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spk04: Good afternoon and welcome to the Novo Bay Pharmaceuticals Third Quarter 2022 Financial Results Conference Call. All participants will be in a 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 telephone keypad. 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.
spk03: This is Jody King 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, 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 the circumstances beyond the company's control that impact the broader economy, such as the COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of COVID-19 and circumstances that impact the broader economy on Nova Bay's operations its financial results, and its outlook is the best estimate based on the information available for today's discussion. For a list and description of risks and uncertainties, please review 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, November 14, 2022. NOVA may undertake no obligation to revise or update any statements to reflect events or circumstances, except as required by law. 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'm delighted to report a 69% increase in product revenue over the prior year period, mostly driven by our acquisition of Dermadoctor and diversified product revenue streams. On recent conference calls, we had projected that revenue growth in 2022 would accelerate in the second half of the year, as many of our initiatives we implemented throughout the year gained traction. It is highly gratifying to deliver on this expectation during the third quarter and our outlook for accelerated growth to continue in Q4 as well. One of our highlights of the quarter was that we again achieved year-over-year growth in online Avanova unit sales. Another tremendous achievement was that we delivered our highest sales quarter for Dermadoctor products since the acquisition a year ago. While revenue increased 69%, our ability to optimize digital marketing led to an 11% decrease in sales and marketing spend, even with the additional expenses for promoting Dermadoctor products. I'm excited about our prospects for continued growth. We have established brands in three large and growing verticals, eye care, skin care, and wound care. Now I'd like to share updates on each one of our three verticals, beginning with Avanova and our eye care products. Avanova is the number one antimicrobial lid and lash spray in the US dry eye market. And as mentioned, online Avanova Online Avanova Spray unit sales increased year over year as we continued the successful shift to this more efficient online sales channel. For the quarter, more than two-thirds of unit sales were generated online, which is a testament to the effectiveness of our digital advertising. For example, we recently completed a Fall for Eyes sweepstake, which drove 10,000 new email subscribers and 2,500 new Instagram followers. Now we have Black Friday, Cyber Monday, and December holiday promotions on tap to further drive sales for a strong end-of-year push. During the past several years, we've capitalized on the recognition of the Avanova brand by commercializing companion products that help with our blepharitis and dry eye customers. These include Nova Wipes, the Avanova Warm Eye Compress, Avanova Lubricating Drops, and the Eye Check. I'm pleased to report that this strategy is working well and our companion products made a notable contribution to the third quarter revenue number. Moving on to Dermadoctor and our collection of skin care products. You may recall that we identified growth opportunities for Dermadoctor with a trend towards more beauty products being purchased online. In fact, the research firm Insider Intelligence expects cosmetics and beauty e-commerce sales in the U.S. to reach $18 billion this year. By 2026, e-commerce sales are expected to account for nearly a third of the category's total. With our digital focus, we are well positioned to tap into this ongoing market trend. Last month, we announced significant orders for a top-selling derma doctor product, Kakadu C Anti-Aging Serum, with these orders being placed just ahead of the holiday season. Some revenue from these large orders was recognized in the third quarter, with more to come in the fourth quarter. We also have a number of promotional activities around the holidays, including a discount feature in the Costco holiday mailer. Since the beginning of the year, we've introduced six new skincare products to the ever-popular Derma Doctor collections, and plans are underway to introduce more products in the future. These new products keep us highly relevant in an industry characterized by the constant emergence of new formulations, and importantly, they keep the Derma Doctor brands in the mind of the consumers. As Andy will discuss in a moment, we have commercialized these new products while holding R&D and sales and marketing expenses in check with our launches executed under our low-cost model. Among upcoming promotions for our Dermadoc products are additional appearances by Audrey Kunin on the QVC network with several shows already booked. Increasing Dermadoc's presence in international markets is a key priority. As you may know, NovaBay has excellent relationships in China, and we know that success