NovaBay Pharmaceuticals Inc (NBY) 2021 Q1 法說會逐字稿

Hello, and welcome to the NovaBay Pharmaceuticals' first-quarter 2021 financial results conference call. (Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.

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 best estimate based on the information available for today's discussion. For a list and description of risks and uncertainties, please review NovaBay's 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, May 6, 2021. NovaBay undertakes no obligation to revise or update in these statements to reflect events or circumstances, except as required by law.

And now I'd like to turn the call over to Justin Hall. Justin?

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 unit -- 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 begin 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 (sic - see press release, "51%"). We're making excellent progress in building upon our momentum in 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 dry -- 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 in a heightened level of sophistication combined with the data-driven marketing programs. This approach targets specific customer segments with messages that will resonate with them. Our digital marketing will be monitored to 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.

While expanding our customer base is our main focus, we do not take for granted that Avenova users are quite devoted to our product. This loyalty is evidenced by numerous favorable product reviews on amazon.com and the growing number of repeat customers signing up for the subscribe and save feature offered on both amazon.com and avenova.com. Building and nurturing this loyal customer base provides for reoccurring revenue and provides visibility on future sales.

We plan to leverage this loyal customer following and growing brand recognition with a full suite of dry eye products. We've already launched our warm eye compress, and we'll be launching two new products in the coming months.

The warm eye compress is a mask that when used with Avenova helps clear oil glands and allows natural oils to flow back onto the eye to relieve dry eye discomfort. Our warm eye compress is washable and reusable and can be used for a host of conditions from blepharitis, seasonal allergies, headaches, and puffy itchy eyes. Furthermore, it's easy to use by simply heating in the microwave and placing it over your eyes for 15 to 20 minutes. It's also quite soothing and effective even were not heated. We're offering the warm eye compress to consumers as a stand-alone product or in a therapeutic combination of our spray and wipes.

We believe our strong following is directly linked to our product's many unique characteristics. Avenova is formulated with NovaBay's proprietary pure pharmaceutical-grade hypochlorous acid with no bleach impurities or other impurities that could sting or irritate the eye, making our product completely safe for regular use. In addition, customers can be assured that Avenova is the only lid-and-lash antimicrobial spray to be clinically proven to reduce the bacterial load on ocular skin surfaces. Avenova addresses the underlying cause of bacterial dry eye rather than just the symptoms. Avenova also provides the consumer with the added confidence of knowing that our product is manufactured here in the United States.

Our focus for the balance of the year includes growing consumer sales of CelleRx Clinical Reset, which is the unique pharmaceutical product we launched into the beauty market earlier this year. We are working with our new media partner to bring the same sophistication to the digital marketing campaigns for Clinical Reset as we did with Avenova.

Clinical Reset is a gentle, calming, soothing, daily facial spray that fights against irritated, inflamed, and compromised skin by removing barriers to cell regeneration through gentle cleansing and biofilm disruption without stripping the skin. Clinical Reset reduces the traumas and disruptors to skin, thereby leading to healthier and less inflamed complexions. Our product is highly complementary to a daily beauty regimen and can be used with any combination of skincare products. Like Avenova, CelleRx is formulated with NovaBay's pharmaceutical-grade pure hypochlorous acid to eliminate harmful microorganisms and to provide for clearer, healthier skin.

In surveying existing CelleRx users, our media partner is discovering that Clinical Reset has already developed a loyal following. We look forward to our full media launch program, which we expect to occur in the third quarter of this year.

Our other key initiatives for 2021. We have stepped up our efforts to further grow through strategic acquisition of existing products or organizations in the large ophthalmic and skincare markets in order to grow revenues. We are positioned to capitalize on these opportunities by leveraging sales channels and our marketing expertise. We've engaged the services of a quality advisory firm to support this endeavor. We believe NovaBay is extremely well positioned to execute on our growth strategy, including our new media programs with sufficient capital to fund operations well into 2022.

Lastly, although we are only one month into the second quarter, based on current trends, we expect Avenova revenue in unit sales to increase over the second quarter of 2020. We will, however, not have any comparable revenue from PPE this year as we did last year during the height of the pandemic. That said, we expect a favorable revenue uptick from our core Avenova business.

Now I'll turn the call over to Andy to review our financial performance in more detail.

