Q4 2019 Earnings Call
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Welcome to the Novabay Pharmaceuticals, 2018 fourth quarter and full years, earning conference call.
This time, all participants are no listen only mode.
Following management's prepared remarks, we'll hold a key when they session.
Asked the question. Please press star followed by one on your Touchtone phone.
Andrew This conference is being recorded Thursday March 26, 2020, I'd now like to turn the conference over to Jody Cain. Please go ahead.
This is Jody Cain with L.A.J.. Thank you for participating in today's call joining me from Novabay Pharmaceuticals, our Justin halt President and Chief Executive Officer, and Jason Raleigh, The company's Chief Financial Officer, I'd like to remind listeners. The 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 many anticipated results for a list and description of those risks and uncertainties. Please review no put these filings with the Securities and Exchange Commission it.
As he see dot Gov.
Furthermore, the content at this conference call contains information that is accurate only as of the date of the live broadcast March 26, 2020, Nope would be 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.
Justin Hall Justin.
Thank you Jody and good afternoon, everyone and thank you for joining us [laughter] I would first like to begin with a topic on many people's minds Cobot 19, and the impact on her business first and foremost, we're gratified to owner or commitment at Novabay to the health and wellbeing of people everywhere by tapping into our global supply.
Hi network to locate and make available high quality K., a 95 masks at the most reasonable price impossible.
Online ordering of these masses available through our website Epanova dot com.
These cadninety five rated masks are affected that filtering out at least 95% of airborne particles, including micro organisms dust, Poland and air pollution.
They are constructed with a three layers filtration system of nonwoven soft and reasonable fiber for effective protection.
The mass feature an extra soft in comfortable elastic your lives and have an adjustable news bridge strip.
Our first small shipment of Candy 95 mass came in last week, we sold out online very quickly. We received our second large inventory of math yesterday published or a press release and began shipping immediately.
These mass are available in quantities of 10 were 30 through our website up another dot com.
However, because of our direct access to a large supplier, we're able to fulfill individual high volume orders of quantities of $50000 or 50000 masks for more.
Special pricing for these large orders is available anybody interested in placing a large order of 50000 mass or more should come into contact us directly sales at Novabay Dot com.
Demand has been brisk and we're working diligently to ship orders quickly as quickly as possible. Although these are just a temporary item for us we plan to continue providing K in the K and 95 bass for as long as the demand remains.
And the current environment, we've been asked if our current hydrochloric acid based products, which include I've Inova Celebrex Neutrophase, maybe use as an antiseptic to come back to Corona virus.
Nobody does not have the appropriate clearance nor have we conducted extensive the extensive testing necessary to make this claim.
Further the FDA has announced that there are no accrued vaccines drugs or investigational products currently available to treat or prevent the corona virus that said, we do have a line of anti microbial products, they're scientifically proven to kill a broad spectrum of bacteria virus and funny.
No more than ever people are understanding the value of a powerful yet gentle anti microbial solution.
Turning to ever Nova I'm pleased to report police report that the global pandemic has had minimal impact on nobody's operations to date.
They start price hidden [laughter], a an eight month hi at $1.68 cents last week on March 19th.
Because of the strong demand for anti microbial products no. They currently does not anticipate any structural changes to his operations are workforce, all of whom our U.S. based.
Like all companies during this unprecedented and trying time, we will continue to assess as circumstances evolve.
At our headquarters in the San Francisco Bay area, we are complying with the requirements of the shelter in place mandate with all of our employees having work from home capabilities.
In terms of product availability, we're confident and having sufficient supply.
Avenue about manufacturing has been uninterrupted Patterson contract manufacturers.
All wrong materials and other supplies used in the manufacturing I've never are available from various third party suppliers and quantities, we believe will be adequate to meet her needs.
Switching now to a review of our result, no. They ended a year of transition on a high note with Avenue of a unit sales for December reaching their highest monthly level for all of 2019, our momentum was largely driven by our new direct to consumer sales channel.
