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 Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 may press star then one on your touchtone phone. 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 Kane. Please go ahead.
spk05: 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, Andy Jones, Chief Financial Officer, and Dr. Audrey Keenan, the company's new chief product officer. I would like to remind listeners the 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 the future operations of Nova Bay's newly acquired subsidiary, Dermadoctor, and the duration of potential impact of the ongoing COVID-19 pandemic. This means that results could change at any time, and the contemplated impact of Nova Bay's recent acquisition and COVID-19 on Nova Bay's operations, its financial results, and its outlook is a best estimate based on the information available for today's discussion. For a list and description of risks and uncertainties, please review Nova Bay'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 podcast, November 11, 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?
spk01: Thank you, Jody. Good afternoon, everyone, and thank you for joining us. I would like to welcome the entire Derma Doctor team and our new shareholders to today's call. The purpose of today's call is twofold. The first is to review NovaBay's third quarter performance. The second and more important purpose of the call is to talk about NovaBay's acquisition of Derma Doctor. Last Friday, I was in Kansas City with the Dermadoctor team when we closed on the transaction and officially became one company. This was just days after closing the $15 million private placement. We appreciate the strong reception we received for this financing in the investment community, which we see as an endorsement of the financials and strategy underlying the Dermadoctor acquisition. Now, more than ever, I'm extremely optimistic about NovaBay's future. Dermadoctor's new product development capabilities will put us on a growth trajectory previously unattainable as a one-product company. That said, we continue to see strong performance from our Avanova business. Avanova revenues year-to-date have increased 16% over the same period last year, with unit sales reaching an all-time high, as more people than ever are using Avanova today than ever before. Before discussing Dermadoctor and our new product pipeline, I'll turn the call over to Andy to review NovaBay's standalone financial performance from Q3, a period prior to the acquisition.
spk02: Thank you, Justin, and good afternoon, everybody. Avanova product revenue for the third quarter of 2021 was $1.8 million. That's unchanged from the prior year quarter. Total Avanova unit sales increased 11%, and Avanova over-the-counter, or OTC, unit sales increased 26%, both compared with the prior year period. Gross margin for this year's third quarter was 73%, compared with 75% for the 2020 quarter, which is affected modestly by Avanova sales channel mix. And total operating expenses were $3.6 million for the third quarter of 2020, down slightly from $3.7 million a year ago. The decrease was due primarily to lower sales personnel headcount as we focus more on the OTC channel and due to lower overall legal expenses offset in part by higher digital advertising costs. Net loss for the 2021 third quarter was $2.1 million, or 5 cents per share. This is an improvement from a net loss a year ago of $3.2 million, or 8 cents per share, which included a $1.6 million non-cash loss on the change of fair market warrant liability. We eliminated the warrants underlying this loss in 2020, so there was no comparable amount this year. Turning briefly to our year-to-date financial results, For the first nine months of 2021, total net sales were $5.8 million. Avanova unit sales increased 39%, and Avanova OTC unit sales increased 67%, both compared with the prior year period. Total sales for the first nine months of 2020 were $8.0 million and included $3.1 million in sales of KN95 masks and other PPE products. Gross margin for the first nine months of this year was 73%, which is an improvement from 61% for the first nine months of 2020, which included sales of lower margin PPE products. Total operating expenses were $9.9 million versus $9.6 million for the year-ago period, with the increase mainly attributable to higher sales and marketing expenses as we invested in digital advertising programs. Net loss for the first nine months of 2021 was $5.7 million or 13 cents per share. This is an improvement from a net loss of $9.3 million or 28 cents per share for the first nine months of 2020, which included a non-cash loss of $5.2 million related to the warrant liability that we eliminated last year. As of September 30th, 2021, NovaBay had cash and cash equivalents of $9 million. During the first nine months of this year, we raised net proceeds of $1.8 million from the sale of common stock through an ATM facility. As Justin mentioned, we also completed a $15 million financing last week. This financing allows us to fully execute on the closing of the acquisition of Dermadoctor and integrate its operations. We expect that the total administrative cost to acquire and integrate DermaDoctor will be approximately $1.5 million, a majority of which will be incurred in the fourth quarter of this year. In reviewing the financial impact of the DermaDoctor acquisition, this transaction makes clear financial sense. DermaDoctor is immediately accretive to our bottom line, with the addition of DermaDoctor expected to double NovaBay's revenues. We anticipate some modest expense synergies as Derma Doctor will continue as a standalone entity in the near term. As we've said in the past, we expect to reach profitability with tremendous revenues exceeding 20 million for the fiscal year 2022. We now expect to achieve profitability as soon as the fourth quarter of 2022. I'm pleased to report that we believe our current cash is sufficient to fund operations through that time. Lastly, I'd like to personally and publicly welcome the Dermadoctor team to the NovaBay family. I am very, very excited about our shared future. And with that, I'll turn the call back over to Justin.
