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Operator: Ladies and gentlemen, welcome to the NovaBay Pharmaceuticals Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. And I would now like to turn the conference over to Bruce Voss. Please go ahead.

Bruce Voss: Thank you. This is Bruce Voss with LHA. Thank you all for participating in today’s call. Joining me from NovaBay Pharmaceuticals are Justin Hall, Chief Executive Officer and General Counsel; and Tommy Law, Interim Chief Financial Officer. I would 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. This means that results could change at any time and the contemplated impact of such circumstances on NovaBay’s operations, financial results and outlook is the best estimate based upon 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, which are available at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, May 9th, 2024. NovaBay undertakes no obligation to revise or update 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, Bruce. Good afternoon, everybody, and thank you for joining us. I’m pleased to report that we hit an all-time record high ordered sales of Avenova products in the past two months on Amazon.com, our largest sales channel. We set a new record in March and then beat it in April. In fact, our April 2024 sales were — order product sales were more than 20% higher than April 2023. These records are even more impressive given that ordered sales in March and April, eclipse months, that even included record-breaking Amazon Prime Days. So it’s not surprising that our first quarter sales increased 13% over the prior year, with that increase largely attributed to Avenova product sales through online channels. We saw an 8% increase in sales over the prior quarter through our online sales channels with sales from this channel surpassing $2 million for the very first time.

This growth is largely due to sales driven by our social media channel, which increased more than 160% year-over-year and from our e-mail program, which has been on a sustained upward trajectory since mid-2023 being up more than 360% over the prior year. Even with these higher sales, we were able to reduce marketing spend in Q1 by 15% through our cost-efficient ad placement programs. We’re excited and encouraged by these new records following the streamlining of our business to focus solely on eyecare. This is a testament to our marketing expertise and the high quality of our products and extremely loyal customer base. We also attribute these records to our recognition several years ago that dry eye can be a multifaceted stubborn and complex condition that may require more than one approach to manage.

This prompted us to expand the Avenova branded portfolio to offer scientifically developed best-in-class products for each step of the dry eye treatment regimen We built our dry eye franchise on a solid foundation of the Avenova spray, which is the number one doctor-recommended hypochlorous acid lid and lash solution. Our Avenova product line now includes lubricating eye drops for instant relief, a WarmEye Compress to soothe irritated eyes, an antioxidant-rich dietary supplement with omega-3 oils, and the i-Chek to monitor physical eyelid health. Earlier this year, we took a major step to position NovaBay to pursue high-growth opportunities by focusing on the eyecare market with most of our products under the Avenova brand addressing dry eye.

This is a large and growing market that offers us plenty of room to grow. Dry eye syndrome is one of the most commonly observed clinical diseases in the US, afflicting approximately 16 million Americans. In fact, the US market for the treatment of dry eye and other ocular surface diseases is projected to grow from $3 billion in 2023 to $4.7 billion by 2030. Among the factors driving this growth are the escalating prevalence of dry eye due to increased computer time and smartphone screen usage, the aging population and a heightened awareness of this condition and improved diagnostic capabilities. In the past, we’ve discussed marketing programs to better engage eyecare specialists in our physician dispense channel, noting the halo effects this channel has in transitioning their patients into our OTC customers.

Throughout this period, we did not lose sight of our digital marketing programs aimed directly at our OTC customers. We’re expanding our digital marketing to include text messages and targeted e-mails to build on the incredible success with our social media marketing to further enhance the Avenova brand, engage customers and drive online sales of Avenova products. These programs meet our cost management measures to efficiently enhance customer loyalty and reach new prospective customers. Our text messaging programs provide an additional and immediate touch point with our customers and are producing encouraging strong initial results. We plan to use text messaging to share exclusive discounts, news and value-added content such as tips for enhancing eye health and other tips will engage and encourage our audience to interact with the brand.

We also recently refreshed our e-mail campaign to include new creative and added automation. Both programs target our existing and highly loyal customer base to enhance retention while expanding reach to new audiences. Turning now to update everybody on our co-marketing agreement with Eyenovia that we announced in March. You may recall that Eyenovia received FDA approval for prescription-only clobetasol, a unique and differentiated steroid that’s prescribed by cataract surgeons. Clobetasol provides ophthalmologists and ocular surgery patients with a compelling, rapid and sustained and more convenient solution for the treatment of postoperative inflammation and pain. This is the first new ophthalmic steroid to enter the US market in more than 15 years.

We are expecting it to launch in the third quarter. Eyenovia will market this program through their sales reps, while NovaBay will market it alongside Avenova in our physician dispense channel. Under the agreement, Eyenovia sales reps will also market our Avenova products. I’m pleased to report that we completed training of the Eyenovia sales team earlier this month. So now I’d like to turn the call over to Tommy to review our financial results. Tommy?