in that country is based on having strong local business partners who understand the market and have the ability to create positive brand awareness. We now have an updated derma doctor store on Tmall, which is China's largest B2C network. And through our local marketing partner, we have an expanded network of bloggers and influencers. We also have strong media presence and brand building capabilities on such key platforms as TikTok. Our ability to capture even an extremely modest share of the Chinese market would have a considerable impact on our revenue. We also offered special promotions on select Dermadoctor products during the Double 11 event, so named because it occurs on November 11th each year. Double 11 is similar to our Black Friday, but it grosses several times more in revenue. We are also working towards distribution agreements in Europe and plan to expand the geographic reach of Dermadoctor even further. Now turning to our wound care vertical. We manufacture and sell a proprietary wound care product under the Phase I brand that is distributed in the U.S. for professional use by our commercial partner, Phase I Health. Products under our NutraPhase brand are distributed in China by our partner, Pioneer Pharma. These products are used for cleansing and irrigating post-surgical wounds, minor burns, and superficial abrasions. We have an advantage in this market as our product is made without the toxic chemicals found in many other wound care products. It is gentle, non-irritating, non-sensitizing to skin and new tissue. Like our Avanova spray, our wound care products are formulated with our FDA-cleared, proprietary, antimicrobial, pure form of hypochlorous acid. Our formulation exhibits broad-spectrum activity against a range of gram-positive and gram-negative bacteria, making it highly effective. Among the advantages of hypochlorous acid is the ability to penetrate and kill biofilm which represents a significant barrier to wound healing. Among various promotional activities, Phase One Health has refreshed their website, including recent blog postings from industry key opinion leaders. The most recent post is by Dr. Jack Fisher, a past president of the American Society for Aesthetic Plastic Surgery and author of more than 120 publications, a frequent speaker at medical conferences around the world, and an ardent supporter of Phase One. He has used our product with his patients for more than a decade. Before reviewing our financial results, I want to thank our stockholders for their continued support. Last Thursday, we held a special meeting of stockholders, and I'm pleased to report that all proposals passed, including the proposal authorizing our board to effect a reverse stock split. This is critical in regaining compliance with the NYSE American listing and completing the previously announced private placement for gross proceeds of $3.25 million. Our Board of Directors has approved a 1 for 35 reverse stock split that will become effective tomorrow, Tuesday, November 15th, with our common stock trading on a split-adjusted basis Wednesday, November 16th. The increased market price resulting from the reverse split will improve the marketability of our stock and should encourage additional interest and trading. Now I'd like to turn the call over to Andy to review our Q3 financial performance. Andy?
spk02: Thank you, Justin, and good afternoon, everybody. As a reminder, our financial results for 2022 periods reflect combined NovaBay and Dermadocs results. The comparable 2021 periods do not include results from Dermadoctor since we did not close the Dermadoctor acquisition until November 2021. I also want to announce a change in the way that we present fees paid to third-party online retailers such as Amazon. Sales commissions and fulfillment fees charged by these retailers, which typically total 15 to 20 percent of total net sales, were previously netted against related product sales, which reduced total net sales in our statement of operations. During the third quarter of 2022, we began presenting sales commissions as sales and marketing expenses and fulfillment fees as cost of goods sold. Our former presentation of the commissions was an error. However, the impact was immaterial to reported financial results. That said, to enhance period-over-period comparability, our prior financial results for the comparable periods we are reporting today and in the future will reflect the changes and revisions for both the commissions and fulfillment fees. We are also excited that these changes will enhance the comparability of our financial results against our peers as sales from our OTC online channel continues to grow in importance. Importantly, these changes and revisions had no impact on our operating loss, net loss, comprehensive loss, loss per share, cash flow, cash balances, or any balance sheet components for any current or former periods. Additional information about these changes and revisions, including their impact on the 2022 and 2021 periods, can be found in our Form 10-Q filed with the SEC today. Now, turning to our financial results. Product revenue in Q3 2022 was $3.8 million, up 69 percent from the prior year period. The 2022 third quarter included $1.3 million in Dermadoctor product sales, which Justin