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spk05: Welcome to the Nova Bay Pharmaceuticals 2022 fourth quarter and full year 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 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.
spk04: 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 Tommy Law, Interim Chief Financial Officer. I'd 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's uncertainty about circumstances beyond the company's control that could 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-based 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, March 30th, 2023. Nova Bay undertakes no obligation to revise or update any circumstances 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, Jodi. Good afternoon, everybody, and thank you for joining us. Today, we are reporting that product sales for the 2022 year increased 41% year over year as we benefited from our strategy to diversify revenue streams. For the quarter, product sales grew 15% over the prior year quarter. A highlight of the fourth quarter was that Avanova online unit sales continued to grow with increases in both our new and existing customer base. We also saw notable contributions from Avanova Companion products and our Phase 1 and NutraPhase branded wound care products. While Q4 revenue increased 15%, our ability to optimize digital marketing led to a 10% decrease in sales and marketing spend when compared to Q4 of 2021. For the full 2022 fiscal year, we reduced sales and marketing expenses by 4% while increasing revenue by 41%. Now I'd like to share updates on each of our three verticals, eye care, skin care, and wound care, beginning with Avanova in our eye care franchise. Eye care has long been our core business, and we continue to see good prospects for its growth in this market. Our eyes are under more stress than ever with increased screen time, air pollution, indoor heating and cooling, all of which can lead to dry eye and eye fatigue. In fact, up to 49 million Americans suffer from dry eyes, and the global market for dry eye is expected to reach nearly $9 billion by 2030. We know that dry eye is a multifaceted and complex condition that may require more than one approach to gain relief and sustain that relief. We identified dry eye as an opportunity to establish NovaBay at the forefront of innovation in the OTC eye care market. We have a solid base of reoccurring revenue with our Avanova antimicrobial spray, as it is the number one doctor-recommended lid and lash spray on the market today. Over the past several years, we've gained traction in the dry eye market and capitalized on the well-known Avanova brand by commercializing evidence-led, differentiated, superior quality, and highly effective Avanova companion products. These include the Nova Wipes, which are soft hypoallergenic wipes specially designed to absorb our Avanova spray, the Avanova Warm Eye Compress to soothe sore eyes, our Avanova Lubricating Eye Drops for instant relief, and the Eye Check to monitor physical eyelid health. Sales of these companion products have grown steadily over the past year and have become a more meaningful contributor to our business with each passing quarter. Earlier this month, we expanded our portfolio in the OTC eye care market with the addition of two more innovative, high-quality products, both of which address the multifactorial and complex condition of dry eye. The first is our Avanova Eye Health Support Supplement. This oral supplement helps relieve symptoms of dry eye and is aimed at promoting overall eye health from a systemic perspective. It is uniquely formulated with a combination of high-quality concentrated omega-3 oils and Mackey Brite, a nutrient-rich antioxidant extracted from the Mackey Berry, which is three times the antioxidant level of blueberries and is found only in the forests of Patagonia. The clinical effects of the Mackey Berry are impressive. Participants in a four-week, randomized, double-blind, placebo-controlled study of the effects of Mackey Brite showed an increase of 89% in tear production and reported a 57% improvement in dry eye discomfort, with results from the study being published in a peer-reviewed journal. The second product is EyeGanics Organic Tears. This product is the only eye drop certified by the USDA as 100% organic and preservative-free, and it's also the first non-Avanova-branded eye care product that we've added to our portfolio. These organic tiers have only three ingredients, glycerin, salt, and water. There are no additives or artificial chemicals. This product was formulated especially for those who have sensitivity to some chemicals that may be found in other lubricating eye drops. This product is offered in a 10-milliliter bottle that incorporates new technology that dispenses one drop at a time, thereby offering a cost and convenience advantage over other preservative-free artificial tiers found in single-use vials. Our partnership with Iganix is the first of what we hope will be other highly effective ophthalmic products added to our distribution channels. With the strategic additions of an oral supplement and an organic eye drop, we now offer a best-in-class product for each step of the standard dry eye regimen. Further, with the addition of these high-quality new products, we have reinforced NovaBay as a one-stop destination for customers seeking relief from the symptoms of dry eye and other ophthalmic-related eye conditions through our online and physician-dispensed channels. We plan to further expand our eye care portfolio with additional innovative, effective products for both dry eye and other ophthalmic-related conditions. We are also pursuing a strategy to grow sales through our physician-dispensed channel in which our products are available to our customers directly through their eye care specialist. In an effort to deepen our relationships