spk01: Thanks, Andy. Now let's turn to our vision for the combined companies post-acquisition. Dermadoctor will operate as a wholly owned subsidiary of NovaBay, with co-founders Jeff and Audrey Kunin continuing to lead the Dermadoctor operations. I'm pleased to announce that Audrey has taken on a broader role at Nova Bay as our chief product officer. As mentioned on our last call, Audrey is a board-certified dermatologist, a known trailblazer in the skincare industry, and the developer of many of the unique formulations found in Derma Doctor products. In the short time since we've announced our proposed business combination, Audrey has been working with us on new products to be introduced into both the skincare and eye care markets. Audrey will discuss some plans for our new products in a few moments. I'm truly excited about the transformation of NovaBay, as we view DermaDoctor as an ideal fit with NovaBay for multiple reasons. As Andy mentioned, this transaction has compelling financial implications. However, I'd like to reiterate the broader benefits. These benefits specifically include, first, product diversification, second, marketing capabilities, third, international distribution, Fourth, warehousing and front office synergies. And fifth, new product development. I'll expand a little on each one of these points. First, the Dermadoctor acquisition greatly expands our current product portfolio. We've achieved considerable success with Avanova, including establishing our brand as the premier antimicrobial lid and lash spray. While we are proud of this accomplishment, we have now eliminated the risk of being a one-product company. Further, we significantly increased our foothold in the high-growth, lucrative skincare market. ResearchinMarkets.com estimates that the global market for cosmetic skincare products exceeded $145 billion in 2020 and will reach $185 billion by 2027. This market rewards innovation, and we believe that scientifically formulated products developed by a dermatologist and proven to be highly effective will resonate strongly with consumers. Second, we bring our expertise in over-the-counter marketing to promote sales of derma doctor skincare products. We launched our OTC product two and a half years ago, and I'm pleased to report that through immense effort and skill, more than two-thirds of Avanova units are now sold through the online sales channel. We bring expertise in developing robust social media and print advertising campaigns and a strong marketing presence across all digital channels, allowing consumers to engage with the brand through social media and influencer campaigns. Our sophisticated digital programs include real-time monitoring of metrics to evaluate effectiveness in reaching target demographics. Importantly, we can make quick adjustments to improve the effectiveness and optimize ad spend. We're excited about bringing these successful strategies to Dermadoctor products. This is an exciting opportunity to advance and enhance the Dermadoctor business and customer base. Third, with Dermadoctor's established relationships, we have the opportunity to expand Avanova and Celerac sales into international markets. Dermadoctor products are sold through a large and growing network of international distributors and retailers in North America, South America, Europe, and Asia. The Dermadoctor team has developed these relationships over many years and we continue to see significant future growth opportunities. We look forward to leveraging Dermadoctor's relationships with international distributors to further distribute NovaBay products throughout the world. The fourth benefit of the acquisition relates to warehouse and front office synergies. For example, Dermadoctor can now share its warehouse operations with NovaBay. These operations include storage, picking, packing, shipping, and logistics. We anticipate some cost savings from shifting from third-party providers to the existing Derma Doctor warehouse team. With respect to G&A expenses, we, of course, expect to consolidate all accounting and finance functions. Lastly, but most importantly, We gain Audrey and her team's capabilities in developing new, scientifically proven products to expand our presence in both the skin care and eye care markets. This highly experienced group at Dermadoctor has a proven track record of creating innovative, award-winning products. With the acquisition of Dermadoctor, NovaBay now has product development capabilities, including idea generation, proprietary product formulation, packaging, clinical testing, and marketing. Dermaductr has created new product categories with clinically effective formulations, which consumers have come to love and trust. We are extremely excited about our new ability to immediately accelerate the development of numerous innovative products across all of our brands. With this one highly strategic acquisition, we have created a new NovaBay with revenues diversified across the eye care and skin care market and a path towards profitability. Now I'd like to turn the call over to Audrey Cunin.
