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

Ed Woo - Ascendiant Capital Michael Bardakjy - The Geneva Group

Welcome to the NovaBay conference call. [Operator Instructions] 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's financial results and business update. Joining me 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 time-sensitive information as of this date of the live broadcast March 3, 2016. 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 afternoon to everyone, and thanks for joining the call. I'm pleased to report that Avenova sales for the fourth quarter reached a record of $1.6 million, representing growth of 41% from the third quarter. We also achieved substantial gains in various metrics that indicate we are building a strong foundation for future commercial Avenova success. Importantly, we have implemented our newly highly-focused strategic plan and are continuing on a path to reach positive cash flow from operations by the end of 2016, and ultimately to achieve sustained profitability and stability on our balance sheet. Our solid quarter four performance capped off a highly productive first full year of Avenova commercialization. Avenova sales grew significantly in each successive quarter throughout 2015, and we ended the year with sales totaling $4 million and we attribute our early success to several factors. Among these, we executed on our comprehensive sales and marketing strategy, aimed at creating visibility and acceptance by eye care specialist. Our work has resulted in Avenova being available in 90% of the retail pharmacies across the U.S. The strategy clearly delivered results in the early launch phase. Also key to our sales growth is Avenova's unique formulation based on pure hypochlorous acid. Our laboratory testing show that hypochlorous acid has antimicrobial properties, and that it can be used safely on a daily basis. It's important to note that Avenova has no direct competition. Other products that target blepharitis and dry eye contain soap and other bleach particles. We believe our pure, safe formulation, and most importantly its effectiveness make Avenova the product of choice for eye care specialists and their patients. Its effectiveness is borne out by the increasing number of patients that are refilling their prescription, and the feedback that's received from both our physicians and consumer themselves. Additionally, approximately 67% of all prescriptions are now being covered by health insurance plan. So the combination of the patient and physician testimonials that attest to its effectiveness with continual regular use, growing insurance coverage and the product’s utility in treating not only pre and post-surgical settings for Lasik procedures and cataract removals, as well as for retinal injections and in managing contact lens intolerance, point to a product with an extremely bright and robust future. Please remember that we estimate the collective U.S. market for all indications at about 41 million patients, providing ample opportunity for growth. On last quarter's call, we introduced our plan to increase efforts to grow our prescription business, while continuing to support product marketing to eye care specialist for in-office sales. To that end, I am pleased to report that our fourth quarter sales into our professional or ophthalmology distribution network increased by 49% compared with the prior quarter. Before, I turn the call over to Tom, I want to discuss some recent changes in our marketing strategy that we expect will ultimately improve our revenues. First, having reviewed patient usage, we found that the Avenova 40mL bottle, which had been our standard size, was inadequate for 30 days of twice daily usage. To address that issue and satisfy patient needs, we have now introduced an 80mL size and expect to be selling only the 80mL size into the ophthalmology channel by the end of the first quarter. Second, under our newly implemented value pricing strategy, Avenova is priced to reflect the market value and the cost savings it brings to managing the care conditions, such as blepharitis and the resulting dry eye. The cost savings are reflected through fewer office visits and replacing the more expensive therapies, such as antibiotic and steroid prescriptions currently being used. We also recognized that not all medical plans cover Avenova and some medical plans have high co-pays. To increase patient access to Avenova, we introduced the rebate program to help patients cover the cost of their prescriptions. Patients receive a rebate voucher either from their doctor or online that is then presented to the pharmacy. The amount of the rebate the patient receives is determined by their specific insurance plan and co-pay features. We have found that these rebates are having their desired impact, as consumer's out-of-pocket expenditure is continuing to be fairly consistent with their historical experience. The company will began to have a revenue benefit from this approach, after distributors sell through their product inventory purchased at the lower per unit price last year. The lower price inventory is expected to be out of the system by the end of the current quarter. And looking at revenues, for the first quarter we have some moving pieces in terms of those rebates and lower price inventory, but what we do know is that approximately 67% of prescription filled at pharmacy are reimbursed by medical plans, and reimbursement continues to grow significantly. The 80mL size of Avenova is already being ordered and sold in pharmacy channel, and we expect complete transition from the 40mL size by the end of the first quarter. As a result, we anticipate this pricing strategy will have a significant positive impact on our revenues, beginning with this year's second quarter, as was planned in reaching our goal of achieving positive cash flow from operation by the end of 2016. So now I'm going to ask Tom to review our financial results. Tom.