with eye care professionals, We are partnering with educational organizations that are CE accredited to help optometrists and ophthalmologists meet their continuing education requirements. We also have advisory boards consisting of optometrists and ophthalmologists that we use to discuss the efficacy and marketing of our eye care products. Moving on to Dermadoctor and our collection of skin care products. Innovation is key to our strategy, and we recently introduced a new product to our KP Duty collection. Our new peel pads offer a high-potency complex of hydroxy acids and other exfoliants, effectively lifting away dry, dull, dead skin cells to re-texturize skin. Fatty acids help maintain the skin's moisture to support a strong protective skin barrier, while antioxidant-rich botanicals calm and soothe. The KP Duty Peel Pads Advanced Clinical Exfoliation leaves the skin feeling brighter, smoother, healthier, and more youthful in a single step. KP Duty Peel Pads are available at dermadoctor.com and also on Amazon. Derma Doctor customers are extremely loyal, so attracting new customers who will become repeat users is among our top priorities. To further this initiative, we just completed a spring break promotion with 20% off of all Derma Doctor products ordered through the Derma Doctor website to welcome new customers to the brand. Now, turning to wound care. Like our Avanova spray, our wound care products are formulated with Novavay's FDA-cleared proprietary and antimicrobial form of hypochlorous acid. These products are distributed under the Phase I brand in the U.S. and under the Nutrafaze brand in China. These products are used for cleansing and irrigating post-surgical wounds, minor burns, and superficial abrasions. Among the advantages of hypochlorous acid is its ability to penetrate and kill biofilm, which represents a significant barrier to wound healing. Our formulation exhibits broad spectrum activity against a range of gram-positive and gram-negative bacteria, making it highly effective. We have an advantage in this market as our product is made without the toxic chemicals found in many other wound care products. Ours is gentle, non-irritating, and non-sensitizing to skin and new tissue. Like our Avanova companion products, our wound care products have been making a more notable contribution to our total revenue. We've been working with Phase I Health on their strategy to leverage their recent commercial success and expand beyond surgical applications. We also expect to ship a significant near-term order for our NutraPhase product. Now I'd like to turn the call over to our Interim Chief Financial Officer, Tommy Law, to review our Q4 and full financial year results. Tommy has been with us for a number of years and just recently stepped into the Interim CFO role on February 15th. Tommy?
spk03: Thank you, Justin, and good afternoon, everybody. It's a pleasure to be speaking with all of you today. As Justin mentioned, we completed our acquisition of Derma Doctor in early November 2021, And the financial results I'll be discussing today reflects the operations of both NovaBay and Dermadoctor after the date of acquisition. Let me start my review with the discussion of our fourth quarter financial results. Net product revenue for the fourth quarter of 2022 increased 15% over the prior year period to $3.6 million and included $2.1 million of Avanova branded product sales, $1 million of Dermadoctor product sales, and $0.4 million of wound care product sales. Gross margin on net product revenue for the fourth quarter of 2022 was 48%. This compares with 53% for the fourth quarter of 2021, with a decrease primarily due to higher sales of lower margin product in the skin care and wound care verticals. Sales and marketing expense decreased 10% to $1.9 million for the fourth quarter of 2022, which reflects lower Avanova digital advertising and related consultant expenses partially offset by the addition of sales and marketing expenses for Dermadoctor. G&A expenses for the fourth quarter of 2022 were relatively flat at $2.4 million compared with $2.7 million for the fourth quarter of 2021. R&D expenses for the fourth quarter of 2022 were $66,000 compared with $9,000 for the prior year period. due mostly to new product development under the DERMA doctor brand. For the three months ended December 31, 2022, non-cash gain on change in fair value of warrant liability was $976,000, and non-cash gain on change in fair value of contingent liability was $342,000. The net loss attributable to common stockholders for the fourth quarter of 2022 was $8.2 million, or 4.33 cents per share, which included a large non-cast impairment charge of $6.7 million due to the reduced value of Dermadox's intangible assets, such as Goodwill. The net loss attributable to common stockholders for the fourth quarter of 2021 was $894,000, or 69 cents per share. Turning now to our full year financial results. Product revenue for 2022 was $14.4 million, a 41% increase over 2021, and reflecting a full year of Dermadocter product sales. Gross margin on net product revenue for 2022 was 54%, compared with 64% for 2021, with a decrease primarily due to increased sales recognized for Dermadocter and wound care products. For 2022, sales and marketing expense decreased by 4% and G&A expense increased by 3%, both compared with 2021. R&D expenses for 2022 were $174,000 versus $44,000 for the prior year. The net loss attributable to common stockholders for 2022 was $16.3 million, or $10.10 per share, and included the non-cash impairment charges recognized in the fourth quarter. The net loss attributable to common stock orders for 2021 was $6.6 million, or $5.26 per share. We reported cash and cash equivalents of $5.4 million as of December 31st, 2021, compared with $7.5 million as of December 31st, 2021. And with that, I'll turn the call back to Justin. Thanks, Shelby.
