NovaBay Pharmaceuticals, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Hello and welcome to the NovaBay Pharmaceuticals First Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.

[Jody Cain:]

This is Jody Cain with LHA. Thank you for participating in today's call. Joining me from NovaBay Pharmaceuticals are Justin Hall, President and Chief Executive Officer 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.

[Justin Hall:]

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. NovaBay is off to a strong start in 2021 with continued momentum with the over the counter sales of Avenova. Revenue from this channel exceeded $1 million for the first time ever on record high unit sales. This increase in over the counter Avenova was driven by year-over-year growth from both Amazon.com and Avenova.com. We also benefited from revenue generated by Walmart.com, which began offering Avenova in the third quarter of 2020 and from a first time revenue contribution from CVS, one of the nation's largest retail chains. The OTC channel accounted for 79% of total Avenova revenue for the quarter. That's up from 66% in Q4, 2020. We are making excellent progress in building upon our momentum of the OTC channel. Avenova is now available on the shelves of CVS stores nationwide and it's exciting to have them as our first brick and mortar partner. The market opportunity for Avenova is large as chronic dry eye afflicts approximately 30 million Americans with ocular bacteria accounting for about 85% of these cases. Driving continued growth in the OTC channel is our top priority. We plan to further capitalize on the significant market opportunity by accelerating Avenova sales through digital advertising campaigns with online advertising now being one of our core competencies. Our new digital advertising campaigns are focused on growing our customer base with newly developed creative messaging and a heightened level of sophistication combined with data driven marketing programs. This approach to target specific customer segments with messages that will resonate with them. Our digital marketing will be monitored through real time performance metrics, such as click through and conversion rates and customer acquisition costs, as we direct our campaign across multiple advertising platforms while maximizing our return on ad spend.

[Andy Jones:]

Thank you, Justin. Good afternoon, everyone. Starting with our Q1 top line results. Avenova product revenue was up for the quarter on total net sales of $1.8 million. We recorded $1.6 million in Avenova revenue for Q1, 2021 which is an increase from $1.5 million for Q1 of 2020. As we heard from Justin Q1, 2021 was the first in which Avenova product revenue from the OTC channel topped $1 million. In fact, OTC product revenue from Amazon sales alone exceeded $1 million for the first time, increasing 34% over the first quarter of 2020. These increases demonstrate the momentum that we are gaining from our improved and better informed digital marketing programs. Gross Margin for the first quarter of 2021 was 75%. That's up from 69% a year ago. The improvement resulted from lower revenue from products other than Avenova which are generally sold at a lower relative margin. Total operating expenses in the first quarter of 2021 were $2.9 million compared with $2.8 million for the prior year period. G&A expenses for Q1, 2021 were $1.2 million down compared with $1.3 million a year ago. The 2021 quarter included the benefit of an insurance reimbursement for legal costs that were incurred in 2020. Sales and marketing expenses were $1.7 million. That's compared with $1.6 million for Q1, 2020. This increase was primarily due to increased investments in our marketing programs for both Avenova and CelleRX as we look to capitalize on these large market opportunities. The increase was offset in part by a reduction in field sales headcount as part of our increasing focus on a more cost effective in house sales team.

[Justin Hall:]

Thanks, Andy. Before we open the call to your questions, let me summarize our near term plans to continue building upon the sales momentum we've achieved over the past several quarters. First, we're focusing on driving Avenova sales through the direct to consumer channel which is where we see the greatest growth opportunity. We have a strong foundation upon which to build having already established Avenova as the premier antimicrobial lid and lash spray. We have expanded consumer access to Avenova this year through availability at CVS and we are excited by the prospect of gaining momentum through this large retailer as the year progresses. We will also be rolling out new media campaigns that feature customized lifestyle messaging and data analytics to attract new Avenova customers and encouraged repeat usage to build upon our loyal customer following. Second, we're developing new sophisticated digital marketing programs for CelleRX. To build upon a customer base that's also showing early signs of loyalty to our product. Like Avenova this new campaign will include the monitoring of various metrics to evaluate the effectiveness in reaching and expanding targeted demographics and to optimize our ad spend.

[Operator:]

Thank you. We will now begin the question and answer session. The first question today will come from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

[Jeffrey Cohen:]

Hey, Justin and Andy, how are you?

[Justin Hall:]

Hi Jeff.

[Andy Jones:]

Good.

[Jeffrey Cohen:]

So let's start with the gross margins, which were a fair amount higher than what we estimated any read into that?

[Andy Jones:]

Yes. Sure. So Jeff last year, we had a little bit more in terms of revenue from non-Avenova including the beginning of mask sales and other products. Those generally come with a lower margin then does an Avenova. So with less revenue from those products allowed us to raise our margins bit.

[Jeffrey Cohen:]

Okay. So would you expect for the balance of the year with Avenova driving a large proportion of the revenue that we should be stable at this mid 70 level?

[Justin Hall:]

Sure. Yes.

[Jeffrey Cohen:]

Fantastic. Okay. What are you seeing out there as far as recurring orders and purchasing trends as far as stickiness of your customer base?