spk03: Thanks, Justin, and it's a pleasure to be here. I can speak for the full Dermadoc team in expressing our enthusiasm for joining Nova Bay. Dermadoc sells over 30 products within families, such as Ain't Misbehavin', Calm, Cool, and Corrected, Kakadu C, KP Duty, and Wrinkle Revenge. Our products are sold through major retailers such as Macy's, QVC.com, and Costco. through digital beauty retailers such as Skin Store and through amazon.com and of course our dermadoctor.com website. We are very excited about expanding our brand awareness, distribution and sales utilizing Nova Bay's financial and marketing resources. An important new partner for Dermadoctor in Q1 of 2022 is QVC's on-air televised platform, which has an audience composed of approximately 11 million viewers. Our focus at Dermadoc has always been on creating innovative dermatologically correct problem-solving solutions which target common skin concerns. Our approach has been to develop clean clinical formulations that are hypoallergenic yet effective. In joining with NovaBay, we intend to continue this approach, both in launching new skin care as well as in developing solutions for the eye care market. We currently have an extensive pipeline of problem-solving products in various stages of development that address a variety of skin conditions. We can expect at least four new SKUs to be manufactured and commercially available in the first half of 2022. We will expand popular categories targeting common skin concerns, such as anti-aging, keratosis pilaris, and eczema. We are scientifically developing innovative solutions within the CACADC, KPGD, and Calm, Cool, and Corrective families. Similarly, for 2023, we'll both expand existing families and create new ones. We're bringing the same product development strategy to new solutions in the eye care market. We have identified dry eye, blepharitis, myomobium gland dysfunction, inflammation, bacterial, and contact lens intolerance as concerns to address in 2022 and 2023. Our plan is to develop a range of products under the Avanova brand, furthering our mission to address all needs for lid and lash health. We're very excited to be working with Nova Bay to accelerate pipeline growth. It has been our longstanding goal to continue creating innovative problem-solving skin care, and we now have the backing of a strong partner in Nova Bay. And with that, I'd like to turn it back to Justin.
spk01: Thanks, Audrey. You may have seen that we filed a preliminary proxy statement with the SEC for a special meeting of stockholders to be held virtually on December 17th. If you are a Nova Bay stockholder as of the October 25th, 2021 record date, you will receive the proxy statement towards the end of the month in the mail. We are asking that you vote in favor of all proposals. You will receive instructions in the proxy statement to vote your shares by mail, by phone, or online. The first two proposals pertain to our recent $15 million financing in support of the Dermadocter acquisition. The passage of all proposals is key to allowing us to move forward as a combined company. The first proposal authorizes us to go beyond the 20% NYSE threshold for new share issuances, and the second authorizes the shares that underlie the warrants. Now, I know that there are some current shareholders who are concerned about dilution. However, I want to assure everyone that the acquisition of Dermaductor creates intrinsic and immediate shareholder value, and the approval of both proposals is definitely in the best interest of all shareholders. We need stockholder approval for both of these proposals to advance our vision for NovaBay. I want to reiterate my enthusiasm for the derma doctor transaction. I expect that the Nova Bay and derma doctor complementary skill sets will create a stronger and faster growing company with expanded footprints in the eye care and skin care markets. Importantly, with the anticipated revenue growth afforded by this acquisition, we are targeting profitability by the end of 2022. An achievement we believe will greatly enhance shareholder value. I couldn't be more excited about our future. With that, I thank you for your attention. Operator, we're ready to take questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
spk01: While we're waiting for the first question, I want to urge our shareholders to vote for all proposals in our proxy statement. If you have questions or would like to vote your shares by phone, please call 1-800-690-6903. I also want to mention that we'll be presenting at the H.C. Wainwright Virtual BioConnect Conference, and we'll also be holding in-person investor meetings at the J.P. Morgan Healthcare Conference in San Francisco. with both events being held January 10th through the 13th, 2022. We invite you to view the webcast of our BioConnect presentation, which will be posted to our corporate website beginning January 10th. Okay, operator, we're ready for the first question.
spk04: Thank you. Our first question comes from Jeffrey Cohen with Gladberg Salmon. Please go ahead.
spk07: Well, hi, Justin, Andy, and Audrey. How are you? Very good. Hi, Jeff. Thanks, Jeff. So just a few questions from Aaron. I think we're pretty up to speed on the acquisition and integration. So, Justin, you said you closed last week. So that would mean two out of three months built in from Dermadoc during the fourth quarter. Is that correct?
spk01: That's correct, yeah. So the official close date was Friday, November 5th. So it's pretty much two months. That's correct.
