherently risky.

Key risks for investors include:

• M&A Execution Risk: The ability of the new management team to identify suitable targets, negotiate favorable terms, and successfully integrate new businesses is paramount. Poor acquisition choices or integration failures could lead to significant capital loss.
• Regulatory and Market Acceptance: Any new business acquired will face its own set of regulatory hurdles and market acceptance challenges, particularly in the highly regulated healthcare sector.
• NYSE American Delisting: Despite the new investment, NovaBay remains non-compliant with NYSE American listing standards regarding stockholders' equity. While a plan of compliance was accepted through October 18, 2025, continued non-compliance or significant changes could still lead to delisting, impacting liquidity and investor confidence.
• Operational Challenges: Even with a lean structure, the continuing wound care operations, though minimal, are subject to fluctuations in costs and demand, particularly from its Chinese distribution partner.
• Concentration of Credit Risk: The company holds significant cash balances in financial institutions, exceeding federally insured limits, posing a risk in the event of institutional failure.

Conclusion

NovaBay Pharmaceuticals is no longer the company it was a year ago. Its divestiture of all operating product lines and the subsequent $6 million investment from new CEO David E. Lazar have fundamentally reshaped its investment thesis. The company has transitioned from a product-focused entity to an acquisition vehicle, aiming to create value through strategic investments and M&A. This bold pivot, backed by a strengthened balance sheet and a clear mandate to pursue new opportunities, presents a speculative but potentially high-reward proposition.

Investors in NBY are now betting on the new leadership's ability to identify and successfully integrate new businesses that can establish a fresh competitive moat and drive future growth. The anticipated special cash dividend in Q3 2025 offers a near-term return of capital, but the long-term trajectory will be defined by the quality and execution of its acquisition strategy. While significant risks remain, particularly around M&A execution and NYSE listing compliance, NovaBay's transformation offers a compelling narrative for those seeking exposure to a company poised for a complete strategic overhaul.