Jody Cain - Investor Relations, LHA Mark Sieczkarek - President & Chief Executive Officer Tom Paulson - Chief Financial Officer

Ed Woo - Ascendiant Capital Jason Kolbert - Maxim

Welcome to the NovaBay Pharmaceuticals Second 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 August 11, 2016. I would now like to turn the call 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 second quarter financial results and business update. Joining from NovaBay are Mark Sieczkarek, 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 time sensitive information that is accurate only as of the date of the live broadcast August 11, 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 on our exceptional quarterly financial performance with record revenues, expanded gross margins and reduced expenses. These results attached to the early success in executing our new marketing and sales strategies as well as focusing of resources late last year Avenova commercialization. Importantly, we remain on track to achieve our goal of positive cash flow from operations by the end of 2016. Let me start by sharing some highlights on our continued progress with Avenova commercialization. First, the sales of Avenova reached $2.6 million for the quarter, which is up 220% from last year’s second quarter and up 89% from this year’s first quarter. By the way, this puts us on a more than $10 million annualized run rate. Secondly, our quarter two Avenova sales $1.7 million or 65% came from retail pharmacies as we directed more of our sales and marketing activities on the ophthalmology channel. Indeed, Avenova sales from this channel are up threefold over the preceding quarter, which to me is the clear indication of tangible results from our new marketing and pricing strategies. Now, the increase in the number of prescriptions and the price per prescription led to improved gross margin on Avenova sales, which reached 85% for the quarter. Now, with this joy, we’re delivering on our expectations for Avenova gross margin to be in line with those typically seen for pharmaceutical products, as we’re quickly approaching to the 90% threshold. And lastly our restructuring and expense reduction measures announced late last year, led to a 50% decline in operating expenses both year-over-year and sequentially. Our new strategy is squarely aimed at driving Avenova product sales to the ophthalmology channel in which consumers fill the prescriptions at retail pharmacies. This is a change from our earlier focus on direct sales Eye Care practitioner offices. We introduced this new strategy in conjunction with the launch of Avenova in the 80 ml bottle as the 40 ml size was proving inadequate for 30 days of twice daily usage. We also instituted a rebate program for prescriptions, filled through pharmacies for consumers with health plans that currently don’t reimburse Avenova or have high co-pays. This rebate program allows those consumers to pay a price for Avenova that is in line with the typical prescription co-pay. Our newly implemented marketing and pricing strategy is a win for all the constituencies. As I just mentioned, consumers win by paying similarly low prices for Avenova regardless of their medical plan coverage. The healthcare system wins by having a lower cost and more efficient protocol for managing eye health using Avenova versus the more expensive antibiotic and steroidal combinations. And our shareholders win through rapid revenue growth and margin improvement, putting NovaBay squarely on a path for profitability. Now, improved Avenova metrics for the quarter flow directly from our ability to execute on our new strategies and I’m very proud of what the NovaBay organization has accomplished in a relatively short period of time. Lastly, I’m exceptionally pleased to announce that earlier this month, we closed the second and final tranche of nearly $12 million private placement. This is an important milestone that provided us with capital to support our commercial growth plans and our quest to hit the important cash flow breakeven goal by year-end. So now, I’m going to turn the call over to Tom for a more thorough financial review of our second quarter results. Tom?

