NovaBay Pharmaceuticals, Inc. (NYSE:NBY) Q4 2021 Earnings Conference Call March 29, 2022 4:30 PM ET
Company Participants
Jody Cain – Investor Relations
Justin Hall – Chief Executive Officer and General Counsel
Andy Jones – Chief Financial Officer
Conference Call Participants
Destiny Hance – Ladenburg Thalmann
Ed Woo – Ascendiant Capital
Operator
Good afternoon and welcome to the NovaBay Pharmaceuticals Fourth Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 are Justin Hall, Chief Executive Officer and General Counsel 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 the 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 uncertainty about the integration of DERMAdoctor into NovaBay’s operations and duration of potential impact of the ongoing COVID-19 pandemic. This means that results could change at any time and the contemplated impact of NovaBay’s recent acquisition and COVID-19 on NovaBay’s 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 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, March 29, 2022. NovaBay undertakes no obligation to revise or update any 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?
Justin Hall
Thank you, Jody. Good afternoon, everyone and thank you for joining us. I am pleased to report that product sales for the fourth quarter increased by 40% over the prior year period on record high unit sales of Avenova spray. Q4 was a strong close to a highly productive year in which Avenova sales increased by 15%, while the number of units sold increased by 31%, as more people than ever used our anti-microbial lid and lash spray. Importantly, 74% of Avenova product revenue during 2021 came from our non-prescription channels reflecting the success of our consumer marketing initiatives.
The crowning achievement of 2021 was the acquisition of DERMAdoctor which was completed in November. In my view, this is the most significant event in our corporate history. By acquiring DERMAdoctor, we effectively transitioned NovaBay from a single product company to one with a strong presence in the large and growing eye care and skincare markets. While diversifying our product portfolio in itself is of significant value, we also gained additional growth opportunities from this highly synergistic transaction.
On our last quarterly call, I laid out a multi-pronged growth strategy for our combined companies. Among our strategic initiatives is introducing innovative, scientifically developed, over-the-counter products under both the Avenova and DERMAdoctor brands. We are already executing on this initiative having launched two new products this year. In January, we expanded our Avenova product portfolio with the launch of our lubricating eye drops. These new eye drops were designed to help dry eye sufferers by providing immediate relief from irritated, gritty, scratchy or blurry eyes. What differentiates our lubricating eye drops and makes them so highly effective is the mode of action that is entirely new to the eye care market. While these drops are effective as a standalone product, when they are combined with the Avenova Warm Eye Compress and Avenova spray, they become our science for sore eyes three-step daily regimen for at home dry eye management. Like other Avenova products, you can find our lubricating eye drops for sale on amazon.com, avenova.com and dermadoctor.com. They are also offered for resale by eye care specialists through our physician dispense channel.
Earlier this month, we launched a hyaluronic acid moisture recovery serum. This new product expands the DERMAdoctor calm, cool and corrected family, which is specifically formulated to hydrate and repair eczema prone skin. The HA Serum was created by our new product officer, Dr. Audrey Kunin, who is a board certified dermatologist and Co-Founder of DERMAdoctor. Our serum is unique to the marketplace, because it includes vitamin C, dragon fruit and water binding cactus botanicals to restore natural hydration to parched skin.
Beyond just the new product pipeline, we have an opportunity for growth by expanding the marketing and distribution of our current products. The combined Avenova and DERMAdoctor teams bring extensive in-house expertise in developing robust social media and a strong marketing presence across all digital channels, allowing consumers to engage with the brand through social media and influencer campaigns. We are building on Audrey’s established position as a key opinion leader in the skincare industry by identifying opportunities for her to provide an expert opinion on various skincare and beauty topics.
Since the beginning of 2022, Audrey has been quoted in articles and appearing in online publications, including glam.com, cosmopolitan.com, cnn.com and marieclaire.com. You may have also seen Audrey in her recent QVC appearance as an on-air guest on a show called Cheers! to Shopping with Leah and Shawn, in which she featured our new eczema balm. Due to the popularity and success of her appearance, Audrey is expected to make additional QVC appearances and we plan to announce those dates and times once they are set.
