NovaBay Pharmaceuticals, Inc. (AMEX:NBY) Q2 2023 Earnings Call Transcript

NovaBay Pharmaceuticals, Inc. (AMEX:NBY) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Welcome to the NovaBay Pharmaceuticals Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.

Jody Cain : This is Jody Cain with LHA. Thank you for participating in today’s call. Joining me from NovaBay are Justin Hall, Chief Executive Officer and General Counsel; and Tommy Law, Interim 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 and uncertainties that could cause actual results to be materially different from any anticipated results. In particular, there is uncertainty about circumstances beyond the company’s control that impact the broader economy, such as rising interest rates and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of circumstances that impact the broader economy on NovaBay’s 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 of risks and uncertainties, please review NovaBay’s filings with the Securities and Exchange Commission at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, August 10, 2023. 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 Hall. Justin?

Justin Hall : Thank you, Jody. Good afternoon, everyone, and thank you for joining us. I’m pleased to begin today’s call by reporting that NovaBay achieved $4.6 million in revenue for the quarter. That’s up 26% from the prior year, with the increase driven by record sales of our wound care products. This increase in revenue was accompanied by a reduction of 16% in sales and marketing expenses as we continue to benefit from our optimized digital marketing programs. We also made significant progress in managing expenses, and we’re able to narrow our operating losses by 37%. Now I’d like to share updates on each of our 3 verticals: eye care, skin care and wound care, beginning with Avenova and our eye care franchise. With our expanded eye care portfolio, we now offer best-in-class Avenova branded products for each step of the standard dry eye regimen.

This includes the Avenova Spray, the #1 doctor recommended lid and lash cleanser; Lubricating Eye Drops for instant relief; a Warm Eye Compress to sooth; and an antioxidant-rich dietary supplement with omega-3 oils; and lastly, the i-Chek to monitor physical eyelid health. We have developed the Avenova brand into a one-stop destination for those seeking relief from the symptoms of dry eye and other ophthalmic-related eye conditions. The high quality of our Avenova product line is evidenced by our consumer reviews on Amazon. All Avenova products are highly rated with Avenova Spray receiving 4.5 out of 5 stars with nearly 13,000 reviews, including 86% of those ratings being at 4 stars or above. We saw momentum in our physician dispense channel, both over the prior year and in consecutive quarters.

This channel represents a win-win for NovaBay and eye care specialists who make our high-quality products available directly to their patients through their practices. On the past several quarterly calls, I’ve discussed our efforts to deepen our relationships with these professionals. These include proactively reaching out to optometrists and ophthalmologists by partnering with educational organizations with CE accredited programs discussing dry eye disease. Physicians benefit by gaining these credits, and we attract new customers by discussing the attributes of our Avenova eye care products. We further expanded reach into this channel by showcasing our full line of Avenova branded products at this year’s Annual Meeting of the American Optometric Association and The American Optometric Student Association.

This meeting was well attended, and we were gratified by the opportunity to feature our products to the next generation of optometrists. More recently, you may have seen our announcement that our Avenova branded products achieved a new sales record during this year’s Amazon Prime Day event held on July 11 and 12. We sold more units of Avenova on those 2 days than ever before. In fact, sales increased 22% over Prime Day 2022 and were up 43% over Prime Day 2021. This growth and customer enthusiasm is encouraging as Amazon continues to be our most important sales channel. We appreciate the loyalty of current Avenova users who took the opportunity to replenish their supplies for the summer. But we are also excited to attract those new to our brand.

Our past experience suggests that many of the new users will become long-term customers. Furthermore, these tremendous results confirm that our marketing strategies are effectively cutting through the clutter of products and advertising that accompanies Prime Day and that our core product, Avenova Spray, is being used by an expanding and loyal customer base who value its superior efficacy. Looking ahead, I’m pleased to say that we anticipate incremental growth in our eye care vertical for the remainder of the year, particularly for sales through our online channel. Moving now to DERMAdoctor and our skin care products. Sales of DERMAdoctor products increased to $1.1 million for the quarter. That’s up more than 40% versus the prior year and included notable contributions from international markets, more specifically for the Middle East and China.