Thank you, Mark, and good afternoon everyone and thank you for joining us today. As Mark stated, we’re reporting excellent growth across the spectrum of Avenova operational fortress and want to start by sharing some highlights on those market share. As in our practice on past quarterly calls, I’ll be reviewing these operational improvements on a sequential quarterly basis as that’s the best indication of our momentum. Of course the most important financial metrics we’re focused on are our sales and cash burn. First, on the sales front as Mark mentioned, prescription sales through the pharmacy channel tripled to 1.7 million, up 201% and represented 65% of all Avenova sales dollars. While direct sales to the practitioners offices channel increased to $914,000, up 12% representing 35% of all Avenova sales. Those of you on our Q4 ‘15 conference call may remember, the split was almost the reverse, 71% direct sales and 29% RX sales. At that time, we stated our target was to reverse those percentages, so we’re pleased to report that almost have been achieved now in only in the second quarter of this year. This significant shift toward the reimbursed pharmacy channel is reflected in the increase in total Avenova sales and the improvement in our gross margin and percent, both of which support our path to profitability and breakeven. Also during the second quarter, and helping the growth of our RX business, we added more than 1,100 new Avenova prescribers. The second key metric of course is cash burn. As noted in our release, Q2 cash burn from operations was cut into half from Q1 and represents the lowest quarterly burn in over three years. Prior to the three year mark, a major part of our cash burn was offset by payments in collaboration revenue from our major corporate partners. In effect, due to the growing Avenova sales and expenses, Q2 burn was the lowest quarterly cash burn since NovaBay became a commercial enterprise, which bodes well for reaching our cash flow breakeven from operations. Now, turning to the financial highlights for the second quarter, we’re providing comparisons with both prior and the preceding quarter again as a reflection of our progress. Our total net sales for the second quarter 2016 reached a record $2.7 million, up 164% from the second quarter 2015 and 55% from the first quarter of 2016. Avenova sales for the second quarter of 2016 reached 2.6 million, also a record. As Mark mentioned, this is a 220% increase over the second quarter of 2015 and up almost 90% from the first quarter of this year. Moving on to total gross margin, as a percent of total sales was 82% for the second quarter of ‘16. This compares to 75% for the second quarter of 2015 and to 64% for the first quarter of 2016, with the increase due to higher sales of Avenova of course and higher average price per prescription. For reverence, gross profit on Avenova itself, the sales grew to 85% for Q2. Operating loss for the second quarter was 2.2 million, an improvement of 55% from the prior year and 52% from the preceding quarter. The year-over-year reduction was due to restructuring and cost reduction measures implemented late last year with our decision to focus our resources on Avenova commercialization. The sequential quarter reduction was due to a number of one-time expenses related to the close out of some R&D programs during the first quarter of 2016. Our operating expenses for the second quarter of 2016 are representative of the run rate we expect for the reminder of ‘16. Reviewing operating expenses by line item, R&D expenses were 278,000, down 80% from the prior year and down 70% from the preceding quarter. These reductions reflect lower spending on clinical trials that are not completed. G&A expenses were 1.3 million for this year’s second quarter, a decrease of 35% over prior year and down 24% from this year’s first quarter. Year-over-year decline was primarily due to our restructuring and cost reduction efforts and the sequential quarter decline was related to one-time charges in the first quarter of 2016. I want to mention that, starting in December, we’ll see a sizable reduction in our rent and utility expenses related to the sub-let of our current office space, office and lab space actually. Our entire NovaBay team is being relocated to a nearby space with a smaller, more economical and better suited to our commercial focus. Sales and marketing expenses for the second quarter of 2016, increased by 23% to 2.9 million, compared with the prior year period, reflecting our focus on Avenova commercialization and more direct sales reps in the field. Sales and marketing expenses for this year’s second quarter decreased 9% from the preceding quarter, which was due to a credit received from our contract sales organization. The net loss for the second quarter of 2016 was 2.7 million or $0.36 per share, this is an improvement from the net loss for the second quarter of 2015 of 4.9 million or $1.84 per share. Our narrowed net loss includes the impact of recognizing 424,000 of non-cash loss on the increase of fair market value of our warrant liability, with no adjustment reported for the prior year period. The net loss for the second quarter, declined by $2.4 million or 47%, from the first quarter of this year. Now turning to our six months results, total net sales for the first half of 2016 were 4.4 million, up 183%, compared with the prior year period due to significantly higher sales of Avenova. I’d point out that the $4.4 million in sales already exceeds our Avenova sales for all of last year. Gross profit margin for the first half of 2016 was 75%, compared with 74% for a year ago. For reference, gross profit margin on Avenova alone was 82% for the first half of 2016. Our operating loss for the first six months of 2016 was reduced by 28% to 6.8 million, reflecting a 59% decrease in R&D expense, 17% decline in G&A expenses. Sales and marketing expenses as you would expect, increased that number by 42%, again due to our focus on commercializing Avenova. Non-cash loss of warrant liability for the first six months of 2016 was $809,000 versus $34,000 gain in the prior year period. The net loss for the first half of 2016 was 7.8 million or $1.35 per share and this represents an improvement from the net loss of 9.5 million or $3.94 per share for the first half of 2015. Reviewing our balance sheet, as of June 30, 2016, our cash and cash equivalents were $3.5 million. We closed the first tranche of almost $12 million financing for gross proceeds of $7.8 million in May. We used a portion of those proceeds to repay $3 million bridge loan that we announce in January of this year and the reminder to continue funding our commercial growth. We closed the second and final tranche of the financing for gross proceeds of 4 million early this month. That transaction brought our cash balance to over $6 million. We used $2.7 million in cash to fund operations during the second quarter of 2016. This is a 50% decline from cash usage in the second quarter of 2015 and the first quarter of 2016 and reflects, better gross margin on higher Avenova sales and lower operating expenses. On a final note, our new marketing and pricing strategies and cost reduction measures are keeping us on track to achieve our financial goal of positive cash flow from operations in December, which we define as GAAP cash flow from operations minus any changes in working capital, assets and liabilities. With that I’ll turn the call back over to Mark.