You may recall that slightly more than a year ago, we shifted our U.S. commercial strategy for ever know back to focus on opportunities with economics that make the best sense for Novabay.
This shift included a significant reduction in our sales force that had been promoting prescription Avenue of eye to eye care specialists and was followed by the launch of Nonprescription Havana about directly connected to consumers on Amazon Dot Com in June.
From that time, we launched the consumer channel in early June unit sales from Amazon Dot Com grew each successive month by the fourth quarter nearly half of all avenues for units were sold on Amazon up from 36% in the third quarter.
We are concerned we are encouraged by consumer reception to Avenue about on Amazon as we view this channel as holding the greatest opportunity for Avenue of growth avenues for growth going forward.
With the online consumer sales, becoming an increasing percentage of or overall sales. We are pursuing a strategy to cost effectively expand our customer base on Amazon.
To that end earlier this week, we unveiled new consumer branding for Epanova with fresh packaging and reinvigorated messages that emphasize quality of life themes.
The refresh branding is accompanied by a social media programs, specifically directed towards broadening of enough its appeal and expanding the universe of customers.
I invite you to view this new exciting about online at <unk> dot com or on Amazon.
Our refreshed branding and new marketing campaign were developed by a leading digital branding for and it highlights avids distinct advantages in the marketplace.
I've been Nova is formulated with our patented after FDA cleared pure hypochlorous acid and is the only pure hypochlorous acid solution on the market today.
This pure formulation supports our assertion the advent of is the best product available today to topic, we treat chronic bacterial infections that affect approx approximately 85% of the dry eye market.
Our hypochlorous acid formulation has anti microbial properties and is clinically proven to reduce bacteria on the ocular skin by more than 90%, but yet is gentle soothing and completely non toxic.
We're capturing these advantages.
[noise] through attractive packaging and consumer friendly messaging, our new packaging encompasses a color palette that conveys concepts such as purity premium modern and science as well as imagery, representing the iris of the I. It's highly distinctive from other competitor products as you can see on Amazon are now.
Consumer messaging focuses on quality of life attributes such as the fact that hypochlorous acid replicates. The substance nationally made by the body to fight bacteria and that having site interrupted by inflammation and irritation is more than a nuisance. It can rob you have the moments that really matter.
Our messaging also teachers use of incorporating I've, Nova into twice daily grooming routines right alongside brushing their teeth and come your hair, we're excited to reach consumers with new tagline such as purely you skincare for your eyes, and we have alluded in last care down to a science.
You may recall that we embark on her consumer channel as one of several strategies to address the issues, we experienced with our prescription channel over the past several years prescription branded pharmaceuticals Avenue of among them have been significantly and negatively impact by impacted by the trend towards higher deductible health care plans.
And our efforts to maintain I've been no business affordability, we were compelled to offer more and more coupons and rebates.
To mitigate the impact of coupon in Rebating, we built relationships with partner pharmacies, who sell prescription hoping to have a at the best possible priced their customers and through our position dispense channel in which I care specialists resale Avenue of it directly to their patients.
We're seeing a stabilization from these prescription base channels, providing us with the opportunity to focus on expanding our customer base.
Notably for all prescription sales, we are retaining our former packaging, which has a look and feel of a prescription product and messaging and promotion for the prescription only product will continue to focus on I care specialists, who write prescriptions.
Our decision to pursue the nonprescription direct to consumer channel was in response to our desire to control the distribution of our own product and also to increase the accessibility with customers purchasing I'm gonna about through Amazon's rapid and efficient infrastructure.
This channel capitalizes on the trend of marketing pharmaceuticals by allowing customers to forgo a time consuming doctors because it and the subsequent trip to the pharmacy with the added potential benefit of offsetting cost in a high deductible health care environment.
That said sales to consumers on Amazon Com at a lower gross to net pricing and the prescription sales.
