NovaBay Pharmaceuticals, Inc. (AMEX:NBY) Q3 2023 Earnings Call Transcript

NovaBay Pharmaceuticals, Inc. (AMEX:NBY) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Welcome to the NovaBay Pharmaceuticals Third 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 Ms. Jody Cain. Please go ahead, ma’am.

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. 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 upon 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, which are available at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, November 9, 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 by reporting that NovaBay’s efforts to deepen relationships with eye care professionals is proving successful with third quarter product sales from our physician-dispensed channel growing 36% over the prior year period and increasing in each consecutive quarter so far in 2023. Not only is this channel important as a standalone revenue source, it also creates a halo effect around our direct-to-consumer sales channel by establishing Avenova as a doctor recommended brand. In fact, many of our customers on Amazon share in their reviews that they bought their product solely upon their doctor’s recommendation. On the expense side, we continued to benefit from our expertise in digital marketing, reporting a 7% reduction in sales and marketing spend for the third quarter and a 12% decrease for the first nine months of the year.

Our ability to manage expenses has led to a 16% reduction in operating loss year-to-date versus the prior year. We’ve made it a priority to focus on expense management and cash preservation this year with an eye towards extending our cash runway in this challenging market environment. Now I’d like to provide some updates on each of our three verticals: eye care; skin care; and wound care, beginning with Avenova and our eye care franchise. As you’re likely aware, we’re in the midst of launching the Avenova Allograft, which is the newest product in our eye care portfolio. This prescription-only product was developed by BioStem Technologies to provide a protective environment or covering for the repair of the cornea and conjunctiva helping ocular surfaces return to a healthier state.

It is often used by doctors to treat patients with extreme dry eye, making it a perfect companion product for our Avenova Spray. Amniotic allografts have been used for more than a century and dehydrated amniotic membrane continues to be a widely used product as an ophthalmic covering. Avenova Allograft is an ultra-thin, ultra-light structural tissue that has a distinct advantage as being the only optical allograft manufactured using BioStem Technologies patented six-step BioREtain process that preserves the natural integrity of the placental tissue. Avenova Allograft is easy to use, has no harsh chemicals or cryopreservants. Like all of the products in our Avenova portfolio, it is science-based, high-quality and differentiated. Avenova Allograft represents a large market opportunity for NovaBay.

The global market for this product is estimated at more than $400 million and is expected to grow at nearly 10% annually through 2030. Additionally, if a procedure using our allograft is deemed medically necessary, Medicare will cover the cost of the product. Importantly, Avenova Allograft allows us to leverage our established relationships with eye care professionals as well as to continue to build out that network. We are actively marketing this product through a campaign targeting the universe of U.S. ophthalmologists and optometrists who have previously used allografts in their practice. In addition to email and other outreach activities, we are hosting CME accredited educational seminars for doctors who would like to learn about this particular dry eye treatment.

We regularly hear from eye care professionals that dry eye is a major concern for many of their patients. So we asked our ophthalmologist and optometrist advisory boards on how we can best help them serve those patients? These discussions led to the creation of two new promotional programs aimed at further rewarding members of our physician-dispensed channel to help their patients manage the symptoms of chronic dry eye with Avenova-branded products. Through our new Avenova Loyalty program and Avenova Affiliate program, thousands of eye care professionals who recommend, prescribe and sell our Avenova Spray now have access to special promotions that are specifically designed to increase awareness of the full suite of Avenova dry eye products, such as our warm eye compress, eye check, lubricating eye drops and oral supplements.

Our physician network helped make Avenova the number one doctor-recommended lid and lash cleanser on the market, and we are delighted to offer them these additional partnership opportunities. As in the past, we took advantage of Amazon’s recent Prime Days held on October 10 and 11 to offer special pricing on select Avenova and DERMAdoctor products. I’m pleased to report that we had another very strong sales event. Amazon continues to be our most important sales channel, and we appreciate the opportunity to reward our current customers and attract new ones to our high-quality products. We believe that many users who take advantage of the special pricing offers to try our best-in-class products, subsequently become loyal, long-time customers.

