NovaBay Pharmaceuticals, Inc. (NYSE:NBY) Q3 2022 Earnings Conference Call November 14, 2022 4:30 PM ET
Company Participants
Jody Cain – LHA Investor Relations
Justin Hall – Chief Executive Officer and General Counsel
Andy Jones – Chief Financial Officer
Conference Call Participants
Good afternoon, and welcome to the NovaBay Pharmaceuticals Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only-mode. [Operator instructions] Please note, this event is being recorded.
I’d 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, Chief Financial Officer.
I’d 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 uncertainty about the circumstances beyond the company’s control that impact the broader economy such as the COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of COVID-19 and circumstances that impact the broader economy on NovaBay based 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, November 14, 2022, NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law.
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 delighted to report a 69% increase in product revenue over the prior year period, mostly driven by our acquisition of DERMAdoctor and diversified product revenue streams. On recent conference calls, we had projected that revenue growth in 2022 would accelerate in the second half of the year as many of our initiatives we implemented throughout the year gained traction. It is highly gratifying to deliver on this expectation during the third quarter and our outlook for accelerated growth to continue in Q4 as well.
One of our highlights of the quarter was that we again achieved year-over-year growth in online Avenova unit sales. Another tremendous achievement was that we delivered our highest sales quarter for DERMAdoctor products since the acquisitions a year ago. While revenue increased 69%, our ability to optimize digital marketing led to an 11% decrease in sales and marketing spend even with the additional expenses for promoting DERMAdoctor products.
I’m excited about our prospects for continued growth. We have established brands in three large and growing verticals; eye care, skin care and wound care. Now I’d like to share updates on each one of our three verticals beginning with Avenova and our eye care products. Avenova is the number one anti-microbial lid and lash spray in the US dry eye market and as mentioned, online Avenova — online Avenova spray unit sales increased year-over-year as we continued the successful shift to this more efficient online sales channel.
For the quarter, more than two thirds of unit sales were generated online, which is a testament to the effectiveness of our digital advertising. For example, we recently completed a fall for eyes sweepstake, which drove 10,000 new email subscribers and 2,500 new Instagram followers. Now we have Black Friday, Cyber Monday and December holiday promotions on tap to further drive sales for a strong end of year push.
During the past several years, we’ve capitalized on the recognition of the Avenova brand by commercializing companion products that help with our righteous [ph] and dry eye customers. These include NovaWipes, the Avenova warm eye compress, Avenova lubricating drops and the Eye Check. I’m pleased to report that this strategy is working well and our companion products made a notable contribution to the third quarter revenue number.
Moving on to DERMAdoctor and our collection of skincare products; you may recall that we identified growth opportunities for DERMAdoctor with a trend towards more beauty products being purchased. In fact, the research firm Insider Intelligence expects cosmetics and beauty eCommerce sales in the US to reach $18 billion dollars this year. By 2026, eCommerce sales are expected to account for nearly a third of the category’s total. With our digital focused, we are well positioned to tap into this ongoing market trend.
Last month, we announced significant orders for a top selling DERMAdoctor product, Kakadu C anti-aging serum, with these orders being placed just ahead of the holiday season. Some revenue from these large orders was recognized in the third quarter with more to come in the fourth quarter. We also have a number of promotional activities around the holidays, including a discount feature in the Costco holiday mailer.
So at the beginning of the year, we’ve introduced six new skincare products to the ever popular DERMAdoctor collections and plans are underway to introduce more products in the future. These new products keep us highly relevant in an industry characterized by the constant emergence of new formulations and importantly, they keep the DERMAdoctor brands in the mind of the consumers. As Andy will discuss in a moment, we have commercialized these new products while holding R&D and sales and marketing expenses in check with our launches executed under our low cost model. Among upcoming promotions for our DERMAdoctor products are additional appearances by Audrey Kunin on the QVC network with several shows already booked.
Increasing DERMAdoctor’s presence in international markets is a key priority. As you may know, NovaBay has excellent relationships in China and we know that success in that country is based on having strong local business partners who understand the market and have the ability to create positive brand awareness.
We now have an updated DERMAdoctor store on Tmall, which is China’s largest B2C network and through our local marketing partner, we have an expanded network of bloggers and influencers. We also have strong media presence and brand building capabilities on such key platforms as Tiktok. Our ability to capture even an extremely modest share of the Chinese market would have a considerable impact on our revenue.
We also offered special promotions on select DERMAdoctor products during the Double 11, so named because it occurs on November 11 each year. Double 11 is similar to our Black Friday, but it grows us several times more in revenue. We are also working towards distribution agreements in Europe and plan to expand the geographic reach of DERMAdoctor even further.
Now turning to our wound care vertical; we manufacture and sell a proprietary wound care product under the Phase 1 brand that is distributed in the US for professional use by our commercial partner Phase 1 health. Products under our NeutroPhase brand are distributed in China by our partner, Pioneer Pharma. These products are used for cleansing and irrigating post-surgical wounds, minor burns and superficial abrasions. We have an advantage in this market as our product is made without the toxic chemicals found in many other wound care products. It is gentle, non-irritating, non-sensitizing to skin and new tissue.
Like our Avenova spray, our wind care products are formulated with our FDA cleared proprietary anti-microbial pure form of hypochlorous acid. Our formulation exhibits broad spectrum activity against a range of gram positive and gram negative bacteria, making it highly effective.
Among the advantages of hypochlorous acid is the ability to penetrate and kill biofilm, which represents a significant barrier to wound healing. Among various promotional activities, Phase 1 health has refreshed their website including recent blog postings from industry key opinion leaders. The most recent post is by Dr. Jack Fisher, a past President of the American Society for Aesthetic Plastic Surgery and author of more than 120 publications, a frequent speaker at medical conferences around the world and an ardent supporter of Phase 1. He has used our product with his patients for more than a decade.
Before reviewing our financial results, I want to thank our stockholders for their continued support. Last Thursday, we held a meeting, a special meeting of stockholders and am pleased to report that all proposals passed, including the proposal authorizing our board to effect a reverse stock split. This is critical in regaining compliance with the NYC American listing and completing the previously announced private placement for gross proceeds of $3.25 million dollars.
Our Board of Directors has approved a one for thirty five reverse stock split that will become effective tomorrow, Tuesday, November 15 with our common stock trading on a split adjusted basis Wednesday, November 16. The increased market price resulting from the reverse split will improve the market ability of our stock and should encourage additional interest and trading.
Now, I’d like to turn the call over to Andy to review our Q3 financial performance. Andy?
Andy Jones
Thank you, Justin, and good afternoon, everybody. As a reminder, our financial results for 2022 periods reflect combined NovaBay and DERMAdoctor results. The comparable 2021 periods do not include results from DERMAdoctor since we did not close the DERMAdoctor acquisition until November 2021.
I also want to announce a change in the way that we present fees paid to third party online retailers such as Amazon. Sales commissions and fulfillment fees charged by these retailers, which typically total 15% to 20% of total net sales, were previously netted against related product sales, which reduced total net sales in our statement of operations. During the third quarter of 2022, we began presenting sales commissions as sales and marketing expenses and fulfilment fees as cost of goods sold. Our former presentation of the commissions was an error; however, the impact was immaterial to reported financial results.
That said, to enhance period-over-period comparability, our prior financial results for the comparable periods we are reporting today and in the future will reflect the changes and revisions for both the commissions and fulfilment fees. We are also excited that these changes will enhance the comparability of our financial results against our peers as sales from our OTC online channel continues to grow in importance.
Importantly, these changes in revisions had no impact on our operating loss, net loss, comprehensive loss, loss per share, cash flow, cash balances or any balance sheet components for any current or former periods. Additional information about these changes in revisions, including their impact on the 2022 and 2021 periods can be found in our form 10-Q filed with SEC today.
Now turning to our financial results; products revenue in Q3 2022 was $3.8 million, up sixty 69% from the prior year period. The 2022 third quarter included $1.3 million in DERMAdoctor product sales, which Justin mentioned was the highest sales quarter since the acquisition. Avenova spray sales for the third quarter of 2022 were $1.9 million versus $2.1 million a year ago. The decrease was due to our continued shift to the more efficient online sales channel and as previously mentioned, unit sales through this channel increased over the prior year period.
Net products revenue for the third quarter of 2022 also included $300,000 from other Avenova optical products, including our NovaWipes and moist heating icon press and $300,000 from Phase 1 branded wound care product sales. Gross margin for the 2022 third quarter was 62%. This compares with 69% for the 2021 quarter. The decrease primarily resulted from the addition of DERMAdoctor and wound care product sales.
Sales and marketing expenses of $1.8 million decreased 11% from the prior year period, even with the addition of $0.6 million in DERMAdoctor sales and marketing costs. As Justin discussed, we were able to reduce our sales and marketing spend by optimizing our digital advertising for Avenova. G&A expenses were $956,000 in Q3 of 2022 and this compares with $1.8 million a year ago. The 2022 period included $300,000 in DERMAdoctor G&A costs, which were offset by a reduction in variable compensation cost in the 2022 period.
R&D expenses for the third quarter of 2022 were $41,000 compared with $10,000 for the prior year period. As you can see by this modest amount in both periods, we continue to create, develop and release new products without incurring significant R&D costs. Operating expenses for the third quarter of 2022 of $2.8 million decreased overall $1 million from the third quarter of 2021 and included DERMAdoctor expenses.
In the 2022 quarter, we recorded several non-cash items related to the 2022 warrant reprice transaction we completed in September. These include a $1.9 million noncash loss on the modification of common stock warrants, a $2.4 million noncash gain on changes in fair value of warrant liability, a $5.7 million non-cash accumulated deficit increase due to an adjustment to the Series B preferred stock conversion and $171,000 in other expenses.
The net loss attributable to common stockholders for Q3 of 2022 was $5.8 million or $0.10 per share. That compares with the net loss attributable to common stockholders for Q3 of 2021 of $2.3 million or $0.05 per share.
Turning to our year-to-date financial results, for the nine months ended September 30, 2022, product revenue was $10.7 million, a 53% increase over the prior year period. Gross margin on product revenue for the first nine months of 2022 was 56%, that compares with 69% for the first nine months of 2021. For the first nine months of 2022, sales and marketing expenses decreased modestly and G&A expenses increased 12%, both compared with the first nine months of 2021. R&D expenses were $108,000 versus $36,000 for the prior year period.
The net loss attributable to common stockholders for the first nine months of 2022 was $8.1 million dollars or $0.15 per share. The net loss for the first nine months of 2021 was $5.7 million or $0.13 per share. As of September 30, 2022, NovaBay had cash and cash equivalents of $3.9 million. This included approximately $2.1 million in gross proceeds received from the warrant reprice transaction that was completed in September 2022.
And with that, I’ll turn the call back to Justin.
Justin Hall
Thanks, Andy. We’re excited about our prospects for continued growth. With Avenova, DERMAdoctor in Phase 1, we have a solid foundation of established brands in the large and growing eye care, skin care and wound care market. We are expanding and refreshing digital marketing campaigns, widening target demographics for existing customers and increasing their accessibility while also expanding the Avenova and DERMAdoctor brands with new innovative products that fill a consumer need and support our corporate positioning.
We expect to benefit from growing — from online sales from growing online sales of DERMAdoctor products in international markets, in particular in China and in Europe. Our partner Phase 1 health is promoting our wound care product through a refreshed website that highlights product advantages and uses key opinion leaders.
We are proud of our specialized portfolio of innovative, scientifically formulated and clinically proven products. We are passionate about offering our customers high quality products through our Avenova, DERMAdoctor and Phase 1 branch.
With that, I thank you for your attention. Operator, we’re now ready to take questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator instructions] And our first question will come from Jeff Cohen of Ladenburg Thalmann. Go ahead, please.
UnidentifiedAnalyst
Hi, Justin and Andy. This is actually Destiny on for Jeff. Thank you for taking our question. I wanted to start first with a bunch of questions around marketing for usual. I’m curious and congratulations on getting that sales and marketing expense down 11%, that’s awesome. I’m curious is that decrease a function of improved or optimize marketing tactics digitally as well as additional cross-selling and maybe even upselling opportunities or is it strictly based on your efficiencies in terms of digital marketing.
Justin Hall
It really is, well, first hi, Destiny. nice to hear from you. It’s across the board. So everything that you just mentioned has played a role in decreasing those expenses and I think primarily, we can say that we looked at all of our campaigns. We eliminated a lot of them that were not producing results, but we also refreshed creative and got better at our targeting, but there is, cross selling and there’s also just a combination of reaching out to those targeted customers with messages that I think are more impactful.
UnidentifiedAnalyst
Okay, got it. And I guess that leads me into my second question around your commentary about expanding the demographic. Are you looking to maybe expand the age of your demographic or the interests or both?
Justin Hall
Yes. So there the answer is a little bit different just depending on what product we’re talking about and what sales channel we’re talking about. I think the most obvious answer for an expanding demographic is for that of Avenova. So, previously our target demographic for Avenova has been an older audience, one that suffers more commonly from bluffrighteous [ph] and dry eye, but with the advent of eyelash extensions that are very common with a younger customer demographic, those problems of [indiscernible] and dry eye are now very prevalent in a younger demographic and this younger demographic is totally new to Avenova.
They really have not paid a lot of attention to lid and lash hygiene in the past because they haven’t needed to. So with a more targeted message towards a totally new demographic, we are expanding our customer base. So we’ll see that with Avenova and then when looking at the DERMAdoctor side, instead of expanding our customer base from a messaging standpoint, we’re really trying to push into two new territories, two new geographic territory. So our expansion of existing products for DERMAdoctor is going well in China and then also in the EU. So you’ll continue to see, I think growth in all three of those areas.
UnidentifiedAnalyst
Okay, got it. So targeting different age groups with Avenova and then on the DERMAdoctor side just different or not just, but adding some different territories. I think I got it and that actually also leads me again very well into my next question. In Europe, what exactly is the process for getting commercial there? Are you doing cross border sales or are you going to partner similarly to how you do or how you are doing in China? Could you talk a little more about that?
Justin Hall
Sure. Yeah. So it’s all about the partners. Whenever we expand into a new geographic territory where we’re a little bit less familiar with the selling trends in the marketplace. I feel like we really do need a partner who knows what they’re doing. So we’re — without sharing too much, we are in the process of onboarding a partner who will be our main distributor for the European Union.
UnidentifiedAnalyst
Okay, got it and we could potentially see some revenue from the EU in early 2023 or at least first half would you say?
Justin Hall
Oh, Yes, yes.
UnidentifiedAnalyst
Okay. Awesome, very good and then let’s see, I think I’ll save my other marketing questions for offline, but I’m curious lastly about the slightly lower margin, I know you called out some changes to the way you are recording the fees as well as the commissions. Is that what kind of impacted COGS this year or is that more related to some of the orders through like what we call the club channel, which includes Costco?
Andy Jones
Yeah. So it’s lower year-over-year Destiny and good to talk to you. It’s lower year-over-year, primarily due to the addition of the DERMAdoctor products, which generally come with a lower margin. We also in the third quarter of this year, we had more wound care sales than we had last year, which also come with a lower margin. Although you did mention the change in the way that we’re presenting, the fees, that will have going forward a slight impact on gross margin percentage. It’ll bring it down a couple of percent, but I think you caught on.
I mentioned, there’s no impact to operating loss or cash flow or anything like that. It’s simply where we’re presenting it in the P&L, but those are the reason that it’s down over last year, but I think being right around that 60% is sort of in the middle sweet spot between where DERMAdoctor is and our traditional businesses have been.
UnidentifiedAnalyst
Okay, perfect. That’s super helpful. I appreciate that. Great quarter. Thank you for taking my questions. I’ll jump back in queue.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Justin Hall for any closing remark.
Justin Hall
Thank you once again for joining us and your interest in NovaBay. We’re extremely excited about our progress and the very bright future we envision. We wish you and your family a happy, healthy holiday season and we look forward to reporting our progress for our full year results during our Investor Call in March 2023. Thank you and have a nice day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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