As a result, while 40% of all Avenue avenues to units sold for the fourth quarter came from the consumer channel and accounted for only 35% of total revenue.
While these lower gross to net unit revenues impacted Avenue of a sales figures you reduced operating expenses for 2019, 24% from the prior year, mainly due to the reduction in the size of our Salesforce.
And as a final topic, our Chief Financial Officer, Jason Rally has tendered his resignation from Novabay effective March 30, Onest in order to take a job as much closer to his home.
Jason has been a significant asset to our company over the past four years and has been instrumental in our transition since stepping into the CFO position last year.
We wish him the best for continued professional success.
Im pleased to welcome lend Christopher to Novabay, as our interim CFO and treasurer.
We are delighted to be able to quickly fill this position through a consulting and executive services from rose Ryan with a highly qualified financial professionals, who as public company experience in the life Sciences industry.
Linda joined US This Monday and is working closely with Jason and our strong finance team here at Novabay to support a seamless transition I'm confident that we're in good hands until we're able to secure a permanent replacement for Jason.
I'll turn things over to Jason So he can review our financial performance in more detail.
Thank you for this kind words, Justin and good afternoon, everyone.
Let's start my financial review with Q4 net sales for the fourth quarter of 2019 were $1.7 million as this compares with $3.6 million from the prior year quarter.
The decrease in net sales was primarily the result of the decrease in the net selling price of Epanova products, along with a decrease in the number.
Inova units sold largely due to a decrease in insurance coverage on the product by national payers.
In response to the price pressure, we launched ever Nova through Amazon, which helped to stabilize Epanova unit sales in 2019, but has a lower net selling price.
In reviewing Q4 2019 sales by channel Epanova sales in the retail pharmacy channel were $897000 or 53% of Evan over sales sales through the up having over direct were $601000 and sales.
Through our in office direct channel.
Were 200 and.
$2000.
Gross margin on net product revenue.
For the fourth quarter of 2019 was 65% compared with 88% in the year ago period.
With the decrease due to lower gross net pricing.
[noise] operating expenses for the fourth quarter 2019 decreased 30%.
$3.3 million from core point $8 million a year ago.
Reflecting the strategic shift and our U.S. commercial organization.
In March of 2019.
This is in line with our previously stated expectation to reduced operating expenses in 2019 related to the reduction in force.
In reviewing Q4 expenses by line item sales and marketing expense were $2.2 million, a 32% decrease from $3.2 million from the prior year period.
The decrease was primarily.
Due to a reduction in headcount, partly offset by an increase in direct marketing expenses.
Janet expenses for the fourth quarter of 2019 were $1.2 million, 822% decrease from $1.5 million from the prior year period.
With the decline due to reduced head count.
Offside offset by severance payments and consulting fees.
R&D expense for Q4, 2019 were $18000 compared with $107000 in the year ago period.
Noncash loss on the fair value of warrant liability for Q4, 2019 was $187000, which compared with a noncash gain of $340000 for Q4 2018.
Noncash gain on the embedded derivative associated with the convertible note for the fourth quarter of 2019 was up $1.001 million. The convertible note are associated with alone completed in 2019. So there is no comparable gain or loss for the prior year period.
Other expense for the fourth quarter of 2019 was $259000 compared with other income of $6000 in the prior year period.
Other expenses reflect interest due on the promise seriously.
Note issued in February 2019, the amortization of discount and the issuance costs related to the convertible note issued in March 2019.
A beneficial conversion feature.
Point $8 million was recorded in the fourth quarter of 2019 elated to conversion of 2.7 million shares a series a preferred stock into 2.7 million shares of common stock.
The transaction was recorded as a discount to preferred stock and an increase to additional paid in capital.
The company recorded no comparable item in the fourth quarter of 2018.
Novabay recorded a loss attributable to common shareholders for the 2019 for corridor of $3.5 million or 13 cents per share. This compares with a net loss for the 2018 fourth quarter.
