Bruce Voss - IR, LHA Mark Sieczkarek - Interim President & CEO Tom Paulson - CFO

Michael Bardakjy - The Geneva Group Ed Woo - Ascendiant Capital

Welcome to the NovaBay First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. [Operator Instructions]. As a reminder, this conference is being recorded May 12, 2016. I would now like to turn the conference over to Bruce Voss. Please go ahead sir.

This is Bruce Voss with LHA. Thank you all for participating in today's call to discuss NovaBay Pharmaceuticals first quarter financial results and business update. Joining me today from management 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 different from any anticipated results. For a 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 May 12, 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?

Yes, thank you, Bruce, and good afternoon to everyone, and thanks for joining the call today. I'm really pleased to report that first quarter sales for NovaBay on a pro forma basis under our new RX channel strategy would have reached $2.3 million that’s a healthy 44% increase from the fourth quarter of 2015. We have also made significant progress in a number of actions that put NovaBay on track to reach our goal of positive cash flow from operations by the end of this year. So in addition to implementing the new prescription channel program that I just mentioned, we made other significant changes to our marketing strategy that create value for our customers, to healthcare system, and ultimately our shareholders. We also announced clinical validation of Avenova’s ability to reduce bacteria that is the underlying cause of blepharitis and finally we closed on the first tranche of financing. We expect this financing when fully funded with the exercise of the callable warrants will provide us with the necessary capital to reach positive cash flow. So now I want to briefly discuss each of these starting with our marketing strategy. On our last conference call, we announced the introduction of Avenova in a new more consumer friendly 80mL size for sale through the third-party distributor channel as we focus our sales force resources on that ophthalmology channel. We have previously been selling Avenova exclusively in the 40 millimeter bottle to all channels. In reviewing patient usage we learned that the 40mL bottle of Avenova was inadequate for a 30 day of twice daily application. Now along with launch of the new 80mL bottle, we introduced the new value pricing model at the beginning of the year that capitalizes on payer reimbursement available on the ophthalmology channel where we found about 90% of Avenova prescriptions are reimbursed at pharmacies for managing the care of conditions such as blepharitis and associated dry eye. This will allow us to deliver higher revenues as well as price protection to consumers through the use of rebate program to those patients with healthcare plans that currently do not cover Avenova or have high co-pays. We clearly see the ophthalmology channel as the primary driver of profitable revenue growth and we now have refocused our sales organization on this specific network. I’m pleased to report we are seeing the anticipated shift in sales mix from Avenova product flow through the offices of eye care professionals for its prescriptions with a substantial increase in sales at the retail pharmacy level versus the preceding quarter. We’re already experiencing the positive impact of our marketing strategy in the current quarter and anticipate increase in the average revenue and margin per prescription as we continue drive sales through these retail pharmacies. This new strategy had a short-term one-time financial negative impact on our first quarter GAAP revenues as we needed to sell-through the lower price inventory while we simultaneously began the rebate program. Now, as a shareholder, here is the takeaway. The consumer continues to pay the same prices before based on the combination of the rebate and their healthcare plan reimbursement. The healthcare systems wins as they have a lower cost and more efficient protocol for treating blepharitis and dry eye using Avenova versus the more expensive antibiotic and steroidal combinations. And NovaBay benefits as well with higher revenues and margins. Now we turn to NovaBay shift in a different direction in the first quarter. The sales force is retrained, yield or inventory has now been cleared from the channel, a rebate system was put into place, tested, and we work through the inherit complications of a complex system at work speed considering that can re-shift the strategy. I am proud of what the organization, what our people accomplished in a relatively short period of time. We grew despite these distractions and I expect stronger growth for the remainder of the year as our people can now focus specifically on gaining new physicians and new growth. As a major shareholder myself, I am committed to these changes and confident in the new NovaBay and only ask for a bit more patience from our shareholders as we redirect the shift. Moving on, I’m pleased to report on a clinical data demonstrating Avenova’s ability to effectively manage blepharitis. Having these data in hand is a key competitive advantage. Now results from a NovaBay study showed that Avenova reduce the bacterial load that is the underlying cause of blepharitis on Ocular Skin Surface by more than 90% within 20 minutes of application. Further it did so without impacting the diversity of bacteria which is important as these bacteria control levels are critical to eye health. In the past, we have shared laboratories studies indicating that NovaBay’s patented proprietary formula of pure hypochlorous acid that is the active ingredient in Avenova is able to control bacteria. And we have many patient testimonials, some claiming relief with Avenova and as little as two weeks after suffering from itching. Inflammation and the crustiness that’s associated with blepharitis. We have also seen strong reorder rates that provide further evidence of patient satisfaction. Now that said, many eye care professionals express the need for clinical validation before prescribing Avenova to their patients. We now have an important piece of that validation. It is highly gratifying to have introduced these very positive clinical results and in all presentation at the well-attended Association for Research in Vision and Ophthalmology Conference last month, commonly known as ARVO. That data is now in the hands of our commercial sales reps across the U.S. Lastly, I’m very pleased to announce that earlier this week, we closed the first tranche what ultimately will be an almost $12 million private placement. We think our shareholders for their approval to move forward with this financing at last week’s Annual Meeting of Stockholders and we think the investors participating in the financing for their confidence in what will become a great commercial organization. This is a major development for NovaBay as the funds from this financing including the exercise of the associated warrants are expected to provide sufficient capital for us to reach positive cash flow from operations by the end of this year. Now I’m going to turn the call over to Tom for a review of our first quarter results. Tom?