Going forward with DERMAdoctor, we are shifting away from new product development, which has been a component of our strategy since we acquired this brand in late 2021. We are now focusing on increasing sales of our top-selling products through our most efficient sales channels. We believe the most effective way to reduce cost is by eliminating product development investment and closing inefficient sales channels. This allows us to manage expenses and conserve cash resources. We will rely on the significant marketing expertise we’ve developed since transitioning to a consumer sales model with Avenova in 2019, and in particular, our digital marketing programs that have proven effective even at reduced spending levels. More specifically, we will focus our efforts on our most popular DERMAdoctor product collections.

First is our KP Duty line, which is specially formulated for dry — for skin that’s dry, rough, bumpy or prone to keratosis pilaris. This product line has long been the top-selling DERMAdoctor collection with a highly loyal following that we will continue to cultivate. Second is our Kakadu C line of complexion brightening solutions, which is sold through Costco in addition to the Amazon and DERMAdoctor websites. We intend to continue to support our Costco listing. Third is our Calm Cool + Corrected collection, which is sold through Amazon and our DERMAdoctor website. We’ve gained traction with these products that are specifically formulated to help soothe and comfort irritable skin. The fourth product line is our Total Nonscents Ultra-Sensitive Brightening antiperspirants with the bulk of sales coming from our distributors in Dubai and Kuwait.

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We sell these products at a fixed price to these distributors who are responsible for their importation, marketing and distribution. Importantly, DERMAdoctor’s 15 top-selling products all fall into these 4 collections and comprise 77% of our skin care revenue. Turning now to wound care. As I mentioned, our wound care products set a new all-time sales record during the quarter. These sales were fueled by a previously announced $1 million order of NeutroPhase coming from our partner, China Pioneer Pharma Holdings, which is a leading Chinese importer and marketer of branded pharmaceuticals and medical devices. We also reported a notable contribution from our U.S. partner, PhaseOne Health, with sales for this year now on track to beat our previous expectations.

All of our sales of NeutroPhase and PhaseOne come through our distribution partners and require only minimal sales and market expense from NovaBay. Like Avenova Spray, our wound care products are formulated with our FDA-cleared pure proprietary form of hypochlorous acid and are used for cleansing and irrigating postsurgical wounds, minor burns and superficial abrasions. Our formulation exhibits broad-spectrum activity against a range of gram-positive and gram-negative bacteria, making it highly effective, yet gentle, non-irritating and nonsensitive to skin and tissue. Among the advantages of hypochlorous acid is its ability to penetrate and kill biofilm, which represents a significant barrier to wound healing. We manufacture our wound products here in the United States, and we bottle our products in amber glass for stability to ensure the safest, purest and most powerful hypochlorous acid wound cleanser on the market.

Now I’d like to turn our conference call over to our Interim Chief Financial Officer, Tommy Law, to review our financial results. Tommy?

Tommy Law : Thank you, Justin, and good afternoon, everybody. I’ll start with Q2 and then discuss our year-to-date results. Net product revenue for the second quarter of 2023 was $4.6 million. This represents an increase of 26% from the prior year quarter and included $2.2 million of Avenova branded product sales, $1.1 million of DERMAdoctor product sales and $1.3 million in sale of our branded wound care products. Gross margin on net product revenue remained consistent at 50% for the second quarters of both 2023 and 2022. Total operating expenses for the second quarter of 2023 decreased 8% over the prior year. This included a 16% reduction in sales and marketing expenses to $1.7 million, which reflects lower Avenova digital advertising costs and lower expenses for outside professional services.