As a final note about our eye care franchise, some of you have asked about recent FDA warnings regarding the use of eye drops from certain foreign manufacturers and some products being recalled and removed from store shops. I’d like to assure you that Avenova Spray and Avenova Lubricant Eye Drops are made in the United States and are unaffected by the FDA warnings and recalls. Our products continue to be sold per usual and are completely safe for use. Now moving on to DERMAdoctor and our skin care products. On our last quarterly conference call, I spoke about our new strategy to increase sales of our most popular DERMAdoctor products in our most efficient sales channels. This strategy relies on significant digital marketing expertise that we’ve developed in transitioning to consumer sales for Avenova products, a strategy that has reduced our sales and marketing costs and aligns with our priority of managing expenses and conserving our cash resources.

A scientist in a lab wearing a protective gear, working with a microscope on a biopharmaceutical drug.

Each of our main four collections of differentiated, science-based formulations specifically developed to treat common but often looked skin conditions are, or KP Duty line that targets skin that’s dry, rough, bumpy or prone to keratosis pilaris. Also our Kakadu C line that’s formulated with clinical strength vitamin C for anti-aging and complexion brightening. Our Calm Cool + Corrected collection helps soothe and comfort irritable skin, and Total Nonscents is our ultrasensitive brightening antiperspirant. Looking forward, we anticipate a strong finish to the year for our DERMAdoctor products. We’re dedicating specific marketing resources to the Chinese Double 11 sales event, which is just days away. The November 11 sales event has become the world’s largest 24-hour online sales event with sales greater than Black Friday and Cyber Monday combined.

We also anticipate a sales uptick with the upcoming holiday season and will once again be offering special holiday gift sets with their KP Duty and Kakadu C collections. Turning now to wound care. And hopefully, as you know, we sell branded wound care products formulated with our Pure proprietary hypochlorous acid through distributors. After having fulfilled large orders in Q2, we’re anticipating additional orders from both our U.S. and Chinese distributors in the fourth quarter. Now I’d like to turn the 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 Q3 and then review our year-to-date results. Total sales net for the third quarter of 2023 was $3.3 million compared with $3.8 million in the third quarter of 2022. The 2023 quarter included $2.4 million of Avenova-branded product sales, $0.8 million of DERMAdoctor product sales and $0.1 million in sale of our branded wound care products. Gross margin on net product revenue for the third quarter was 56% versus 62% for the third quarter of 2022, with the decrease primarily due to product and channel mix. Total operating expenses for the third quarter of 2023 were $3 million, up slightly from $2.8 million from the prior year. Sales and marketing expenses for the third quarter were $1.7 million, a 7% decrease from the prior year, which reflects lower digital advertising costs and lower expenses for outside professional services.

G&A expenses for the third quarter of 2023 were $1.3 million compared with $1 million for the third quarter of 2022. The increase was due primarily to lower variable compensation expenses in the prior year quarter. Total expense — total operating loss for the third quarter of 2023 was $1.1 million compared with an operating loss of $0.5 million for the prior year, with the increase due primarily to lower margins and higher G&A expenses, partially offset by lower sales and marketing expenses. Other expense for the third quarter of 2023 was $641,000, which compares with other expenses of $171,000 for the third quarter of 2022, with the increase primarily due to costs related to the convertible notes issued in May 2023. In the third quarter of 2022, we recorded several noncash items related to the 2022 warrant reprice transaction.

These included a $1.9 million loss on the modification of common stock warrants, a $2.4 million gain on changes in fair value of warrant liability and a $5.7 million cumulated deficit increase due to an adjustment to the Series B preferred stock conversion price. We do not report comparable items for the third quarter of 2023. The net loss for the third quarter of 2023 was $1.7 million or $0.37 per share. This compares with a net loss for the third quarter of 2022 of $5.8 million or $3.61 per share, which included the noncash items I just mentioned. Now turning to our year-to-date financial results. Total sales net for the first nine months of 2023 increased slightly over the prior year to $11 million. Gross margin on net product sales for the first nine months of 2023 was 55% versus 56% for the first nine months of 2022.

Total operating expenses for the first nine months of 2023 decreased 7% to $10.3 million compared with the prior year. For the nine months ended September 30, 2023, sales and marketing expenses decreased 13% and G&A expenses increased modestly, both compared with the nine months ended September 30, 2022. Operating loss for the first nine months of 2023 was $4.2 million, a 16% improvement from the prior year period. Other expense for the first nine months of 2023 was $1.3 million versus other expense of $178,000 for the first nine months of 2022, but the increase due to costs related to the convertible notes we issued in May 2023 that I mentioned earlier. We reported a number of noncash items for the first nine months of 2023 and 2022. The noncash items for the first nine months of this year included a gain on changes in fair value of warrant liability of $0.2 million and loss on modification common stock warrants of $0.3 million and increase to a accumulated deficit due to adjustment to the Series B preferred stock of $1.8 million and a noncash increase to accumulated deficit due to adjustments to the Series C preferred stock of $0.2 million.

The noncash items for the first nine months of 2022 included a gain on change in fair value of warrant liability of $4.5 million, a gain on change in fair value of contingent liability of $0.2 million, the loss on modification of common stock warrants of $1.8 million and an increase to accumulated deficit due to the Series B preferred stock conversion price of $5.7 million. The net loss for the first nine months of 2023 was $7.5 million or $2.27 per share, which compares with a net loss for the first nine months of 2022 of $8.1 million or $5.32 per share. We reported cash and cash equivalents of $3.5 million as of September 30, 2023. And now I’ll turn the call back to Justin.

Justin Hall: Thanks, Tommy. We’re proud of our portfolio of innovative, evidence-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’re having success with the various programs in our physician-dispensed channel. And with the Avenova Allograft, we recently introduced a compelling new product that leverages these established relationships and provides an opportunity for us to further build on this channel. We’re pursuing a strategy with DERMAdoctor aimed at driving sales growth for our best-selling collections. We continue to benefit from the digital marketing expertise we’ve developed over the past several years, which is allowing us to effectively promote our products while prudently managing expenses.

And importantly, we’re on a strategy to conserve cash and extend our cash runway, which is especially important under the current challenging market conditions. With that overview, I thank you for your attention. Operator, we’re now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] And the first question will come from Jeff Cohen with Ladenburg Thalmann. Please go ahead.

Destiny Buch: Hi. This is actually Destiny on for Jeff. Thanks for taking my questions. I think I would maybe like to start with the DERMAdoctor segment. And I’m curious about the new product strategy. Can you just remind me whether or not you’ll be expanding product lines or adding product lines? And then I’m also curious, during the quarter, revenue was a little muted. Is there anything specific you can call out there that may have impacted the growth technically decrease?

Justin Hall: Sure. Yes, happy to provide some color. So the strategy that I mentioned on the call is a shift in strategy, especially this year versus last year. So last year, our strategy was really around expanding with new products and into new sales channels and new geographies. This year, we’re focusing on selling more of our top-selling products in our most efficient sales channels. So we don’t have any product development planned because new product development is uncertain and it’s also expensive. So what we’re doing is focusing on our most popular products in the most efficient sales channels. Some of the — we’ll call it, lumpiness quarter-over-quarter with the sales just really has to do with either seasonality or orders from our international distributors. They usually order maybe twice or three times a year, and we just didn’t see many of those orders in Q3.

Destiny Buch: Okay. Got it. And then kind of sticking with DERMAdoctor for just one more second. I’m curious about your commentary around additional holiday promotions. And I know based on our models, we’ve seen a bit of seasonality like you mentioned and with heavier revenue or greater revenue in the fourth quarter. Do you think between the special promotions that you’re doing across all segments that we should anticipate some significant growth next quarter? And I’m not asking for guidance, just some general color.

Justin Hall: Yes. Sure. Well, the one sort of bright spot that I think will deliver with some certainty is the Double 11 event in China. So we have been planning for that sales event pretty much all year or maybe for the last eight months, making sure that the right inventory is there, that we have the right influencers, that we have the right budget there, that we’re promoting the right products at the right time. So the uptick, I think, will come from the direct-to-consumer sales channel on Amazon and then also on Tmall in China. And that’s the revenue growth that we expect in Q4.

Destiny Buch: Okay. Perfect. Thank you. A couple more, if I may. Tommy, these might be more for you, when you talked about the margins in your commentary, you mentioned channel mix. Is that largely related to the physician-dispensed channel? And then additionally, are you able to give us a revenue contribution specifically from this channel, maybe as a percentage of sales?

Tommy Law: Yes, a little bit of that. And then also on the DERMAdoctor side as well. For the physician channel, it’s about 50% for the contribution margin. So yes…

Justin Hall: Yes. And also, in addition to that, it is some of our wound care products, especially NeutroPhase sold over in China. That comes with a lower margin. So we don’t have any sales or marketing expenses associated with it. So that’s the good news, but we do sell it at a wholesale cost to the distributor. So the margin is just slightly smaller there.

Destiny Buch: Understood. Okay. And then I’m not sure if you’ve ever shared this before, but do you have a general sense of the lifetime value of a customer? I’m thinking more specifically on the Avenova side given the various products through the Amazon channel.

Justin Hall: Yes. Absolutely. We love this. We look at it all the time, and we track it fairly closely because the Avenova Spray is our highest volume and most popular product across the entire company. And it’s a consumable. So and dry eye is a chronic problem. So once somebody uses it and they like it and it works for them, they will just keep on buying it the same way that they buy other sort of self-care products. So we like to make the analogy with toothpaste, right? Once people say like, I need to brush my teeth with toothpaste, right? They just keep on buying toothpaste. And so the long-term value of an Avenova customer is a focus of ours because we really want to reach out and touch those customers that buy the product once, maybe it’s recommended by their doctor, they buy at once.

But they need to be reminded to buy it again and buy it on a regular basis. So about 20% of our Amazon sales come from subscribe and save, and those are people who have signed up to receive at least one product each month, automatically.

Destiny Buch: Okay. Got it. You answered my next question. That was very helpful. Thank you. And then lastly, because I’m definitely hogging the line here.

Justin Hall: That’s okay.

Destiny Buch: You know how I am, Justin. By 10 collaborations, I’m wondering if you can just touch a little bit more on the commercial strategy, so I can better understand that. And then have you gotten any initial feedback? Have you had any physicians use it yet? And then what exactly is the money flow for this partnership?

Justin Hall: Yes. So this is a prescription-only product that we obviously, as I mentioned, sell through the physician-dispensed channel. So we originally started just reaching out to all of the doctors that we have really good relationships with, through Avenova saying, oh, we have a new product. The product price is $300 per allograft. So it’s $300 for one tissue. And the doctor, most often times can apply for insurance coverage, either private insurance coverage or Medicare reimbursement. But the Medicare reimbursement is done for the procedure. So the doctor has to buy the tissue from us for cash and then do the procedure with the patient and then apply separately for Medicare reimbursement for the entire procedure. And depending on the coverage and the procedure and the patient, Medicare coverage can range from $1,000 to $1,300.

Destiny Buch: Okay. Excellent. I think that does it for me. Thank you so much for taking the questions.

Justin Hall: Sure. Yes, of course. As always. Thank you.

Operator: The next question will come from [Rafe Khalid] with Ascendiant Capital Markets. Please go ahead. It seems that Mr. Khalid has left the question queue. I will turn the call back over to Mr. Justin Hall for any closing remarks.

Justin Hall: Thank you for joining us. We’re excited about our progress and the promising future that we envision for our company. We’ll be holding meetings with investment professionals during the 2024 JPMorgan Healthcare Conference being held at January 8 through 11 in San Francisco. If you’re interested in setting up a meeting with us, please contact LHA Investor Relations. Thanks again, and have a nice day.

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