NovaBay Pharmaceuticals, Incorporation. ( NYSE: NBY ) Q3 2022 Earnings Conference Call November 14, 2022 4: 30 PM ET

Company Participants

Jody Cain – LHA Investor Relations

Justin Hall – Chief Executive Officer and General Counsel

Andy Jones – Chief Financial Officer

Conference Call Participants

Good afternoon, and welcome to the NovaBay Pharmaceuticals Third Quarter 2022 Financial Results Conference Contact. All participants will be in a listen-only-mode. [Operator instructions] Please note, this event is being recorded.

I’d now like to turn the conference over to Jody Cain. Make sure you go ahead.

Jody Cain

This is Jody Cain with LHA. Thank you for participating in today’s call. Joining me from NovaBay are Justin Corridor, Ceo and General Counsel and Andy Jones, 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 plus uncertainties that could cause actual results in order to be materially different from any anticipated results. In particular, there is uncertainty about the particular 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 outcomes could change at any time and the contemplated impact of COVID-19 plus circumstances that will impact the particular broader economy on NovaBay based 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 associated with risks plus uncertainties, please review NovaBay’s filings along with the Securities and Exchange Commission at sec. gov. Furthermore, the content of this conference contact contains information that is accurate only as of the date of the live broadcast, November 14, 2022, NovaBay undertakes no obligation to revise or update any kind of statements in order to reflect events or circumstances, except as required by law.

Now Let me turn the call over to Justin Area. Justin?

Justin Lounge

Say thanks to you, Jody. Good mid-day, everyone, and thank you for joining us. I am delighted in order to report the 69% increase in product revenue over the particular prior year period, mostly driven by our acquisition of DERMAdoctor and diversified product income streams. On recent conference calls, we had projected that revenue growth in 2022 would accelerate in the second half of the year as many of our initiatives we implemented throughout the year gained traction. It is highly gratifying to deliver on this particular expectation during the third quarter plus our outlook for accelerated growth to continue in Q4 as well.

One of our highlights of the quarter was that will we again achieved year-over-year growth in online Avenova unit sales. Another tremendous achievement was that we delivered our own highest product sales quarter with regard to DERMAdoctor products since the particular acquisitions a year ago. While revenue increased 69%, our ability to optimize digital marketing led to an 11% decrease in sales and advertising spend even with the additional expenses regarding promoting DERMAdoctor products.

I’m excited about our prospects for continued growth. We have established brands within three large and growing verticals; eye care, skin care and wound care. Now I’d like to share updates on each one of the three verticals beginning with Avenova and our vision care products. Avenova is the number one anti-microbial lid plus lash spray in the US dry eye market and because mentioned, online Avenova — online Avenova spray unit sales increased year-over-year since we continued the successful shift to this more efficient online product sales channel.

For the quarter, more than two thirds of device sales were generated on the internet, which is a testament to the effectiveness of our digital advertising. For example , we recently completed the fall intended for eyes sweepstake, which drove 10, 000 new email subscribers and 2, 500 new Instagram followers. Right now we have Black Friday, Cyber Monday and December holiday promotions on tap to further drive sales to get a strong end associated with year push.

During the particular past several years, we’ve capitalized on the recognition of the Avenova brand simply by commercializing companion products that help along with our righteous [ph] plus dry attention customers. These include NovaWipes, the Avenova warm eye compress, Avenova lubricating drops and the particular Eye Check. I’m pleased to report that this strategy is working nicely and our companion items made a notable contribution to the third quarter income number.

Moving on in order to DERMAdoctor and our collection of skincare products; you may recall that will we identified growth opportunities for DERMAdoctor with the trend towards more beauty products being purchased. In fact , the research firm Insider Intelligence expects cosmetics plus beauty eCommerce sales in the US to reach $18 billion dollars this year. By 2026, e-commerce sales are usually expected to account pertaining to nearly a third from the category’s total. With our own digital focused, we are well positioned in order to tap into this particular ongoing market trend.

Last month, all of us announced significant orders meant for a top selling DERMAdoctor product, Kakadu C anti-aging serum, with these orders being placed just ahead of the holiday season. Some revenue from these large orders was recognized in the 3rd quarter with more to come in the fourth quarter. All of us also have the number associated with promotional activities around the holidays, including a discount feature within the Costco holiday mailer.

So in the beginning of the entire year, we’ve introduced six new skincare items to the ever popular DERMAdoctor collections and plans are underway to introduce more products in the future. These types of new products keep us extremely relevant within an industry characterized by the constant emergence of new formulations and importantly, they keep the DERMAdoctor brands in the mind of the consumers. As Andy will discuss inside a moment, we have commercialized these new items while holding R& D and sales and marketing and advertising expenses inside check with our launches executed under the low cost model. Among upcoming marketing promotions for our DERMAdoctor products are additional appearances by Audrey Kunin upon the QVC network along with several shows already booked.

