NovaBay Pharmaceuticals Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, welcome to the NovaBay Pharmaceuticals Financial Results Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will hold a question and answer session. As a reminder, this conference is being recorded. And I would now like to turn the conference over to Bruce Voss.

Operator

Please go ahead.

Speaker 1

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's call. Joining me from NovaBay Pharmaceuticals are Justin Hall, Chief Executive Officer and General Counsel and Tommy Hall, Interim Chief Financial 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.

Speaker 1

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 such circumstances on NovaBay's operations, financial results and 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, May 9, 2024.

Speaker 1

NovaBay undertakes no obligation to revise or update 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?

Speaker 2

Thank you, Bruce. Good afternoon, everybody, and thank you for joining us. I'm pleased to report that we hit an all time record high ordered sales of Avenova products in the past 2 months on Amazon dotcom, our largest sales channel. We set a new record in March and then beat it in April. In fact, our April 2024 sales were ordered product sales were more than 20% higher than April 2023.

Speaker 2

These records are even more impressive given that ordered sales in March April eclipsed months that even included record breaking Amazon Prime Days. So it's not surprising that our Q1 sales increased 13% over the prior year with that increase largely attributed to Avenova product sales through online channels. We saw an 8% increase in sales over the prior quarter through our online sales channels with sales from this channel surpassing $2,000,000 for the very first time. This growth is largely due to sales driven by our social media channel, which increased more than 160% year over year and from our email program, which has been on a sustained upward trajectory since mid-twenty 20 3 being up more than 3 60% over the prior year. Even with these higher sales, we were able to reduce marketing spend in Q1 by 15% through our cost efficient ad placement programs.

Speaker 2

We're excited and encouraged by these new records following the streamlining of our business to focus solely on eye care. This is a testament to our marketing expertise and the high quality of our products and extremely loyal customer base. We also attribute these records to our recognition several years ago that dry eye can be a multifaceted, stubborn and complex condition that may require more than one approach to manage. This prompted us to expand the Avenova branded portfolio to offer scientifically developed best in class products for each step of the dry eye treatment regimen. We build our dry eye franchise on a solid foundation of the Avenova spray, which is the number one doctor recommended hypochlorous acid lid and lash solution.

Speaker 2

Our Avenova product line now includes lubricating eye drops for instant relief, a warm eye compress to soothe irritated eyes, an antioxidant rich dietary supplement with omega-three oils and the iCheck to monitor physical eyelet health. Earlier this year, we took a major step to position NovaBay to pursue high growth opportunities by focusing on the eye care market with most of our products under the Avenova brand addressing dry eye. This is a large and growing market that offers us plenty of room to grow. Dry eye syndrome is one of the most commonly observed clinical diseases in the U. S, afflicting approximately 16,000,000 Americans.

Speaker 2

In fact, the U. S. Market for the treatment of dry eye and other ocular surface diseases is projected to grow from $3,000,000,000 in 2023 to $4,700,000,000 by 2,030. Among the factors driving this growth are the escalating prevalence of dry eye due to increased computer time and smartphone screen usage, the aging population and a heightened awareness of this condition and improved diagnostic capabilities. In the past, we've discussed marketing programs to better engage eye care specialists in our physician dispense channel, noting the halo effect this channel has in transitioning their patients into our OTC customers.

Speaker 2

Throughout this period, we did not lose sight of our digital marketing programs aimed directly at our OTC customers. We're expanding our digital marketing to include text messages and targeted emails to build on the incredible success with our social media marketing to further enhance the Avenova brand, engage customers and drive online sales of Avenova products. These programs meet our cost management measures to efficiently enhance customer loyalty and reach new prospective customers. Our text messaging programs provide an additional and immediate touch point with our customers and are producing encouraging strong initial results. We plan to use text messaging to share exclusive discounts, news and value added content such as tips for enhancing eye health and other tips that will engage and encourage our audience to interact with the brand.

Speaker 2

We also recently refreshed our email campaign to include new creative and added automation. Both programs target our existing and highly loyal customer base to enhance retention while expanding reach to new audiences. Turning now to update everybody on our co marketing agreement with Eyenovia that we announced in March. You may recall that Eyenovia received FDA approval for prescription only clobetasol, a unique and differentiated steroid that's prescribed by cataract surgeons. Clobetasol provides ophthalmologists and ocular surgery patients with a compelling, rapid and sustained and more convenient solution for the treatment of post operative inflammation and pain.

Speaker 2

This is the first new ophthalmic steroid to enter the U. S. Market in more than 15 years. We are expecting it to launch in the Q3. Eyenovia will market this program through their sales reps, while NovaBay will market it alongside Avenova in our physician dispense channel.

Speaker 2

Under the agreement, Eyenovia sales reps will also market our Avenova products. I'm pleased to report that we completed training of the Eyenovia sales team earlier this month. So now I'd like to turn the call over to Tommy to review our financial results. Tommy?

Speaker 3

Thank you, Justin, and good afternoon, everybody. I'll review Q1 results and then our cash position. Before we start, I'd like to mention that the financial results for the 1st quarters of 20242023 that I will be discussing today do not include results from DermaDoctor. These results can be found in the Form 10 Q that we filed today under the heading divestiture and discontinued operations. Total sales net for the Q1 of 2024 increased 12% over the prior year to $2,600,000 Sales from our eye care business were $2,400,000 up from $2,200,000 in the prior year, with the increase due to higher Avenova branded sales through online channels.

Speaker 3

We also benefited from a modestly higher contribution from branded Phase 1 wound care product sales during the quarter. Gross margin on net product revenue was 68% for the 1st quarters of both 20242023. Sales and marketing expenses decreased by 50% from the prior year to $1,100,000 as we continue to leverage our digital advertising expertise along with lower expenses for related consulting services. G and A expenses were $2,300,000 for the quarter, up from $1,700,000 due mainly to higher legal costs related to non recurring strategic initiative. R and D expenses for the Q1 of 2024 were $19,000 versus $10,000 for the prior year period.

Speaker 3

Related to our DermaDoctor divestiture, we recorded a non cash loss during the Q1 of $865,000 which is recorded as a loss from the divestiture of a subsidiary in operating expenses. In connection with this divestiture, we entered into a service agreement with the acquirer to provide for a customary and orderly business transition. This includes warehousing and logistical services. Costs incurred for these services will be included in continuing operations in future quarters with the service contract expiring at the end of this year. Among non cash items, we recorded gains of $194,000 on change in fair value of warrant liabilities and $65,000 on change in fair value of embedded derivative liability during the Q1 of 2024.

Speaker 3

Also during the quarter, we recorded accretion of discount on convertible notes of $433,000 and other expense net of $480,000 primarily due to the issuance of the March 2024 warrant and the unsecured convertible notes issued in March 2024, with no comparable items in the Q1 of 2023. Net loss attributable to common stockholders for the Q1 of 2024 was $3,600,000 or $0.15 per share. This compared with the net loss attributable to common stockholders for the Q1 of 2023 of $1,700,000 or $0.85 per share. We reported cash and cash equivalents of $1,800,000 as of March 31, 2024. And now, I'll turn the call back to Justin.

Speaker 2

Thanks, Tommy. So in summary, Avenova is a well established brand that has tremendous growth potential in the large and growing dry eye market, which is projected to reach nearly $5,000,000,000 in the U. S. Over the next 6 years. We're proud of our expertise in digital marketing and our recent success that validates its effectiveness with ordered product sales reaching all time records in the past 2 months through amazon.com.

Speaker 2

We're introducing new digital programs to build on this success that target our loyal customer base and attract new potential customers. Importantly, we're effectively promoting our products while cost efficiently at managing our expenses. We're also capitalizing on strategic growth opportunities with our new relationship with Eyenovia to co promote each other's products. Under our co promotion agreement, Eyenovia sales reps will market Avenova while we leverage our established relationships with thousands of eye care specialists to market the newly approved clobetasol product. Our physician dispense channel provides a ready made opportunity to accelerate this product's commercialization, which is complementary to our Avenova line of products.

Speaker 2

Over the past year, we've introduced programs that strengthen our relationships with physician in our physician dispense channel, which creates a halo effect, which supports sales through our OTC channel. It's also instrumental in developing a marketing partnership for prescription product sales. So with that overview of our business and recent financial performance, I thank you for your attention. Operator, we're now ready to take questions.

Operator

And your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Speaker 4

Hi, Justin and Tommy. How are you?

Speaker 2

Hey, Jeff. How are you?

Speaker 4

I'm good. Few questions from our end. So can you talk about Amazon for a moment? And what type of data do you receive as far as geographies or demographics etcetera as far as their customers?

Speaker 2

Yes, Jeff, that's a good question. We are actually just looking at that this week. So we do get geographies and sort of not surprisingly, we are very heavily weighted in California, Texas and the Eastern seaboard. So we do get some good data around geography and we do know where to focus a lot of our efforts. But with that said, I think everybody knows that Amazon does limit the amount of interaction that you're able to get with those customers.

Speaker 2

So it is a little bit of push and pull. It's our largest sales channel. It's also our most efficient sales channel. But we do have somewhat limited data on the customers that buy from there.

Speaker 4

Okay, got it. And I can see on avenova.com you've got looks like 12 SKUs now and it appears that more than half of them are available on Amazon. Could you talk about percent of sales that are ex the spray as far as percent of sales that might be attributable to the supplements, the wipes, the compresses, the eye check or the eye drops?

Speaker 2

Yes. So that percentage really gives good insight into our business. So our hero SKU is really the antimicrobial lid and lash spray. And that's the one that doctors recommend the most. That's also our most differentiated product.

Speaker 2

So there's no other product on the market that I think comes close to the efficacy and purity of the spray. So the majority of our revenue does come from the spray, but an increasing amount of revenue also comes from the bundles and the other product line. But it's sort of without a doubt heavily weighted on the spray.

Speaker 4

Okay, got it. And then any commentary on pricing? It looks like on Avenova Direct, if you sign up for texting, it's 10% off. I don't know if that's a first order or beyond that. But any commentary on pricing differentials or potential differentials between Avenova Direct and Amazon?

Speaker 2

Yes. So this is one aspect, Jeff, that I think that we are the same. We face the same challenges and also opportunities that the vast majority of the vendors on Amazon face. So even though Amazon is very efficient for us, as I mentioned to your first question, it's also very limiting. We don't really get to interact with those customers very much.

Speaker 2

So what we do do is try and lure as many customers to our own website. So they're direct customers of ours away from Amazon. And I think it's an uphill battle because of how easy it makes how easy Amazon makes it for the customer, right? It's like buy now and you'll receive it the very next day. So we try and make it really easy to buy on our own website with Apple Pay and one click options.

Speaker 2

But it's the mix between our own website and Amazon. Amazon is the majority of that OTC revenue, but we are trying to draw customers with unique bundles and unique discounts to our own website. So then we really own that customer, we own that data and then we're also able to interact with them more and make them very loyal Avenova fans.

Speaker 4

Got it. Okay. And one more if I may. Could you talk about the training you referenced with the Eyenovia team as far as what's the size of their team now? And are they all 1099s or W2s?

Speaker 4

And what geographic presence do they have set up domestically?

Speaker 2

Yes. So we are very excited about the partnership with Eyenovia. They currently have 7 field representatives in major metropolitan areas. And one of the main reasons why this is why we're so optimistic about it and why it feels so good is Avenova has not had field sales representatives actually out in the field visiting doctors face to face and talking about our products since before the pandemic. So this is, I don't know, we'll call it just a return to a business model that we haven't really practiced over the past 4 years.

Speaker 2

And I think nothing really replaces that face to face contact. So even while the cost of field sales reps is very expensive, there's a certain magic to that relationship building that can't be replaced with phone calls or Zoom meetings. So we're excited to have them on board and our co promotion agreement with them is that we will sell clobetasol through our inside sales force. So we'll be calling out in areas where they don't have a physical sales rep And then they will be selling both their products and our products out in the field wherever they have their field sales reps. So they're having their earnings call next week.

Speaker 2

I believe it's on Tuesday. So we should all listen into it to hear the details straight from Michael Rowe's mouth, but we're excited about it on our end and the training that we completed was for both clobetasol and Avenova. So we trained their 7 people and then they trained our 3 people on their product.

Speaker 4

Perfect. Okay. Thanks for taking our questions, Justin. Hope that was it for us.

Speaker 2

Sure. Thanks.

Operator

And your next question comes from the line of Edward Wu with Ascendiant Capital. Your line is open.

Speaker 5

Yes, congratulations on the progress. My question is on your marketing strategy for the rest of the year, particularly for the consumers on your direct channel on Amazon. How are you going to reach them? Are you going to be able to spend more money to reach them? Or what is your overall marketing strategy?

Speaker 2

Yes. That's a great question, Ed, because we again, we're just we were talking about that just recently because there's a fine balance between being efficient and growing the business. And I think we have been very successful in becoming efficient, especially over the past 12 months. We have become more and more efficient in the way that we're reaching out to those customers. And with that said, new customer acquisition is hard and it's expensive.

Speaker 2

And so we're a little cautious on spending money on new customer acquisition. But without filling the top of the funnel and going after new customers, it's pretty hard to grow the business. So our strategy for the rest of the year is going to be to continue the efficiency that we have in the online sales channel, but really try and grow the sort of conversion of customers from our physician dispense channel and from the doctor's office into our OTC channel. So I think there's a lot of growth and opportunity there. So when people get their first bottle of Avenova from a doctor, they learn about it.

Speaker 2

They're educated about it. And then they know and trust the product because it's a doctor recommendation. But we all know that nobody's going to go back to the doctor across town just to buy a consumable product. They want to buy it online. So then we're going to try and grab that customer either on appvanova.com or we're happy just to have them find the product on Amazon and buy the product on Amazon to become a subscribe and save customer.

Speaker 5

Great. Thank you for answering my questions and I wish you guys good luck. Thank you.

Speaker 2

Terrific. Always nice to chat with you, Ed. So it looks like that is our last question. So I thank everybody for joining us today and their interest in NovaBay. We're excited about our strategic focus in the large and growing dry eye market and our established eye care business.

Speaker 2

We look forward to providing another update on our quarterly call in August. Thanks again and have a nice day.

Operator

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

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Earnings Conference Call
NovaBay Pharmaceuticals Q1 2024
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