Q3 2021 NovaBay Pharmaceuticals Inc Earnings Call

Good day and welcome to Windows, Okay Pharmaceuticals, third quarter 2021 financial results Conference call.

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I would now like to turn the conference over to Jody Cain. Please go ahead.

This is Jody Cain with elite Jay. Thank you for participating in today's call. Joining me from Novabay are Justin Hall, Chief Executive Officer, and General Counsel, Andy Jones, Chief Financial Officer and Dr. Kadri.

Audrey coupons.

This new Chief product 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.

Forward looking statements involve risks and uncertainties that could cause actual results could be materially different from any anticipated results. In particular, there is uncertainty about the future operations of Nova basically you'll be acquired subsidiary to a doctor and the duration and potential impact of the ongoing COVID-19.

18th pandemic. This means that results could change at any time and the contemplated impact no, but basically since the acquisition.

COVID-19 has over base operations.

Its financial results and outlook is our best estimate based on the information available for today's discussion for a list and description of risks and uncertainties. Please review the milk based filings with the Securities and Exchange Commission at.

<unk> Dot Gov.

Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast November 11th 2021 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 Justin.

Thank you Jody good afternoon, everyone and thank you for joining us.

I would like to welcome the entire German Doctor team and our new shareholders to todays call. The purpose of today's call is twofold. The first is to review <unk> third quarter performance. The second and more important purpose of the call is to talk about <unk> acquisition of Derma Doctor.

Last Friday I was in Kansas City with the German Dr. Tepe, when we closed on the transaction and officially became one company.

This was days and this was just days after closing the $15 million private placement.

We appreciate the strong reception we received for this financing in the investment community, which we see as an endorsement of the financials and strategy underlying the German Doctor acquisition.

Now more than ever I'm extremely optimistic about <unk> future.

From a doctor is new product development capabilities will put us on a growth trajectory previously unattainable unattainable as a one product company.

That said, we continue to see strong performance from our Avenova business.

I've been over revenues year to date have increased 16% over the same period last year with unit sales, reaching an all time high as more people than ever are using avenova today than ever before.

Before discussing derma Doctor and our new product pipeline I'll turn the call over to Andy to review Novabay Standalone financial performance from Q3, a period prior to the acquisition. Thank you Justin and good afternoon, everybody Avenova.

Avenova product revenue for the third quarter of 2021 was $1 $8 million, that's unchanged from the prior year quarter.

Total Avenova unit sales increased 11% and avenova over the counter or OTC unit sales increased 26%, both compared with the prior year period.

Gross margin for this year's third quarter was 73% compared with 75% for the 2020 quarter, which is affected modestly by Avenova sales channel mix.

And total operating expenses were $3.6 million for the third quarter of 2020 down slightly from $3 $7 million a year ago. The decrease was due primarily to lower sales personnel head count as we focus more on the OTC channel and due to lower overall legal expenses.

Offset in part by higher digital advertising costs.

Net loss for the 2021 third quarter was $2 $1 million or five cents per share. This is an improvement from a net loss a year ago of $3 $2 million or <unk> <unk> per share, which included a $1 $6 million noncash loss on the change of fair market warrant liability.

We eliminated the warrants underlying net loss in 2020, so there was no comparable amount this year.

Turning briefly to our year to date financial results for the first nine months of 2021 total net sales were $5 $8 million Avenova unit sales increased 39% and Avenova OTC unit sales increased 67%, both compared with the prior year period.

Total sales for the first nine months of 2020 or $8.1 million and included $3 $1 million in sales of K N 95 masks and other PPE products.

Gross margin for the first nine months of this year was 73%, which is an improvement from 61% for the first nine months of 2020, which included sales of lower margin PPE products.

Total operating expenses were $9 $9 million versus $9 $6 million for the year ago period, with the increase mainly attributable to higher sales and marketing expenses as we invested in digital advertising programs net loss for the first nine months of 2021 was $5 $7 million or <unk> 13 per share.

Was an improvement from a net loss of $9 $3 million or 28 cents per share for the first nine months of 2020, which included a noncash loss of $5 $2 million related to the warrant liability that we eliminated last year.

As of September 30th 2021, Novabay had cash and cash equivalents of $9 million. During the first nine months of this year, we raised net proceeds of $1 $8 million from the sale of common stock through an ATM facility.

As Justin mentioned, we also completed a 15 million dollar financing last week.

