This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good day and welcome to the Nova Bay Pharmaceuticals second quarter 2021 financial results conference call. At this time, all participants are in listen-only mode. Following management's prepared remarks, we will hold a Q&A session. To ask a question at that time, please press the star key followed by the number one on your touchtone phone. If anyone has difficulty hearing the conference, please press star, then zero for operator assistance. As a reminder, this conference is being recorded I would now like to turn the conference over to Jody Kane. Please go ahead.
spk02: This is Jody Kane with LHA. Thank you for participating in today's call. Joining me from Nova Bay are Justin Hall, Chief Executive Officer and General Counsel, and Andy Jones, the company's 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. 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 significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that results could change at any time, and the contemplated impact of COVID-19 on Nova Bay's operations is financial results and its outlook is the best estimate based on information available for today's discussion. For a list and description of risks and uncertainties, please review NOVA-based 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 12, 2021. NOVA Bay 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?
spk00: Thank you, Jody. Good afternoon, everyone, and thank you for joining us. Highly gratifying to begin this call by reporting record high quarterly unit sales, as more people are using Avanova today than ever before. Our Q2 financial performance was driven by record Avanova unit sales and record revenue in the DTC channel for the fourth consecutive quarter. In fact, with the exception of one quarter last year during the height of the pandemic, we have consistently broken records in this channel since its inception in 2019. Amazon continues to be our largest source of online sales, complemented by growing sales through our own website. Our considerable DTC competency is reflected in our ever increasing sophistication in digital marketing. We now consistently launch fresh advertising campaigns across multiple electronic platforms with marketing techniques that include real-time monitoring of performance metrics. This tracking allows for quick adjustments to placements and messaging to leverage what's working best, accelerate sales, and maximize our return on ad spend. Our efforts to expand and improve our DTC channel are paying off, and we continue to see this channel as our highest growth potential for Avanova. DTC sales are coming from both first-time users and our loyal customer base. Expanding our customer base is key to creating a reliable revenue stream, as Avanova enjoys a very high rate of repeat business. We know we have strong brand loyalty because of the growing number of users who are utilizing the subscribe and save feature on Amazon.com and Avanova.com. We also know that our customer satisfaction is extremely high, as evidenced by Avanova's full five-star rating by 70% of the 8,000 customers who have reviewed our product on Amazon, with 84% of the ratings at four stars and above. Verified purchasers praise our product in written reviews with comments such as, I've suffered for years with dry eye, and this is the only thing that has ever worked. I've literally tried everything else on the market. These customer reviews are especially rewarding because they are honest and unsolicited, as required by Amazon. We can truly say that our product is making a positive impact in people's lives. Other contributions to the DTC channel have also come from Walmart.com and from CVS, where Avanova has been available both in stores and online since earlier this year. It's exciting to announce that CVS has recently expanded access to our product, with Avanova now on the shelves of more than half of CVS's 10,000 stores nationwide. We are also capitalizing on the strong Avanova brand by launching complementary eye care products in the DTC channel. So far this year, we've added the warm eye compress and the EyeCheck illuminated eye examination mirror. The EyeCheck is a portable, lightweight, handheld mirror featuring 10 times magnification and is specifically designed for at-home visual resolution and magnification of the eye and surrounding area. Among its uses, EyeCheck enables our customers to have an up-close look at the effectiveness of Avanova on their lids and lashes. These ancillary products are meant