Title

Presentation

Operator: Welcome to the NovaBay Pharmaceuticals’ 2022 Fourth Quarter and Full Year Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.

Jody Cain: This is Jody Cain with LHA. Thank you for participating in today’s call. Joining me from NovaBay are Justin Hall, Chief Executive Officer and General Counsel and Tommy Law, Interim Chief Financial Officer. I’d like to remind listeners that comments made during this call by management will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. In particular, there is uncertainty about circumstances beyond the company’s control that impact the broader economy such as the COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of COVID-19 and circumstances that impact the broader economy on NovaBay’s operations, its financial results and its outlook is the best estimate based on the information available for today’s discussion.

For a list and description of risks and uncertainties, please review NovaBay’s filings with the Securities and Exchange Commission at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, March 30, 2023. NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law. And now, I’d like to turn the call over to Justin Hall. Justin?

Justin Hall: Thank you, Jody. Good afternoon, everybody and thank you for joining us. Today, we are reporting that our product sales for the 2022 year increased 41% year-over-year as we benefited from our strategy to diversify revenue streams. For the quarter, product sales grew 15% over the prior year quarter. A highlight of the fourth quarter was that Avenova online unit sales continued to grow with increases in both our new and existing customer base. We also saw notable contributions from Avenova companion products and our PhaseOne and NeutroPhase branded wound care products. While Q4 revenue increased 15%, our ability to optimize digital marketing led to a 10% decrease in sales and marketing spend when compared to Q4 of 2021.

For the full 2022 fiscal year, we reduced sales and marketing expenses by 4%, while increasing revenue by 41%. Now, I’d like to share updates on each of our three verticals: eye care, skin care and wound care beginning with Avenova in our eye care franchise. Eye care has long been our core business and we continue to see good prospects for its growth in this market. Our eyes are under more stress than ever with increased screen time, air pollution, indoor heating and cooling all of which can lead to dry eye and eye fatigue. In fact, up to 49 million Americans suffer from dry eyes and the global market for dry eye is expected to reach nearly $9 billion by 2030. We know that dry eye is a multifaceted and complex condition that may require more than one approach to gain relief and sustain that relief.

We identified dry eye as an opportunity to establish NovaBay at the forefront of innovation in the OTC eye care market. We have a solid base of reoccurring revenue with our Avenova antimicrobial spray, as it is the number one doctor recommended lid and lash spray on the market today. Over the past several years, we have gained traction in the dry eye market and capitalized on the well-known Avenova brand by commercializing evidence-led differentiated superior quality and highly effective Avenova companion products. These include the NovaWipes, which are soft, hypoallergenic wipes specially designed to absorb our Avenova spray, the Avenova warm eye compress to sooth sore eyes or Avenova lubricating eye drops for instant relief, and the i-Chek to monitor physical eyelid health.

Sales of these companion products have grown steadily over the past year and have become a more meaningful contributor to our business with each passing quarter. Earlier this month, we expanded our portfolio in the OTC eye care market with the addition of two more innovative, high-quality products, both of which address the multi-factorial and complex condition of dry eye. The first is our Avenova Eye Health Support supplement. This oral supplement helps relieve symptoms of dry eye and is aimed at promoting overall eye health from a systemic perspective. It is uniquely formulated with a combination of high-quality concentrated omega-3 oils and MaquiBright, a nutrient rich antioxidant extracted for the maqui berry, which is 3x the antioxidant level of blueberries and is found only in the forests of Patagonia.

The clinical effects of the maqui berry are impressive. Participants in a 4-week randomized double-blind placebo-controlled study of the effects of MaquiBright showed an increase of 89% in tear production and reported a 57% improvement in dry eye discomfort with results from the study being published in a peer reviewed journal. The second product is Eyeganics Organic Tears. This product is the only eye drops certified by the USDA as 100% organic and preservative free and is also the first non-Avenova branded eye care product that we have added to our portfolio. These organic tears have only three ingredients: glycerin, salt and water. There are no additives or artificial chemicals. This product was formulated especially for those who have sensitivity to some chemicals that maybe found in other lubricating eye drops.

This product is offered in a 10-milliliter bottle that incorporates new technology that dispenses one drop at a time, thereby offering a cost and convenience advantage over other preservative free artificial tears found in single use vials. Our partnership with Eyeganics is the first of what we hope will be other highly effective ophthalmic products added to our distribution channels. With the strategic additions of an oral supplement and inorganic eye drop, we now offer a best-in-class products for each step of the standard dry eye regimen. Further, with the addition of these high-quality new products, we have reinforced NovaBay as a one-stop destination for customers seeking relief from the symptoms of dry eye and other ophthalmic related eye conditions through our online and physician dispense channels.