Of $1.3 million or seven cents per share.
Turning now to a full year financial results.
Net sales for 2019 were $6.6 million and this compares with $12.5 million for 2018.
The decrease was primarily due to the loss of insurance reimbursement and the resulting lower Evan Nova gross to net pricing.
Offset by an increase in direct sales in the fourth quarter.
Gross margin on product revenue was 74% for 2019 compared with 88% for 2018.
Operating expense for 2019, Greece decreased 24% to $14.2 million from $18.9 million for 2018.
Sales and marketing expense declined 31% to $8.8 million from $12.8 million in 2018, but the decrease due to reduced sales rep headcount, partly offset by an increase in direct marketing expense.
Gionee expense decreased 11% to 5.3 million from 5.8 million in 2018 with the decreased due to reduced head count.
R&D expense for 2019 were $184000 compared with 259000 in 2018.
The noncash gain on the fair value of warrant liability for 2019 was $149000 compared with a noncash gain for 2018 of $1.3 million.
The noncash gain on the embedded derivatives associated with the convertible note for 2019 was $424000. The company recorded no comparable item in 2018.
Other expenses for 200 for 2019.
Were $1.4 million compared with other income of $19000 for 2018.
The other expense was due to interest on the promissory note issued in February 2019.
The amortization of discount and issuance of costs related to the convertible note issued in March 2019, and the issuance costs related to the issuance of warrants in August 2019.
A beneficial conversion feature a point $8 million was recorded in 2019 related to the conversion of 2.7 million shares of series a preferred stock into 1.7 million shares of common stock as discussed in the quarterly funnel finance.
Our results.
Net loss attributable to common shareholders for 2019 was $10.4 million were 48 cents per share.
Compared with a net loss for 2018 of $6.5 million for 39 cents per share.
In reviewing our balance sheet, we had cash and cash equivalents of $6.9 million as of December 30, Onest 2019.
With that I'll turn the call back to Justin.
Thank you Jason.
Our strategy. This year is to build shareholder value by cost effectively expanding our customer base for OMNOVA, while leveraging our online and physician dispensed channels with product line extensions and new product offerings. As discussed we are already executing on this strategy with the launch of our reinvigorated quality of life consumer branding for ever Nova.
And there's more to come.
In summary, the consumer response to having avenue of available on M. on Amazon has been great and we continue expected.
We expect continued growth from this channel throughout 2020.
We are unveiling a fresh consumer branding in a cost effective new social media campaign to hold our customer base for Avenue about through Amazon Dot com.
We are seeing stabilization in our prescription base sales for ever Nova in our and our continuing our commercial activities directed to those channels.
We are targeting ups helmick and skin care products in line extensions that will allow us to leverage our salesforce in our physician dispense channels under economics that makes sense for novabay.
And we are evaluating new products to support cost efficient growth.
And finally in these most unusual circumstances are novabay team is pleased to provide a source for the much needed K and 95 mass which is keeping in inline with our commitment to the health and wellbeing of people worldwide.
Weve out to be here to accomplish this objective during and after this crisis.
With that overview I. Thank you for your attention operator, we're now ready to take questions.
Ladies and gentlemen, if you wish to register for a question for today's question and answer your question, we'll need to press Star then one number one on your telephone.
If your question has been answered and with all your pulling request you may do you still by pressing the pension.
If you are using a speakerphone. Please pick up your handset before entering your request one moment. Please for the first question.
While we're waiting for the first question first question I wanted to mentioned that earlier. This week one of our large shareholders a exercise their option to purchase approximately $200000 worth of words, which were issued in a private placement in June 2019.
These warrants were exercisable at 87 cents per share and we believe this action is a vote of confidence in our company's future.
Our first question comes from Jeffrey Cohen with Ladenburg Thalmann.
Please go ahead with your question.
Hi, Justin Jerry So when how are you.
Good.