This financing allows us to fully execute on the closing of the acquisition of Derma Doctor and integrate its operations, we expect that the total administrative cost to acquire and integrate dock derma Doctor will be approximately $1 $5 million, a majority of which will be incurred in the fourth quarter of this year.

In reviewing the financial impact of the Derma Doctor acquisition. This transaction makes clear financial sense Derma Doctor is immediately accretive to our bottom line with the addition of Derma Doctor expected to double Novo based revenues we.

We anticipate some modest expense synergies as derma Doctor will continue as a standalone entity in the near term.

As we said in the past, we expect to reach profitability with tremendous revenues exceeding $20 million for the fiscal year 2022.

We now expect to achieve profitability its profitability as soon as the fourth quarter of 2022.

I'm pleased to report that we believe our current cash is sufficient to fund operations through that time.

Lastly, I'd like to personally and publicly welcome the Derma Doctor team to the Novabay family I am very very excited about our shared future.

And with that I'll turn the call back over to Justin.

Thanks, Andy.

Now, let's turn to our vision for the combined companies post acquisition German Doctor will operate as a wholly owned subsidiary of Novabay with co founders, Jeff and Audrey Kunin and continuing to lead the German Doctor operations I'm pleased to announce the Audrey has taken on a broader role at Novabay as our chief product officer.

As mentioned on our last call Audrey is a board certified dermatologist, a known a trailblazer in the skin care industry and the developer of many of the unique formulations found in derma Doctor products in.

In the short time since we've announced our proposed business combination Audrey has been working with us on new products to be introduced into both the skincare and eye care markets.

We will discuss some plans for our new products in a few moments.

I'm truly excited about the transformation of Novabay as we view derma doctor as an ideal fit with novabay for multiple reasons.

As Andy mentioned this transaction has compelling financial implications, however, I'd like to reiterate the broader benefits.

These benefits specifically include first product diversification.

Marketing capabilities.

Third international distribution.

Fourth warehousing and front office synergies and fifth new product development.

I'll expand a little on each one of these points first Germany, the German Doctor acquisition greatly expands our current product portfolio. We've we've achieved we've achieved considerable success with avenova, including establishing our brand as the premier anti microbial lid and lost right.

While we are proud of this accomplishment we have now eliminated the risk of being a one product company.

Further we significantly increased our foothold in the high growth lucrative skincare market.

Research and markets Dot com estimates that the global market for cosmetic skincare products exceeded $145 billion in 2020 and will reach $185 billion by 2027.

This market rewards innovation, and we believe that scientifically formulated products developed by a dermatologist and proven to be highly effective will resonate strongly with consumers.

Second we bring our expertise in over the counter over the counter marketing to promote sales of derma Doctor skincare products.

We launched our OTC product, two and a half years ago and I'm pleased to report that through immense effort and skill more than two thirds of Avenova units are now sold through the online sales channel.

We bring expertise in developing robust social media and print advertising campaigns and a strong marketing presence across all digital channels, allowing consumers to engage with the brand through social media and Influencer campaigns.

Our sophisticated digital programs include real time monitoring of metrics to evaluate effectiveness in reaching target demographics.

Importantly, you can make quick adjustments to improve the effectiveness and optimize ad spend.

We're excited about bringing these successful strategies to German doctor products.

This is an exciting opportunity to advance and enhance the derma doctor business and customer base.

Third with German doctors established relationships, we have the opportunity to expand avenova in salaries sales into international markets.

Derma Doctor products are sold through a large and growing network of international distributors and retailers in North America, South America, Europe and Asia.

The German Doctor team has developed these relationships over many years and will continue to see and we continue to see significant future growth opportunities. We look forward to leveraging derma doctors relationships with international distributors to further distribute novabay products throughout the world.

The fourth benefit of the acquisition relates to warehouse and front office synergies for example, derma Doctor can now share his warehouse operations with Novabay. These.

These operations include storage picking packing shipping and logistics, we anticipate some cost savings from shifting from third party providers to the existing derma Doctor warehouse team.

With respect to G&A expenses, we of course expect to consolidate all accounting and finance functions.

Lastly, but most importantly, we gained audrey and her team's capabilities in developing new scientifically proven products to expand our presence in both the skincare in eyecare markets.

This highly experienced group at Derma Doctor has a proven track record of creating innovative award winning products with the acquisition of Derma Doctor Novabay now has product development capabilities, including idea generation proprietary product formulation packaging clinical testing and marketing derma.

Derma Doctor has created new product categories with clinically effective formulations, which consumers have come to love and trust.