Thank you, Mark, and good afternoon everyone and thank you for joining us today. We continue to see good momentum and important growth metrics for Avenova. Among these the total number of eye care practitioners who have prescribed Avenova grew to nearly 5,500, a 12% increase over fourth quarter, with an additional 2,900 purchasing Avenova directly for sale in their practices. In other words, nearly 8,400 practitioners have been actively prescribing Avenova. It’s also important to note that two-thirds of those practitioners have written multiple prescriptions with half of those writing more than five scripts each. Also as Mark mentioned, we are working to shift our revenue mix towards the pharmacy channel which represented 40% of the Avenova sales for the first quarter of this year, up from 29% over the preceding quarter. If we look at this RX channel share on a non-GAAP basis, pharmacy channel sales would have represented 60% of all Avenova sales. Our total net sales for the first quarter of 2016 on a GAAP basis were $1.7 million and $2.3 million on a non-GAAP basis significantly up from the $538,000 reported in the first quarter of 2015. In previous quarterly calls -- as in previous quarterly calls we are providing Avenova sales on a sequential basis, Avenova sales for the first quarter of 2016 were $1.4 million and this compares to $1.6 million in the fourth quarter of 2015. This sequential decline is based on, as Mark mentioned earlier, the rebate program that we discussed that honored on rebates on products we previously sold to our distributor channel at lower 2015 prices. Importantly, we cleared all of this lower priced inventory from the pharmacy channel during the first quarter; field tested a new rebate system, and worked through the start-up issues on a real time basis. Among the other factors that impacted first quarter sales include the traditional seasonal impact from a surgeon prescriptions in December that relates to patients having satisfied their insurance deductibles for the year and taking advantage of expiring flex spending programs. Additionally with the commercial launch of Avenova little more than a year ago, we are just beginning to understand trends such as the seasonality. We note that some other prescription products for managing chronic conditions such as blepharitis show very similar seasonal sequential declines in the first quarter as consumers work through their deductibles. That said, at this time, we are seeing a positive trend with prescriptions in the early part of the second quarter with a strong conversion rate to our new 80mL size. Moving on gross profit margin as a percent of total net sales were 64% for the first quarter of 2016 compared to 72% for the first quarter of 2015. The decline was primarily due to the mix of products between Avenova and NeutroPhase during this time period. If we look at it on a non-GAAP basis, first quarter GPM percent would have been 76% on total sales and 85% on Avenova sales. The net loss for the first quarter of 2016 was $5.1 million or $1.24 per share and this compares with a net loss of $4.6 million and $2.13 per share for the first quarter of 2015. The higher net loss from 2016 was a net result of a $1.2 million increase in sales and marketing expenses as we increased the size of our commercial sales organization and the impact of recognizing on a non-cash loss on the increase in our fair market value of our warrant liability. This was partially offset by higher product revenue and gross product margins. Alternatively I add more color to our first quarter operating expenses and how they are not representative of the quarterly run rate we expect for the rest of this year. As a direct result of the restructuring and cost reduction programs implemented last year, R&D expenses for this year’s first quarter decreased by 41% or $650,000 to $933,000 for this quarter. However, considering one-time expenses related to the closeout of R&D program such as UCBE and Conjunctivitis, R&D expenses would have declined by an additional $680,000. In other words, R&D expenses for Q1 would have declined by total of $1.3 million from Q1 of 2015. The resulting $300,000 in net R&D expenses for the quarter is more representative of what we expect our run rate to be for the rest of the year. G&A expenses were $1.7 million for the first quarter of 2016 representing an increase of 6% or $101,000 from first quarter of 2015. The increase was a result of additional professional expenses related to accelerating the filing of our 10-K and the closing of our recent financing. In summary then, given that R&D and G&A expenses for the first quarter included nearly $800,000 in expenses unique to the first quarter; we expect quarterly operating expenses to run at a much lower rate more close to $4.5 million range for the remainder of 2016. As of March 31, 2016, our cash and cash equivalents were $1.4 million compared with $2.4 million as of December 31 of 2015. We used approximately $4.9 million in cash to fund operations during the first quarter of 2016. In January, we secured a $1.4 million bridge loan and in February completed private placement raising net proceeds of $2.6 million. Additionally, as Mark mentioned, we received shareholder approval last week to move forward with an $11.8 million private placement. We closed the first of two tranches earlier this week with gross proceeds NovaBay of $7.8 million. The second tranche is scheduled to close on July 31, 2016, for an additional gross proceeds of $4 million. The completion of this financing and with the potential of another $6 million from the sale of related callable warrants we have the necessary funds to reach our goal of positive cash flow from operations by the end of this year. With that, I will turn the call back over to Mark.