G&A expenses remained consistent for both quarters at $1.9 million. Operating loss for the quarter was $1.4 million, a 37% improvement from the prior year. The net loss for the second quarter of 2023 was $4 million or $1.27 per share and included a $2 million noncash retained earnings reduction related to the preferred stock round down feature. This compared with the loss of — for the second quarter of 2022 of $2.2 million or $1.43 per share. Turning to our year-to-date financial results. Net product revenue for the first 6 months of 2023 increased 11% over the prior year to $7.7 million. Gross margin on net product sales increased to 55% for the first half of 2023 versus 53% for the first half of 2022. For the 6 months ended June 30, 2023, sales and marketing expenses decreased 16% and G&A expenses declined modestly, both compared with the 6 months ended June 30, 2022.

Operating loss for the first 6 months of 2023 declined to $3.1 million, an improvement of 32% compared with the prior year. The net loss for the first half of 2023 was $5.8 million or $2.21 per share, which included the noncash retained earnings reduction I just mentioned. This compares with a net loss for the first half of 2022 of $2.3 million or $1.54 per share, which included a noncash gain on changes in fair value of warrant liability of $2.1 million and a noncash gain on changes in fair value of the contingent liability of $0.2 million. We reported cash and cash equivalents of $4.4 million as of June 30, 2023, which includes proceeds from a $3 million private placement of convertible notes and warrants that we closed in May. And now I’ll turn the call back to Justin.

Justin Hall : Thanks, Tommy. We’re proud of our portfolio of innovative science-based and clinically proven eye care, skin care and wound care products, and are passionate about bringing these best-in-class products to a growing number of customers. We continue to benefit from the digital marketing expertise we’ve developed over the past several years that’s allowing us to effectively promote our products while managing expenditures. As mentioned, we anticipate incremental growth from our eye care segment for the remainder of 2023. With our skin care franchise, our strategy is now aimed towards profitability by shifting our focus to our top-selling products in our most efficient sales channels. This strategy allows us to benefit from products that are proven winners while prudently managing expenses and extending our cash runway. With that, I thank you for your attention. Operator, we’re now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Jeffrey Cohen from Ladenburg Thalmann.

Jeffrey Cohen : So a few questions from our end. So I guess, firstly, maybe for Tommy, what was the actual cash loss for the second quarter?

Tommy Law: It was about [$1 million].

Jeffrey Cohen : Okay. Got it. And then, Justin, talk a little bit about the wound business. Two questions specifically. Firstly, well, talk about channels and talk about number of actual SKUs and then talk about Q3 as in you had a $1 million order for Q2. So should we expect Q3 to normalize back to previous levels?

Justin Hall : Yes. So the larger order that we saw in Q2 won’t be repeated again in Q3. We should have another order of a smaller magnitude again for NeutroPhase in Q4. So our wound care segment is pretty simple. It really just — it consists of only two products, the PhaseOne and the NeutroPhase. And there is really just two sizes of each one of those products. So it’s pretty simple to wrap your mind around and keep track of.

Jeffrey Cohen : Okay. Got it. And then could you talk about some of the DERMAdoctor channels in addition to your direct website and Amazon? You did mention Costco. I know you’ve been selling there. Are there any other opportunities in some of the other club channels out there?

Justin Hall : Yes. So really, our main sales channels, our largest source of revenue last year came from Amazon, with the other channels being about equal in their revenue contribution. So that’s dermadoctor.com, Costco, the Middle East, and then China this year will hopefully grow over what it was last year to be a significant contributor that’s sort of on equal footing with the rest of those.

Jeffrey Cohen : Okay. Got it. And then lastly for us on the margin front for modeling purposes, any look into the back half of the year as compared to the 50% from the second quarter or the 52% or 53% for the first half?

Justin Hall : Yes. So it should go up a little bit in the second half just because the wound care products have a slightly lower margin. So when we saw more of those, it brings that down a little bit. But we can expect something around 55%.

Operator: [Operator Instructions] As there are no more questions at this time, I would now like to turn the conference back over to Mr. Hall for any closing remarks.

Justin Hall : Thank you today for joining us and your interest in NovaBay. We’re excited about our progress and the promising future we envision for our company. We look forward to updating you on our third quarter investor conference in November. Thanks again, and have a nice day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.