to support the use of Avanova by both new and returning customers. Our Avanova lubricating eye drops are still slated to launch at the beginning of Q4. While sales have continued to grow through our DTC channel, we continue to focus on our pharmacy channel with our RX-only product. We increased our focus on the prescription channel through our recently announced highly promising partnership, with the nation's largest ophthalmic pharmacy, Impromis Rx. Our new partner has had lots of success in commercializing high-quality prescription ophthalmic drugs to its established customer base of thousands of eye care specialists nationwide. Avanova is highly complementary to their newly launched cyclosporine eye drop, Clarity C. I firmly believe that patients who use both Clarity C and Avanova will experience better clinical outcomes if they use both products together. These two products have different mechanisms of action but are completely complementary. Although they were designed separately, it's almost as if the two products were created to be used together. In addition to their eye drops, their portfolio consists of hundreds of products used in ophthalmic surgical procedures. Avanova's antibacterial and antimicrobial properties make it ideal for pre and post LASIK surgery and cataract procedures. This opens a significant market opportunity for Avanova, as cataract surgery is the number one surgical procedure in the United States, with about 4 million procedures performed each year. ImpromiseRx is involved in approximately 20% of all cataract surgeries in the U.S., so the market potential is huge, and we're excited to have a partner with such broad reach. The Inframis Rx sales force is already promoting Avanova, and we expect to see a material impact from this new partnership in the fourth quarter. Avanova's high-quality formulation has made it the number one physician-recommended antimicrobial lid and lash spray and provides a foundation for continued growth. Novabay was the first to launch a hypochlorous acid product into the large dry eye market. We continue to stand by our assertion that Avanova is best in class due to our patented pharmaceutical grade formulation. We have tested every hypochlorous acid lid and lash product we can find on the market and no other formulation has been found to be as pure as Avanova. As we've said many times, Avanova is completely safe for regular use. It's the only lid and lash antimicrobial spray to be clinically proven to reduce the bacterial load on ocular skin surfaces thus addressing the underlying cause of bacterial dry eye rather than just the symptoms. Turning now to Celerex Clinical Reset. We very recently launched digital advertising campaigns for this product with creative messaging aimed at accelerating sales. These campaigns have the same high level of sophistication as our Avanova campaigns with real-time tracking. Clinical Reset is a truly exciting product that opens up a new category for pharmaceutical-grade skincare. Our product is a gentle, calming, and soothing facial spray that effectively removes barriers to cell turnover by disrupting the biofilm layer without stripping the skin. CellRx is the answer to the dangerous idea of needing to scrub, repetitively wash, and use harsh ingredients to have healthy, glowing skin. Increasingly, researchers are realizing that the balance of oil and lipids in the skin's biofilm is exceedingly important to keeping it healthy. Celerex addresses this balance. As a wholly new approach to skin care, adoption requires some education about its benefits. Our new digital media campaigns are focused on defining the role of Celerex in a daily skincare routine with messaging that features all natural, non-drying, deep cleansing benefits and lifestyle testimonials from actual users. Like Avanova, we find a high level of customer loyalty in this product. Cellarex also provides us with relationships and competencies in the large skincare market, much like Avanova does in the ophthalmic market. These competencies are important as we actively negotiate strategic opportunities to broaden our product portfolio with complementary products. This is a top priority for NovaBay as we look to build shareholder value by reaching profitability through growing revenue and a diversified product offering. We are positioned to capitalize on attractive opportunities by leveraging our sales channels, our marketing know-how, and our administrative expertise. Now I'll turn the call over to Andy to review our financial performance in more detail.