I got a bunch of question. So just run through then we'll know you cut me off when you feel new true so.
Okay, you expect to see Ernie.
Mass revenue hit the first quarter.
Ah, Yes of course so.
We are not taking returns on the math because they are a disposable item and also a temporary item. So as soon as we receive payment and ship them. It. That's when we have record that revenue. So we will see a little bit of that in March sort of just in the last two weeks here.
But I think most of the significant revenue will be in April.
Got it Okay, and then comments a little bit about the margins I know that they're related than what we saw it and how that relates to I am pretty familiar with how that relates to online versus.
Correct, but could you talk about the margins as it relates actual units was the actual units for Q4.
Greater than the rest in Q3.
Yes, so we pushed out in sold more units in Q4 than we did in Q3 and December was a particularly strong month with more units being sold in December than any other month of the year, but a lot of that growth.
Came from the lower GP channels of the online sales and the physician dispense channel.
Okay, and then how would that relate to your through TTC activities and in a perfect World what would you like to composition to be okay.
In line versus.
Versus your direct channel versus the physician Chen.
Yes, so you that that's that's a great question and.
For right now about half of our revenues coming from.
The traditional physician and pharmacy channel and.
I think that that as I mentioned on the on the call is I think going to stabilize and I'd like it to stay exactly I think where it is.
But I do see our future growth all coming from that direct to consumer channel.
The market I feel is a very large for that channel.
And there's a lot of potential there and really looking for growth out of that channel, while the physician dispense and Rx only channels I think our are going to stay right about where they are.
Okay got it and then as far as Steve indicated 95 can you talk just a little bit about.
Your supplier and the potential number of units, which could be available as far as their capacity.
And exclusiveness, you're not for North America.
Yes.
So this was something that I think was just born out of pure need in the marketplace and our ability to.
Meet that need so.
The supplier is.
One that's in China, and because we have a lot of Chinese connections, both with distribution and with.
Our large majority shareholders. That's how we came in contact with the supplier called earn and earned Luckily has a huge capacity to manufacture. These masks. So that's why I mentioned on the call any large orders of 50000 masks for more can be.
And we can deliver straight from the factory to a designated delivery address anywhere in the United States. So I think you know very pleased at this time to sort of help out people at large because it is.
Something that people are really clamoring for and for us to be able to provide this product that.
Desperate need is I think especially gratifying for us.
Okay could you quantify huge and could you talk about.
Competitive forces as far as ordering from Ernst into other territories or countries.
Well so we just.
We heard that the Spanish government, just ordered 1 million masks from Ernst and or it's going to be able to provide that over the next couple of weeks. So I think that's indicative of their capacity to produce these masks. So when I say that their capacity is.
I don't want to say limit less but their capacity to produce these nice I think is greater than any demand that will be able to conjure up here in the United States.
So.
The the numbers that we'll be able to sell here in the United States I I couldn't even begin to.
Guess at that if you had asked me a month ago, if we would be selling mass I would have told you know.
And now we are hustling up to try to meet demand in every shipment that shows up.
Here at Novabay is already sold out by the time it arrives.
Okay got it one for you Jason could you Kinda give me a sense for the.
The consulting and severance portion of the sales and marketing.
Quarter, I'm, just trying to get a sense or would it a baseline may look at on the sales and marketing.
Kind of a normalized levels.
Yes, yes, so I'll, let I'll, let Jason answer that but yeah, I don't think that there is.
Any any severance.
There wasn't significant severance within the.
With the sales folks it was limited do it to a two week severance upon their departure of the sales team at the first part of the year.
So there wasn't there wasn't anything significant from a go forward run rate.
Okay got it and.
Getting down toward the end so.
Any specific steady state you could fill will soon.
Hi, there for both Nova wipes as well as Stellarex from the quarter.
Oh, yes, sure. So nobody buys we're always meant to be a small product line extensions and to take up the online real estate on Amazon just to.
