Form of First Amendment to the Security Agreement, dated March 24, 2024

Exhibit 10.3

FIRST AMENDMENT TO SECURITY AGREEMENT

This FIRST AMENDMENT TO SECURITY AGREEMENT (this “Amendment”) is made and entered into as of March 24, 2024, by and among NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), DERMAdoctor, LLC, a Missouri limited liability company (“DERMAdoctor”, and together with the Company, the “Debtors”), and the holders of the Company’s Original Issue Discount Senior Secured Convertible Debentures in the original aggregate principal amount of $3.3 million (collectively, the “Debentures”) signatory hereto (collectively, the “Purchasers” or the “Secured Parties”).

WHEREAS, reference is made to that certain Securities Purchase Agreement, dated as of April 27, 2023, between the Company and the Purchasers (the “Purchase Agreement”), pursuant to which the Company agreed to sell and issue to the Purchasers, and the Purchasers agreed to purchase from the Company, the Debentures, subject to the terms and conditions set forth therein;

WHEREAS, as a condition precedent under the Purchase Agreement, DERMAdoctor executed and delivered the Subsidiary Guarantee dated as of April 27, 2023 in favor of the Purchasers (as renewed, reaffirmed, extended, supplemented and amended, the “Subsidiary Guarantee”), pursuant to which DERMAdoctor agreed to guarantee to the Purchasers and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance when due of all of the liabilities and obligations due or to become due of the Company or any Guarantor (as defined therein) to the Purchasers;

WHEREAS, in connection with the Purchase Agreement and the Subsidiary Guarantee, the Company, DERMAdoctor, and the Secured Parties entered into that certain Security Agreement dated as of April 27, 2023 (as renewed, reaffirmed, extended, supplemented and amended, the “Security Agreement”), pursuant to which the Company and DERMAdoctor granted to the Secured Parties security interests in certain collateral described therein;

WHEREAS, the Company entered into that Membership Unit Purchase Agreement, dated as of March 12, 2024 (the “MUPA”), among the Company, as the seller, New Age Investments LLC, a Florida limited liability company, as the buyer (the “Buyer”), and DERMAdoctor, pursuant to which the Company will sell and Buyer will purchase 100% of the membership units of DERMAdoctor (the “Sale Transaction”);

WHEREAS, pursuant to the MUPA, the closing of the Sale Transaction is conditioned upon the Company obtaining the consent of the Purchasers to: (i) amend the Security Agreement, as provided in this Amendment; and (ii) release DERMAdoctor from its obligations under the Subsidiary Guarantee and corresponding termination of the Subsidiary Guarantee, as provided by the Consent and Release with the Company, dated as of the date hereof (the “Consent and Release”);

WHEREAS, in consideration of the Purchasers taking the necessary actions to contemporaneously execute and deliver this Amendment and the Consent and Release to the Company to satisfy the above referenced closing condition under the MUPA, the Company offered two forms of consideration to each Purchaser, and, in accordance with the election by each Purchaser, will issue either (i) a new Series D warrant (“New Warrant”), in the form attached hereto as Exhibit A, exercisable for shares of Company common stock, par value $0.01 per share (“Common Stock”) or (ii) a new unsecured convertible note (“Unsecured Convertible Note” and, together with the Warrants, the “Consent Consideration”), in the form attached hereto as Exhibit B, convertible for shares of Common Stock, which Consent Consideration shall be issued promptly upon both this Amendment and the Consent and Release becoming automatically effective upon the closing of the Sale Transaction, as provided in this Amendment;

WHEREAS, the Debtors and the Purchasers desire to amend the Security Agreement as more particularly set forth in this Amendment and the Purchasers each desire to enter into the Consent and Release contemporaneously with the execution and delivery of this Amendment, which shall be delivered to the Company contemporaneously with the execution and delivery of this Amendment;

WHEREAS, Section 19(c) of the Security Agreement provides that no provision therein may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Debtors and the Secured Parties holding 50.1% or more of the principal amount of Debentures then outstanding; and

WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings as set forth in the Security Agreement.