Tommy Law: Thank you, Justin, and good afternoon, everybody. I’ll review Q1 results and then our cash position. Before we start, I’d like to mention that the financial results for the first quarters of 2024 and 2023 that I will be discussing today do not include results from DERMAdoctor. These results can be found in the Form 10-Q that we filed today under the heading Divestiture and Discontinued Operations. Total sales net for the first quarter of 2024 increased 12% over the prior year to $2.6 million. Sales from our eyecare business were $2.4 million, up from $2.2 million in the prior year, with the increase due to higher Avenova branded sales through online channels. We also benefited from a modestly higher contribution from branded Phase 1 wound care product sales during the quarter.

Gross margin on net product revenue was 68% for the first quarters of both 2024 and 2023. Sales and marketing expenses decreased by 50% from the prior year to $1.1 million as we continue to leverage our digital advertising expertise, along with lower expenses for related consulting services. G&A expenses were $2.3 million for the quarter, up from $1.7 million due mainly to higher legal costs related to nonrecurring strategic initiatives. R&D expenses for the first quarter of 2024 were $19,000 versus $10,000 for the prior year period. Related to our DERMAdoctor divestiture, we recorded a noncash loss during the first quarter of $865,000, which is recorded as a loss from the divestiture of a subsidiary in operating expenses. In connection with this divestiture, we entered into a service agreement with the acquirer to provide for a customary and orderly business transition.

This includes warehousing and logistical services. Costs incurred for these services will be included in continuing operations in future quarters with the service contract expiring at the end of this year. Among noncash items, we recorded gains of $194,000 on change in fair value of warrant liabilities and $65,000 on change in fair value of embedded derivative liability during the first quarter of 2024. Also during the quarter, we recorded accretion of discount on convertible notes of $433,000 and other expense net of $480,000 primarily due to the issuance of the March 2024 warrant and the unsecured convertible notes issued in March 2024, with no comparable items in the first quarter of 2023. Net loss attributable to common stockholders for the first quarter of 2024 was $3.6 million or $0.15 per share.

This compares with the net loss attributable to common stockholders for the first quarter of 2023 of $1.7 million or $0.85 per share. We reported cash and cash equivalents of $1.8 million as of March 31st, 2024. And now I’ll turn the call back to Justin.

Justin Hall: Thanks, Tommy. So in summary, Avenova is a well-established brand that has tremendous growth potential in the large and growing dry eye market, which is projected to reach nearly $5 billion in the US over the next six years. We’re proud of our expertise in digital marketing and our recent success that validates its effectiveness with ordered product sales reaching all-time records in the past two months through Amazon.com. We’re introducing new digital programs to build on the success that target our loyal customer base and attracting new potential customers. Importantly, we’re effectively promoting our products while cost efficiently managing our expenses. We’re also capitalizing on strategic growth opportunities with our new relationship with Eyenovia to co-promote each other’s products.

Under our co-promotion agreement, Eyenovia sales reps will market Avenova, while we leverage our established relationships with thousands of eyecare specialists to market the newly approved clobetasol product. Our physician dispensed channel provides a ready-made opportunity to accelerate this product’s commercialization, which is complementary to our Avenova line of products. Over the past year, we’ve introduced programs that strengthen our relationships with — in our physician dispense channel, which creates a halo effect, which supports sales through our OTC channel. It’s also instrumental in developing a marketing partnership for prescription product sales. So with that overview of our business and recent financial performance, I thank you for your attention.

Operator, we’re now ready to take questions.

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Jeffrey Cohen with Ladenburg Thalman. Your line is open.

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

Justin Hall: Hey, Jeff. How are you?

Jeffrey Cohen: I’m good. Few questions, from our end. So can you talk about Amazon for a moment? And what type of data do you receive as far as geographies or demographics, et cetera, as far as their customers.

Justin Hall: Yes, Jeff, that’s a good question. We are actually just looking at that this week. So we do get geographies and sort of not surprisingly, we are very heavily weighted in California, Texas and the Eastern Seaboard. So we do get some good data around geography, and we do know where to focus a lot of our efforts. But with that said, I think, everybody knows that Amazon does limit the amount of interaction that you’re able to get with those customers. So it is a little bit of push and pull. It’s our largest sales channel. It’s also our most efficient sales channel. But we do have somewhat limited data on the customers that buy from there.

Jeffrey Cohen: Okay. Got it. And I can see on avenova.com you’ve got looks like 12 SKUs now, and it appears that more than half of them are available on Amazon. Could you talk about percent of sales that are ex the spray as far as percent of sales that might be attributable to the supplements, the wipes, the compresses the eye check or the eye drops?

Justin Hall: Yes. So that percentage really gives good insight into our business. So our hero SKU is really the antimicrobial lid and lash spray. And that’s the one that doctors recommend the most. That’s also our most differentiated products. So there’s no other product on the market that I think comes close to the efficacy and purity of the spray. So the majority of our revenue does come from the spray, but an increasing amount of revenue also comes from the bundles and the other product line, but it’s sort of without a doubt, heavily weighted on the spray.

