Jody Cain - LHA, IR Mark Sieczkarek - Interim President and CEO Tom Paulson - Chief Financial Officer

Ed Woo - Ascendiant Capital Michael Bardakjy - Geneva Group Yale Jen - Laidlaw & Company

Welcome to the NovaBay Third Quarter Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded, November 19, 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 all for participating in today’s call. Earlier this morning NovaBay Pharmaceuticals issued a press release announcing a plan restructuring and its financial and operational results for the third quarter of 2015. The release is available in the News and Event section of www.novabay.com. Joining me this morning from NovaBay Pharmaceuticals are Mark Sieczkarek, Interim President and CEO; and Tom Paulson, the company’s CFO. 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 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 information that is accurate only as of the date of the live broadcast November 19, 2015. NovaBay Pharmaceuticals undertakes no obligation to revise or update any 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 Mark Sieczkarek. Mark?

Thank you, Jody, and good morning to everyone, and thanks for joining the call. I hope that you all had the opportunity to review this morning's press release, in which we announced the new path forward for NovaBay Pharmaceuticals. Our plan is to restructure the company to focus on the significant commercial potential that we see with the prescription Avenova Lid and Lash Cleanser. With our new commitment to growing sales and reducing expenses, we are setting in motion a plan with the all important goal of reaching positive cash flow from operations by the end of 2016. I'm pleased to have been named the Interim CEO to lead this effort and I look forward to leveraging my experience with successful product launches to support the commercialization of Avenova. Many of you may know me from my past CEO positions at Solta Medical, as well as Conceptus during the commercial launch of the Essure permanent birth control device. Before that I was Senior Vice President and President of Bausch & Lomb’s total commercial pipeline in both Europe and the Americas, where I lead the multinational national commercial launches of several leading ophthalmic products. Now I joined the NovaBay Board of Directors in early 2014, expressly to lend support for the commercial planning for Avenova. This April, I was asked to assume also the Chairman position. So before we discuss the go-forward proposition, I want to take this opportunity on behalf of my colleagues and my fellow Board members to thank Ron Najafi for his many years of service and dedication to our company. It was Ron’s vision that led to the development of Neutrox, which is our proprietary pure hypochlorous acid used in Avenova. As founder of the company, Ron has been a driving force behind NovaBay and the commercial launch of Avenova, and we greatly appreciate his pledge of support to facilitate a smooth transition. Now our work to reduce expenses will be very targeted and focused on seizing clinical development and other R&D activities, as well as looking at all other operating expenses. Our goal is to achieve approximately $4 million in annual savings. For development programs currently underway we will review options at some point in the future. However, among the more difficult steps associated with the -- restructuring is our decision to reduce our workforce. So we are taking these measures beginning immediately to allow us to direct more our limited resources towards Avenova commercialization activities. We believe that through the combination of continued revenue growth and expense reductions we will be on a path to reach positive cash flow from operations again by the end of 2016 and ultimately achieve sustain profitability. NovaBay has never turn to profit and we are committed to changing that. With Avenova as a pure-play, we see an exciting opportunity for NovaBay and for our shareholders. Our commercial progress has been exceptional with sales increasing 10 fold over the course of one year. Avenova effectively has no direct competition. There is no other product on the market that is formulated with pure hypochlorous acid. Laboratory testing shows that hypochlorous acid has antimicrobial properties and can be used safely on a daily basis. Other products targeting the same indications contain soap and bleach particles. So given a choice, we believe and not only do we believe but we are seeing that eye care specialists and patients choose Avenova. Again, the market for Avenova is large. There is 30 million Americans that suffer from blepharitis, which is typically chronic and meibomian gland dysfunction that’s associated with dry eye and that is also largely untapped. It is very encouraging to see the benefit Avenova brings patients who have suffered for years with itching inflammation and irritation associated with these chronic conditions. With daily use, Avenova successfully begins to manage blepharitis within one to two weeks. This is an important aspect of our commercialization. As I mentioned earlier that blepharitis is chronic and we are finding that patients need to use Avenova regularly to sustain the benefits. To that end, I’m pleased to report that we are seeing growth in reorders. Avenova is also finding use as a pre and post surgical sending for Lasik and cataract surgeries and also for retinal injections and in managing contact lens intolerance. All told, we estimate that the total U.S. market is over 40 million patients. I spend the last weekend at the AAO and spoke to many surgeons were having success using it pre and post refractive and cataract surgeries. So, we are really excited about entering that part of the market as well. So, we are proud of our third quarter sales for Avenova that top $1.1 million for the first time. Now that’s a 39% increase from our second quarter. And while clearly, we are just scratching the surface, we are seeing continued momentum in sales and key uptick metrics, indicating we are building a solid foundation for continued success. Now because I have been both the Director and Chairman of the company for over a year, I’m very familiar with our go-to strategy and oversight role and its developments. I believe our strategy is a solid one, yet there is always room for execution on improvement. We need to work on improving our execution. In the coming days and weeks, I will be taking careful look at all we are doing, all we should be doing and all we can do. I look forward to keeping you all pries of our progress and our results. So with that, I’m going to ask Tom Paulson to review with you the quarterly financial results. Tom?