[Justin Hall:]

Yes. So I think that we are really lucky to have a product that is not only safe for long term use, but also designed for a disease that is chronic. So once people start on Avenova with dry eye, they generally love it and keep on coming back for it. Dry eye unfortunately, is not one of those conditions that can ever be truly healed. It can only be managed. And we are finding more and more as we expand into the consumer space that people love to manage it with Avenova which is great.

[Jeffrey Cohen:]

Got it and are you seeing any interesting trends in the consumer space as far as geography goes within the U.S.?

[Justin Hall:]

Well, so what's actually really interesting is that it is spread out pretty evenly all across the United States. What we are seeing for CelleRX though, is it tends to be congregated in large metro areas. So we're seeing a lot of New York where you are in a lot of San Francisco, where we are of course, LA and Chicago, Miami, those kind of places with not so much in the smaller metro areas.

[Jeffrey Cohen:]

Okay and then he talked about the possibility of a couple of more products. Will we see that in the second quarter? Can you give us an indication or flavor in what area of that maybe whether it be ocular, derm or online extension or another?

[Justin Hall:]

Yes. So there is, we're really moving forward on two different fronts. One front is just expanding the Avenova product line. And so you will see one product launch next week and then you will see another product launch in about three months. And then the other half of that is our licensing and acquisition where we're looking for complete product lines with existing revenue and that's through sort of in M&A initiative and there's no telling when that will hit. Sometimes it happens fast and sometimes it's a long drawn out process.

[Jeffrey Cohen:]

Got it. And then lastly, for me, can you talk a little bit about the OTC trends and the channels as far as your direct channel compared to or otherwise against the Amazon channel as far as growth and efficiency and repeat orders? I think that pricing is spot on matched up?

[Justin Hall:]

Yes. So there's price parity across all channels even in our physician dispensed channel. We tried how the costs of the customer be exactly the same. But our mantra here is that we like to have the path of least resistance. So we'll put it in the hands of the customer any which way they want it. So on our online site, you'll see like four or five different pay buttons. So if somebody comes to our site but they want to use their Amazon account to buy it they can do that. We find that with the growth of Amazon just during the pandemic and nationwide most of our traffic comes from Amazon. But I think the ability to really grow brand identity will never really come through Amazon. It'll have to come through our voice and our site and our messaging and through influencers. And so all of that will be outside of Amazon.

[Jeffrey Cohen:]

Okay. Got it. And then lastly, for me any commentary over the past five weeks as far as Q2 over Q1 specific to pickups or non-pickups and just your general macro trends in order that you could provide would be helpful. Thank you.

[Justin Hall:]

Yes. Actually Andy you want to take this one?

[Andy Jones:]

Sure. Yes. We mentioned we're a little bit into the second quarter. We certainly expect to see an uptick versus the second quarter of last year but as we're implementing new digital marketing programs obviously that's pushing the OTC channel. We expect to see some success and some growth from those in the second quarter.

[Jeffrey Cohen:]

Okay, perfect. Thanks, guys. And I appreciate taking the questions.

[Justin Hall:]

Thanks Jeff.

[Operator:]

And the next question will come from Ed Woo with Ascendiant Capital. Please go ahead.

[Ed Woo:]

Yes. Congratulations on growing Avenova year-over-year. My question is you mentioned that you have a lot of repeat buyers. Dry eyes is a chronic condition. So for your digital marketing, how are you be able to pinpoint the people who aren't buying Avenova yet versus people who are repeat customers?

[Justin Hall:]

Yes. It is something that we are focusing on now that we really have, I think, a very solid base to grow on. As I mentioned before it's kind of tricky with Amazon because it is definitely our largest channel and the path of least resistance for most customers. But when people buy on Amazon, we are not able to remarket to them directly. We are not able to capture their email addresses and remarket to them. So one of the main things that we'd like to do this year is really grow people on our site and tell our brand story and sort of capture that customer data and remarket to them. So that is the trend that I was referring to that now that we're really diving into obtaining our own customer information, maintaining it and then remarketing to them. And it has surprised us how well that has worked because people generally like to come back to something that has worked well for them, but sometimes they just need a little reminder.

[Ed Woo:]

Right. And then you mentioned a couple of new products, one market next week one in the next three months, CelleRX will be doing a full launch in third quarter. Should we expect increase sales and marketing expenses significant on a significant scale for the next couple OF quarters?

[Andy Jones:]

Yes, I mean as we're growing those channels, I think it'll be more focused on the refreshed advertising for both Avenova and for CelleRX but we'll be investing a little bit more in those areas. As far as the new products go we'll obviously invest in those as well but probably a little bit more modestly in the beginning.

[Ed Woo:]

Great, thanks for the color and I wish you guys good luck. Thank you.

[Justin Hall:]

All right, thanks Ed.

[Andy Jones:]

Thank you Ed.

[Operator:]

This will concludes today's question and answer session. I would now like to turn the conference back over to Justin Hall for any closing remarks.

[Justin Hall:]

Before we end, I want to mention that we'll be presenting at the Ladenburg Thalmann in 2021 Virtual Healthcare Conference that's going to be held on July 13 and 14. So we invite you to view the webcast of our presentation which will be posted to our corporate website. So thank you to everybody for joining us today and thank you for your interest in NovaBay. We look forward to updating you on our next call in August when we'll discuss our second quarter financial results and business progress. In the meantime, have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.