Thanks, Tom. Now, I just wanted to emphasize several key points that positioned Avenova for continued success. First, our multi-pronged sales and marketing programs are driving sales and support growth in key metrics including the number of total prescriptions, the number of total prescribers and the number of prescribers writing multiple prescriptions. Now, we’re going to continue to experience the positive impact from our new strategies as we increase sales through the ophthalmology channel and benefit from the more lucrative reimbursed pricing. We also have a powerful competitive benefit in Avenova formulation based on 100% pure hypochlorous acid with no bleach impurities. We also have an important piece of clinical validation to support the effectiveness of Avenova in the management of eye health. Last May, we presented clinical data from NovaBay study showing then Avenova reduces the bacterial load as the underlying cause of blepharitis and ocular skin surface by more than 90% within 20 minutes of application. Further, it did show without impacting the diversity of bacteria, which is important as these bacteria are critical to eye health. Many eye care professionals previously expressed the need for clinical validation before prescribing Avenova to their patients, for their eye care health and we’ve now incorporated these findings into our marketing programs. Importantly, we’re seeing evidence of patient satisfaction in our strong re-order rates, this satisfaction is also expressed in a growing number of positive patient testimonials, some claiming a relief with Avenova in as little as two weeks, after suffering from itching and formation and the crustiness that’s associated with blepharitis. We’ve barely scratched the surface of the U.S. market for Avenova, which we estimate as 41 million Americans. This includes about 30 million who suffer from blepharitis and dry eye. We’ve found these conditions are best managed by regular ongoing, twice daily use regimen of Avenova and we have reports that symptoms returning among those who go off this regimen. Remember this is a chronic disease state. The remaining 11 million in our total market count include use for ophthalmic procedures such as laser cataract surgeries as well as for contact lens wearers. I want to mention that we are gaining the support of ophthalmologists for the use of Avenova for these uses. I’ll give you an example, Dr. Steve Wilmarth, who is a respected eye surgeon, practicing in the Sacramento area issued a press release last month sighting the biggest worry from cataract surgery is contracting a potentially devastating infection that can ultimately lead to blindness in the infected eye. He also noted that contact lens wearers have a much higher rate of infection than those who don’t wear lenses. In both surgical patients and contact lens users, Dr. Wilmarth indicated that the source of infection of populations of bacteria such as staphylococcus and streptococcus that normally live on the skin. He pointed to Avenova as the effective new way to reduce infections due to these bacteria. Now, these testimonials that we are receiving from Dr. Wilmarth and other eye care specialist who are prescribing Avenova for their patients are certainly aiding us and driving our revenues. Finally, our financial profile is changing quickly and very much for the better as Tom laid out. We are benefiting from fast growing revenues, margins that have already exceeded 80% and are quickly moving towards 90% and operating expenses that are appropriately focused on the Avenova commercialization and probably more importantly our under control. We are reaffirming our expectation to achieve cash flow positive by the end of the year and we’re certainly making strides towards a stronger balance sheet. That said, there still is plenty to do. In summary, this is an exciting time for our passionate employees and sales force at NovaBay. We’re making excellent commercial progress with the product that has a clear competitive advantage, implementing and executing new strategies that have already produced tangible results in revenues and margin and addressing an enormous market with a significant growth opportunity. And again, we remain committed to driving this business to a breakeven point before year-end. So with that overview of our business and our plans, we’re ready to take your questions. Operator?

[Operator Instructions]

While we’re waiting for the first question, I invite you to visit our new corporate website at www.novabay.com, which features our focus on Avenova commercialization.

Our first question comes from the line of Ed Woo with Ascendiant Capital.

Yeah, thanks for taking my question and congratulations on the increase in Avenova sales. I had a couple of housekeeping questions maybe for Tom. What’s the right share count to use after I guess the most recent transit financing?

Well, as of - as reported in the Q, it was 11.9 - 1.3 million shares issued note and then there’s about another 3.5 million warrants in total out there. And roughly another 1.3 million options, if you want everything available. Of course, the weighted average price on those options and warrants are much higher than where we are at today.

Would it be fair to add I guess the recent share count and - add to 1.3 million?

For stock options, you’re saying?

No, no, for a diluted - for share count going forward.

Well, the total share I could say would be - the 11.2 plus, if all the warrants and options are exercised, that has another 5 million.

Alright, great. Then I just wanted to - I had another clarifying question, do you say that expense levels are - had a steady rate now and that if we use this most recent quarter as a proxy for what it’s going to be in the next couple of quarters.

It’s reasonable. We’re seeing even more reduction as we’re - we’re seeing significant drop in our rent and utilities as move to appropriate space and leave the more expensive R&D space behind.

Okay and you said that that will be completed in the fourth quarter.