spk01: With Avanova, Dermadoctor, Phase One, and NutraPhase products, we have a solid foundation of established brands in the large and growing eye care, skin care, and wound care markets. We're expanding the Avanova and Dermadoctor brands with new and innovative products that fill consumer needs and support our corporate positioning. And we're taking steps to broaden our customer base with campaigns aimed at targeted demographics. Importantly, we're advancing these growth initiatives while prudently allocating our marketing spend. We are proud of our specialized portfolio of innovative, evidence-based, and clinically proven products and are passionate about bringing these best-in-class products to a growing number of customers. And with that, I thank you for your attention. Operator, we're now ready to take questions.
spk05: As a reminder, if you wish to register to ask a question in 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.
spk01: While we're waiting for the first question, I would like to thank our absolutely tremendous former CFO, Andy Jones, for his nearly three years of service to NovaBank. As we announced in an AK filing mid-January, Andy resigned as of February 15th, but has agreed to consult with the company on an as-needed basis for the next six months. We are grateful to Tommy for stepping into this role on an interim basis to ensure a timely and accurate filing. Okay, operator, we're ready for the first question.
spk05: Our first question comes from Jeffrey Cohen with Lattenburg-Bauman. Please go ahead.
spk06: hi justin and tommy how are you oh jeff it's actually you i was expecting destiny yeah sorry for the demotion so um anyway a couple questions from there firstly justin can you talk a little bit about uh q4 margins which kind of uh stand down to the rest of the quarters for 22 and talk about margins for 23 a bit? Should we expect some rebound from that Q4 level or does that feel like the baseline?
spk01: That's a good question. It's something that we definitely keep our eye on. The good news is that the lower margin is due to higher sales of lower margin products. we're not actually losing margin on our high margin products like Avanova. So Avanova is our highest revenue driver, and it's also our highest gross margin product. But when we bring in revenue from wound care and skin care products, especially those that are sold to distributors at wholesale prices, that will bring down that gross margin. So that's what we saw in Q4. Uh, so going forward in, in 2023, because we are going to see, uh, you know, continued growth in the wound care, uh, sector, and then also continuously selling those skincare products, um, you know, at wholesale prices, you know, is this just depending on whether Avanova can bring it back up, but, uh, I think you're right in, in considering, uh, maybe this as a new baseline, but it all. Just really depends on the product mix for that particular quarter.
spk06: Okay, got it. Can you talk a little bit about Avanova while you're at it as far as demographic changes that you've seen over the past handful of quarters or so and what you anticipate going forward?
spk01: Yeah, so our customer base has changed a little bit. Definitely, we have pulled in some younger customers and that we've just done that through a change in our messaging and a change in advertising. But one thing that we are emphasizing in 2023 is we want to leverage our relationships. So we have relationships with about 10,000 optometrists and ophthalmologists who know Avanova, recommend it, prescribe it in some form or fashion. And so what we have seen in the over-the-counter direct-to-consumer sales channel is a lot of our reviews on Amazon start with, my doctor told me to get this product. I'm buying this because my doctor recommended it. I went to the optometrist and got my first bottle and now I buy it on Amazon. So, you know, I think one of our key growth initiatives in 2023 is really going to be to lean in on that doctor recommended sort of brand and bring in new customers from the brand, you know, through that sort of traditional clinical setting.