NovaBay has also been executing on our strategy to expand marketing activities outside of the United States. To that end, we engaged a leading Chinese marketing firm to drive consumer sales of DERMAdoctor products in the vast Chinese market. As of March 1, our new partner began managing DERMAdoctor’s flagship store on tmall.com, which is the leading business to consumer online retailer in China. As you may know, NovaBay has developed excellent relationships in China over the last several years. One thing that we have learned is that success in China is predicated on having a strong local business partner that understands the market and has the ability to create positive brand awareness. Social media platforms like TikTok are the best ways to attract new customers in China and our new marketing partner brings a greatly expanded network of bloggers and influencers along with strong social media brand building capabilities.
We are also looking to leverage DERMAdoctor’s relationships with their network of international distributors and retailers to further distribute NovaBay products throughout the world. As an update on another benefit from this acquisition, NovaBay and DERMAdoctor are now sharing warehouse operations, including storage, picking and packing, shipping and logistics. All orders for Avenova branded products placed through our own website are now fulfilled by DERMAdoctor helping us save on Amazon fees.
Now I’d like to turn the call over to Andy to review our financial performance from Q4 and the full year 2021.
Andy Jones
Thank you, Justin and good afternoon everybody. As a reminder, we closed the DERMAdoctor acquisition on November 5, 2021 and our financial results from that date forward reflect combined NovaBay and DERMAdoctor results. Products revenue in Q4 was $2.6 million, which consisted of Avenova spray sales of $1.6 million, up 11% from the prior year quarter. Total Avenova spray unit sales increased 13% with over-the-counter unit sales increasing 41%, both compared with the prior year period. Rounding our product revenue for Q4, DERMAdoctor product sales contributed approximately $600,000 and we recorded approximately $400,000 for Phase 1 and NeutroPhase wound care brands and other Avenova branded products.
Gross margin for the 2021 fourth quarter was 54%. And this compares with 57% for the 2020 quarter with the decrease due primarily to a reduction in the portion of net revenue from traditionally higher margin pharmacy channels. Total operating expenses for Q4 2021 were $4.6 million. That compares with $2.8 million in the prior year period. The majority of the increase was due to one-time expenses associated with the DERMAdoctor acquisition and the related financing.
Sales and marketing expenses were $1.9 million compared with $1.5 million in the prior year quarter with the increase due to higher marketing costs for Avenova branded products as we increased our investment in digital advertising to adopt their – to drive their adoption, excuse me. The 2021 quarter also includes $200,000 in DERMAdoctor sales and marketing costs incurred after the close of the acquisition. These increases were partially offset by a decrease in NovaBay sales headcount, which took place in the beginning of 2021.
G&A expenses were $2.7 million in Q4 of 2021. That compares with $1.3 million a year ago with the increase due primarily to non-recurring cost associated with the DERMAdoctor acquisition and private placement financings that we completed in the fourth quarter of 2021. The 2021 fourth quarter also includes approximately $300,000 in DERMAdoctor G&A costs incurred after the close of the acquisition.
R&D expenses for the fourth quarter of 2021 were $9,000 and this compares with $36,000 for the prior period. We recorded a non-cash gain on changes in fair value of warrant liability in the 2021 fourth quarter of $4.6 million. This gain relates to warrants issued in conjunction with the private placement financing, which we completed in the fourth quarter in anticipation of the DERMAdoctor acquisition. These warrants were classified as the liabilities until they became exercisable subsequent to December 2021 on January 31, 2022 when the fair value at that time was transferred to equity. Other expense net for the fourth quarter of 2021 was $1.6 million. And this represented issuance costs related to those warrants. Net loss attributable to common stockholders for the 2021 fourth quarter was approximately $900,000 or $0.02 a share. This is a significant decrease from the prior year period when the net loss attributable to common stockholders was $1.8 million or $0.04 per share.
Turning now to our 2021 full year financial results, we are reporting total net sales for 2021 of $8.4 million, which includes $6.8 million in Avenova spray sales, up 15% from 2020. As Justin mentioned, Avenova spray unit sales for 2021 increased 31% and compared with 2020. Total net sales for 2020 were $9.9 million and this included $3.1 million in non-recurring sales of KN95 masks and other PPE products we sold early in the COVID-19 pandemic when these products were in short supply.
Gross margin for 2021 was 67%. This is an improvement from 60% for 2020. Total operating expenses for 2021 were $14.5 million. And this compares with $12.4 million for 2020 with the increase mainly attributable to one-time costs incurred in conjunction with the DERMAdoctor acquisition and the previously mentioned financing and to hire sales and marketing expenses as we invested in digital advertising programs.
We recorded a non-cash gain on changes in fair value of warrant liability for 2021 of $4.6 million. This compares with a non-cash loss for 2020 of $5.2 million. Other expense net for 2021 was $1.6 million. This compares with other income net for 2020 of approximately $600,000. Net loss attributable to common stockholders for 2021 was $6.6 million or $0.15 per share. This is a significant improvement from a net loss attributable to common stockholders of $11 million or $0.31 per share for 2020.
As of December 31, 2021, we had cash and cash equivalents of $7.5 million. During 2021, we raised net proceeds from the private placement financing as well as an ATM facility. I am pleased to report that we believe our current cash is sufficient to fund operations through the coming year, including our cost effective development and launch of new product offerings under both the Avenova and DERMAdoctor brand names.
And with that, I will turn it back over to Justin.
Justin Hall
Thanks, Andy. There is plenty of opportunity for us to grow in 2022, not only will we be expanding our product pipeline throughout the year, but we will also be expanding the addressable market for some of our existing products. Up until now, Avenova has been focused on the dry eye market. This year, we plan on going after a totally new market with almost no overlap and customer demographic, the beauty industry. Many women are turning to eyelash extensions to enhance their appearance while eliminating the need for mascara. Eyelash extensions can also increase the risk of irritation and infection of the eyelids.
Avenova’s broad anti-microbial properties can help manage this challenge. This represents a significant opportunity as the global lash extension market is primed for rapid growth with a projected 7.6 growth rate through 2031, reaching $2.4 billion in sales that year. Moving into this market will be our first time integrating eye care and beauty, which will allow us to capitalize on cross-selling opportunities afforded by a demographic overlap with DERMAdoctor customers.
Before opening the call to questions, I would like to welcome our new NovaBay board members. In January, Audrey along with Julie Garlikov and Sean Zheng joined our Board of Directors. Julie brings more than 25 years of marketing experience, including significant expertise in the eye care and dermatology markets. Sean was recommended by several of our large overseas stockholders to fill a vacancy following a resignation. With these new appointments, we increased the size of our board from 6 to 8 directors and added significant expertise that better reflects our transformed company.
Lastly, I would like to reiterate my enthusiasm for NovaBay’s future. We are already executing on a strategy aimed at creating stronger and faster growing – stronger and faster growing company with expanded footprints in the eye care and skincare markets. We have many more initiatives underway to accelerate growth. Giving the timing of our initiatives, we expect the majority of our growth in 2022 to be in the second half of the year. Thankfully, with no debt instruments, we will remain unencumbered by rising interest rates with a clear path to profitability. We have an ambitious agenda set out in front of us, but I am highly confident that we can capitalize on our transformed company to achieve all of our stated goals.
With that, I thank you for your attention. Operator, we are now ready to take questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Justin Hall
Before we take questions, I’d like to alert you that we plan to file our proxy statement at the end of this month and we will hold our 2022 Annual Meeting of Stockholders as a virtual event on May 11. Okay. Operator, we are ready for the first question.
Operator
And that question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Destiny Hance
Hi, this is actually Destiny on for Jeff. How are you doing today?
Justin Hall
Hi, Destiny. We are doing great.
Andy Jones
Hi.
Destiny Hance
I am glad to hear. I just wanted to quickly go over the product pipeline that you have referenced a couple times where – and I know you talked about going into lash extensions in the beauty industry with Avenova. What are some of the other segments you are looking into and which product lines are you looking to extend further in 2022? And then I am kind of curious to understand how if there could be any crossover at some point with eyelash extensions and some of the DERMAdoctor products given that they are both in the skincare/beauty market? Could you just discuss that a little bit?
Justin Hall
Yes. Well, I would love to discuss it at length with you, Destiny. But actually, for competitive reasons, we don’t want to give out our entire product pipeline. So, we are planning on developing new products that fall into DERMAdoctor’s established product families. So, this year, you are going to see a few additions to the DERMAdoctor family, just like the hyaluronic acid that we launched earlier this year, you will see some product additions to establish families just like that, but you are going to have to wait and see what they are.
Destiny Hance
Very exciting. Okay. So, no new product families, necessarily just extensions of the existing ones, that will do. Thank you. And then I am curious about the subscribe and save feature. Are you noticing that a larger portion of repeat customers are buying another product and opting in on their second purchase, or do you think it’s happening more on the first purchase?
Justin Hall
Yes. So, that is a really great question. And it’s something that we are seeing after the second and third purchase. So, there is quite a bit of consumer education that needs to happen before the first purchase. And then once they tried the product, especially Avenova for the first time and they go back to purchase another bottle, they will oftentimes either do the subscribe and save or they will purchase one of our new multipacks. So, one of our larger initiatives that we rolled out along with some of the and excuse me for using this word, the synergies we moved a lot of or all of our warehousing into the DERMAdoctor warehouse in Kansas City. And that gave us the ability to do kitted bundles on our own website and then also on Amazon. And our most popular kitted bundle is the three-pack. So, when people will buy a single product, decide as they should, that they absolutely love it and must have it, they will go back in either do the subscribe and save, or they will do a three-pack. And DERMAdoctor has actually already been so good at customer loyalty they have, a loyalty program that works really well for them.
Destiny Hance
Got it. Okay, that’s great. And then I guess just sticking with that whole theme, I am curious about this presence on QVC. And I am wondering if you could just discuss some of the buying trends associated with this marketing channel? Are you discovering that people are seeing it on QVC, not necessarily buying it there, but doing their own kind of research and then buying it through other channels? Are you finding that people are quick to purchase also QVC?
Justin Hall
Yes. So, it’s actually both. I think one really nice thing about QVC is that, Audrey goes on herself, and people sort of feel a connection with a female dermatologist that really understands a lot of the very common skin problems and offers up a little bit of very good and practical advice along with the sale of the product. But the consumer trends, I think as you very astutely pointed out, people will hear about it on QVC, and either go to the DERMAdoctor website, or go to Amazon, which is sort of like the go to place. And even though there is a pricing special for people who buy through QVC, we definitely saw a spike on Amazon, sort of simultaneously with her appearance on QVC. And then a slight lift afterwards. So, I think both is true, it’s really nice to get that immediate sale through QVC, but also a lift in all other channels.
Destiny Hance
Got it. Alright. And then I guess lastly for me, can we just talk about the strategy in China a little more specifically and you engaged the marketing firms? So, I am just curious, what are some of the near-term campaigns or initiatives that they will be rolling out? And what – does the branding and messaging differ at all in this region, or is everything fairly consistent within in the U.S. as well?
Justin Hall
Well, one of the things that made DERMAdoctor very appealing to us is, the brand is a problem solving brand, the same way that Avenova is. So, to some degree, the marketing has to remain the same, because the products are specifically designed to treat either in eye care, a very specific like eye care, or skincare problem. So, a lot of the marketing sort of remains the same. If you have keratosis pilaris, which is kind of nicknamed bumpy chicken skin. Well, we have a product for that. And so worldwide, the marketing remains the same as something that has scientifically created, clinically proven to address a particular type of problem. So, that remains the same with Avenova and DERMAdoctor products, sort of companywide and worldwide. But the thing that really differs in the Chinese market is how you get the word out. So here, we have our own influencer initiatives. And we have our paid social in all of the usual things, but over in China, to really gain traction, you have to be on the social platforms with the right influencers. And because we are an American brand, we need a very strong partner that already knows the market that knows the influencers, knows the right social platforms to use. And I think that we have that in our new partner. I think that they are ready to kind of supercharge sales for DERMAdoctor over in China and that is such a large market. So, even small incremental growth winds up being a significant amount for a company like us.
Destiny Hance
Got it. Okay. Thank you. I think that does it for me. I will jump back in queue.
Operator
The next question is from Ed Woo with Ascendiant Capital. Please go ahead.
Ed Woo
Yes. Do you have any issue or impact from supply chains? And also what inflations are rising input costs?
Justin Hall
Yes. So, that is a great question, Ed. And the answer is a little complicated. The short story is we have been able to manage it successfully. It has cost us a lot of work and a lot of time. But thankfully, we have not had any supply chain interruptions that haven’t been able to be managed. And so when we get cost increases from any suppliers or delays, we have been able to successfully find solutions for those. But I won’t say that, we haven’t felt the effects of it at all, but sort of very thankfully and happy to say that, we have been able to work all of those things out.
Ed Woo
Great. Well, thank you. And I wish you guys, good luck. Thank you.
Justin Hall
Okay. Thanks Ed.
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 and your interest in NovaBay. We are extremely excited about our progress and the very bright future we envision. We look forward to reporting progress during our Q1 2022 investor call in May. In the meantime, have a good day. Thank you.
Andy Jones
Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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