Earnings Transcript for NBY - Q2 Fiscal Year 2023

Operator: Welcome to the NovaBay Pharmaceuticals Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference 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 Tommy Law, Interim 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 circumstances beyond the company's control that impact the broader economy, such as rising interest rates and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of circumstances that impact the broader economy 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, August 10, 2023. 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'm pleased to begin today's call by reporting that NovaBay achieved $4.6 million in revenue for the quarter. That's up 26% from the prior year, with the increase driven by record sales of our wound care products. This increase in revenue was accompanied by a reduction of 16% in sales and marketing expenses as we continue to benefit from our optimized digital marketing programs. We also made significant progress in managing expenses, and we're able to narrow our operating losses by 37%. Now I'd like to share updates on each of our 3 verticals

Tommy Law : Thank you, Justin, and good afternoon, everybody. I'll start with Q2 and then discuss our year-to-date results. Net product revenue for the second quarter of 2023 was $4.6 million. This represents an increase of 26% from the prior year quarter and included $2.2 million of Avenova branded product sales, $1.1 million of DERMAdoctor product sales and $1.3 million in sale of our branded wound care products. Gross margin on net product revenue remained consistent at 50% for the second quarters of both 2023 and 2022. Total operating expenses for the second quarter of 2023 decreased 8% over the prior year. This included a 16% reduction in sales and marketing expenses to $1.7 million, which reflects lower Avenova digital advertising costs and lower expenses for outside professional services. G&A expenses remained consistent for both quarters at $1.9 million. Operating loss for the quarter was $1.4 million, a 37% improvement from the prior year. The net loss for the second quarter of 2023 was $4 million or $1.27 per share and included a $2 million noncash retained earnings reduction related to the preferred stock round down feature. This compared with the loss of -- for the second quarter of 2022 of $2.2 million or $1.43 per share. Turning to our year-to-date financial results. Net product revenue for the first 6 months of 2023 increased 11% over the prior year to $7.7 million. Gross margin on net product sales increased to 55% for the first half of 2023 versus 53% for the first half of 2022. For the 6 months ended June 30, 2023, sales and marketing expenses decreased 16% and G&A expenses declined modestly, both compared with the 6 months ended June 30, 2022. Operating loss for the first 6 months of 2023 declined to $3.1 million, an improvement of 32% compared with the prior year. The net loss for the first half of 2023 was $5.8 million or $2.21 per share, which included the noncash retained earnings reduction I just mentioned. This compares with a net loss for the first half of 2022 of $2.3 million or $1.54 per share, which included a noncash gain on changes in fair value of warrant liability of $2.1 million and a noncash gain on changes in fair value of the contingent liability of $0.2 million. We reported cash and cash equivalents of $4.4 million as of June 30, 2023, which includes proceeds from a $3 million private placement of convertible notes and warrants that we closed in May. And now I'll turn the call back to Justin.

Justin Hall : Thanks, Tommy. We're proud of our portfolio of innovative science-based and clinically proven eye care, skin care and wound care products, and are passionate about bringing these best-in-class products to a growing number of customers. We continue to benefit from the digital marketing expertise we've developed over the past several years that's allowing us to effectively promote our products while managing expenditures. As mentioned, we anticipate incremental growth from our eye care segment for the remainder of 2023. With our skin care franchise, our strategy is now aimed towards profitability by shifting our focus to our top-selling products in our most efficient sales channels. This strategy allows us to benefit from products that are proven winners while prudently managing expenses and extending our cash runway. With that, I thank you for your attention. Operator, we're now ready to take questions.

Operator: [Operator Instructions] Your first question comes from Jeffrey Cohen from Ladenburg Thalmann.

Jeffrey Cohen : So a few questions from our end. So I guess, firstly, maybe for Tommy, what was the actual cash loss for the second quarter?

Tommy Law: It was about [$1 million].

Jeffrey Cohen : Okay. Got it. And then, Justin, talk a little bit about the wound business. Two questions specifically. Firstly, well, talk about channels and talk about number of actual SKUs and then talk about Q3 as in you had a $1 million order for Q2. So should we expect Q3 to normalize back to previous levels?

Justin Hall : Yes. So the larger order that we saw in Q2 won't be repeated again in Q3. We should have another order of a smaller magnitude again for NeutroPhase in Q4. So our wound care segment is pretty simple. It really just -- it consists of only two products, the PhaseOne and the NeutroPhase. And there is really just two sizes of each one of those products. So it's pretty simple to wrap your mind around and keep track of.

Jeffrey Cohen : Okay. Got it. And then could you talk about some of the DERMAdoctor channels in addition to your direct website and Amazon? You did mention Costco. I know you've been selling there. Are there any other opportunities in some of the other club channels out there?

Justin Hall : Yes. So really, our main sales channels, our largest source of revenue last year came from Amazon, with the other channels being about equal in their revenue contribution. So that's dermadoctor.com, Costco, the Middle East, and then China this year will hopefully grow over what it was last year to be a significant contributor that's sort of on equal footing with the rest of those.

Jeffrey Cohen : Okay. Got it. And then lastly for us on the margin front for modeling purposes, any look into the back half of the year as compared to the 50% from the second quarter or the 52% or 53% for the first half?

Justin Hall : Yes. So it should go up a little bit in the second half just because the wound care products have a slightly lower margin. So when we saw more of those, it brings that down a little bit. But we can expect something around 55%.

Operator: [Operator Instructions] As there are no more questions at this time, I would now like to turn the conference back over to Mr. Hall for any closing remarks.

Justin Hall : Thank you today for joining us and your interest in NovaBay. We're excited about our progress and the promising future we envision for our company. We look forward to updating you on our third quarter investor conference in November. Thanks again, and have a nice day.

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