Thank you, Mark. And I'd like to add my thanks to those participating on today's call. I'll start my review by some operational highlights from the fourth quarter. Given the high growth of Avenova sales since its commercial launch, I'll be reviewing several key metrics on sequential quarter basis, as we believe this is the most meaningful way to track our progress. Comparing the fourth quarter of 2015 with the third quarter, one, our distributor, McKesson, Cardinal Health and AmerisourceBergen reported a combined prescription volume increased 49% to approximately 21,000 prescriptions. The number of retail pharmacies ordering Avenova increased by 29% to 3,500, and this represented in all 50 states. Third, we increased the number of optometrists and ophthalmologists purchasing Avenova for direct sales in their practices by 29% to 2,600 with a 41% reorder rate. And fourth, data from independent prescription tracking services show a fourth quarter increase of 77% in the total number of prescriptions filled at retail pharmacies. Turning to our fourth quarter financial results. Sales of Avenova reached $1.6 million, a 41% increase, as Mark mentioned earlier. I want to mention that we may have benefited from a surge of Avenova orders in the month of December that could be attributed to patients having satisfied healthcare coverage deductibles and expiring [indiscernible] spending programs. This has a potential effect of pulling some Q1 '16 prescriptions into Q4, but we can't be sure of that yet. Gross margin on total sales was approximately 64%. This was down from 76% for the third quarter due to the impact of an accrual we took for rebates for product already in distribution channel that Mark discussed, but up to 40% for the fourth quarter of 2014. Without this one-time charge our gross margin percentage would have been comparable to third quarter of 76%. Net loss for the forth quarter of 2015 was $4.2 million compared with net loss of $5.3 million for the third quarter of '15. Included in the fourth quarter was a one-time charge of $860,000 related to our corporate restructure. Net loss, of course, would have been down to $3.3 million without this restructuring charge. The per share net loss for the fourth quarter was $1.26 and reflects a 1-for-25 reverse stock split that was effected in December of 2015 to maintain our NYSE market listing. For the fourth of 2015, research and development expenses were $1.2 million. Sales, general and admin expenses were $6.0 million. And we recorded the impact of a non-cash gain in fair valuation of warrants of $2 million. In reviewing our full year 2015 financial results, Avenova sales reached $4 million, as Mark mentioned, for the full year with total net sales of all products at $4.4 million. This was up from $3.3 million compared to 2014. We recorded a net loss for 2015 of $19 million or $6.82 per share, which compares with a net loss for 2014 of $15,200,000 or $7.65 per share. The higher net loss for 2015 reflected increased spending on sales and marketing activities for Avenova, but lower spending on research and development. R&D expenses were $6 million and SG&A expenses were $18.1 million for 2015 compared with $9.5 million and $7.9 million, respectively, for 2014. Also, reported a non-cash gain in fair valuation of warrants of $2.1 million for the year 2015 versus $1.7 million in 2014. Now related to operating expenses, I'd also like to point out that to help ensure we reach operating cash flow breakeven by the end of 2016, our financial plan for this year incorporates over $6 million of expense reductions from 2015 levels. These savings were result of our previously announced restructuring and related expense reductions throughout the organization, primarily in R&D and clinical expenses, but also as well in all administrative areas. These significant reductions combined with growing Avenova sales are aimed at reversing the historical trend of increasing operating losses starting with this first quarter. Operating loss in Q1 is expect to materially lower than Q4, with an expected trend of even lower losses in subsequent quarters with the goal of reaching cash flow breakeven during the fourth quarter and ultimately sustained profitability. Cash, cash equivalents and short-term investments were $2.4 million, as of December 31 last year, and we used approximately $4.5 million in cash to fund operations during the fourth quarter. In the past three months, we secured nearly $6 million of capital infusion with previous investors and several Board members participating in these finances. You should note that the financings were secured without the need for further dilutive terms, such as the need to issue additional warrants. However, we are committed to clearing up our balance sheet and we'll need to raise additional capital to fund our operations this year, while working to become cash flow positive by December of 2016. We are exploring multiple options for financing NovaBay, and will provide greater detail at the appropriate time. Because we are in the foundational phases of commercializing Avenova, our financial guidance for 2016 remains reaching positive cash flow from operations by the end of 2016, by increasing revenues and adjusting expenses appropriately. We expect to see the full impact of our strategic direction when we report 2016 second quarter financial results. Mark, back to you.

Thanks, Tom. As Tom stated, we are building a solid foundation with increasing prescriptions and reorder rates and we expect our momentum to continue. And the reason for that is, first off, we have a product that works extremely well; and secondly, it fills an unmet medical need in a large patient population. We also have a sales organization in place in the markets where we see the greatest opportunity. We have the support of highly respected key opinion leaders in Opthamology and Optometry. We have distribution to reach more than 90% of the nation's retail pharmacies through agreements with McKesson, Cardinal Health and AmerisourceBergen. We are building broader awareness and distribution through our partnerships with Vision Source Network and now ALLDocs, the two largest Optometry networks. We have a new pricing strategy aimed at significantly increasing our per unit revenue. We have an active public relations program, that's reaching both consumers and physicians. And as Tom already said, we are reducing expenses to direct more resources towards the commercial success of Avenova, with the goal, again, of reaching positive cash flow from operations in 2016 and ultimately sustained profitability. We are becoming a very data-driven organization. This approach will ensure the best views of our scarce cash resource in 2016. So our transformation to success, folks, is underway. So with that overview of our accomplishments and our plans, operator, let's open the call up to questions.

