NovaBay Pharmaceuticals, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Welcome to the NovaBay Pharmaceuticals Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. As a reminder, this conference is being recorded today November 12, 2020. 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. 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 NovaBay's operations and financial results, and its outlook is the best estimate based on the information available for today's call.

[Justin Hall:]

Thank you, Jody. And thank you everybody for joining us today. This is an exceptionally exciting time at NovaBay. We’re reporting record quarterly earnings, or I'm sorry, record quarterly unit sales and are finalizing the launch preparations for our groundbreaking product CelleRx Clinical Reset. With this launch, we’ll be creating a new opportunity for the company to expand by entering the beauty market. I'm pleased to begin this call by discussing the successful execution on our strategy to expand our product portfolio to support growth under economic terms that makes sense to NovaBay. Following an extensive evaluation of product and market opportunities that capitalize on our hypochlorous acid technology, we developed CelleRx Clinical Reset. Clinical Reset is a differentiated product in the beauty category and like Avenova it is formulated with our patented pure hypochlorous acid, which unlike many of our competitors is manufactured here in the United States. It's exciting to introduce a novel consumer use for our unique hypochlorous acid. Clinical Reset is a gentle, calming and soothing facial spray that disrupts the layer of bacteria that settles and grows on the face. It keeps the skin narrow because when this barrier is out of balance, acne, rosacea and infection can set in. As the brand name suggests, Clinical Reset gets the skin back to a healthy baseline to heal itself into better absorbed skincare products. The use of Clinical Reset can replace or augment a morning cleanse for dry sensitive skin, reduce bacteria after exercising, calm skin following microdermabrasion and other aesthetic facial procedures and combat environmental aggressors. During the pandemic, we have all learned the importance of personal healthcare, and that skincare is a part of that routine. Using Clinical Reset is highly complementary to a daily beauty regimen and can be used on skin, on clean skin or over makeup. This product provides consumers with access to a product developed from an entirely new level of clinical research and rigor that is often missing from the traditional beauty industry. As you may recall, we previously marketed CelleRx to medical professionals for use by their patients to gently clean and ease discomfort following aesthetic dermatology and cosmetic procedures.

[Andrew Jones:]

Thank you, Justin and good afternoon everyone. I'll begin my financial review with Q3 top line results. Net product revenue for the third quarter of 2020 increased by 34% to $2.2 million. That's up from $1.6 million for the prior-year quarter. Avenova revenue for the quarter increased 14% to $1.8 million from $1.6 million a year-ago. The increase reflects a record number of Avenova quarterly units sold and demonstrates continued acceptance of Avenova even outside of medical professional recommendation. This record is the result of an increase in the number of Avenova direct online and buy and sell units sold when comparing the quarters. The increase was partially offset by a decrease in the number of units sold through our retail and partner pharmacy channels, and an expected lower average net selling price associated with non-prescription Avenova direct units. Net product revenue for the third quarter of 2020 also included approximately $225,000 from the sale of PhaseOne with no comparable revenue in the prior-year period. PhaseOne is a private label prescription skin and wound care product that contains our proprietary hypochlorous acid and is distributed under a private label agreement by PhaseOne Health, LLC. Gross profit on net sales for both the third quarter of 2020 and 2019 was 75%. Overall operating expenses for the third quarter of 2020 were $3.7 million, compared with $2.9 million a year-ago. Sales and marketing expenses were $1.7 million compared with $1.5 million for Q3 2019. The increase was primarily the results of higher spending on Avenova direct digital advertising and costs associated with our launch of CelleRx Clinical Reset. This increase was partially offset by lower headcount related costs and lower travel and related expenses due to restrictions associated with the pandemic. G&A expenses for Q3 2020 were $1.9 million due to higher legal related costs, compared with $1.3 million for the prior-year period. R&D expenses for Q3 2020 were $125,000 which compares with $49,000 for the third quarter of 2019. Operating loss for the third quarter of 2020 was $2.1 million, which compares with a $1.7 million operating loss for the third quarter of 2019. During the third quarter of 2020, we also recorded a non-cash loss on the change in fair value of warrant liabilities of $1.6 million. This compares with a non-cash gain of $1.5 million for Q3 2019. As Justin mentioned, the primary warrants associated with this liability were exercised during the quarter and as a result, there will be no P&L impacts from them in future quarters.

[Justin Hall:]

Thanks, Andy, and thank you for sharing our tremendous financial progress. Before we open the call to questions, let me summarize our near-term plans. We have launched a Clinical Reset on cellerx.com. As of today, our new CelleRx website is operational. And I encourage you to visit the site to see our new product packaging and consumer messaging. We plan to broaden the distribution channel of Clinical Reset through more channels in the future. We also intend to seek additional products in the skincare and beauty markets that we can promote under the CelleRx brand. We continue to focus on Avenova online sales as this channel holds the greatest growth opportunity. Our digital advertising campaign is successfully attracting new users and our online presence enables consumers to buy Avenova without a prescription and without leaving home. And importantly, we have narrowed our operating loss year-over-year and significantly strengthened our balance sheet. And we believe that we have capital to sufficiently find all of our current operations. From a business development perspective, we’re continuing to target ophthalmic and skincare products and line extensions that will allow us to leverage our established sales channels under economic terms that makes sense for NovaBay. We’re regularly evaluating new products to support profitable growth. With that overview, I thank you for your attention. Operator, we're now ready to take questions.

[Operator:]

[Justin Hall:]

While we're waiting for the first question, I want to mention that we’ll be participating in the A.G.P. Virtual Healthcare Conference. This is a one-on-one meeting conference being held virtually next Thursday. And we look forward to keeping everybody posted on our launch activities related to CelleRx Clinical Reset. Okay, operator, we're ready for the first question.