Yeah, we expect to see in December really, literally. By the time we move -

Great and then the last question I have for you guys is, you had - it’s obviously a very strong quarter because guys have over growth I know, as you guys get bigger may - maybe some of the growth may moderate a little bit, was there anything [indiscernible] about the second quarter or was it just all execution, your sales forces, falling season and how we should this type of growth for the next couple of quarters.

Yeah, it’s a good question. I think the second quarter was a better example. As I said in the first quarter, we’re just implementing the new strategies, we’re flipping our people over relative to training them to go into the pharmaceutical or the ophthalmology group versus the optometrist and so I think it’s a better reflection. That being said, I think as we’re gaining more and more experiences, we’ll see even gains from that experiences as we’re moving forward. So I don’t think there were certainly any elaborations in the quarter that we don’t expect going forward.

Great. Well, thanks for answering my questions. I wish you guys best of luck. Thank you.

I appreciate that, thank you.

[Operator Instructions] Your next question comes from the line of Jason Kolbert with Maxim.

Hi guys, thank you very much. Can you talk with me a little bit - I’ve a couple of questions in a couple of areas. I mean, let’s just pick up on the share count, on the reported press release said 7.4 million shares outstanding, but given the fact that you just raised capital, with just talking about shares outstanding and not fully diluted shares as per the treasury method. What is the correct share count?

Yeah, thanks Jason. Yeah, I was reading off the Q, which is number of shares of August 9 and after the tranche, 11.251 million.

Okay, so 11.251 million really reflects the recent rates that you describe.

Correct, that’s correct. Sorry for the -

That’s all I need Tom. We can calculate fully diluted based on the number. Can you talk a little bit about the $2.6 million number? What percentage of that was driven by pricing versus what percentage was organic growth? I know you quoted strip numbers, but rather than making me reverse it out, can you just give me an idea of what the split look like.

Well, Jason I think you got to part with the split between the one channel, again the ophthalmology channel versus the optometry channel and as Tom mentioned in his remarks that has moved, almost slipped to 65 - 65 to 35. Now, that being said, certainly we’re not to the point yet where we’re going to be talking about units specifically. We’ll in the future for sure, but to your point, the majority of that growth is certainly greater than 70% and that growth is due to price at this point in time. And again that’s strictly in the ophthalmology channel that we’re talking about. That being said, I should mention that we’re holding pretty nicely in the optometry channel and we have plans for that as we move forward. I think we’re on an annualized rate there. I can quote you units of about 180,000 units in that channel alone.

So help me understand kind of how that leads me into the third part of the discussion, which is, maybe my definition of what cash flow breakeven is and yours, maybe they’re different, maybe that’s where some of the confusion is. If you’re going to annualize - I think I heard you say on the quarter that the 4.8 million in expenses is kind of a good approximation or your R&D and your SG&A spending are a good approximation for the rest of the year. So if I use those numbers the rest of the year, I have to see sales double from here by Q4 for you to hit breakeven and I think if that happens then you hit breakeven in Q4, that’s what you’re saying is breakeven for the year. Is that what you’re trying to communicate?

Correct, yeah.

Okay.

Yeah, we’re trying to use operational cash flow and not take away any cash needed to grow inventory for next year. It’s just operation of the P&L cash flow.

Yeah, no, I understand and at the end of the day I don’t think it’s going to make that much of a difference, but since you’ve brought the question, how much sales went into the channel versus what percentage of sales went to end users in the current quarter?

All our sales are recognized when they move from the wholesaler to the pharmacy. So there is - there’s no, if you will, ability to load sales. Our wholesalers sales do not get recognized.

I got it, no and I think that’s a good thing. So help me understand then, how do you get the number from 2Q at 2.6 million, which admittedly is in part driven by price increases, how do you move it, how do you double it in the next months? You feel like you’re getting that much traction in the prescribing community that you’re going to be able to double numbers from Q2 to Q4, is that right?

Well, if you think about it Jason, if you take - your second quarter number is 2.7 versus the first quarter number is 1.7 that simply stated that’s a $1 million gain. We gained $1 million per quarter where we’re getting right to the number that we need for that breakeven that we’re talking about.

Okay, it sounds good. Thanks a lot. I really appreciate the clarity.

Yeah, thanks for joining us Jason.

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

Yeah, again thank you for joining us today and for your interest in NovaBay. We’re certainly excited about our new path and the opportunity we see with Avenova. I also wanted to let you know that we’re going to be presenting at the Rodman & Renshaw Healthcare Conference and that’s being held September 12 and 13 in New York. We’re also going to post a webcast of that presentation on novabay.com for those of you unable to attend. So with that we look forward to updating you on our progress during next quarterly call. And have good rest of the day. Thank you very much.

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