[Operator Instructions] And our first question comes from Ed Woo from Ascendiant Capital.

I had a question about the new bottle size. You mentioned it's at a higher rate. What's the price versus the 40 milliliter?

Right. Basically it’s double what we're charging for the 40 mL?

Not quite double.

And you mentioned that it's to meet patients demand for 30 days. So do you still anticipate that it would have the same rate of usage of 30 day supply?

Our doctors are basically advising patients to use this twice a day. We've had some calls relative to people running out and meaning to go back for a second, so we thought that this will certainly address those consumer needs.

And Ed, when we track prescriptions literally one by one, you see the average prescription duration is assumed to be by the physician pretty close to 30 days with the 80mL bottle?

Previously you gave a lot of metrics in terms of how big your sales force is. With the recent reorganization of focus on Avenova, has your sales force, number of people, or strategy, has it changed significantly?

No, it hasn't. Ed, I think at this point in time, we're at 43 sales reps, and I mentioned towards the end of my presentation about being a very data-driven organization in aligning that sales force. We looked at areas of high prescription rates and high writers, all that data is very sophisticated these days. And we place the people in the territories, where we thought we certainly had them the at most opportunity. That being said, we certainly have opportunities down the road to expand on that. And we will, when we kind of see the payback from the people that we currently do have and the opportunity of being able to take each one of these people to breakeven very quickly.

Would you roughly say that most of your sales people, are they pretty well ramped up now or do you think we should see that sometime later this year?

At this point in time, we're comfortable, Ed, with what we've got and where we've got them. But like I said, this is a bit earlier. If we see the ramp up coming sooner and the payback coming sooner, we're not going to be shy about adding appropriately. But all within the overall goal, like I said before, becoming profitable in the fourth quarter of this year.

And our next question comes from the line of Michael Bardakjy from The Geneva Group.

Congratulations on a great quarter. I have a question for you. I'd say probably, four or five months ago, you had about 2,000 doctors online actively using the product. And I see now you're about 2,600, so you've had about 30% increase in about three months?

Right.

What do you guys estimate in order to become cash flow positive or breakeven the number of doctors you must increase to, to get to those numbers.

That's a good question. I think we looked it a little bit differently. We looked at, again, the scripts coming from certain areas, and that's where we put our reps to represent Avenova. From a doctor perspective, we haven't really looked at the data that way. Again, if you will, we're taking the cream of the crop and making sure that we're addressing those writers first. And we'll take it by again, scripts rather than numbers of doctors, I think it's more appropriate for us to look it at that way.

And also on your sales force, how are they treated? Are there quotas involved or is it traditional medical product ways that -- I mean, it is a one product company basically, and I'm just kind of curious as to how the commissions are paid and are there salary plus commissions or under quotas or -- and how is that [indiscernible].

It's a very sophisticated system, again, coming from both big pharma and medical device companies. Rest assured that I think we have a very balanced system, certainly salaried, but it's also highly leveraged based on their ability to meet specific quotas. And we have, again, being able to track scripts by territory by doctor. We have individual quotas, so without getting into a lot of detail relative to calling on some of the key people, first in the territory and how much that business they can garner early and often. So all in all I guess if we were to summarize it, it's a fairly sophisticated system. It is highly leveraged, so performance is expected and tracked in detail.

I know that initially the bulk of the expenses were based upon trying to commercialize the product and ramp up, but I guess, it's now catching up, see the number of people that you have out there based upon the revenue you're producing, so we hope that continues.

That's the goal.

There are no further questions at this time. Please proceed with your presentation or any closing remarks. End of Q&A

I'll kind of wait around, in case there are some other questions. I'd like to mention that Tom and I will actually be presenting at the ROTH Conference on Monday, March '14, at 12:30 PM Pacific time. So for those of you who are not attending that conference in person, there is going to be a live webcast of our presentation available to investors on the Investors section of novabay.com. So operator, if anybody else joining in for a question, if not, I'll check out then.

No sir, we have no more questions at this time.

So thanks all of you for joining us today and for your interest in NovaBay. We are excited about our new path and the opportunity we see with Avenova. And we look forward to updating you on the progress during our next quarterly call. So you all have 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.