spk07: Okay, got it. And what's your expected share count to report for the fourth quarter? I can see this quarter at the 44.9, but what's the anticipated share count?
spk01: Yeah, so right now we have, as you said, about 45 million shares outstanding. The preferred shares have already been issued in the private placements. We are filing a registration statement. I think that'll be next week. But those shares are not convertible into outstanding common stock until after shareholder approval. So the date for shareholder approval is set for December 17th. And there's a high likelihood that only a small portion of the preferred shares will convert before year end. But it is all contingent upon the shareholders of the preferred shares and the approval from the current shareholders on the 17th.
spk07: Okay. And what's the total preferred share count?
spk02: The total preferred share count is $15,000, which at the conversion price would convert into 37.5 million shares of common stock at the $0.40 conversion price.
spk07: Okay, so it would be somewhere between those two numbers, between now and zero to plus 37.5 on top of now. Yeah, at most 95 to 96 million shares after converting everything.
spk01: Yeah, but it would be, you know, unlikely that there would be much conversion before the end of the year.
spk07: Got it. And as far as the cash now is $9 million with the anticipated acquisition and close of Dermadoc in this quarter as well as the raise this quarter, could you give us an estimate of where cash may be today? Okay.
spk02: Yeah, we anticipate we'll end the year at roughly seven, seven and a half million, something like that. That would be at the end of this year.
spk07: Got it. Okay. And then your 20-plus number for 2022, is that guidance, 20-plus?
spk01: It is.
spk07: Got it. And you're profitability guidance by the end of next year. Is that a cash number or a gap number? I'm sorry, a cash number or a... Or a gap number when you talk about getting profitable, assume it's Q4 2022. I've got it.
spk02: Yeah, it's likely both. We're shooting for both.
spk07: Okay. Okay. Got it. And ramifications from Dermadoctor on margins. I know that your margins have been hovering in the, let's call it low to mid 70% range. What do you expect will be the ramifications of the Kanban business?
spk02: Yeah, good question. So Dermadoctor has improved their margins in recent times and they've been more in the lower 60s recently. But, you know, I think we've talked a little bit about their sort of focus on, you know, direct-to-consumer and online channels like us. So we anticipate that their margins will continue to improve. And, you know, once the dust settles, we'll be somewhere close to that 70% as a combined company.
spk07: I got it. Okay. And... Let me just check here. I think that does it for all of our questions. Thanks for taking them all.
spk01: Thank you, Jeff. Thanks, Jeff.
spk04: Thanks, Jeff. Our next question comes from Ed Wu with Ascendian Capital. Please go ahead.
spk06: Yeah, I want to welcome Audrey to the team. My question is, you mentioned in your call that you will have, I think you said, four new SKUs for the first half of next year. Are they all skin care products? And what's your normal cycle time for product development from idea to getting it on the shelf?
spk03: Well, those four new SKUs that I was referring to are skin care products within the Dermadoc brand. I am also working on the Avenue of a Pipeline, but don't have anything to really reveal just yet on that process, as I'm so new to the company. Typically, it takes six to 12 months from inception of idea to commercialization, and that can obviously vary. So we try to have multiple SKUs in the pipeline, just in case one makes it to market a little sooner than another.
spk06: Great. Is it a very capital-intensive business in product development?
spk01: I'll take that one. What we have typically been telling people is that both Andy and I come from a pharmaceutical and medical device background where it is very capital-intensive to bring new products to market. And the commercialization of a new product is measured in millions of dollars in years of time, whereas the products that we will be commercializing are all over-the-counter products or done on an FDA monograph that's already existing. So the time to market is measured in months, and the investment is measured in the thousands of dollars.
spk06: Great. And, you know, congratulations on definitely the international reach. Are there particular international areas where you are stronger, either Asia or Europe?
spk01: Yeah, I'll let Audrey answer that.
spk03: Actually, the Middle East is one of our fortes. We have been working with very wonderful distributors over more than a decade, and they have built a wonderful business for Dermadopter across the entire Middle East.
spk06: Great. Well, thanks for answering my questions, and I wish you guys good luck.
spk01: Thank you. All right. Thanks, Ed. Thank you.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.
spk01: Thank you once again for joining us today and your interest in NovaBay. We are extremely excited about our company's transformation with the acquisition of Dermadoctor and the very bright future we envision. We look forward to reporting progress during our fourth quarter investor call in March 2022. In the meantime, please have a nice day.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer