Q3 2022 NovaBay Pharmaceuticals Inc Earnings Call

Good afternoon, and welcome to the Nova based Pharmaceuticals third quarter 2022 financial results conference call. All participants will be in a listen only mode did you need assistance. Please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you made.

Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would 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 are Gestern Hall, Chief Executive Officer, 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 median that federal securities laws. These forward looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results.

Particular, there's uncertainty about the circumstances beyond the companys control that impact the broader economy, such as the COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the content contemplated impact of COVID-19 and circumstance.

Does that impact the broader economy on Nova based operations its financial results and outlook is the best estimate based on the information available for today's discussion.

For a list and description of risks and uncertainties. Please review Novabay filings with the Securities and Exchange Commission SEC Dot Gov.

Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast November 14th 2022, Novabay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law now I'd like to turn.

The call over to Justin Hall, Justin.

Thank you Jody good afternoon, everyone and thank you for joining us I'm delighted to report a 16, 9% increase in product revenue over the prior year period, mostly driven by your acquisition of Derma Doctor and diversified product revenue 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 expectation during the third quarter and our outlook for accelerated growth to continue in <unk>.

Q4 as well.

One of our highlights for the quarter was that we again achieved year over year growth in online Avenova unit sales. Another tremendous achievement was that we delivered our highest sales quarter for German doctor products since the acquisition a year ago.

While revenue increased 69% our ability to optimize digital marketing led to an 11% decrease in sales and marketing spend even with the additional expenses for promoting Dermot offer products.

I am excited about our prospects for continued growth, we have established brands and three large and growing verticals I care skin care and wound care.

Now I'd like to share updates on each one of our three verticals, beginning with Avenova and our eyecare products.

Avenova is the number one anti microbial late in life straight in the U S dry eye market.

And as mentioned online Avenova online Avenova spray unit sales increased year over year as we continued the content the successful shift to this more efficient online sales channel.

For the quarter more than two thirds of unit sales were generated online, which is a testament to the effectiveness of our digital advertising. For example, we recently completed a fall for ice sweepstake, which drove at 10000, new email subscribers and 2500, new Instagram followers now we have black Friday, cyber Monday and dish.

<unk> holiday promotions on tap to further drive sales for a strong end of year push.

During the past several years, we've capitalized on the recognition of the Avenova brand by commercializing companion products that help with our blepharitis and dry eye customers. These.

These include Nova wipes, the Avenova warm I compress avenova lubricating drops and the I check I'm pleased to report that this strategy is working well and our companion products made a notable contribution to the third quarter revenue number.

Moving onto Derma Doctor and our collection of skincare products, you may recall that we identified growth opportunities for derma doctor with a trend towards more beauty products being purchased online in fact, the research firm <unk>.

Insider intelligence expects cosmetics and beauty e-commerce sales in the U S to reach $18 billion. This year by 2026 E. Commerce sales are expected to account for nearly a third of the categories total.

With our digital focus we are well positioned to tap into this ongoing market trend.

Last month, we announced significant orders for a top selling derma doctor product cat could you see anti aging serum with these orders being placed just ahead of the holiday season.

Some revenue from these large orders was recognized in the third quarter with more to come in the fourth quarter.

We also have a number of promotional activities around the holidays, including a discount feature in the Costco holiday Mailer.

Since the beginning of the year, we've introduced six new skin care products to the ever popular Dora Dr collections and plans are underway to introduce more products in the future.

These new products keep us highly relevant in an industry characterized by the constant constant or emergence of new formulations and importantly, they keep the derma Doctor brand in the mind of the consumers.

As Andy will discuss in a moment, we've commercialized these new products, while holding R&D and sales and marketing expenses in check with our launches executed under our low cost model.

Among upcoming promotions for our German doctor products or additional appearances by Audrey Kunin on the QVC network with several shows already booked.

Increasing German doctors, our presence in international markets is a 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 market and have the ability to create positive brand awareness.