But improve the sort of storefront for I've, Nova and Novabay store front on Amazon.
And people really do.
Like those wipes a lot and I've always been a big fan of those because I think people, who use avenue, but with the Nova waves are going to get the best clinical result by using those two together when you tell somebody you know too.
Use of cotton pad or something like that often times.
They don't apply it right or they're not using.
Right application method so.
You know I'm I'm, a big fan of those wipes, but those were never meant to be sort of a huge revenue driver. There just more of a by product line extension.
As far as Celebrex is concerned we did launch that direct to consumer campaign and.
Doing a lot of social media and online advertising for that.
We're just trying to take advantage of that foundation that we created with Avenue of duplicating.
That for Celebrex and so we are.
We are getting some good recognition in brand recognition in the marketplace, but I think we will.
Rebrand that similar to how we rebranded Avondale, but to reach a much broader audience.
Okay got it and last one if I may.
Which occasions or the.
The masks on your margins based off your Q4 margins would you expect it could be.
To drag that lower or tried out higher.
The.
The GP per mask of course is much lower but I think as a percentage.
It will probably match that you know of another maybe it's a little bit less.
But just kind of happy to have.
Those out on the market and adding to our topline.
Okay perfect. Thanks folks that does it for me I appreciate it.
Yes, so Jeff the last thing I'll say about that without giving specifics, we're very cognizant of the price gouging, that's going on in the marketplace and I think we wanted to really keep our hands clean and our brand clean.
And not in any way be.
Participatory in that so the mass are priced at a level that is I think very reasonable.
And we we definitely don't want to price them high so people would accuse us of price gouging, but we one of the.
Main drivers of these math is the immediate needs. So we're flying them in from China, which makes the shipping cost quite expensive, so you're not going to see.
Rock bottom prices. There. So we are making I think a very small reasonable profit on those.
Something that I think balances very well the public need with our cost of doing business.
Perfect.
Thanks, Justin.
Thank you great to talk to you.
Once again, ladies and gentlemen.
As a reminder to register for a question. Please press Star then number one on your telephone or.
Our next question comes from Ed Woo with Ascendiant capital.
Please go ahead with your question.
Yeah, congratulations on getting the math have you thought about introducing other products that may be.
Needed at the moment.
Yes, we absolutely have some of the other products that we're looking at are a little bit more.
More complicated with greater lead time, but I think where we're definitely tapping into our global supply network to see.
If we can bring in any additional items that have a strong demand in the marketplace.
Great and then I know the impact obviously on possible sales, but.
If you do so much sales through Amazon It has been not discuss about Amazon being overwhelmed some delayed shipping times has that impacted your business at all.
Well so.
Amazon is a.
Humid and sometimes a little difficult to navigate so the great thing about Amazon is that you know during normal times their reach is very broad.
And our advertising on Amazon actually has.
The greatest rate of return out of any of our advertising channels. So in that respect Amazon is good but Amazon is also a bad in the sense that you lose control over that distribution network and.
If they push out.
You know the your ship date Theres really not much you can do about that so.
Amazon I think is both good and bad in in relation to the masks. The first thing that we did when we heard that they were available for us to sell.
Of course, like we went to Amazon to see if we can list.
You know alongside of Inova and.
They refused to lifting and we couldn't get the mass up on Amazon. So that's why we just decided to.
Take control of it ourselves and list them on our website and sell them directly. So you know its a.
You know Amazon is both good and bad.
Great well. Thank you for answering my questions and good luck and thank you again for being proactive on during this crisis. Thank you Oh, yes, absolutely agree to talk to you had.
There are no further questions at this time Justin Hauke. Please proceed with the presentation or any closing remarks.
Thank you once again for joining us and your interest in Novabay. We look forward to updating you on our next call in May to discuss our financial results for the first quarter of 2020 in the meantime, please have a good day.
Ladies and gentlemen that concludes your conference call for today.
Thank you for your participation and ask disconnect your lines.
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