[Operator:]

Our first question comes from Jeff Cohen of Ladenburg Thalmann. Your line is now open.

[Unidentified Analyst:]

Hi, Justin and Andy, this is Destiny on for Jeff, thank you for taking the questions. I guess I'd like to first just kind of follow on your last comments there. Regarding your marketing, can you talk a little bit about your current marketing strategies for Avenova now that you've kind of taken some of the COVID claims out, have you reverted back to some of your previous strategies and messaging and or is it different now? And then, how will you leverage your existing marketing strategies to promote CelleRx Reset? Will there be any cross selling opportunities there?

[Justin Hall:]

Yes, so absolutely, very interesting question, which I think sort of parallels what's going on in the world at large. So, I think that we were really excited to share the information and the third-party independent lab results that we obtained, and those are still very much great and reliable test results. But when the FDA said to take out the messaging about COVID, we did so and didn't really see any effects surprisingly, in our sales. And so we just went back to the messaging that we had pre-pandemic, right, so sort of our Q1, I know it seems like a long time ago now, but our Q1 messaging, which is still resonating very much with the consumer market. I do think that there is some messaging and some cross selling that's available with CelleRx, I think the number one example that pops into my mind right now is mask because our solution of pure hypochlorous acid is a very strong anti microbial and cleanses skin, will cleanse the skin around your eye and is very safe for that delicate skin around your eye. But it's also very safe for all the skin on your face. And so as you cleanse the skin around your eye to care for your eye and treat some of those eye care issues that we've always been targeting like blepharitis and dry eye, using CelleRx on your broader face. So you can use both Avenova and CelleRx for in your entire face. And so that, that’s just one example. But I do think that there are lots of opportunities for cross promotion.

[Unidentified Analyst:]

Okay, thank you for that clarity, I definitely think you have a growing committed customer base. So I appreciate that. And then also, I just wanted to ask about bulk orders. I know you had mentioned a couple in Q2. So I'm wondering if there were any that you'd like to comment on in Q3, and if you’re anticipating any in Q4?

[Justin Hall:]

So the bulk orders I think are harder to chase down. And so we did have some bulk orders in Q2. And then also in Q3, we had the bulk orders of PhaseOne, which I think were nice to get the product out there. We continue to sort of chase down some, I wouldn't necessarily call them bulk orders, but expanded marketing opportunities through additional sales channels. So I don't want to spill the beans on anything. But we are definitely opening the door to some retailers that are going to carry both Avenova and CelleRx in brick and mortar stores. And so even though I don't I wouldn't necessarily classify those as bulk orders, they will be POs place for our products, so we can get them into new distribution channels and those are all coming in Q4 and Q1.

[Unidentified Analyst:]

Okay, got it. Maybe just one more for me. I'm wondering what trends you're seeing in reopenings of optometrist offices. And if there are any geographies that are maybe demonstrating some strength or weakness that you'd like to comment on?

[Justin Hall:]

Well, this is always very, very dynamic. I think that our sales have followed the broader trends that we see in the news. So we saw a big drop-off in our major markets, which are the major metropolitan markets, so New York, San Francisco, Los Angeles, we saw sales in those areas really drop off very sharply in Q2 because those were the areas that closed down first, those really picked back up in Q3 and those markets opened back up, and we saw sales really surge in those markets. But, now there's questions about those markets staying open and other markets, smaller markets in the Mid-West shutting down. So I would say our sales very closely follow what everybody has been seeing in the news, there's sort of nothing unusual about that.

[Unidentified Analyst:]

Okay, thank you.

[Justin Hall:]

Thank you, Destiny.

[Operator:]

Thank you. And our next question comes from Ed Woo of Ascendiant Capital. Your line is now open.

[Edward Woo:]

Yes, congratulations on the quarter. My question is on CelleRx, as you guys doing the launch of it, will you have to make any significant marketing investments to launch it?

[Justin Hall:]

Well, I think it depends on what you say is significant. This is a really great way for us to have a second product on the market, in a totally different industry. So I think we’re opening the door to the beauty industry with the launch of this product. And we're able to do that with a product that is our own, we didn't have to go out and license it, or acquire it or purchase it. This is something that we created leveraging our own technology, which I think is a really cost efficient way to create a second revenue stream. So really, really excited about that. But this is a direct-to-consumer product in a very crowded marketplace. So, we acknowledge that and plan to combat that with a very aggressive marketing campaign. But, with that said, it's not going to be so significant that, we won't be able to afford it with our current resources.

[Edward Woo:]

Great. Are there plans to launch it on other e-commerce sites, particularly Amazon?

[Justin Hall:]

No, not right now, because this is in the beauty market. And we see this as a very high-end product, we don't want to put it on Amazon quite yet. And so it's going to be available in the beginning, just on cellerx.com. But we’re working with partners and possibly one very high-end exclusive partner to sort of launch the brand. So it will always be available on cellerx.com and then it will be available online through I think some exclusive partners, but probably not Amazon.

[Edward Woo:]

Great. Well, thank you. And I wish you guys good luck on the launch. Thank you.

[Justin Hall:]

Thanks, Ed.

[Operator:]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Justin Hall for any closing remarks.

[Justin Hall:]

Thank you once again for joining us and your interest in NovaBay. We’re excited about the launch of CelleRx Clinical Reset and creating a new category in the large consumer skincare market. We look forward to updating you during our next call in March when we'll discuss our fourth quarter and full-year 2020 financial results and progress. In the meantime, have a great day. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.