NOW, THEREFORE, in consideration of the mutual agreements, covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.         Effective automatically as of the closing of the Sale Transaction (the “Effective Time”), the Security Agreement (including its schedules) is hereby irrevocably amended as follows:

For avoidance of doubt, the Purchasers were entitled to elect and receive only one type of Consent Consideration, which election is reflected and set forth on Schedule 1 to this Agreement, and such Consent Consideration shall be issued to the Purchaser only if the Sale Transaction closes.

3.          Security Agreement. Except as otherwise expressly provided in this Amendment, the Security Agreement is and shall remain in full force and effect.

4.         Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.

5.         Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute but one agreement, binding on all parties hereto, notwithstanding that all parties are not signatories to the same counterparts.

6.         Binding Effect. This Amendment is binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

7.         Further Assurances.

(a)         The Purchasers agree to deliver to DERMAdoctor or its designees all pledged shares, certificates and any other similar collateral previously delivered in physical form by the Company or DERMAdoctor to the Purchasers under the Security Agreement.

(b)         After the Effective Time, each of the Purchasers further agrees to execute and deliver any Lien release (including UCC termination statements), notice of termination of deposit account control agreement, mortgage releases, re-assignments of trademarks and copyrights, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release or terminate as of record, the security interests, and all other notices of security interests and Liens previously filed by or on behalf of the Purchasers against DERMAdoctor respecting the collateral to be released herein and the removal of DERMAdoctor from the Security Agreement and the other Transaction Documents as provided herein.

(c)         On or any time after the Effective Time, the Company and DERMAdoctor and their counsel and their designees are hereby authorized by each Purchaser to file termination, amendment, and release documents evidencing the release of such liens, including without limitation any UCC financing statements in favor of the Purchasers respecting the collateral to be released herein as provided in this Amendment.

(d)         The Purchasers shall perform such other actions reasonably requested by the Company and DERMAdoctor to effect the release contemplated herein, including delivery of certificates, securities and instruments, and the irrevocable stock power executed in blank with respect to such certificates.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties have executed this First Amendment to Security Agreement as of the date first set forth at the beginning hereof.

Signature Page to First Amendment to Security Agreement

SCHEDULE 1

CONSENT CONSIDERATION

EXHIBIT A

FORM OF NEW WARRANT

See Exhibit 4.2 of the Form 8-K filed by the Company with the Securities and Exchange Commission on March 25, 2024, which is incorporated herein by reference.

EXHIBIT B

FORM OF UNSECURED CONVERTIBLE NOTE

See Exhibit 4.3 of the Form 8-K filed by the Company with the Securities and Exchange Commission on March 25, 2024, which is incorporated herein by reference.

EXHIBIT C

Representations, Warranties and Covenants

Representations, Warranties and Covenants. The Company hereby makes the following representations and warranties to each Purchaser in paragraphs (a) through (d) below, and each of the Company and each Purchaser, as the case may be, acknowledge and agree to the covenants set forth in (e) through (g) below:

(a)    Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Amendment and to otherwise carry out its obligations hereunder and thereunder. The execution and delivery of this Amendment and the consummation by the Company and DERMAdoctor of the transactions contemplated hereby will be duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its stockholders in connection therewith, other than the approval of Company stockholders for the exercise of the New Warrants and the conversion of the Unsecured Convertible Note. This Amendment has been duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(b)    No Conflicts. The Company’s execution, delivery and performance of this Amendment and the consummation of the transactions contemplated hereby do not and will not: (i) conflict with or violate any provision of the Company’s certificate of incorporation, bylaws or other organizational or charter documents; or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any lien upon any of the properties or assets of the Company in connection with, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other material instrument (evidencing Company debt or otherwise) or other material understanding to which such Company is a party or by which any property or asset of the Company is bound or affected, other than for which a waiver has been obtained by the Company; or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have reasonably be expected to result in a Material Adverse Effect.