spk06: Okay, got it. That's super helpful. A couple other questions that come to mind. Could you talk a little bit about, at least for modeling purposes, seasonality going forward? Would you expect a similar type of even seasonality, or do you expect back half growth for 23?
spk01: Yeah, so definitely some seasonality, especially on the DERVA doctor side. You know, some of the big orders from Costco do tend to come around the holiday season. So there is definitely that seasonality. And I just, you know, sort of alluded to some of our wound care. So we have, you know, a large wound care order. You know, so we don't stock the wound care product. We make it to order. So whenever a distributor places an order, then we manufacture it for them. So we have a relatively large PO for some wound care products coming in the second quarter. So that's going to make, I think, top-line revenue look a little higher in the second quarter than in other quarters because that's just sort of one very large order that won't be repeated in this fiscal year. So there is seasonality. There is, I think, some lumpiness. But I think... Overall, the trends that I think we saw last year will, other than those exceptions that I just mentioned, will hold true for this year as well.
spk06: Okay, got it. And then lastly, as far as Igenix and some of the other companies out there and products out there, what have you been doing on the M&A front and how's your appetite there? And is it specific to ocular and eye care or it also may... over into skin care and beauty?
spk01: Yeah. So, Jeff, the only thing that I can really say right now is that we are absolutely committed to doing something in the M&A field this year, you know, before the end of the year. And I'll just say, well, I'll be disappointed if we don't do something. So I'll just kind of leave it at that because we're going to have to be very opportunistic and make sure that the deal is the right thing for the company at the right time and at the right price. But with all that said, I do think that our eye care vertical in the Avanova franchise is sort of a more fertile ground for something like that because As I mentioned, we do have a lot of relationships with eye care professionals. And if we can leverage those relationships by simply just dropping another product in the bag, that's going to bring the most, I think, synergies to us. But, you know, we have to make sure that whatever comes our way is, you know, makes sense at the time.
spk06: Okay. Perfect. I got it. Those are for us. Thanks for taking the questions.
spk01: Hey, yeah, always. Thank you.
spk05: Our next question comes from Ascendant Capital Markets. Please go ahead.
spk02: Hi, it's for Edward Wu, Ascendant Capital Markets. Can you talk a little bit about, hi, can you talk a little bit about international growth opportunities for each of the products?
spk01: Yeah, sure. The sort of growth that I think we'll see in our wound care vertical this year will come mostly from China. And then for Dermadoctor, we have always looked at both China and the EU as tremendous growth opportunities. So Dermadoctor has created global formulations that can be sold all over the world. Lining up distributors and supporting growth in those foreign markets is definitely an opportunity that we're looking to develop this year.
spk02: Great. And are you looking at any further product line extensions for either Avanova or Dermadocter?
spk01: Yeah. So we have really shifted strategy this year from last year. So we started... last year in 22 with interest rates low and the stock market doing well and the capital markets very accessible and now just sort of a short 12 months later you know the world is a very different place and so we launched seven products last year and I think our general strategy for this year is going to be to sell more of what we have so we're not going to be investing heavily in In new product development and new product launches, what you'll see is us selling more of what we have in sort of new and better ways. We do have one or two things lined up for the rest of the year, but those things were sent into motion well before the beginning of this year. So it is a shift in strategy, but we won't be totally without new product launches this year.
spk02: Great. One more question. Are you expecting, what is your outlook for digital spending compared to more traditional sales and marketing expense?
spk01: Yeah, so we really did a huge shift last year. And what we did was we tried to find the floor with our digital marketing spend. And by that I mean the least amount of money we can spend and still maintain sales. And I think we were able to find that floor and achieve it with both brands. And so this year, I think we're going to continue sort of at the same levels without any large increase in that sales and marketing expense. So that will remain relatively steady. But not to harp on this too much, but our strategy for this year is really to leverage our relationships with eye care professionals and strengthen that number one doctor-recommended positioning for Avanova, and then also just optimize all the digital ad spend for all of our products, especially those that are on Amazon.
spk02: Great. Thank you very much.
spk01: Thank you.
spk05: 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, everybody, for joining us today and your interest in NovaBay. We're extremely excited about our recent accomplishments and the promising future that we envision for the company. We look forward to updating you on our progress during our first quarter investor conference call in May. Thanks again and have a nice day.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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