Yes, thanks Tom. And let me just summarize for you the key takeaways from this call. I think first and foremost that number one this new strategy is fully implemented and what does that mean. From a customer standpoint, we’re talking about similar pricing to the consumer, so it’s relatively transparent to them. From a healthcare standpoint, look the healthcare system receives more efficient and cost effective treatment for blepharitis, dry eye as well as pre and post-surgical procedures. For us, as NovaBay, and for you, as shareholders, certainly higher revenues and margins. Secondly, I think the pro forma results and the reason we put them in on a one-time basis is really show great future relative to this whole new strategy. And that being said, as I kind of indicated in my remarks, we went through a lot of working through the issues in the first quarter as we implemented the system on the run and again my hats off to the organization for working through that, I think they’ve done a great job, and we’re still able to produce the results that we basically promise. And then the third point is we remain committed to driving the business to a breakeven point before year-end. And with that, with the financing in place, I think it certainly takes away that financing overhang that we’ve been experiencing for the past couple of years. Before I open the call to questions, I also want to welcome Todd Zavodnick to our Board of Directors. Todd has extensive senior management commercial experience in the medical technology, eye care, and pharmaceutical industries. He knows the ophthalmology space well, having held several senior positions with Alcon Labs. And in addition to joining our board, Todd will also serve on the audit and the corporate governance committees. So I’m really happy to have Todd on board. So in final here, this is a exciting time at NovaBay, when we report our second quarter financial results, we expect to see the fuller impact of our new strategic direction in marketing initiatives and a truer picture of our cost reduction measures. The team at NovaBay was able to execute on many developments in a very rapid timeframe keeping us on track to reach our full-year financial goals. We expect in the coming quarters to unveil new marketing and public relations initiatives to further drive Avenova’s commercialization and to grow sales in the largely untapped target market of an estimated 41 million Americans. So I look forward to continuing to work with our people to create a great company around the promise of a great product Avenova. Thanks for your time and patience and operator please open up the call for questions.

[Operator Instructions]. We have our first question from the line of Michael Bardakjy with The Geneva Group.

Hey guys. Congratulations on the great quarter. I know there has been a lot of shifting and maneuvering and you guys are doing a fabulous job, I commend you.

Thanks.

Just have a couple of questions, you’re welcome. What’s the status of the non-optical assets, you know the catheter issue, and then, also you were doing a -- there was another product that involved timing of the contact lens cap that seem to be an exciting little thing that just haven’t heard anything about it, is that shelved or where do you guys stand on those assets?