Increasing DERMAdoctor’s presence in international markets is the key priority. As you may know, NovaBay has excellent relationships in China and we know that success in that country is based on having strong local business partners who understand the particular market plus have the ability to create positive brand awareness.

We right now have an updated DERMAdoctor store on Tmall, which is China’s largest B2C network and through our local marketing partner, we possess an expanded network of bloggers and influencers. We all also provide solid media presence and brand building capabilities on like key platforms as Tiktok. Our capability to capture even an extremely modest talk about of the Chinese marketplace would have a considerable impact on our income.

We also offered special promotions on select DERMAdoctor products during the Double 11, so named because it occurs upon November eleven each year. Double 11 will be similar to our Black Friday, but it grows us several times more within revenue. We are also working towards distribution agreements in Europe plus plan in order to expand the particular geographic reach of DERMAdoctor even further.

Today turning to our wound care vertical; we all manufacture and sell the proprietary wound care product under the Phase 1 brand name which is distributed in the US designed for professional use by our own commercial companion Phase 1 health. Products under the NeutroPhase brand are dispersed in China by our partner, Pioneer Pharma. These products are used for cleansing plus irrigating post-surgical wounds, minor burns and superficial abrasions. We have got an advantage inside this market place as our own product is usually made without the toxic chemicals found in many other wound care products. It is gentle, non-irritating, non-sensitizing to skin plus new tissue.

Like the Avenova aerosol, our wind care products are formulated with the FDA cleared proprietary anti-microbial pure form of hypochlorous acid. Our formulation exhibits broad spectrum activity against a range of gram positive and gram negative bacteria, making it highly effective.

Among the advantages of hypochlorous acid is the ability to penetrate plus kill biofilm, which represents a significant barrier in order to wound healing. Among various promotional actions, Phase one health has refreshed their website including recent blog postings through industry key opinion leaders. The most recent post is simply by Dr. Jack Fisher, a past President of the particular American Society for Aesthetic Plastic Surgery and author associated with more compared to 120 publications, a frequent speaker from medical conferences around the world plus an ardent supporter of Phase 1. He has used our item with his patients for more than a decade.

Before reviewing our monetary results, I want to thank our stockholders for their continued support. Last Thursday, we held a meeting, a special meeting of stockholders and am pleased to statement that all proposals passed, which includes the proposal authorizing our own board to effect the reverse stock split. This really is critical within regaining compliance with the NYC American listing and completing the particular previously announced private placement for gross proceeds associated with $3. 25 million bucks.

Our Board of Directors has approved an one just for thirty five reverse stock split that will become effective tomorrow, Tuesday, Nov 15 with our common stock trading on a split adjusted basis Wednesday, The fall of 16. The increased market price resulting from the invert split will improve the market ability of our stock and should encourage additional interest plus trading.

At this point, I’d like to turn the phone call more than to Andy to review our Q3 financial performance. Andy?

Andy Jones

Give thanks to you, Justin, and good afternoon, everybody. As a reminder, the financial results for 2022 periods reflect combined NovaBay and DERMAdoctor results. The particular comparable 2021 periods do not include results from DERMAdoctor since we did not close the DERMAdoctor purchase until November 2021.

I also want in order to announce the change in the way that we present fees paid to third party on-line retailers such as Amazon. Sales commissions and fulfillment charges charged by these retailers, which typically total 15% to 20% of complete net product sales, were previously netted towards related product sales, which reduced total net sales in our statement associated with operations. During the third quarter of 2022, we began presenting sales commissions as sales plus marketing expenses and fulfilment fees while cost of goods sold. Our former presentation associated with the commissions was an error; however, the particular impact has been immaterial in order to reported economic results.

That said, to enhance period-over-period comparability, our prior financial outcomes for the comparable periods we are reporting today and in the future will reveal the changes and revisions for both the commissions and fulfilment fees. We are furthermore excited that these changes will certainly enhance the comparability of our financial results against our peers as product sales from our OTC on the web channel continues to grow in importance.

Importantly, these types of changes in revisions had no effect on our own operating loss, net reduction, comprehensive loss, loss per share, cash flow, cash balances or any balance sheet components for the purpose of any current or past periods. Additional information about these changes in revisions, including their effect on the 2022 and 2021 periods can be found in our form 10-Q filed with SEC today.