We now have an updated derma doctor store on Tmall, which is China's largest b to C network and through our local marketing partner, we have an expanded network of bloggers and Influencers. We also have strong media presence and brand building capabilities.

Oh on such key platforms as Tictoc, our ability to capture even in extremely modest share of the Chinese market would have a considerable impact on our revenue.

We also offered special promotions on select Derma Doctor products during the double 11 event. So named because it occurs on November 11th each year.

Oh, well 11 is similar to our black Friday, but it grosses several times more in revenue. We are also working towards distribution agreements in Europe and plan to expand the geography the.

Geographic reach of Derma Doctor even further.

Now turning to our wound care vertical we manufacture and sell a proprietary wound care product under the phase one brand that is distributed in the U S for professional use by our commercial partner phase one help.

Products under our neutral phase brand are distributed in China by our partner Pioneer pharma.

These products are used for cleansing and you're getting post surgical wounds minor burns and superficial abrasions, we have an advantage in this market as our product is made without the toxic chemicals found in many other wound care products. It is gentle non irritating non sensitizing to skin and new tissue.

Like our Avenova spray our wound care products are formulated with our FDA cleared proprietary anti microbial pure form of hydrochloric acid, our formulation exhibited 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 and killed biofilm, which represents a significant barrier to wound healing.

Among various promotional activities phase one health has refreshed our website, including recent blog postings from industry key opinion leaders. The most recent post is by Doctor Jack Fisher, a past president of the American Society for aesthetic plastic surgery, and author of more than 120 publications a frequent speaker in med.

Conferences around the world and in ardent supporter of Phase one he has used our product with his patients for more than a decade.

Before reviewing our financial results I want to thank our stockholders for their continued support last Thursday, we held a meeting a special meeting of stockholders and I am pleased to report that all proposals passed including their proposal authorizing our board to effect to effect a reverse stock split.

This is critical in regaining compliance with the NYSE American listing and completing the previously announced private placement for gross proceeds of $3 to $5 million.

Our board of Directors has approved a one for 35 reverse stock split that will become effective tomorrow Tuesday November 15th with our common stock trading on a split adjusted basis Wednesday November 16th.

Yes.

The increased market price, resulting from the reverse split will improve the marketability of our stock and should encourage additional interest and trading now.

Now I'd like to turn the call over to Andy to review, our Q3 financial performance Andy. Thank you Justin and good afternoon, everybody as a reminder, our financial results for 2022 periods reflect combined Novabay and Derma Doctor results.

The comparable 2021 periods do not include results from Derma Doctor since we did not close the Derma Doctor acquisition until November 2021.

I also wanted to announce a change in the way that we present fees paid to third party online retailers such as Amazon.

Sales commissions and fulfillment fees charged by these retailers, which typically total 15% to 20% of total net sales were previously netted against related product sales, which reduced total net sales in our statement of operations. During the third quarter of 2022, we began presenting sales commission.

As sales and marketing expenses and fulfillment <unk> as cost of goods sold are former presentation of the Commission's wasn't air However, the impact was immaterial to reported financial results.

That said to enhance period over period comparability, our prior financial results for the comparable periods, we're reporting today and in the future will reflect the changes and revisions for both the commissions and fulfillment fees. We are also excited that these changes will enhance the comparability of our financial results.

Against our peers as sales from our OTC online channel continues to grow in importance.

Importantly, these changes and revisions had no impact on our operating loss net loss comprehensive loss loss per share cash flow cash balances or any balance sheet components for any current or former periods additional information about these changes and revisions, including their impact on the 2022 and <unk>.

2021 periods can be found in our Form 10-Q filed with the SEC today.

Now turning to our financial results product revenue in Q3, 2022 was $3 $8 million up 69% from the prior year period.

2022 third quarter included $1 $3 million in Derma Doctor product sales, which Justin mentioned was the highest sales quarter since the acquisition.

Avenova spray sales for the third quarter of 2022 or $1 $9 million versus $2 $1 million a year ago.