Okay. Thank you, Mark. And I’d say my thanks to those participating on today’s call. I will review highlights of our performance, staring with some operational highlights for the third quarter. NovaBay is a high-growth company with the recently launched lead product. So looking at our results on a sequential quarter basis is the most meaningful way to track progress. Comparing the third quarter of 2015 with the second quarter, we are happy to report we increased the number of optometrists and ophthalmologists purchasing Avenova for their practices by 26% to more than 2,000. Our distributors at McKesson, Cardinal Health and AmerisourceBergen reported that combined prescription volume more than doubled to more than 14,000, a 119% increase. Also the number of retail pharmacies ordering Avenova also more than doubled to almost 2,800, a 145% increase and they represented all 50 states. IMS data confirms that the total number of prescriptions more than doubled as well. Reorders continued to grow and now it represents 53% of all monthly orders. Our prescriptions increased each month as the third quarter progresses. Now turning to our third quarter financial results. Sales of Avenova reached $1.1 million, with total net sales $1.2 million. Gross margin on total net sales was approximately 78% for the quarter. Gross margins for the second and first quarters of 2015 were approximately 75% and 64% respectively. So this improvement that we reported for this quarter reflects increased sales of our higher margin Avenova products. We recorded a net loss of $5.2 million, or $0.07 per share for the third quarter of 2015. This compares with the net loss of $4.2 million, or $0.08 per share for prior year period. The increase in net loss reflects our high 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 $4.4 million for the quarter and R&D expenses $1.9 million. Now turning to our year-to-date financial results. For the first nine months of 2015, Avenova sales were approximately $2.4 million, with total net sales of $2.7 million. This is up $2.2 million compared with the first nine months of 2014. The net loss for the first nine months of 2015 was $14.8 million, or $0.23 per share, compared with a net loss of $10.7 million, or $0.22 per share for the first nine months of 2014. The increase in net loss reflects higher spending due mainly to increased sales and marketing activities, again partially offset by lower R&D spending. R&D expenses were $4.8 million year-to-date and sales, general and admin expenses were $12.1 million. Cash, cash equivalents and short-term investments as of the end of September were $3.4 million, compared with $5.4 million at the end of 2014. We used approximately $4.1 million in cash to fund operations during the third quarter of 2015. In October, we raised the proceeds of $2.3 million in a public offering. However we will be required to raise additional capital to fund our operations in 2016. While we tend to raise additional capital to fund our operations and meet our ongoing obligations, with the intention of becoming cash flow positive by December 2016, we’re exploring multiple options for financing NovaBay and we will provide greater detail at the appropriate time. I also want to mention that we filed a proxy statement with the SEC announcing our intent to hold a special meeting of stockholders on December 11. The purpose of the meeting is to secure stockholder approval for proposed -- proposal to effect reverse split of all of our outstanding shares of common stock by a ratio in the range of 1 to 15 to 1 to 25. We believe that reverse stock split may be necessary to maintain the listing of our common stock on the NYSE market. And it could improve the marketability and the liquidity of common stock. If this proposal is approved by our stockholders, NovaBay Management and the Board will work in concert with our banking advisor to determine the split ratio and the timing that makes the most sense. We encourage you to read our filing with the SEC, which is available on sec.gov. The bottomline is that we expect sales of Avenova to continue to increase. Because we have the foundational phases of our commercialization, it is not prudent for us to provide financial guidance at this time. We do caution that we expect the rate of sales growth of course to slow based on the larger and larger sales base we're now working from. Mark, back to you.

All right, Tom. Thank you. Before I open this call to your questions, I want to leave you with a few thoughts. First of all, I want to assure our investors that we’re going to continue to support our partnerships in the U.S. and international markets for both Avenova and NeutroPhase. We definitely are excited about ramping sales for Avenova and believe this new structure for the organization not only will focus our efforts strictly on commercialization, but it will be the most efficient use of our scarce cash resource. So to simplify the complex giving three goals for the organization; number one, drive Avenova growth; number two, eliminate any expenses that are not related to Avenova growth; and number three, raise and preserve cash. So with that operator, we’re ready for questions.

[Operator Instructions] Our first question is from Ed Woo with Ascendiant Capital.