We plan to further expand our eye care portfolio with additional innovative effective products for both dry eye and other ophthalmic related conditions. We are also pursuing a strategy to grow sales through our physician dispense channel, in which our products are available to our customers directly through their eye care specialist. In an effort to deepen our relationships with eye care professionals, we are partnering with educational organizations that are CEO accredited to help optometrists and ophthalmologists meet their continuing education requirements. We also have advisory boards consisting of optometrist and ophthalmologist that we use to discuss the efficacy and marketing of our eye care products. Moving on to DERMAdoctor and our collection of skincare products.

Innovation is key to our strategy and we recently introduced a new product to our KP Duty collection. Our new peel pads offer a high potency complex of hydroxy acids and other exfoliants effectively lifting away dry, dull, dead skin cells to retexturize skin. Fatty acids help maintain the skin’s moisture to support a strong protective skin barrier, while antioxidant rich botanicals calm and soothe. The KP Duty peel pads advanced clinical exfoliation leaves the skin feeling brighter, smoother, healthier and more youthful in a single step. KP Duty peel pads are available at DERMAdoctor.com and also on Amazon. DERMAdoctor customers are extremely loyal. So attracting new customers who will become repeat users is among our top priorities. To further this initiative, we just completed a spring break promotion with 20% off of all DERMAdoctor products ordered through the DERMAdoctor website to welcome new customers to the brand.

Now turning to wound care. Like our Avenova spray, our wound care products are formulated with NovaBay’s FDA cleared proprietary and antimicrobial form of hypochlorous acid. These products are distributed under the PhaseOne brand in the U.S and under the NeutroPhase brand in China. These products are used for cleansing and irrigating post-surgical wounds, minor burns and superficial abrasions. Among the advantages of hypochlorous acid is its ability to penetrate and kill biofilm, which represents a significant barrier to wound healing. Our formulation exhibits broad-spectrum activity against a range of gram-positive and gram-negative bacteria making it highly effective. We have an advantage in this market as our product is made without the toxic chemicals found in many other wound care products.

Ours is gentle, non-irritating and non-sensitizing to skin and new tissue. Like our Avenova companion products, our wound care products have been making a more notable contribution to our total revenue. We have been working with PhaseOne Health on their strategy to leverage their recent commercial success and expand beyond surgical applications. We also expect to ship a significant near-term order for our NeutroPhase products. Now, I would like to turn the call over to our Interim Chief Financial Officer, Tommy Law, to review our Q4 and full financial year results. Tommy has been with us for a number of years and just recently stepped into the Interim CFO role on February 15. Tommy?

Tommy Law: Thank you, Justin and good afternoon everybody. It’s a pleasure to be speaking with all of you today. As Justin mentioned, we completed our acquisition of DERMAdoctor in early November 2021 and the financial results I will be discussing today reflects the operations of both NovaBay and DERMAdoctor after the date of acquisition. Let me start my review with the discussion of our fourth quarter financial results. Net product revenue for the fourth quarter of 2022 increased 15% over the prior year period to $3.6 million and included $2.1 million of Avenova branded product sales, $1 million of DERMAdoctor product sales, and $0.4 million of wound care product sales. Gross margin on net product revenue for the fourth quarter of 2022 was 48%.

This compares with 53% for the fourth quarter of 2021 with the decrease primarily due to higher sales of lower margin product in the skincare and wound care verticals. Sales and marketing expenses decreased 10% to $1.9 million for the fourth quarter of 2022, which reflects lower Avenova digital advertising and related consulting expenses, partially offset by the addition of sales and marketing expenses for DERMAdoctor. G&A expenses for the fourth quarter of 2022 were relatively flat at $2.4 million compared with $2.7 million for the fourth quarter of 2021. R&D expenses for the fourth quarter of 2022 were $66,000 compared with $9,000 for the prior year period, due mostly to new product development under the DERMAdoctor brand. For the 3 months ended December 31, 2022, non-cash gain on change in fair value of warrant liability was $976,000 and non-cash gain on change in fair value of contingent liability was $342,000.

The net loss attributable to common stockholders for the fourth quarter of 2022 was $8.2 million or $0.433 per share, which included a large non-cash impairment charge of $6.7 million due to the reduced value of DERMAdoctor’s intangible assets, such as goodwill. The net loss attributable to common stockholders for the fourth quarter of 2021 was $894,000 or $0.69 per share. Turning now to our full year financial results, product revenue for 2022 was $14.4 million, a 41% increase over 2021 and reflecting a full year of DERMAdoctor product sales. Gross margin on net product revenue for 2022 was 54% compared with 64% for 2021, with the decrease primarily due to increased sales recognized for DERMAdoctor and wound care products. For 2022, sales and marketing expense decreased by 4% and G&A expense increased by 3% both compared with 2021.

R&D expenses for 2022 were $174,000 versus $44,000 for the prior year. The net loss attributable to common stockholders for 2022 was $16.3 million or $10.10 per share and included the non-cash impairment charges recognized in the fourth quarter. The net loss attributable to common stockholders for 2021 was $6.6 million or $5.26 per share. We reported cash and cash equivalents of $5.4 million as of December 31, 2021 compared with $7.5 million as of December 31, 2021. And with that, I will turn the call back to Justin.

Justin Hall: Thanks, Tommy. With Avenova, DERMAdoctor, PhaseOne and NeutroPhase products, we have a solid foundation of established brands in the large and eye care, skin care and wound care market. We are expanding the Avenova and DERMAdoctor brands with new and innovative products that fill consumer needs and support our corporate positioning. And we are taking steps to broaden our customer base with campaigns aimed at targeted demographics. Importantly, we are advancing these growth initiatives while prudently allocating our marketing spent. We are proud of our specialized portfolio of innovative evidence-based and clinically proven products and are passionate about bringing these best-in-class products to a growing number of customers. And with that, I thank you for your attention. Operator, we are now ready to take questions.

Operator:

Justin Hall: While we are waiting for the first question, I would like to thank our absolutely tremendous former CFO, Andy Jones, for his nearly 3 years of service to NovaBay. As we announced an 8-K filing mid-January, Andy resigned as of February 15 but has agreed to consult with the company on an as-needed basis for the next 6 months. We are grateful to Tommy for stepping into this role on an interim basis to ensure a timely and accurate filing. Okay, operator, we are ready for the first question.

See also 10 Pro-Life Companies to Invest In and 15 Biggest Non-Tech Companies in the World.

Operator: Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen: Hi, Justin and Tommy. How are you?

Justin Hall: Jeff, it’s actually you. I was expecting destiny.

Jeffrey Cohen: Yes, sorry for the demotion. So anyway, couple of questions from my end. Firstly, Justin, if you could talk a little bit about Q4 margins, which kind of stand down to the rest of the quarters for €˜22 and talk about margins for €˜23 a bit, should we expect some rebound from that Q4 level or does that feel like the baseline?

Justin Hall: Yes, that’s a good question. It’s something that we definitely keep our eye on. So, the good news is that the lower margin is due to higher sales of lower margin products. So we are not actually losing margin on our high margin products like Avenova. So, Avenova is our highest revenue driver and it’s also our highest gross margin product, but when we bring in revenue from wound care and skin care products, especially those that are sold to distributors at wholesale prices that will bring down that gross margin. So, that’s what we saw in Q4. So, going forward in 2023, because we are going to see continued growth in the wound care sector, and then also continuously selling those skincare products at wholesale prices, this just depending on whether Avenova can bring it back up. But I think you are right in considering maybe this as a new baseline, but it all just really depends on the product mix for that particular quarter.

Jeffrey Cohen: Okay. Got it. Can you talk a little bit about Avenova, while you added as far as demographic changes that you have seen over the past handful of quarters or so and weigh it in anticipate going forward?

Justin Hall: Sure. So, our customer base has changed a little bit, definitely. We have pulled in some younger customers and that we have just done that through a change in our messaging and a change in advertising. But one thing that we are emphasizing in 2023 is we want to leverage our relationships. So, we have relationships with about 10,000 optometrists and ophthalmologists who know Avenova, recommended, prescribe it in some form or fashion. And so what we have seen in the over the counter direct-to-consumer sales channel, is a lot of our reviews on Amazon start with my doctor told me to get this product. I am buying this because my doctor recommended it. I went to the optometrist and got my first bottle and now I buy it on Amazon. So, I think one of our key growth initiatives in 2023 is really going to be to lean in on that doctor recommended sort of brand and bring in new customers from the brand through that sort of traditional clinical setting.