Yes, Michael, good question. Those assets are valuable assets and as we said with the new strategy, we’re going to be micro-focused on the Avenova opportunity. That being said we’re certainly looking and we’ve stated before we’re looking to monetize potentially those assets on behalf of again the shareholders and we’re going to continue to look to that point and personally I’m very involved in that side of it, I guess from a business development standpoint and probably more to come as the year goes on but again right now our focus is on Avenova and in monetizing those specific assets that you’re referring to.

Terrific, thank you, Mark. My next question is there was some talk last year about possibly getting Avenova into the Chinese market in addition to the NeutroPhase; is that still actively being pursued?

Yes, it’s still being actively pursued. I think, as we spoke of in previous quarters, certainly overall we’ve been disappointed with the Chinese, if you will marketplace at this point. There are many reasons for that that are very similar to some of the experiences we have in the U.S. lot of things relative to regulatory impact and regulatory approvals and then going from home what’s on a hospital or hospital basis. I think those issues were underestimated when they introduced NeutroPhase originally into the Chinese market. And I think realistically I think on last call, I mentioned that in the near future, we’re not -- we haven’t really in our projections included anything relative to the Chinese marketplace in terms of contributing to our short-term growth. I still think it’s a great long-term potential. I travelled out there recently to get kind of a up-to-date business plan and they’re putting a lot of effort and money into it. In China, I think someday it will be very lucrative for us but again short-term we’re not looking for anything and have not really projected anything as we’re moving forward here in 2016.

Great, thanks. One final question, I know towards the end of the year, you had approximately 2,000 doctors as customers; and is that number increased substantially since the last quarter of last year?

Number of doctors.

Well we have reported, as I mentioned really 8,400 practitioners that have actively prescribed the product. About 5,500 have prescribed the products, some more than five times and then another 2,900 have bought the product directly for their practitioners.

Yes that’s what I was referring to. The actual doctors had a little bit of marketing at their offices, it was about 2,000. So basically what you’re saying you’ve increased that by more than 30% --

Right.

In pretty much the last two quarters which is terrific I think.

Yes, I think that being said what we’re looking to do is increase the utilization of those specific doctors and again with this new strategy, typically it takes somewhere between six and eight calls to really educate both doctor and staff and so. At this point I would say a lot of people are using it for few patients to see what the results are; our top doctors are prescribing it up to four times, four times a day for patients. So we see back to array at this point as we just again this is kind of new to the marketplace.

Yes, I mean I have to tell you, I use the product and that’s really, really helped me dramatically but it also has helped other things and unfortunately the off-label prescribing probably should be pursued but there is a fine line how you can market this stuff but --

Well Michael thank you, thank you very much for your questions. I think we need to move on to some of the others. Thanks again.

I’m sorry, okay, great. Thanks.

Our next question is from the line of Ed Woo with A Capital.

It’s actually Ascendiant Capital. Thanks for taking my questions and congratulations on getting Todd to the board of directors. Just curious I know Mark you’ve been here a little bit of time but do you feel that overall the management team that you have in place should allow you guys to execute as you had plan or do you see that there was some more fine-tuning that you guys may have to do over the near-term?

That’s a great question, I think both in terms of in building an ideal team and ideal company, you’re always looking to see where you need to putting the right people in place and upgrade where necessary. I think if you just take a look for instance over the past half year at our board, we’re basically can I end up with four new people on the board and I think it starts there in terms of the leadership. And I think we’re pretty lean organization at this point in time and from a sales perspective and that’s where most of our people are out in the field, we have 43 reps and four managers and that’s an area that we continue to demand if you will performance and turnover based on the quality of performance. And as we go forward to your part and I know, I’ve done this historically, you’re constantly looking to upgrade your organization as we grow, we’re going to need new people and we will continue to look for good quality people to come on board with this exciting effort going forward.

[Operator Instructions]. And I see no questions in the queue at this time sir.

Okay, well thanks again for joining us today and your interest in NovaBay. We’re certainly excited about our new path, the opportunity that we continue to see now with Avenova and we’re really looking forward to updating you on our progress in on our next quarterly call. So thanks again and have a good day.

Thank you.

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