Yeah. Thanks for taking my question. I had a question, you said that you are going to reduce your workforce. Is that going to impact the salesforce for Avenova in anyways?

No. I think initially what we are looking at certainly is the clinical effort for the R&D effort that are inherent to this operation, Ed. And beyond that I think we’re going to certainly look at our salesforce more from a standpoint of the efficiency and what we can do add to that efficiency. There is certainly couple of ways to skin the cat and to create demand in the field and to help our salesforce. So again as I said we’re committed to driving Avenova sales. How that will play out over the next several weeks is yet to be determined. But in terms of cutting strictly on a numbers basis that right now is not top of mind.

Great. Another question I have is, you obviously have a very accomplished backgrounds with many of our company’s divisions you work with, being acquired. Is there any plans to possibly explore that option in the next 12 months?

I think, you know look at this point in time, by making this what I referred to is pure play. I think that’s the best thing not only for our organization driving sales but also for investors in the longer term. Certainly, I'm sure people will be looking at Avenova and its continued growth but at present time, selling Avenova, selling NovaBay is really not top of mind for us. It's really restructuring this organization and get us focused on that growth. And I think the return then for shareholders will come very naturally.

Great. Well thank you and good luck.

Thank you very much, Ed.

[Operator Instructions] Our next question is from Michael Bardakjy with Geneva Group.

Yeah. Hi, Mark. Congratulations and good luck to you.

Thank you very much.

Got a question. Back in November you announced that you completed a Phase 2 study on your catheter product. What was the thinking behind that? And do you have any plans on showing that asset?

Yeah. That’s a great question. We had talked about monetizing our assets. And again, we had some continued efforts going toward the UCBE Clinical that you're referencing. We do have some results from the 2a -- the Phase 2a plan. And those, we’re going to be collating in the next couple weeks. And at that point in time again from our standpoint, we’re certainly putting the product, if you want, on the shelf. But that being said, I think there's commercial appropriateness for possibly in other group other than NovaBay. And we’re always going to look to see what value those assets can bring to the shareholders. But again, we’re not going to put anymore of our own clinical efforts into it at this point in time.

Yeah. We’re taking you to the point. I think as we announced in that release too where its had a nice stopping point, where we have this Phase 2b data completed and the package will then be -- should we say, more marketable to an interested party.

Right, right. Thank you. I have another question regarding Neutrox and the Asian business side. I see there's really not a lot of circles being -- hoops being jumped with that market, is that due to the problems that the Asian markets are having or is it something other than that going on why sales are not so robust?

That’s a good question. I think most of our issues there are gaining regulatory approvals. I think the biggest market that you're referring to is China at this point. And it’s been a slow build as a lot of the marketing has been kind of one-off as they await final approval from the FDA. So we don't anticipate nor should you, a lot of growth in the next year from those markets.

Right. Okay. My final question is regarding a product you have in the pipeline that when you announced it, it did sparkle lot of, I would say growth in the price per share with the intelli-Case. Where do we stand on that and what can we look forward as a shareholder here?

Yeah. Another one -- once again, we are just finishing up, collecting some data on that. We again will entertain interested parties in that. Again, the key word around intelli-Case as well as UCBE has always been the faster monetization of those assets. We are going to continue to look for partnerships but again, we are not going to at this point in time going to be spending any of our scares cash on furthering that assets.

Okay. Thank you very much. Again, good luck to you in your new endeavors and I’m sure you are hoping as well as we are hoping that we can get our shares more fully valued than where they are right now.

Absolutely.

[Operator Instructions] Our next question is from Yale Jen with Laidlaw & Company. Please go ahead with your question.

Yale.

Yale Jen, your line is open.

Hello. Can you hear me?

Yes.

Yes. Hi, Yale.

Hi. Good morning. Sorry about that. I just put on mute at a moment. You mentioned that you intended to get cash breakeven by next year or end of next year. What level of sales you anticipate or you modeled to enable you to achieve that goal?

Yeah. I think, Yale, welcome to the call.

Thank you.

I think, Tom, has indicated earlier in his remarks at this point in time it is too early to really give guidance relative to those sales. Again, we’re going to assess like the total P&L, we’re going to take a look at the trends. We’re also going to, like I said, hopefully put in some more demand type programs into place. And we haven't -- with me starting today we haven't really had the time if you will to see what the -- that total impacts going to be. So I think at some point in time, no promises, but hopefully we will be able to provide you with a little bit more guidance relative to that specific sales growth.

Okay. Great. Thanks.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Well, folks, thank you again for joining us this morning and for your interest in NovaBay. We’re certainly excited about this new path and opportunity that we see specifically with Avenova. And we look forward to updating you again on our progress during the next quarterly call. Wish you all a good day. Thank you.

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