We are extremely excited about our new ability to immediately accelerate the development of numerous innovative products across all of our brands.

With this one highly strategic acquisition, we have created a new novabay with revenues revenues diversified across the eye care and skin care market and a path towards profitability.

Now I'd like to turn the call over to Audrey Q&A.

Thanks, Justin and it's a pleasure to be here I can speak for the whole derma Doctor team expressed enthusiasm for joining novabay.

Turnpike yourselves over 30 products within families such as AIT misbehave calm cool and collected talkative C. K P duty and when can we bundle our products are sold through major retailers, such as Macy's QBC dotcom and tough to predict.

It'll be the retailers such as skin store and through Amazon Dot Com and of course, I've done the docs and Dot Com website.

We are very excited about expanding our brand awareness distribution and sales utilizing everbank financial and marketing resource.

And importantly, a partner for Derma Doctor in Q1 of 2022 is kidney fees on air televised platform, which has an audience composed of approximately 11 million viewers.

Our focus of Derma Doctor has always been on creating innovative German philosophy, correct problem solving solutions, which target common skin concerns.

Our approach has been to develop clean clinical formulation.

Allergenic yet effective.

And joining with Novabay, we intend to continue this approach both in launching new skin care as well as in developing solutions for the eye care market.

We currently have an extensive pipeline of problem solving products in various stages of development.

Oh I get skin condition.

Can expect at least for his schemes to be manufactured and commercially available in the first half of 2022.

We will expand popular categories targeting common skin concerns.

Such as anti aging characterize with Polaris and eczema.

We are scientifically developing innovative solutions within the categories.

P D and calm cool uncollected formal.

Similarly for 2023 will both expand existing families and create new ones.

We're bringing the same product development strategy to this solution in the eye care market.

We have identified dry eye blepharitis.

My dog my MLB, I'm glad I'm glad dysfunction inflammation bacterial and contact lens intolerance.

So as to address in 2022 and 2023, our plan is to develop a range of products under the Avenova brand furthering our mission to address all needs forbid and rationale.

We're very excited to be working with novabay to accelerated pipeline grow and it's been our long standing goal to continue creating innovative problem solving skincare and we now have the backing of a strong partner novabay and with that I'd like to turn it back to Jonathan.

Thanks Audrey.

You may have seen that we filed a preliminary proxy statement with the SEC for a special meeting of stockholders to be held virtually on December 17th. If you are a novabay stockholder as of the October 25, 2021 record date, you'll receive the proxy statement towards the end of the month in the mail.

We are asking that you vote in favor of all proposals you will receive instructions in the proxy statement to vote your shares by mail by phone or online.

The first two proposals pertain to our recent 15 million dollar financing in support of the Derma Doctor acquisition.

Passage of all proposals is key to allowing us to move forward as a combined company. The first proposal authorizes us to go beyond the 20% NYSE threshold for new share issuances in the second authorizes the shares that underlie the warrants.

I know that there are some current shareholders who are concerned about dilution. However, I want to assure everyone that the acquisition of Derma Doctor creates intrinsic an immediate shareholder value and the approval of both proposals is definitely in the best interest of all shareholders.

We need stockholder approval for both of these proposals to advance our vision for Novabay.

So I want to reiterate my enthusiasm for the Derma Doctor transaction I expect that the Novabay and derma Doctor complementary skill sets will create a stronger and faster growing company with expanded footprint in the eye care and skin care markets importantly, with the anticipated revenue growth afforded by this acquisition we are targeting profit.

Ability by the end of 2022 and achievement, we believe will greatly enhance shareholder value I couldnt be more excited about our future with that I. Thank you for your attention operator, we're ready to take questions.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then one.

Tom.

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To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

While we're waiting for the first question I want to urge our shareholders to vote for all proposals in our proxy statement. If you have questions or would like to vote. Your shares by phone. Please call one 806 906903.

I also want to mention that we'll be presenting at the H C. Wainwright virtual bio connect conference and well also be holding in person investor meetings at the J P. Morgan Health care conference in San Francisco with both events being held January 10th through the 13th 2022.

We invite you to view the webcast of our bio connect presentation, which will be posted to our corporate website beginning January 10th.

Okay, operator, we're ready for the first question.

Yeah.

Thank you. Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Well, Hi, Justin Indian Audrey how are you.

Hi, Jeff Thanks, Jeff.

So just a few questions from our end I think were pretty up to speed on the acquisitions integration suggestion, you said you're close.

First week, so that would mean two out of three months to obtain from German doctor in the fourth quarter is that correct.

That's correct yeah. So the official close date was Friday November 5th So it's pretty much two months Thats correct.

Okay got it and what's your expected share count.

To report for the fourth quarter I can see this quarter at.

44 important right.

What's your anticipated share count.

Yeah, So right now we have.

As you said about 45 million shares outstanding are the preferred shares have already been issued in the private placement.

We are filing a registration statement I think that'll be next week.

But those shares are not convertible into outstanding common stock until after shareholder approval. So the date for shareholder approval is set for December 17th and you know there's a you know a.

A high likelihood that only a small portion of the preferred shares will convert before year end.

But it is all contingent upon the.

The shareholders of the preferred shares and the approval from the current shareholders on the 17th.

Okay, and what's the total preferred share Carol.

So the total preferred share count is 15000, which at the conversion.

<unk> wed converted at 37 5 million shares of common stock at at the 40 <unk> conversion price, okay should be somewhere between the street numbers now.

This year, we're at plus 30 shows another helpful. Jonathan.

Yes.

Yeah, most 90, 95% to 96 million shares after converting everything.

Yeah, Yeah, it would be unlikely that there would be much conversion before the end of the year.

Got it and as far as the cash there was 9 million with the anticipated.

Acquisition and close a German doctor in this quarter as well as to raise this quarter could you give us a estimate of where cash may be.

Today.

Yeah.

We anticipate well we'll end the year at roughly 775 million something like that.

Yeah.

That would be at the end end of this year.

Okay.

Got it Okay and then your 20 plus number for 2022 is that garden's 20, plus.

It is.

Got it and you're.

Your profitability guidance by the end of next year.

A a cash number or a GAAP number.

Is that I'm, sorry, our cash number or a.

Or a GAAP number when you talk about getting profitable assume its Q4 2022.

Got it yeah, that's what I likely both well.

Well shooting for both.

Okay got it.

Ramifications from Derma Doctor on margins.

Margins I know that your margins have been hovering in the AR.

Let's call it low to mid 70% range, where do you expect will be the ramifications of the combined business.

Yeah. So good question. So derma Doctor has has improved their margins in recent times and as you know they've.

<unk> been more in the lower Sixty's recently, but you know I think we've talked a little bit about there sort of a focus on direct to consumer and online channels like us. So we anticipate that their margins will continue to improve and you know.

Once the dust settles, we'll be somewhere close to that 70% as a combined company.

Got it okay.

Let me just check here.

That does it for all of your questions. Thanks for taking them all.

Thank you Jeff Thanks, Jeff.

Sure.

Our next question comes from Ed Woo with <unk> capital. Please go ahead.

Yes, I want to welcome Audrey to the team. My question is you mentioned in your call that you will have I think you said four new skus for the first half of next year are they all skin care products had what's your normal cycle time for product development too from idea to get it on the shelf.

Well, there's four new Skus that I was referring to our skin care products within the Derma Doctor brands.

I am also working on the Avenova pipeline, but don't have anything to really maybe I'll just yet on that process.

Certainly that the company typically it takes six to 12 months from inception of IGF two are.

Commercial is motion and that can obviously theory. So we try to have multiple skus in the pipeline just in case, one metric to market a little sooner than another.

Great is there isn't a very capital intensive business and product development.

Yeah, so at all yet.

I'll take that one.

And so you know what what we have typically been telling people is that you know both Andy and I come from a pharmaceutical and medical device background, where it is very capital intensive to bring new products to market and the commercialization of a new product as measured in millions of dollars in years of time, whereas the <unk>.

Products that we will be commercializing our all over the counter products were done on an F. D. A monograph that's already existing so the the time to market as measured in months and the investment is measured in the thousands of dollars.

Great and you know.

Congratulations on definitely the international reach are there particular international areas, where you're stronger either Asia or Europe.

Yeah, I'll, let adria answer that.

Actually the Middle East is one of our forecast.

Uh huh.

Oh, yes, a very wonderful distributors over more than a decade and they have built a wonderful business for derma doctor across the entire amount.

Great well, thanks for answering my questions and I wish you guys. Good luck.

Great. Thanks, Ed Thank you.

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

Thank you once again for joining us today and your interest in Novabay. We are extremely excited about our company's transformation with the acquisition of Derma Doctor and the very bright future we envision.

We look forward to reporting progress during our fourth quarter Investor call in March 2022 in the meantime, please have a nice day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.