NovaBay Pharmaceuticals, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Welcome to the NovaBay Pharmaceuticals Fourth Quarter 2020 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. 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, its financial results, and its outlook is the best estimate based on information available for today's discussion.

[Justin Hall:]

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. 2020 was a transformative year for NovaBay. During a tumultuous year, we increased product revenue by an impressive 50% over the prior year. We transformed our marketing by developing and deploying more sophisticated strategies that more than tripled our online sales of Avenova. We transformed our sales efforts by reducing our field sales force and focusing more on telephonic outreach by our internal sales team. We pivoted quickly when PPE was in short supply and added to our top line revenue. And lastly, we transformed our balance sheet by raising cash and eliminating all major debt instruments. Over the counter, Avenova continues to be our number one priority and where we see the most potential for continued growth. More than 50% of our revenue in 2020 and more than 60% of our revenue in Q4 came through our online sales channel. Additionally, Avenova is becoming available at a growing number of CVS stores nationwide, thereby greatly expanding consumer access and marking our entry into brick and mortar retail stores. Avenova is also available for purchase at CVS.com. More people than ever are using Avenova due in large part, the ease of access through these multiple channels, but also due to the continued strong support from physicians. Doctors and patients love Avenova. We continue to grow our customer base and increase the number of repeat users. As a reminder, chronic dry eye disease affects approximately 30 million Americans with ocular bacteria accounting for about 85% of these cases. Avenova is the only commercial hypochlorous acid lid and lash product clinically proven to reduce the bacterial load on ocular skin surfaces, thus effectively addressing the underlying cause of bacterial dry eye. We believe Avenova is a product of choice for consumers and eye care specialists alike due to its unique formulation of pharmaceutical grade hypochlorous acid, making it the purest lid and lash solution on the market. Unlike many of our competitors, Avenova provides the consumer with the added comfort of knowing it's manufactured in the United States.

[Andy Jones:]

Thank you, Justin. Good afternoon, everyone. Let's start with Q4 top line results. Total net product revenue for the fourth quarter of 2020 was $1.9 million, that's up 10% from $1.7 million for the prior year quarter. The 2020 quarter included approximately $350,000 from sales of NeutroPhase, our FDA cleared skin and wound cleanser. Avenova product revenue for the fourth quarter of 2020 was $1.5 million, which is down from $1.7 million for the fourth quarter of 2019. The 2020 quarter was impacted by a $400,000 increase in our reserve for potential future product returns after we experienced an increase in actual expired prescription product returns in the latter months of 2020. The adjustment to the reserve also impacted our gross margin for the fourth quarter of 2020, which was 57% down from 65% for the fourth quarter of 2019. Although there is always uncertainty about potential returns, even with the increase that we experienced in our actual return rate last year, we expect the potential number of expiring units in the prescription channel to decline over time and the related reserve to decrease.

[Justin Hall:]

Thanks, Andy. Before we open the call to your questions, let me summarize our near-term plans. We’ll continue to focus on driving Avenova consumer sales with our entry into CVS brick and mortar stores and accessibility online through cvs.com. We're excited about building on our Avenova business, particularly with the momentum generated in the second half of 2020. In April, we plan to launch our new digital media campaigns that feature customized storytelling and data analytics to attract new Avenova customers and encourage repeat usage. And we are developing new branding for Clinical Reset to properly situate this breakthrough product in the beauty marketplace. In addition to organic growth, we are evaluating opportunities to support profitable growth through acquisition or licensing of ophthalmic and skincare products. Our experienced commercial organization improved the balance sheet and established industry relationships, gives us confidence that now is the opportune time to leverage these assets to generate new sources of revenue and increase shareholder value.

[Operator:]

Thank you. We will now begin the question-and-answer session.

[Justin Hall:]

While we're waiting for the first question, I want to mention that we're launching some complimentary products to Avenova on our website. Check out the warm eye compress that when used with Avenova helps clear oil glands and allows natural oils to float back onto the eye to relieve dry eye discomfort. We're also doing some online promotions and giveaways for world optometry week. Check out Avenova eye care on social media for details. All right, operator, we are ready for the first question.

[Operator:]

Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

[Jeffrey Cohen:]

Hi Justin and Andy. How are you?

[Justin Hall:]

Great. Hey Jeff.

[Jeffrey Cohen:]

So firstly, what we're curious about is some of the marketing strategies and key performance indicators, has there been much change at all over the past quarter? And could you also kind of tie that into the situation with CVS both bricks and mortar as well as online there?