Jeffrey Cohen: Okay. Got it. That’s super helpful. A couple of other questions that come to mind. Could you talk a little bit about, at least for modeling purposes seasonality going forward, will you expect a similar type of even seasonality, or do you expect back half growth for €˜23?

Justin Hall: Yes. So, definitely, some seasonality, especially on the DERMAdoctor side, some of the big orders from Costco do tend to come around the holiday season. So, there is definitely that seasonality. And I just sort of alluded to some of our wound care. So, we have a large wound care order. So, we don’t stock the wound care product, we make it to order. So, whenever a distributor places an order, then we manufacture it for them. So, we have a relatively large PO for some wound care products coming in the second quarter. So, that’s going to make I think top line revenue look a little higher in the second quarter than in other quarters, because that’s just sort of one very large order that won’t be repeated in this fiscal year. So, there is seasonality, there is I think some lumpiness. But I think overall, the trends that I think we saw last year, will other than those exceptions that I just mentioned, will hold true for this year as well.

Jeffrey Cohen: Okay. Got it. And then lastly, as far as our Genex and some of the other companies out there and products out there, what have you been doing on the M&A front? And how is your appetite there? And is it specific to ocular and eye care, or it also may spill over into our skincare and beauty?

Justin Hall: Yes. So, I €“ Jeff, the only thing that I can really say right now is that we are absolutely committed to doing something in the M&A field this year before the end of the year. And I will just say, well, I will be disappointed if we don’t do something. So, I will just kind of leave it at that, because we are going to have to be very opportunistic and make sure that the deal is the right thing for the company at the right time, and at the right price. But with all of that said, I do think that our eye care vertical, and the avenue of a franchise is sort of a more fertile ground for something like that, because as I mentioned, we do have a lot of relationships with eye care professionals. And if we can leverage those relationships by simply just dropping another product in the bag, that’s going to bring the most, I think synergies to us. But we have to make sure that whatever comes our way is, makes sense at the time.

Jeffrey Cohen: Okay. Perfect. Got it. That does it for us. Thanks for taking the questions.

Justin Hall: Yes. Always. Thank you.

Operator: Our next question comes from Sentient Capital Markets. Please go ahead.

Unidentified Analyst: Hi. It’s Rafai for Edward Wu with Sentient Capital Markets. Can you talk a little bit about international growth opportunities for each of the products?

Justin Hall: Yes, sure. So, the sort of growth that I think we will see in our wound care vertical, this year will come mostly from China. And then for DERMAdoctor, we have always looked at both China and the EU as tremendous growth opportunities. So, DERMAdoctor has created global formulations that can be sold all over the world. So, lining up distributors and supporting growth in those foreign markets is definitely an opportunity that we are looking to develop this year.

Unidentified Analyst: Great. Are you looking at any other further product line extensions for either Avenova or DERMAdoctor?

Justin Hall: Yes. So, we have really shifted strategy this year from last year. So, we started last year, in €˜22, with interest rates low and the stock market doing well and the capital markets very accessible. And now just sort of a short 12 months later, the world is a very different place. And so we launched seven products last year. And I think our general strategy for this year is going to be to sell more of what we have. So, we are not going to be investing heavily in new product development and new product launches, what you will see is us selling more of what we have in sort of new and better ways. We do have one or two things lined up for the rest of the year. But those things were set into motion, well before the beginning of this year, so it is a shift in strategy, but it is, we won’t be totally without new product launches this year.

Unidentified Analyst: Great. One more question. Are you expecting €“ what is your outlook for digital spending compared to more traditional as the marketing expense?

Justin Hall: Yes. So, we really did a huge shift last year. And what we did was we tried to find the floor with our digital marketing spend. And by that, I mean the least amount of money we can spend and still maintain sales, and I think we were able to find that floor and achieve it with both brands. And so this year, I think we are going to continue sort of at the same levels without any large increase in that sales and marketing expense. So, that will remain relatively steady, but not to harp on this too much. But our strategy for this year is really to leverage our relationships with eye care professionals and strengthen that doctor. Number one, doctor recommended positioning for Avenova. And then also just optimize all the digital ad spend for all of our products, especially those that are on Amazon.

Unidentified Analyst: Great. Thank you very much.

Justin Hall: Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.

Justin Hall: Thank you everybody for joining us today and your interest in NovaBay. We are extremely excited about our recent accomplishments and the promising future that we envision for the company. We look forward to updating you on our progress during our first quarter investor conference call in May. Thanks again and have a nice day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.