Thank you, Justin. Good Afternoon, everyone. Starting with our Q1 topline 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 head count as part of our increasing focus on a more cost-effective in-house sales team.

Our in-house team is focused primarily on telephonic and video conference outreach to educate the medical community about how their patients can benefit from the extraordinary qualities of Avenova, and how their offices can benefit financially from our affiliate and physician-dispensed programs. As we have previously discussed, the doctor's office is where the Avenova patient journey and the physician recommended halo effect often begins.

Operating loss for the first quarters of 2021 and 2020 was unchanged at $1.5 million. Net loss attributable to common stockholders for the 2021 first quarter was $1.5 million or $0.04 per share. Operating loss and net loss for the 2021 quarter were substantially the same as we eliminated our warrant liability in the second half of 2020 as part of our effort to improve our balance sheet. Net loss attributable to common stockholders for the first quarter of 2020 was $1.6 million or $0.06 per share.

Lastly, we continue to be pleased with the overall health of our balance sheet. As of March 31, 2021, we had cash and cash equivalents of $10.5 million, and we ended the quarter again with no significant debt obligations. We have sufficient funds to meet planned operating needs well into 2022, allowing us to comfortably execute on all 2021 initiatives to drive adoption of Avenova and CelleRx and seek out other product opportunities that will provide top line growth and operating synergies as we execute on our path toward profitability.

With that, I'll turn it back to Justin.

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 anti-microbial lid-and-lash spray. We have expanded consumer access to Avenova this year through availability at CVS, and we are excited by the prospects 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 encourage 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.

Third, we will be introducing two new products in the coming months to complete our suite of dry eye offerings. And fourth, we continue to actively evaluate opportunities to support profitable growth through acquisition or licensing of ophthalmic and skincare products. This is a priority for us. Our experienced commercial organization, improved balance sheet, and established industry relationships all give us confidence that now is the opportune time for us to pursue new sources of revenue in order to increase shareholder value.

With that summary of our business and future plans, I thank you for your attention. Operator, we're now ready to take questions.

(Operator Instructions)

Jeffrey Cohen, Ladenburg Thalmann.

Hi, Justin and Andy. So let's start with the gross margins which were a fair amount higher than what we estimated. Any read into that?

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

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

Sure, yes.

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

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 state 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.

Got it. And are you seeing any interest in terms in the consumer space as far as geography goes within the US?

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 and a lot of San Francisco where we are. Of course, LA and Chicago, Miami, those kinds of places with not so much in the smaller metro areas.

Okay. And then you talked about the possibility of a couple more projects. Will we see that in the second quarter? And can you give us an indication or flavor in what area that may be in, whether it'd be ocular, derm, or a line extension to another?

Yes. So there is a -- we're really moving forward on 2 different fronts. One front is just expanding the Avenova product lines. 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 an M&A initiative. And there is no telling when that will hit. Sometimes it happens faster, and sometimes it's a long drawn-out process.

Got it. And then lastly for me, could 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? And I think that pricing has spot on matched up.

Yes. So there is price parity across all channels. Even in our physician-dispensed channel, we try to have the cost 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 will 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.

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 ordering that you could provide would be helpful. Thank you.

Yes. Actually, Andy, do you want to take this one?

Sure. Yes. So as 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 are implementing new digital marketing programs, obviously, that's pushing the OTC channel. And we expect to see some success and some growth from those in the second quarter.

Perfect. Thanks, guys. Nice radar. Appreciate you taking questions.

Ed Woo, Ascendiant Capital.

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 are buying Avenova yet versus people who are repeat customers?

Yes. So it is something that we are focusing on now that we've 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 in the path of least resistance for most customers. But when people buy on Amazon, we are not able to re-market to them directly. We don't -- we're not able to capture their email addresses and re-market 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 re-market to them. So that is the trend that I was referring to, now that we're really diving into obtaining our own customer information, maintaining it, and then re-marketing 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.

Great. And then you mentioned a couple of new products. One launch in next week, one in the next three months. CelleRx will be doing a full launch in third quarter. Will we -- should we expect increased sales and marketing expenses significant -- on a significant scale for the next couple of quarters?

Yes. I mean as we're growing those channels, I think it will be more focused on the refresh advertising for both Avenova and for CelleRx. But yes, we will 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.

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

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

Before we end, I want to mention that we'll be presenting at the Ladenburg Thalmann 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.

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