(c)    NYSE American Corporate Governance. The transactions contemplated under this Amendment comply with all applicable rules of the NYSE American LLC.

(d)    Issuance of the Consent Consideration. The issuance of the Consent Consideration as provided by Section 2 of the Amendment will be duly authorized and will be duly and validly issued, fully paid and nonassessable, free and clear of all liens imposed by the Company other than restrictions on transfer, exercise and/or conversion as provided in this Amendment and the New Warrant or the Unsecured Convertible Note, as the case may be, and the Warrant Shares and the shares of Common Stock upon conversion of the Unsecured Convertible Notes (the “Conversion Shares” and, together with the Warrant Shares, the “Underlying Shares”), when issued in accordance with the terms of the New Warrants or the Unsecured Convertible Notes, as the case may be, will be validly issued, fully paid and nonassessable, free and clear of all liens imposed by the Company other than restrictions on transfer as provided in this Amendment and the Unsecured Convertible Note. The Company shall have reserved from its duly authorized capital stock a number of shares of Common Stock for future issuance of the Underlying Shares in full in accordance with the New Warrants or the Unsecured Convertible Notes. 

(e)    Legends and Transfer Restrictions.

(i)    The New Warrants, the Unsecured Convertible Notes and the Underlying Shares may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of any New Warrants, Unsecured Convertible Notes or Underlying Shares other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of the undersigned or in connection with a pledge, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred New Warrants, Unsecured Convertible Notes and Underlying Shares under the Securities Act of 1933, as amended (the “Securities Act”). As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Amendment.

(ii)    The undersigned agrees to the imprinting, so long as is required by this Section (e) or as required by the applicable Consent Consideration, of a legend on any of the New Warrants, Unsecured Convertible Notes and Underlying Shares in the following form:

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY IS SUBJECT TO THE TRANSFER RESTRICTIONS SET FORTH HEREIN AND IN THE FIRST AMENDMENT TO SECURITY AGREEMENT, DATED MARCH 24, 2024, AS MAY BE AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE AVAILABLE WITH THE SECRETARY OF THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(A) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

The Company acknowledges and agrees that the undersigned may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the New Warrants or Unsecured Convertible Notes, as the case may be, to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Amendment and, if required under the terms of such arrangement, the undersigned may transfer pledged or secured New Warrants or Unsecured Convertible Notes, as the case may be, to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate undersigned’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of the New Warrants or Unsecured Convertible Notes, as the case may be, may reasonably request in connection with a pledge or transfer of the New Warrants, the Unsecured Convertible Notes or Underlying Shares.

(iii)           Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section (e)(ii) hereof), (a) if a registration statement covering the resale of such security is effective under the Securities Act, (b) following any sale of such Underlying Shares pursuant to Rule 144, (iii) if such Underlying Shares are eligible for sale under Rule 144 without volume or manner-of-sale limitations pursuant to Rule 144, or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the U.S. Securities and Exchange Commission (the “Commission”)). The Company shall cause its counsel to issue a legal opinion to its transfer agent (if required by the transfer agent) and the undersigned (if requested by the undersigned) in connection with the removal of the legend hereunder. If all or any portion of the New Warrants or the Unsecured Convertible Notes is exercised or converted, as the case may be, at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144 or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Underlying Shares shall be issued free of all legends. The Company may not make any notation on its records or give instructions to the transfer agent that enlarge the restrictions on transfer set forth in this Section (f). Certificates for Underlying Shares subject to legend removal hereunder shall be transmitted by the transfer agent to the undersigned by crediting the account of the undersigned’s prime broker with the Depository Trust Company System as directed by the undersigned. “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days (as defined in the Purchase Agreement), on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of a certificate representing Underlying Shares issued with a restrictive legend.

(f)          Listing of Common Stock. The Company shall, subject to applicable requirements of the NYSE American, apply to list or quote all of the Underlying Shares on the NYSE American and secure the listing of all of the Underlying Shares on such NYSE American.

(g)          Registration Statement.