[Justin Hall:]

Yes, sure. So we are excited about CVS, but I think we're more excited about some of the new marketing initiatives that we have for both Avenova and CelleRx. So, as I tried to convey on the call, we are really kind of supercharging and upgrading our entire online marketing strategy. So I think 2020 really taught us the importance of online marketing, and that's I think especially good for us, because that is truly where our greatest opportunity for growth is. So, while we continue to nurture the physician relationships in like I said, we really love that support from doctors, but our future revenue growth is really going to come from the online channel. And so, we have done a couple of things in late Q4 and then during Q1 to really transform the way that we look at our online marketing. We brought on some new partners and really done, I think – I won't get too much into the detail because we're going to really start rolling it out in Q2. But yes, we are sort of full speed ahead on the online sales here. And I think we're pretty excited about our new approach to it.

[Jeffrey Cohen:]

Okay, got it. And then could you talk about any notable changes with your demographics as far as the rebrand for Avenova, and then discuss with us a little bit more about the search engine optimization and search engine marketing and where you're seeing the most traction, whether it’d be one over the other or both channels.

[Justin Hall:]

Yes. So this is going to sound like a lot of buzzwords, but we are – we spent really the last three months creating a brand story around Avenova. And that's what I think we're going to see roll out. So it's less about search engine optimization because we did that last year, we did that sort of early 2020, and definitely reaped the benefits of that. But our demographics, I think one of the most beautiful things about Avenova is that, it has many use cases in many target demographics. And I think we have done a really good job of targeting what I call the -- like the medical use of Avenova and that’s blepharitis and dry eye and doctors prescribe it for that, and people love it. But really what we haven't done yet is, move into the beauty market and the makeup market. So there is a lot of women who use a lot of makeup every day, like on their eyes and they get eye infections and there are not infections that really require medical attention or a trip to the doctor's office, but what they will do is they'll go online and say, hey, like, my eyes are kind of irritated, I have a stye or chalazion on my eye. What can I order online and have directly sent to my home to try and Avenova is a very good and effective product for that. And now it's really sort of, the onus is on us to make sure that, when they're online searching for a product to help them in the eye care space, that we pop up and we educate them on the effectiveness of Avenova. And so, that – although we do have a very strong demographic that we have targeted online for the past year and a half, there is lots of different use cases that I think we're going to start targeting very effectively now.

[Jeffrey Cohen:]

Okay. Got it. And then lastly for us on the NeutroPhase in the fourth quarter, was that one time in nature, do you expect recurring throughout 2021 and onward, or is that periodic?

[Justin Hall:]

Well, so NeutroPhase is the wound care product that are very staunched supporter and distributor in China, buys from us. So we have been manufacturing China NeutroPhase for many, many years. And so, that – while it's small incremental revenue we have had it sort of episodically over the years, when demand over there has either increased or decreased in. For the rest of this year, we should see a few more of those orders.

[Jeffrey Cohen:]

Okay. Got it. That does it for us. Thanks for taking the questions.

[Justin Hall:]

Pleasure, as always Jeff.

[Operator:]

Our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

[Ed Woo:]

Yes, sound great. I am glad that you guys were able to get additional revenue from NeutroPhase this quarter. And what about some of your other products? I know you guys are launching, you mentioned a couple of other new products. Would that be material to your revenue this year?

[Justin Hall:]

Well. So we will, I think continue to manufacturer NeutroPhase, like I just said. I think we will have a few orders for Phase 1, which is for the U.S. wound care market. So we will have some orders for both NeutroPhase in Phase 1 this fiscal year. And we are rolling out a few ancillary products like I mentioned, like the warm eye compress. But the other products that are sort of complimentary to Avenova are really meant to augment sales of Avenova and sort of create more of an eye care brand around Avenova. But those I think are not going to be very large revenue drivers.

[Ed Woo:]

And also you probably won't be – a lot of capital for you guys to invest as well, right?

[Justin Hall:]

It's very little, very little. So it's almost like no capital investment other than buying the inventory. So, I say that they won't be big revenue drivers, but we can always be surprised. So Bruder has made an incredible business out of selling these masks. And so, we would love to infringe upon their dominance in the eye care, I mean, in the eye mask market by creating an eye mask that's better than Bruder.

[Ed Woo:]

Great. Well, thank you for answering my questions and good luck. Thank you.

[Justin Hall:]

All right, thanks Ed.

[Andy Jones:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.

[Justin Hall:]

Thank you once again for joining us today and for your interest in NovaBay. We look forward to updating you during our next call in May, when we'll discuss the 2021 first quarter financial results and progress. In the meantime, have a good day. Thanks very much.

[Operator:]

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