Now turning to our monetary results; products revenue within Q3 2022 was $3. 8 million, up sixty 69% from the prior year period. The 2022 third fraction included $1. 3 mil in DERMAdoctor product sales, which Mr. bieber mentioned had been the highest sales one fourth since the particular acquisition. Avenova spray product sales for that third quarter associated with 2022 had been $1. 9 million versus $2. one million a year back. The decrease was due to the continued shift to the more efficient online sales channel and as formerly mentioned, unit sales via this route increased over the prior 12 months period.

Net products revenue for the particular third district of 2022 also included $300, 500 from other Avenova optical items, including our NovaWipes and moist heating icon press and $300, 000 through Phase 1 branded injury care product sales. Gross margin for your 2022 third one fourth was 62%. This compares with 69% for the 2021 quarter. The decrease primarily resulted from the addition of DERMAdoctor and wound care product sales.

Product sales and marketing expenses of $1. 8 million decreased 11% through the earlier year time period, even along with the addition of $0. 6 million in DERMAdoctor sales plus marketing costs. As Justin discussed, we were able to reduce our own sales and marketing spend by optimizing our electronic advertising for Avenova. G& A expenses were $956, 000 in Q3 associated with 2022 and this compares with $1. 8 million a year ago. The 2022 period included $300, 000 in DERMAdoctor G& A costs, which were offset by a reduction inside variable compensation cost within the 2022 period.

R& D costs for the third quarter of 2022 were $41, 000 compared with $10, 000 for that prior yr period. As you can see by this modest amount in both periods, all of us continue to create, develop plus release brand new products without having incurring substantial R& Deb costs. Operating expenses for your third one fourth of 2022 of $2. 8 mil decreased overall $1 million from the 3rd quarter of 2021 and included DERMAdoctor expenses.

In the 2022 quarter, we all recorded several non-cash items related in order to the 2022 warrant reprice transaction we completed in September. These include the $1. nine million noncash loss on the modification of common stock warrants, a $2. 4 mil noncash gain on modifications in fair value associated with warrant liability, a $5. 7 million non-cash accumulated deficit increase due to a good adjustment to the Series B preferred stock conversion and $171, 000 in other expenses.

The net loss attributable to common stockholders for Q3 of 2022 was $5. 8 mil or $0. 10 for each share. That compares with the net reduction attributable in order to common stockholders for Q3 of 2021 of $2. 3 million or $0. 05 per share.

Turning to the year-to-date economic results, for the nine months ended Sept 30, 2022, product revenue was 10 dollars. 7 million, a 53% increase on the prior season period. Gross margin upon product income for the particular first nine months of 2022 was 56%, that compares along with 69% with regard to the first nine weeks of 2021. For the first 9 months associated with 2022, product sales and advertising expenses reduced modestly plus G& The expenses improved 12%, each compared with the particular first nine months of 2021. R& D expenses were $108, 000 compared to $36, 500 for the prior calendar year period.

The particular net loss attributable to common stockholders for that first nine a few months of 2022 was $8. 1 thousand dollars or even $0. 15 per share. The web reduction for your initial nine several weeks of 2021 was $5. 7 mil or $0. 13 for each share. As of September 30, 2022, NovaBay experienced cash and cash equivalents of $3. 9 million. This incorporated approximately $2. 1 mil in gross proceeds received from the particular warrant reprice transaction that was designed in September 2022.

And with that, I’ll turn the call back to Justin.

Justin Hall

Thanks, Andy. We’re excited regarding our prospects for carried on growth. With Avenova, DERMAdoctor in Stage 1, all of us have a solid foundation associated with established brands in the particular large plus growing eyesight care, skin care and wound treatment market. We have been expanding plus refreshing digital marketing campaigns, widening target demographics regarding existing customers and increasing their accessibility while also expanding the Avenova and DERMAdoctor manufacturers with new innovative products that fill a consumer need plus support our corporate positioning.

We expect to benefit from growing — from on the internet sales from growing on-line sales of DERMAdoctor items in international markets, in particular in The far east and in Europe. Our own partner Phase 1 health is promoting our injury product by means of a refreshed website that will highlights item advantages and uses key opinion frontrunners.

We are usually proud of our own specialized portfolio of innovative, scientifically developed and clinically proven products. We are passionate about offering our clients high quality products through our Avenova, DERMAdoctor plus Phase one branch.

Along with that, I thank a person for your attention. Operator, we’re today ready in order to take questions.

Question-and-Answer Session

Owner

We will at this point begin the particular question-and-answer session. [Operator instructions] And our first question will come from Jeff Cohen associated with Ladenburg Thalmann. Go forward, please.

UnidentifiedAnalyst

Hi, Mr. bieber and Andy. This is actually Destiny on intended for Jeff. Appreciate you to get taking the question. We wanted to start first with a bunch of questions around marketing pertaining to usual. I am curious and congratulations on getting that sales plus marketing expense down 11%, that’s awesome. I’m curious is that decrease a function of improved or enhance marketing tactics digitally like well seeing that additional cross-selling and maybe even upselling possibilities or is definitely it strictly based upon your efficiencies in terms of electronic marketing.