mentioned was the highest sales quarter since the acquisition. Amanova spray sales for the third quarter of 2022 were $1.9 million versus $2.1 million a year ago. The decrease was due to our continued shift to the more efficient online sales channel, and as previously mentioned, unit sales through this channel increased over the prior year period. Net product revenue for the third quarter of 2022 also included $300,000 from other Avanova optical products, including our NovaWipes and Moist Heating Eye Compress, and $300,000 from Phase I branded wound care product sales. Gross margin for the 2022 third quarter was 62%. This compares with 69% for the 2021 quarter. The decrease primarily resulted from the addition of derma doctor and wound care product sales. Sales and marketing expenses of $1.8 million decreased 11% from the prior year period, even with the addition of $0.6 million in derma doctor sales and marketing costs. As Justin discussed, we were able to reduce our sales and marketing spend by optimizing our digital advertising for Abanova. G&A expenses were $956,000 in Q3 of 2022, and this compares with $1.8 million a year ago. The 2022 period included $300,000 in Dermadoc or G&A costs, which were offset by a reduction in variable compensation costs in the 2022 period. R&D expenses for the third quarter of 2022 were $41,000 compared with $10,000 for the prior year period. As you can see by this modest amount in both periods, we continue to create, develop, and release new products without incurring significant R&D costs. Operating expenses for the third quarter of 2022 of $2.8 million decreased overall $1 million from the third quarter of 2021 and included German doctor expenses. In the 2022 quarter, we recorded several non-cash items related to the 2022 warrant reprice transaction that we completed in September. These include a $1.9 million non-cash loss on the modification of common stock warrants, a $2.4 million non-cash gain on changes in fair value of warrant liability, a $5.7 million non-cash accumulated deficit increase due to an adjustment to the Series B preferred stock conversion price, and $171,000 in other expenses. The net loss attributable to common stockholders for Q3 of 2022 was $5.8 million, or 10 cents per share. That compares with the net loss attributable to common stockholders for Q3 of 2021 of $2.3 million, or 5 cents per share. Turning to our year-to-date financial results, for the nine months ended September 30, 2022, product revenue was $10.7 million, a 53% increase over the prior year period. Gross margin on product revenue for the first nine months of 2022 was 56. That compares with 69% for the first nine months of 2021. For the first nine months of 2022, sales and marketing expenses decreased modestly, and G&A expenses increased 12%, both compared with the first nine months of 2021. R&D expenses were $108,000 versus $36,000 for the prior year period. The net loss attributable to common stockholders for the first nine months of 2022 was $8.1 million, or 15 cents per share. The net loss for the first nine months of 2021 was $5.7 million, or 13 cents per share. As of September 30th, 2022, NovaBay had cash and cash equivalents of $3.9 million. This included approximately $2.1 million in gross proceeds received from the warrant reprice transaction that was completed in September 2022. And with that, I'll turn the call back to Justin.
spk01: Thanks, Andy. We're excited about our prospects for continued growth. With Avanova, Dermadoctor, and Phase 1, we have a solid foundation of established brands in the large and growing eye care, skin care, and wound care markets. We are expanding and refreshing digital marketing campaigns, widening target demographics for existing customers, and increasing their accessibility while also expanding the Avanova and Dermadoctor brands with new, innovative products that fill a consumer need and support our corporate positioning. We expect to benefit from growing online sales of derma doctor products in international markets, in particular in China and in Europe. Our partner, Phase I Health, is promoting our wound care product through a refreshed website that highlights product advantages and uses key opinion leaders. We are proud of our specialized portfolio of innovative, scientifically formulated, and clinically proven products. We are passionate about offering our customers high-quality products through our Avanova, Dermadoctor, and Phase I brands. With that, I thank you for your attention. Operator, we're now ready to take questions.
spk04: We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're 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. And our first question will come from Jeff Cohen of Labenberg Salomon. Go ahead, please.
spk05: Hi, Justin and Andy. This is actually Destiny on for Jeff. Thank you for taking our question. I wanted to start first with a bunch of questions around marketing per usual. I'm curious and congratulations on getting that sales and marketing expense down 11%. That's awesome. I'm curious, is that decrease a function of improved or optimized marketing tactics digitally, as well as additional cross-selling and maybe even upselling opportunities, or is it strictly based on your efficiencies in terms of digital marketing?