The decrease was due to our continued shift to the more efficient online sales channel and as previously mentioned unit sales through this channel increased over the prior year period.

Net product revenue for the third quarter of 2022 also included $300000 from other avenue of optical products, including our Nova wipes and moist heating icon press.

And $300000 from phase one branded wound care product sales.

Gross margin for the 2020 to the third quarter was 62%. This compares with 69% for the 2021 quarter. The decrease primarily primarily resulted from the addition of derma Doctor and wound care product sales.

Sales and marketing expenses of $1 $8 million decreased 11% from the prior year period, even with the addition of zero point $6 million in Derma Doctor sales and marketing costs as Justin discussed we were able to reduce our sales and marketing spend by optimizing our digital advertising for Avenova.

G&A expenses were $956000 in Q3 of 2022, and this compares with $1 $8 million a year ago. In 2022 period included $300000 in Derma Doctor G&A costs, which were offset by a reduction in variable compensation costs.

In the 2022 period.

R&D expenses for the third quarter of 2022 or $41000 compared with $10000 for the prior year period.

As you can see by this modest amount in both periods, we continue to create develop and release new products without incurring significant R&D costs.

Operating expenses for the third quarter of 2020 to $2 $8 million decreased overall $1 million from the third quarter of 2021 and included Jeremy Doctor expenses.

In the 2022 quarter, we recorded several noncash items related to the 2022 warrant reprice transaction that we completed in September . These include a $1 $9 million noncash loss on the modification of common stock warrants.

A $2 $4 million noncash gain on changes in fair value of warrant liability, a five $7 million noncash accumulated deficit increase due to an adjustment to the series B preferred stock conversion price and $171000 and other expenses.

The net loss attributable to common stockholders for Q3 of 2022 was $5 $8 million or 10 cents per share that compares with the net loss attributable to common stockholders for Q3 of 2021 of $2 $3 million or <unk> <unk> per share.

Turning to our year to date financial results for the nine months ended September 32022 product revenue was $10 $7 million, a 53% increase over the prior year period gross margin on product revenue for the first nine months of 2022 was 56 that compares with 69% for the first nine months of 2000.

'twenty one.

For the first nine months of 2022 sales and marketing expenses decreased modestly and G&A expenses increased 12% both compared with the first nine months of 2021, R&D expenses were $108000 versus $36000 for the prior year period.

The net loss attributable to common stockholders for the first nine months of 2022 was $8 $1 million or <unk> 15 per share. The net loss for the first nine months of 2021 was $5 $7 million or <unk> 13 per share.

As of September 32022, Novabay had cash and cash equivalents of $3 $9 million. This included approximately $2 $1 million in gross proceeds received from the warrant reprice transaction that was completed in September 2022.

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

Thanks, Andy.

We're excited about our prospects for continued growth with Avenova Derma Doctor in phase one we have a solid foundation of established brands in the large and growing eye care skin care and wound care market.

We are expanding and refreshing digital marketing campaigns widening target demographics for existing customers and increasing their accessibility. While also expanding the avenova in derma Doctor brands with new innovative products that fill a consumer need and support our corporate positioning.

We expect to benefit from growing from online sales from growing online sales of Derma Doctor products in international markets in particular in China and in Europe .

Our partner Phase one health is promoting our wound care product through a refreshed web site that highlights product advantages and uses key opinion leaders.

We are proud of our specialized portfolio of innovative scientifically formulated and clinically proven products. We are passionate about offering our customers high quality products through our Avenova Derma Doctor in phase one brands.

With that I. Thank you for your attention operator, we're now ready to take questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Your question. Please press Star then two.

This time, we will pause momentarily to assemble our roster.

And our first question will come from Jeffrey Cohen of Ladenburg Thalmann go ahead. Please.

Hi, Justin and Andy This is actually destiny on for Jeff. Thank you for taking our question.

I wanted to start first with a bunch of questions around marketing per usual I'm curious, Dan and congratulations on getting that sales and marketing expense down 11%. That's awesome I am curious is that decrease.

Function of improved or are optimized.

Marketing tactics digitally as well as additional cross selling and maybe even upselling opportunities or is it strictly based on your efficiencies in terms of digital marketing.

It really is a well first high destiny.

It's nice to hear from you of.

It's across the board so everything that.

You just mentioned.

He has played a role in decreasing those expenses in <unk>.

I think primarily we can say that we looked at all of our campaigns.

We eliminated a lot of them that were not producing results.

But we also refreshed creative and got better at our targeting but there is a cross selling.

And there's there's also just a combination of <unk>.

Reaching out to those targeted customers with messages that I think are more impactful.

Okay got it and I guess that leads me into my second question is around your commentary about expanding the demographic are you looking to maybe expand the age of your demographic or interests or both.

Yeah. So there are the answer is a little bit different just depending on what product, we're talking about and what sales channel. We're talking about I think the most obvious answer for it.

And expanding demographic is for that of Avenova. So.

Previously our target demographic for Avenova has been an older audience, one that suffers more commonly from blepharitis and dry eye.

But with the advent of eyelash extensions that are very common with a younger customer demographic.

Those problems of blepharitis and dry eye are now.

A very prevalent in a younger demographic and this younger demographic is totally new.

To avenova, they really have not paid a lot of attention to Linden lodge hygiene in the past because they haven't needed to so with.

A more targeted message towards a totally new demographic. We are you know.

Expanding our customer base, so we'll see that with Avenova and then when you.

Looking at the Derma Doctor side instead of expanding.

Our customer base from.

A messaging standpoint, we're really trying to push into two new territories to new geographic territories, so or expansion of existing products for derma Doctor.

Is going well in China, and then also in the EU. So you'll you'll continue to see.

I think growth in all three of those areas.

Okay got it so targeting different age groups with Avenova and then all the derma doctor side, just different or not jobs, but adding some different territories I think I got it and that actually also leave me again very well into my next question.

In 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 how you are doing in China could you talk a little more about that sure.

Sure, Yes, so it's all about the partners whenever we expand into a new geographic territory, where we're a little bit less familiar with the.

Selling trends in the marketplace.

I feel like we really do need a partner who knows what they're doing so well.

Without.

Sharing too much we are in the process of Onboarding, a partner who will be our main distributor for the European Union.

Okay got it and we could potentially see some revenue from.

The EU in early 2023 or at least first half would you say.

Oh, yes, yes, okay.

Awesome very good and then what.

I think I'll save my other marketing questions for offline, but I'm curious lastly, about the slightly lower margin I know you called out some changes to the way you are recording the fees as well as the commission is that what kind of impacted Cogs. This year or is that more related to some of the orders through like what.

We call the club channel, which includes Costco.

Yeah. So it's.

It's lower year over year Destiny, and I got to talk to you it's lower year over year, primarily due to the addition of the Derma Doctor products, which generally come with a lower margin. We also in the third quarter of this year, we had more wound care sales than we had last year, which also come with a lower margin. Although you did mention the change in the.

The way that we're presenting the fees that that we'll have going forward a slight.

Impact on gross margin percentage it will bring it down a couple of percent, but I think you caught on I mentioned, there is no impact to operating loss of cash flow or anything like that it's simply why we're presenting it in the P&L.

But those are the reason that it's that it's down over last year, but I think being right around that 60% is sort of in the middle sweet spot between where derma Doctor is in our traditional businesses had been.

Okay perfect. That's super helpful. I appreciate that great quarter. Thank you for taking my questions I'll jump back into you.

Okay terrific.

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And 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 and your interest in Novabay, we're extremely excited about our progress and the very bright future. We envisioned we wish you and your family a happy healthy holiday season, and we look forward to reporting our progress for our full year results during our investor call in March 2023.

Thank you and have a nice day.

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