Jeffrey Cohen: Okay. Got it. And then any commentary on pricing. It looks like on Avenova Direct if you sign up for texting, it’s 10% off. I don’t know if that’s your first order or beyond that. But any commentary on pricing differentials or potential differentials between Avenova Direct and Amazon?

Justin Hall: Yes. So this is one aspect, Jeff, that I think that we are the same. We face the same challenges and also opportunities that the vast majority of the vendors on Amazon face. So even though Amazon is very efficient for us, as I mentioned to your first question, it’s also very limiting. We don’t really get to interact with those customers very much. So what we do, do is try and lure as many customers to our own website, so they’re direct customers of ours away from Amazon. And I think it’s an uphill battle because of how easy it makes — how easy Amazon makes it for the customer, right? It’s like buy now and you’ll receive the very next day. So we try and make it really easy to buy on our own website with Apple Pay and one-click options, but it’s — the mix between our own website and Amazon, Amazon is the majority of that OTC revenue.

But we are trying to draw customers with unique bundles and unique discounts to our own website. So then we really own that customer — we own that data and then we’re also able to interact with them more and make them very loyal Avenova fans.

Jeffrey Cohen: Got it. Okay. And one more, if I may. Could you talk about the training reference with the Eyenovia team as far as what’s the size of their team now? And are they all 1099s or W2s and what geographic presence do they have set up domestically?

Justin Hall: Yes. So we are very excited about the partnership with Eyenovia. They currently have seven field representatives in major metropolitan areas. And one of the main reasons why this is — why we’re so optimistic about it and why it feels so good is Avenova has not had field sales representatives actually out in the field, visiting doctors face-to-face and talking about our products since before the pandemic. So this is, I don’t know, we’ll call it just a return to a business model that we haven’t really practiced over the past four years. And I think nothing really replaces that face-to-face contact. So even while the cost of field sales reps is very expensive, there’s a certain magic to that relationship building that can’t be replaced with phone calls or Zoom meeting.

So we’re excited to have them on board. And our co-promotion agreement with them is that we will sell clobetasol through our inside sales force. So we’ll be calling out in areas where they don’t have a physical sales rep. And then they will be selling both their products and our products out in the field wherever they have their field sales reps. So they’re having their earnings call next week. I believe it’s on Tuesday. So we should all listen into it to hear the details straight from Michael Rowe’s mouth, but we’re excited about it on our end and the training that we completed was for both clobetasol and Avenova. So we trained their seven people, and then they trained our three people on their product.

Jeffrey Cohen: Perfect. Okay. Thanks for taking our questions, Justin. That was it for us.

Justin Hall: Sure. Thanks.

Operator: And your next question comes from the line of Edward Woo with Ascendiant Capital. Your line is open.

Edward Woo: Yeah, congratulations on the progress. My question is on your marketing strategy for the rest of the year particularly for the consumers on your direct channel on Amazon? How are you going to reach them? Are you going to be able to spend more money to reach them? Or what is your overall marketing strategy?

Justin Hall: Yes. That’s a great question, Ed, because we — again, we’re just — we were talking about that just recently because there’s a fine balance between being efficient and growing the business. And I think we have been very successful in becoming efficient, especially over the past 12 months. We have become more and more efficient in the way that we’re reaching out to those customers. And with that said, new customer acquisition is hard and it’s expensive. And so we’re a little cautious on spending money on new customer acquisition. But without filling the top of the funnel and going after new customers, it’s pretty hard to grow the business. So our strategy for the rest of the year is going to be to continue the efficiency that we have in the online sales channel, but really try and grow the sort of conversion of customers from our physician-dispensed channel and from the doctor’s office into our OTC channel.

So I think there’s a lot of growth and opportunity there. So when people get their first bottle of Avenova from a doctor, they learn about it, they’re educated about it, and then they know and trust the product because it’s a doctor recommendation. But we all know that nobody is going to go back to the doctor across town just to buy a consumable product. They want to buy it online. So then we’re going to try and grab that customer either on avenova.com or we’re happy just to have them find the product on Amazon and buy the product on Amazon to become a subscribe and save customer.

Edward Woo: Great. Thank you for answering my questions and I wish you guys good luck. Thank you.

Justin Hall: Terrific. Always nice to chat with you Ed.

Justin Hall: So it looks like that is our last question. So I thank everybody for joining us today and their interest in NovaBay. We’re excited about our strategic focus in the large and growing dry eye market in our established eyecare business. We look forward to providing another update on our quarterly call in August. Thanks again and have a nice day.

Operator: Ladies and gentlemen this concludes today’s call and we thank you for your participation. You may now disconnect.