Justin Hall

It really can be, well, 1st hi, Future. nice to hear from you. It’s across the board. So everything that will you just mentioned has played a role within decreasing those expenses and I think primarily, we all can say that we looked at all associated with our promotions. We eliminated a lot of them that were not producing results, but we also refreshed creative plus got better with our targeting, but presently there is, cross selling and there’s furthermore just a combination of reaching out to those targeted customers along with messages that I think are more impactful.

UnidentifiedAnalyst

Okay, got it. And I actually guess that leads me into my second question close to your commentary about expanding the demographic. Are you looking in order to maybe expand the age of your own demographic or the interests or both?

Justin Corridor

Yes. Therefore there the answer is a little bit different just depending on what product we’re talking about and what sales channel we are going to talking about. I think the most obvious answer for an expanding demographic is meant for that of Avenova. So , earlier our focus on demographic designed for Avenova offers been an older audience, one that suffers more commonly from bluffrighteous [ph] plus dry eyes, but with the advent of eyelash extensions that are very typical with a younger customer market, those problems of [indiscernible] and dried out eye are now very prevalent within a younger demographic and this particular younger demographic is totally brand new to Avenova.

They really have not paid a great deal of attention to lid and lash hygiene in the past because they haven’t needed to. So along with a more focused message in the direction of a totally new demographic, all of us are growing our customer base. So we’ll see that with Avenova and then when looking on the DERMAdoctor side, instead of expanding our customer base from a messaging standpoint, we’re really trying to drive into two new territories, two new geographic territory. So our own expansion of existing items for DERMAdoctor is going well in Tiongkok and then also within the EU. So you’ll always see, I think development in all three of those areas.

UnidentifiedAnalyst

Okay, started using it. Therefore targeting various age groups with Avenova plus then on the DERMAdoctor side just different or not really just, yet adding some different areas. I believe We got this and that actually furthermore leads me again really well in to my next question. Within Europe, what exactly is the process for getting commercial there? Are you doing cross border sales or are you going to partner similarly to how you do or even how you are doing in China? Could you talk a small more about that?

Justin Area

Sure. Yeah. So it’s all about the particular partners. Whenever we increase into the new geographic territory where we’re a little bit less familiar with the selling trends in the particular marketplace. I feel like we really do need a partner who knows what they’re doing. So we’re — without sharing too much, we have been inside the procedure of onboarding a partner that will be our main distributor for the European Union.

UnidentifiedAnalyst

Ok, first got it and we could potentially see a few revenue from your EU in early 2023 or at least first fifty percent would a person say?

Mr. bieber Hall

Oh, Yes, yes.

UnidentifiedAnalyst

Fine. Awesome, extremely good after which let’s observe, I think I’ll save my some other marketing queries for offline, but Now i’m curious lastly about the slightly lower perimeter, I know you called out some adjustments towards the way you are recording the costs as well as the commission rates. Is that exactly what kind associated with impacted COGS this season or is that more related to several of the orders through like what we call the club channel, which includes Costco?

Andy Jones

Yes. So it can lower year-over-year Destiny plus good in order to talk to you. It’s lower year-over-year, primarily because of to the particular addition of the DERMAdoctor products, which generally come with a lower margin. We also in the third quarter of this year, there were a lot more wound care sales compared to we had last year, which usually also have a lower perimeter. Although a person did mention the change in the particular way that will we’re presenting, the fees, that will have going forward a slight impact on gross margin percentage. It’ll bring it down a couple of percent, but I actually think you caught upon.

I pointed out, there’s no impact in order to operating loss or cash flow or anything like that. It’s simply where wish presenting it in the P& L, but those are the reason that it’s down over final year, but I believe being right around that 60% is sort of in the particular middle sweet spot between where DERMAdoctor is and our traditional businesses have been.

UnidentifiedAnalyst

Okay, perfect. That’s super helpful. I appreciate that. Great quarter. Thank you for taking my questions. Items jump back in queue.

Operator

And this concludes the question-and-answer program. I would like to turn the conference back over in order to Justin Lounge for any closing remark.

Justin Hall

Give thanks you once again for signing up for us and your interest in NovaBay. We are going to extremely excited about our progress as well as the very bright future all of us envision. All of us wish you and your family a happy, healthy holiday season and we all look forward to reporting our progress for the full year outcomes during our own Investor Call in March 2023. Thank you and have a nice day.

User

The conference has now concluded. Thank a person for attending today’s presentation. You might now disconnect.