spk01: It really is – well, first, hi, Destiny. It's nice to hear from you. It's across the board, so everything that you just mentioned – has played a role in decreasing those expenses. And I think primarily we can say that we looked at all of our campaigns. We eliminated a lot of them that were not producing results. But we also refreshed creative and got better at our targeting. But there is cross-selling. And there's There's also just a combination of reaching out to those targeted customers with messages that I think are more impactful.
spk05: Okay, got it. And I guess that leads me into my second question around your commentary about expanding the demographic. Are you looking to maybe expand the age of your demographic or the interests or both?
spk01: Yeah, so the answer is a little bit different just depending on what product we're talking about and what sales channel we're talking about. I think the most obvious answer for an expanding demographic is for that of Avanova. So, you know, previously our target demographic for Avanova has been an older audience, one that suffers more commonly from blepharitis and dry eye. But with the advent of eyelash extensions that are very common with a younger customer demographic, those problems of blepharitis and dry eye are now very prevalent in a younger demographic. And this younger demographic is totally new to Avanova. They really have not paid a lot of attention to lid and lash hygiene in the past because they haven't needed to. So with a more targeted message towards a totally new demographic, we are, you know, expanding our customer base. So, you know, we'll see that with Avanova. And then when, you know, looking at the Dermadoctor side, instead of, you know, expanding our customer base from, you know, a messaging standpoint, we're really trying to push into two new territories, two new geographic territories. So our expansion of existing products for Dermadoctor is going well in China and then also in the EU. So you'll continue to see, I think, growth in all three of those areas.
spk05: Okay, got it. So targeting different age groups with Avanova and then on the derma doctor side, just different, or not just, but adding some different territories. I think I got it. And that actually also leads me, again, very well into my next question. In Europe, what exactly is the process for getting commercial there? Are you doing cross-border sales or are you going to partner similarly to how you do or how you are doing in China? Could you talk a little bit more about that?
spk01: Sure, yeah. So it's all about the partners. Whenever we expand into a new geographic territory where, you know, we're a little bit less familiar with, you know, the selling trends in the marketplace, you know, I feel like we really do need a partner who knows what they're doing. So we're, you know, without, you know, sharing too much, we are in the process of onboarding a partner who will be our main distributor for the European Union.
spk05: Okay, got it. And we could potentially see some revenue from the EU in early 2023, or at least first half, would you say?
spk01: Oh, yes. Yes.
spk05: Okay. Awesome. Very good. And then let's see. I think I'll save my other marketing questions for offline, but I'm curious, lastly, about the slightly lower margins. I know you called out some changes to the way you are recording the fees as well as the commissions. Is that what kind of impacted COGS this year, or is that more related to some of the orders through like what we call the club channel, which includes Costco?
spk02: Yeah, so it's lower year over year, Destiny, and good to talk to you. It's lower year over year primarily due to the addition of the derma doctor products, which generally come with a lower margin. We also, in the third quarter of this year, we had more wound care sales than we had last year, which also come with a lower margin. Although you did mention the change in the way that we're presenting the fees, that will have going forward a slight, you know, impact on gross margin percentage. It'll bring it down a couple of percent, but I think you caught on. I mentioned there's no impact to operating loss or cash flow or anything like that. It's simply where we're presenting it in the P&L. But those are the reasons that it's down over last year. But I think being right around that 60% is sort of in the middle sweet spot between where Derma Doctor is and our traditional businesses have been.
spk05: Okay, perfect. That's super helpful. I appreciate that. Great quarter. Thank you for taking my questions. I'll jump back in queue.
spk01: Okay. Terrific. Thanks. Thanks.
spk04: And 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 and your interest in Nova Bay. We're extremely excited about our progress and the very bright future we envision. We wish you and your family a happy, healthy holiday season, and we look forward to reporting our progress for our full year results during our investor call in March 2023. Thank you and have a nice day.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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