spk01: Thank you, Justin, and good afternoon, everybody. Let me start with our Q2 top line results. AbaNova product revenue for the second quarter of 2021 was $1.9 million. That's up 65% versus the prior year, with total net sales of $2.1 million for the quarter. In the 2020 quarter, we've reported total sales of $4 million, which included $2.8 million in KN95 mask sales. We're very proud that we were able to supply much needed PPE during the early days of the pandemic last year. However, we do not anticipate any such future sales now that supply shortages have narrowed. The increase in Avanova revenue for Q2 2021 was driven by a record $1.3 million in Avanova OTC sales. up 117% from the prior year. As Justin mentioned, this is remarkable growth and a continuation of a trend of record quarterly sales since we launched the OTC product. Gross margin for the second quarter of 2021 was 71%. That's up considerably from 49% from the prior year with the improvement mainly due to the lack of sales of the lower margin KN95 masks in the second quarter of this year. Total operating expenses in the second quarter of 2021 were $3.4 million. That compares with $3.0 million for the prior year period. Specifically, G&A expenses for Q2 2021 of $1.6 million were relatively flat with $1.5 million for Q2 2020. Sales and marketing expenses were $1.8 million That compares with $1.4 million for Q2 2020. The increase was primarily due to higher spending on marketing programs for both Abenova and Celerex as we look to continue to capitalize on these market opportunities. The increase in sales and marketing expense this year was offset in part by a reduction in field sales headcount when comparing the periods. We are focused on the OTC and physician dispense channels as part of our emphasis on cost-effective marketing that includes an in-house sales team. We are also excited about the opportunity to expand in the prescription market through our partnership with ImpromissRx. Non-cash net loss of fair market value of warrant liabilities for the 2020 second quarter was $3.8 million. You might recall that we eliminated the warrants underlying this expense as part of our effort to improve our balance sheet last year, and there was, therefore, no comparable expense in this year's second quarter. Net loss for the 2021 second quarter was $1.9 million, or 4 cents a share. This is an improvement from the net loss of $4.5 million or 15 cents a share last year, which reflects higher margin product sales and our elimination of the warrant liability in the second half of 2020. And now turning briefly to our year-to-date results, Abanova revenue for the first six months of 2021 of $3.5 million represents a 29% increase over the prior year. Total revenue was $3.9 million compared with $5.9 million last year, which included $3 million of KN95 mask sales that were non-recurring. Growth margin improved to 73% for the six months in 2021, an improvement from 55% for the six months in 2020, with the improvement again due to higher Avanova sales and no lower margin mask sales in this year. For the first six months of 2021, sales and marketing expenses increased by 16%, largely due to an increase in the investment in digital marketing for Avanova and Celerex. G&A expenses were relatively aligned between the years, and R&D expenses declined modestly, all compared with the first six months of 2020. Net loss for the first six months of 2021 was $3.4 million, or $0.08 per share. This is an improvement from the net loss for the first six months of 2020 of $6.1 million or 21 cents per share, which included a non-cash loss for the warrant liability of $3.6 million. Lastly, our balance sheet remains strong with no significant debt obligations. And as of June 30th, 2021, we had cash and cash equivalents of $10.3 million. We continue to have sufficient funds to meet planned operating needs well into and beyond 2022, allowing us to comfortably execute on all 2021 initiatives to drive adoption of Avanova and Celerex. And with that, I'll turn it back to Justin.
spk00: Thanks, Andy. Let me summarize why we're excited about NovaBase's future and the prospects for growth and profitability. First, we launched fresh digital marketing campaigns and ancillary products earlier this year in order to accelerate Avanova DTC sales by expanding our customer base. Our new sophisticated digital marketing programs are producing results as evidenced by consistent quarter-by-quarter increases in unit sales. We monitor various metrics in real time, which allows us to evaluate the effectiveness in reaching targeted demographics and making adjustments. This, in turn, allows us to optimize our ad spend. We have a strong foundation upon which to build, having already established Avanova as the premier antimicrobial lid and lash spray. Secondly, consumers have more access to Avanova than ever before with our product on the shelves of nearly half of all CVS stores nationwide. Third, we're opening up new opportunities in the prescription channel through our partnership with ImpromissRx, which has a track record of success promoting prescription ophthalmic products. In addition to promoting Avanova for patients with blepharitis, MGD, and other dry eye symptoms, The Impromise Rx sales force is already promoting Avanova in tandem with their other prescription ophthalmic products for pre- and post-surgical use for LASIK procedures and for cataract surgery. Fourth, we plan to begin marketing of a new line of licensed products in the eye care space that will be offered in our physician dispensed channel. And finally, We are actively negotiating opportunities to support profitable growth through acquisition or licensing of ophthalmic and skincare products. Our established presence in these markets, our experienced commercial organization, and strong balance sheet give us the confidence that now is the opportune time for us to pursue these strategic transactions. We're excited to focus on future profitability with the addition of new products that grow and diversify our revenue. With that, I thank you for your attention. Operator, we're now ready to take questions.
spk04: As a reminder, if you wish to register for a question for today's Q&A session, you will need to press star, then the number one on your telephone. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the pound key. If you're using a speakerphone, please pick up your handset before entering your request. One moment, please, for the first question.
spk00: While we're waiting for the first question, I'd like to mention that we'll be presenting at the H.C. Wainwright Global Investment Conference being held September 13th through the 15th. We invite you to view the webcast of our presentation, which will be posted to our corporate website at the beginning of September 13th. Okay, operator, we're ready for the first question.
spk04: Our first question today comes from Jeffrey Cohen with Linenberg-Fallman. Please go ahead.
spk05: Hi, Justin and Andy. This is actually Destiny on for Jeff. Thank you for taking the questions. First, maybe I'll just start with that collaboration with HARO slash Impromise. Can you quantify that opportunity a bit more for us, and how does revenue recognition work for you? Are you providing it to them with a discount, or how is that working?
spk00: Yeah, so I tried to allude to the total market opportunity during the call today. They just have recently started it. So we have a monthly call set up with their management to gauge the demand going forward. So hard to quantify what that is, but this opportunity is beneficial in a number of different ways. You know, for us, just on our side, even without their sales force promoting it, we really needed a nationwide pharmacy partner that had the ability to ship Avanova, prescription Avanova, in all 50 states. And we didn't have that prior to Inframis. We had a network of local pharmacies that did the fulfillment. So I think streamlining the availability with a very, I think, sort of high-end operational platform company like Inframis is going to put the product in the hands of patients, you know, much more cheaply and much more easily. I say it's hard to quantify because we have two real opportunities with them. One is in the pre and post-surgical use case. And so, like I mentioned, that is an incredibly large opportunity, and there are the largest player in the ophthalmic space there. And so, you know, they do, and I think they have publicly said this, but, you know, they do over 100,000 prescriptions just in that space, you know, quarterly. And so if we can grab even, you know, 10% of that, I think we'll be poised to see a lot of growth in that channel. And that's, you know, through our own promotion of it and also their sales force. They have a sales force of 20 to 25 people and Avanova is now a part of their sales pitch.
spk05: That's great. Thank you so much for that additional information. Perhaps I'll just switch over to my marketing questions quickly. Could you talk to us a bit about your marketing strategies and how you change the messaging between new customers and repeat customers? Has that changed at all since last quarter or Q4? And then are you noticing any additional trends in terms of customer stickiness? And then lastly, could you also just remind us about your lag between running an actual campaign and then recognizing revenue? I know it can be a couple weeks to a couple of months, so I'm hoping you can provide a bit more color there.
spk00: Yeah, so we are constantly changing our marketing and campaigns. And that ability to quickly pivot both on messaging and brand and, you know, the graphic, not to mention the platform, whether that be a search engine like Google or a social media platform, a platform like, uh, Instagram or Tik TOK or chat. Uh, those are some of our, our newer ones that we're expanding into, um, as well as doing educational videos, um, on YouTube. So, uh, we, we actually change those, uh, constantly and, and all the time. Uh, one thing that, uh, you know, we find very, I think useful with returning customers is, uh, changing that message, but always being in front of them. So no matter sort of where they are, reminding them that they know and love and need Avanova, but we do it in a number of different ways. So the message never gets stale. So we see that success or failure of some of these messaging and advertising campaigns in real time. So if an advertising campaign is not producing the results that we want, either for brand awareness or conversion, you know, we just stop spend on that and then shift it over to something that is performing well. So as far as revenue recognition, as soon as it results in a sale in our direct-to-consumer channel, that revenue is recognized because it's a sale. And so, you know, I think as far as stickiness, One thing that we are very lucky to have is a product that, regardless of our marketing or sophistication in our online ad campaigns, we have a product that people just, once they start, they really, really like. And it's built into their daily routines. So sometimes when people can't, you know, if they're, you know, one reason why the CVS partnership is really nice is because People travel, and if they don't have their Avanova when they're on the road or, you know, they run out, they kind of freak out sometimes. And they're like, I have to have this. I have to have this as a part of my daily routine. And when I don't have it, you know, I'm unhappy. I feel a difference with, you know, my eyesight. And having the ability to just go into a CVS store and pick it up off the shelf I think is great. We've gotten a lot of really positive customer feedback from about that, but I think that that just goes to the stickiness to the product, that we have a lot of return customers. I wouldn't even call them return customers. They're Avanova loyal, 100%.
spk05: Okay, thank you. That kind of segues into my next question, which is around CVS. Can you just remind us where that's located in the store? I would assume it's with iProducts, but I just want to get a reminder.
spk00: Yeah, definitely. It's actually very hard in the CVS store to choose where it is in the store. So we are in the ophthalmic section with other eye drops. So, you know, like the Visine eye drops. Typically when I have gone to look for it in a CVS store, this section is right outside of the pharmacy. But I would love it if it was over by the fake eyelashes, if it was over by the mascara and eyeliner. I mean, there are so many places within the CVS store that it can be. But for now, if you're going into the CVS store, you have to go to the ophthalmic section with eye drops, and that's usually right outside of the pharmacy.
spk05: I see. Got it. Okay. Thank you for that. And then Finally, I guess I just want to ask, do you see any alternative channels for CellRx? At what point do you think it would make sense to move to a different channel? And would you ever be able to leverage your relationship with CVS to put CellRx kind of in that eyelash and beauty section of CVS as well? Thank you.
spk00: Yeah, so I would love it if Celerex could make it into a brick-and-mortar store. We're trying to be a little bit selective about our partner from that aspect. We spent the first half of this year doing a lot of market research because we certainly didn't want to throw away money or put this out into the market without really knowing what our target demographic was. And through our market research, we found that – Our target demographic, the people who are most likely to buy this product, do not buy their beauty products on Amazon, and they don't buy them at CVS. They tend to buy them on the proprietary website of the manufacturer. So that is where we've placed Cellerex now and where we've placed sort of our main emphasis in access to Cellerex.
spk05: Oh, wow. Okay, that's very interesting. Thank you.
spk04: Our next question will come from Edward Wu with Ascendant Capital. Please go ahead.
spk03: Hey, guys. Thanks, guys. Harry Yang here filling in for Ed Wu. I just wanted to ask, besides some of the products you guys mentioned, like the iCheck Mirror, what other products or areas are you guys thinking about expanding into or adding to broaden the portfolio?
spk00: So you're going to have to stay tuned for that. We are working on a couple different deals right now, and we'll be making those announcements in the coming weeks. So we do have some additions, but our proprietary products that we have right now that are complementary to Avanova are the NovaWipes, and the warm eye compress that really, I think, competes head-to-head with Bruder. We don't say it in our marketing, but we say it around the office. Our mask is better than Bruder. That's our tagline. And the eye check because, you know, it's very hard to see your eye up close. And even though symptoms with the use of Avanova may be getting better, There's also a visual difference of the lids and lashes. And the eye check allows people to track their progress using Avanova. And there is a visual difference to the eye and the lids and lashes that you can't really see just by looking in a mirror. So the eye check is specifically designed for people to track their progress with Avanova. And then, as I mentioned earlier, we do have a dry eye lubricating drop that is Avanova branded and that will be coming out later this year.
spk03: Got it. Got it. Thanks. That helps a lot. Thanks guys.
spk00: Sure.
spk04: Ladies and gentlemen, this will conclude our question and answer session. I'd like to turn the conference back over to Justin Hall for any closing remarks.
spk00: Thank you once again for joining us and your interest in NovaBay. We look forward to updating you during our next call in November when we'll discuss our third quarter financial results and business progress. In the meantime, please have a nice day.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer