Jody Cain - IR, LHA Ron Najafi - President and CEO Tom Paulson - CFO Glenn Moro - SVP of Sales & Marketing

Ed Woo - Ascendiant Capital Jason Kolbert - Maxim

Welcome to the NovaBay Pharmaceuticals’ Second Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded August 13, 2015. I would now like to turn the conference over to Jody Cain. Please go ahead ma’am.

This is Jody Cain with LHA. Thank you for participating in today’s call to discuss NovaBay Pharmaceuticals’ 2015 second results and business progress. Joining me from NovaBay Pharmaceuticals are Dr. Ron Najafi, President and CEO; Tom Paulson, the Company’s CFO; and Glenn Moro, Senior Vice President of Sales & Marketing. 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 risk and uncertainties that could cause actual results to materially differ from any anticipated results. For our list and description of those risks and uncertainties, please review NovaBay Pharmaceuticals’ filings with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast August 13, 2015. NovaBay Pharmaceutical undertakes no obligation to revise or update statements to reflect events or circumstances after the date of this conference call except as required by law. And now, I’d like to turn the call over to Dr. Najafi. Ron?

Thank you Jody and my thanks to all of you for joining us on today’s call. I’m delighted with NovaBay’s progress during the second quarter with our many accomplishments and momentum serving to advance our position as leading innovator in the eye care industry. In particular, I’m very pleased to report on the enthusiastic reception that NovaBay is receiving in the market. Sales of prescription Avenova increased 73% in the second quarter compared with the first quarter. Importantly, during the quarter, we saw positive momentum with each passing month in sales as well as key sales indicators including the number of prescribing physicians and patients reorder. Also on a sequential quarter basis, the number of pharmacies filling Avenova prescription more than doubled and now exceeds 1,100 pharmacies. Our distributors; McKesson, Cardinal Health, and AmerisourceBergen reported their combined prescription volume more than tripled. Additionally, Avenova prescriptions have now been written by eye care specialists in all 50 states. Importantly, the momentum in sales and key metric indicate that we’re building a solid foundation for continued success with Avenova. We see a significant growth opportunity for Avenova through its demonstrated ability to manage blepharitis, meibomian gland dysfunction, and associated dry eye. These are chronic conditions that afflict about 30 million Americans and cause inflammation, itchiness and other painful symptoms. Among treatment options, prescription steroid, prescription antibiotics are able to manage blepharitis but these medications can only be used for a limited period of time. Other products include over-the-counter eye wipes and while other OTC products may relieve the immediate symptoms such as crustiness that accumulates on the eyelid, virtually all contain soap. These detergent disrupt the natural layer of oil produced by our meibomian glands that protect the cornea and facilitate the smooth opening and closing of our eyelids. Keep in mind, we blink almost 11,000 times a day, so just imagine the number of time the eyelid moves over cornea. As a result, the wipe containing soaps could actually worsen the symptoms of blepharitis and associated dry eye. For these reasons and more, many patients suffering from blepharitis and dry eye have returned to their eye care specialist time and again complaining about the lack of relief. With daily use, Avenova successfully manages blepharitis within one to two weeks. This is a chronic condition and daily use of our Avenova will be needed to maintain relief. Avenova is based on our patented proprietary NEUTROX technology, which is pure hypochlorous acid in saline. Laboratory testing shows that pure hypochlorous acid has in solution antimicrobial properties and can be used safely on a daily basis. NovaBay is the only company to have this patented formulation and Avenova is the only product that is pure hypochlorous acid with no sodium hypochlorite commonly known as bleach. Avenova is a soothing liquid that’s sprayed onto a pad and then wiped across the lid and lashes twice daily, that’s it and no rinsing necessary. Given the 30 million Americans suffering from blepharitis and MGD, the dry eye syndrome, this market is significant. We also know that many ophthalmologist are recommending and prescribing Avenova four to five days prior to cataract and LASIK surgery, which represents approximately 5 million procedures per year. Clearly, we’re just scratching the surface of this market opportunity for Avenova. We’re excited about the positive initial market reception and about the increases in patient reorder, the growing number of prescribers, and increases in order from our distributors. Because of this strong traction we’re having with Avenova, we are accelerating plans to expand our medical salesforce to 50 direct sales representatives by the end of September. Our planned expansion is well under way and we’re finding highly qualified professionals for our open positions. Glenn Moro who is on the call, our VP of Sales & Marketing will be providing you an update on our commercial strategy, key metrics, and sales force expansion a bit later in the call today. Also as a result of our Avenova sales, we’re reporting record quarterly revenue for NovaBay of more than $1 million. This includes sales of NeutroPhase skin and wound cleanser through distributors in the U.S. and abroad. As you may recall, we announced that we had an order to ship 200,000 units of NeutroPhase to our partner, China Pioneer Pharma to introduce the product in China. A majority of this product is being used to seek that market to support future sales in what both NovaBay and China Pioneer see a significant market opportunity. These efforts are going well and we are encouraged by the support we are getting from China Pioneer, our partner. At this time, I’d like to turn the call over to Tom Paulson. Tom?

Thank you, Ron, and thanks to those participating on today’s call. I will be reviewing highlights of our financial performance starting with the second quarter. We reported total net sales for the second quarter of 2015 of $1 million, which as Ron mentioned is a new company record. Product revenues, which include sales of Avenova and NeutroPhase were $931,000 up from $21,000 reported for second quarter of 2014. Other revenue was $77,000 and included miscellaneous revenue. Total net sales for the second quarter of 2014 were $123,000 and had no revenue from Avenova, which was launched in August of 2014. Gross margin on total net sales was approximately 75% for the second quarter of 2015. This was a very good improvement from the gross margin for the first quarter of 2015 of approximately 64%. The improvement reflects increased sales of our high margin Avenova product. We recorded a net loss of $4.9 million or $0.07 per share for the second quarter of 2015. This compares with a net loss of $2.9 million or $0.06 per share for prior year period. The increased net loss reflects our higher spending on sales and marketing, which was offset partially by lower R&D costs due to the completion of clinical trials in the prior year period. Sales, general and administrative expenses were $4.3 million versus $1.6 million for the second quarter of 2014. Research and development expenses were $1.3 million compared to $1.7 million for the comparable period last year. Turning now to our six month financial results, for the first half of 2015, total net sales were $1.5 million, up $1.1 million compared with the first half of 2014. Total net sales for the first six months of 2015 consisted of product revenue of $1.4 million and other revenue of $123,000. Sales of Avenova for the first half of 2015 were $1.3 million. Net loss for the first six months of 2015 was $9.5 million or $0.16 per share compared with a net loss of $6.5 million or $0.14 per share for the first six months of 2014. The increase in net loss reflects higher spending due mainly to increased sales and marketing activities for Avenova, partially offset by lower R&D spending. R&D expense was $2.9 million year-to-date and general, sales and administrative expenses were $7.7 million. We reported cash, cash equivalents, short-term investments of $7.2 million as of June 30, 2015 and in May 2015, we announced an at market private placement, raising gross proceeds of $6.9 million. With respect to cash, we intend to seek additional financing in the coming months. We believe the traction we’re now seeing with Avenova and the sales potential for this product validate our plan to expand our sales organization and is in the best interest of our shareholders. We have multiple options for this financing and we’ll provide greater detail at the appropriate time. Lastly, we expect sales of Avenova to continue to increase. Because we are in the foundational phases of our commercialization, it’s not prudent at this time for us to provide financial guidance. We do caution that we expect the rate of sales growth to slow of course based on the larger sales base we’re now working from. We also reported that the New York Stock Exchange has accepted our plan to regain compliance with the NYSE market continued listing standards. We have until October 28 of next year 2016 to meet these compliance standards. We have received a number of questions on this matter and I’d like to take the opportunity to clarify what compliance issue was raised by the NYSE. The only issue the NYSE raised was related to the net shareholder equity balance on our balance sheet at December 31, 2014. I don’t want to get deep in to the weeds, but for listeners not familiar with the segments of the balance sheet, simply stated, NovaBay ‘s net shareholder equity is essentially the combination of all the equity financing NovaBay has ever completed plus or minus our accumulated net income or loss since inception, specifically the NYSE requires $6 million balance in our net shareholder equity to be maintained and we fell below that amount last December. But I want also to make clear what was not an issue with the NYSE and that’s our trading price. The NYSE has never brought up our trading price as an issue nor have they even mentioned a reverse split as a means of raising our trading price, nor has NovaBay ever considered a reverse split. I hope that helps clarify the matter for everything. And now, I’d like to turn the call over to Glenn Moro.

Thanks, Tom. Good afternoon, everyone and I’m pleased to report the market traction we are seeing for Avenova. As Ron mentioned, we are highly encouraged by the initial market acceptance for Avenova with sales for the second quarter reaching $806,000, up 73% from the first quarter. As many of you know, there were three sources of Avenova sales and I’m pleased to report that we saw growth from each of them. First is what we call buy and bill, which is a direct sales to ophthalmologist and optometrists who carry Avenova in their offices and then resell the product directly to their patients. Customers from this source increased 58% over the first quarter of 2015. We attribute this to our medical direct sales team and their ability to educate eye care specialists about the advantages of incorporating Avenova in to their practices. Additionally, we are reaching these doctors through our trade advertising conferences and many podium presentations by prominent MDs and ODs. We also believe that eye care specialists who have prescribed Avenova are hearing from their patients as they’re getting the relief from blepharitis and dry eye that they need. Another important statistic from the buy and bill component of our business is that 28% of patients have already reordered Avenova. This is significant as we are just launching this product and more than a quarter of those using Avenova are now on at least their second bottle. The second source of Avenova sales is prescription orders that are filled by retail pharmacies that are served by distributors. We saw 145% growth in orders through our distribution partners in the second quarter compared with the first. And the third source of sales is organic growth, in which our orders have come in through our Avenova.com website or through our insight sales organization. Sales from this source increased 32% sequentially. These are very encouraging metrics and as Ron discussed, support an accelerated plan to expand our sales organization. We are well on our way to increasing the number of medical direct representatives promoting Avenova 250 by the end of September, up from 35 reps currently. Each of these territories represent new geography and our major metropolitan areas. We have already identified new representatives from an exceptional talent pool of candidates and are in the process of extending offers to fill these physicians. The representatives being hired are experienced, having buy and bill and significant time in territory calling on ophthalmology and optometry. We believe 50 direct sales reps as the optimal number of medical direct sales representatives, promoting Avenova. With these new hires, we will be able to reach the approximate 20% of physicians responsible for approximately 80% of potential market opportunity. Our sales organization is rounded out with one national sales manager and five district managers. We are working diligently to improve upon our early sales success by replicating tactics that are producing results. We track each day by market and by rep, which allows us to duplicate [indiscernible] that work in one market to other markets. I want to reiterate that a vast majority of ophthalmologists and optometrists carrying Avenova are selling one bottle, which is one month supply for $30 to $40. Avenova is a private pay product and is not reimbursed by third party payers and this price is in line with the patient’s copay on a covered prescription for a branded pharmaceutical product. We also continue to raise awareness through collateral materials that feature testimonials from highly respected ophthalmologists and optometrists. We placed full page ads in six of the top trade journals in August. We are also raising visibility through our presence at 10 industry conferences this year, including the American Academy of Ophthalmology and the American Optometric Association Conference, numerous expo, vision expo meetings nationally and state societies and dinners within sales territories. Additionally, we are holding our own educational and marketing programs. We believe this multifaceted approach to sales and marketing is increasing visibility of Avenova within the actual community and establishing the brand which we are pleased to see early results in the form of increased sales. Ron, back to you.

Thanks, Glen. I now want to provide a brief update on our new high-tech intelli-Case for safely disinfecting contact lenses with hydrogen peroxide. We announced FDA clearance of this product back in June. This is another example of cutting-edge product being developed by NovaBay that targets unmet need in the eye care market and demonstrates our strong commitment to innovation. Hydrogen peroxide is the gold standard for disinfecting contact lenses, but can irritate the eye or fail to kill bacteria if not used correctly. Our new intelli-Case ensures the adequacy of the disinfection cycle and that the contact lenses are safe for insertion into the eye. This could potentially benefit millions of contact lens users. We now have completed package design and we are manufacturing the products for limited test markets in the United States. Before opening this call to your questions, I want to summarize why we are excited about prospects for Avenova. We have a product that works and fields an unmet medical need in the large patient population. We are expanding our sales organization to additional markets where we see greatest opportunity. We have the support of highly respected key opinion leaders in ophthalmology and optometry. And I invite you to go to our website and on the left-hand side take a look at who are the doctors and optometrists and ophthalmologists that are associated with NovaBay. We have distribution to more than 90% of the nation's retail pharmacies through agreement with McKesson, Cardinal Health and AmerisourceBergen. And more importantly, we are a building a solid foundation with increasing sales prescription and re-order rates for continued future growth. Including, I would like to reiterate that NovaBay has a track record for innovation in eye care market with exciting products such as Avenova and intelli-Case. Our business plan focuses the entire company on growing revenue, developing additional innovative products and seeking opportunities to monetize some of our non-core assets, all while supporting our established partnerships. Operator, let’s open the call up for questions.

[Operator Instructions]

While we are waiting for the first question, I’d like to mention that we will be presenting at the Rodman & Renshaw Healthcare Conference being held in New York City, September 9 and 10. If you're attending, we look forward to seeing you there. A webcast of our presentation will be available on our website novabay.com. Also for those of you interested in more information on intelli-Case, I invite you to listen in to the webcast from our June 9 call that features product overview and commentary about the advantages of this product from leading ophthalmologists and optometrists. And also, we have very nice video that we made from our intelli-Case and how it works and that’s also on our website. Okay, operator, we're ready for the first question.

Your first question will come from the line of Ed Woo with Ascendiant Capital.

Yeah, thank you for taking my question and congratulations on the sales ramp for Avenova. It sounds like your sales are ramping up pretty well. How much of it is due to I guess your sales reps becoming a little bit more seasoned and when do you think that they will be fully ramped up before you hire I guess a new wave of new sales people?

Glenn, would you be able to respond to this question?

Sure. To answer your first question, we do believe that the reps are improving in their abilities to sell the products as they gain experience with it. The second thing, it is an integral thing. We are doing a better job now of picking candidates for the sales openings that will do a good job. So the combination of the two are really helping drive sales at a faster pace. Again we are just eight months into the launch, so it’s a little early to make determinations on when they will all be fully functional, if you will.

Great. And I know previously that you mentioned adding additional products to their product portfolio. Are there any updates to when possibly you guys may be doing that?

So, Ed, we are on track. Obviously, one other product that we are working on is our intelli-Case which will be test marketed hopefully before the end of this year in the United States. We have quite a lot of interest on – with intelli-Case from not only the US doctors, also internationally. And we are also – we’ve mentioned publicly that we are working on an Avenova night cream and that’s coming. We hope to be able to begin manufacturing before the end of the year and perhaps launch early part of 2016. So those are couple of products that I can mention on the phone.

Great. Then just on a housekeeping question, in terms of your gross margin, it is very good to see the high uptick. Without giving like guidance, what kind of rate of growth do you think that we should see longer-term in terms of gross margin for Avenova?

We think, Ed – that’s good question. Over time, we expect traditional pharmaceutical grade margins here. As Avenova grows more and more as a percent of our sales base, those margins we expect to go up.

Economy of scale will kick at a little bit more as we produce more and market more.

Great. Well, thank you for answering my questions and I wish you guys good luck.

Our next question will come from the line of Jason Kolbert with Maxim.

Hi, Ron, I would like to understand where the quarters go from here. So, can you talk a little bit about the dynamics of what it took to hit that sales number and help me understand the dynamics of how much of that business will be repeat business, how much of it represents inventory in the channel and what’s it going to take for that number to continue to grow? Thanks.

Tom? Tom Paulson : Yeah, Jason, obviously a good question. Well, we look effectively at 35 reps that are in the field now and obviously the 35 we didn’t -- was not the total number every day of the quarter. So now that we have got 35 in the field and growing to 50 shortly, that’s the main driver as roughly 80% of our sales are right now buy and bill, 20% prescriptions, clearly the big driver is buy and bill and when we get those 50 reps in the field by the end of September, we should obviously hope for some sales growth there. So as our scripts continue as Ron mentioned, on the other hand in addition to buy and bill, scripts tripled – more than tripled first quarter to second quarter, so that will hopefully even take out a more dominant position in our sales ramp as ophthalmologists are more apt to prescribe rather than actually sell product in their office, that will become a bigger and bigger portion of our sales. And Glenn can speak to really what percent we expect each to be in our business.

Sure, I mean, it’s hard to put a number on that because we have started out so strong with buy and bill and we know this is the ideal market for optometrists. Also, we also know that buy and bill is not ideal for most ophthalmologists, they prefer not to sell things, like those out of their office, they prefer write prescriptions. And as you probably know, ophthalmologists per capita write a lot more prescriptions than optometrists per capita. So as they begin to grow and we believe there are feeling this really strong growth in prescriptions and at some point prescriptions will equal buy and bill and probably exceed buy and bill. Again when in the future that happens, we are not really sure but that seems to be the trend.

Glenn?

[Operator Instructions] Your next question will come from the line of Robert Lieber [ph] with Aegis Capital.

Good afternoon and congratulations to the whole team on the performance this quarter. My question has to do with the usage you’re getting and whether it’s the mild patients or the more severe patients and how the compliance is in terms of whether they are using it every day or as needed or if there is any kind of use patterns that you’re seeing?

So I will try to respond and I’d like to Glenn also to chime in here as well. Basically, Robert, according the guidance by the American Academy of Ophthalmology, whether you have mild, moderate or severe, you must have an appropriate lid hygiene, so NovaBay’s product Avenova falls in that category. So whether you have mild, moderate, severe, now the patient might come in with a very severe blepharitis and the doctor might recommend systemic antibiotics, essentially a course of acetomycin or a course of some ciprofloxacin, something to knock essentially the infection down and potentially even anti-inflammatory like prednisone or that type of thing. But along the way they would also want you to do lid hygiene. So if you come in with a mild blepharitis, they might not require systemic antibiotic, but they would require hygiene, so mild hygiene. So hygiene is really part of all of those categories. Once the patient is stabilized, then we recommend they continue on that hygiene regimen, Avenova daily-use and stay on Avenova daily-use. And we have seen patients that basically stop using Avenova within weeks, they end up having problem again. So this is very much we call it the dental model and this has been become very popular in ophthalmology and optometry that dental model, which really compares your eyelid and your Meibomian gland to caring for your teeth. And they talk about 100 years ago, nobody brush their teeth and almost everybody lost their teeth. Today, you brush your teeth, you have good hygiene, you maintain your teeth. And Meibomian glands are very much like this and managing blepharitis is very much like this. And Glenn, could you give us your take on this?

Yeah, Ron, just to reiterate what you said, we are finding that most doctors are getting their best results when patients maintain on the product. We recommend twice a day with the product. If the case is mild enough, some patients are getting by with one-time usage a day. But really twice a day seems to be what works best and I just want to reinforce what Ron said, many patients who try this product and have good results then stop using it, because they start feeling good and variably their signs and symptoms return, because remember these two conditions, blepharitis and dry eye, you don’t cure them, you can only manage their condition. So they are chronic conditions that never go away and Avenova seems to be the ideal way to really to mitigate some of the signs and symptoms that go along with both of these conditions.

Does that answer your question, Robert?

Yes, thank you very much.

Your next question will come from the line of Greg Allen with Tri Marketing Group. Greg, your line is open. The question has now been withdrawn. There are no further questions. Speakers, please proceed with your presentation or any closing remarks?

Thank you once again for joining us and for your interest in NovaBay. I trust we have conveyed to you our excitement about NovaBay, Avenova and intelli-Case and about our focus as the leading innovator in the eye care market. We look forward to update you on our progress during our next quarterly call. Have a wonderful day.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.