Jody Cain - IR Mark Sieczkarek - President and CEO Tom Paulson - CFO

Yi Chen - Rodman & Renshaw Ed Woo - Ascendiant Capital Lauren Chung - Maxim Group

Welcome to the NovaBay Pharmaceuticals 2016 Fourth Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today March 23, 2017. I would now like to turn the call over to Mr. Jody Cain. Please go ahead, Ma'am.

This is Jody Cain with LHA, thank you all for participating in today's call. Joining me from NovaBay Pharmaceuticals are Mark Sieczkarek, President & CEO and Tom Paulson the Company's CFO. 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 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 March 23, 2017. NovaBay Pharmaceuticals 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 Mark Sieczkarek. Mark?

Thank you, Jody and good afternoon everyone and thank you for joining the call. Let me just start by saying how proud I am of the exceptional performance over the past year of this organization as we executed on a tightly focused business strategy and delivered record annual and fourth quarter results. We achieved all our stated financial goals for 2016 most notably reaching adjusted positive cash flow from operations during the month of December. We grew sales by 172% over 2015 to $11.9 million and we proved the success of the marketing strategy we introduced in early 2016 to shift their sales mix to the more profitable pharmacy channel. By the fourth quarter more than 3/4ths of Avenova sales came through this channel. The impact of the shift and sales mix is dramatic with both higher revenue per unit and higher gross margin on Avenova sales which reached 86% for the year we tightly manage our expenses throughout 2016 and we narrowed our operating loss by newly half from the prior year. We also strengthened our balance sheet by raising $20 million through equity transactions price that reasonable terms with investors who strongly believe in the future of Avenova. We ended 2016 with $9.5 million in cash and equivalents. We now have sufficient financial resources to fund our operations and continued top line growth throughout 2017. Now importantly we've built what we believe is a strong foundation to support our plans for another year of exceptional growth. Our expected outlook for 2017 is for total sales to increase by more than 60% over 2016 to $19 million. With the gross margin on Avenova product sales to remain in the high 80s range. We expect ample room for sales growth having barely scratched the surface of a market we estimate at 41 million Americans. Our plans for this year is to capitalize on the substantial market opportunity by investing in our new employee based sales organization and targeted clinical studies while prudently continuing to manage expenses and cash burn. But before discussing these plans in more granularity I'm going to turn the call over to Tom Paulson to review our financial results and our excellent momentum across several key metrics. Tom? Tom Paulson : Thank you, Mark and a good afternoon everyone and thank you for going us today. I'll start with some highlights from the fourth quarter and then I'll review our financial results in greater detail. As has been our practice in the past quarterly calls I will be reviewing proportions for the sequential quarter basis which we believe provides the best gauge of our products. Total sales for the fourth quarter of 2016 reached a record 4.1 million up 19% from Q3 and Avenova sales of 3.9 million also a record were up 26% from Q3 reflecting both volume and price improvements. Prescription sales through the high margin pharmacy channel grew to $3 million up 45% from Q3, sales through this channel represented 77% of total Avenova sales versus 68% in Q3 with the increase mainly due to higher volume. This continuing shift in sales mix towards the reimbursed pharmacy channel is reflected in both the increase and total Avenova sales and improve gross margins which support positive cash flow. As part of this focus we are successfully converting sales to this channel from the practitioner office channel which declined 12% from Q3 and importantly during the fourth quarter we added more than 1000 new Avenova prescribers bringing the total number of prescribers who have prescribed Avenova to more than 8700. In reviewing fourth quarter financial highlights we're providing comparisons with both the prior year and the proceeding quarter again to reflect our progress. As noted earlier total net sales for the fourth quarter 2016 reached a record 4.1 million up 149% from the fourth quarter of 2015 and up 19% from the third quarter of 2016. As I mentioned Avenova sales in the fourth quarter 2016 reached 3.9 million up 146% from fourth quarter '15 with both unit growth and favorable price and mix through the ophthalmology channel driving the increase. Gross profit margin as a percentage of total sales of 80% for the fourth quarter 2016 was up from 64% for the fourth quarter of 2015 due to higher sales of Avenova gross margin for the fourth quarter of 2016 and was down from 84% in the preceding quarter due to reserves were excess and obsolete inventory which was due to upgrading both our bottles and pumps. Importantly gross profit margin on Avenova sales grew to 87% for the fourth quarter of 2016. The operating loss for the fourth quarter of 2016 was $2 million a significant improvement of 67% from the prior year and slightly reduced from the preceding quarter. The year over year reduction was due to restructuring and cost reduction measures implemented in late 2015 and early 2016 with our decision to focus resources on Avenova commercialization. In reviewing expenses by line item R&D expenses were $156,000 for the fourth quarter of 2016 down $1 million from the prior year reflecting our focus on Avenova commercialization and lower spending on clinical trials which are now only being pursued on a limited and targeted basis G&A expenses were $2 million for the fourth quarter of 2016. This was down from 2.7 million for the prior year primarily due to reorganizational charges in the fourth quarter 2015 and down from 2.3 million for the third quarter of 2016 mainly due to modifications to the exercise price of warrants issued May 2015 in third quarter. Also in the third quarter we reported one-time costs associated with the sublease of our previous headquarters location. As announced in the last quarter's call we have located our team through more economical space and we are now benefiting from the sizeable reduction in our rent and utility expenses related to the sublet of our former office and lab space. We estimate this move will generate approximately $3 million of savings during the life of the lease. Sales and marketing expenses for the fourth quarter 2016 of 3.1 million decreased 3% from the prior year and increased 18% from the third quarter of 2016 reflecting charges in our outsource sales force expenses. As Mark mentioned all of our sales reps and regional managers are not on our team as direct full time NovaBay employees. The net loss for the fourth quarter 2016 was $1.6 million or $0.11 per share on a basic basis. This is a significant 62% decrease from the net loss in fourth quarter 2015 of $4.2 million or a $1.26 per share on a basic basis. Our narrowed net loss includes the impact of recognizing $400,000 of non-cash gain on the increase in a fair market value of our warrant liability primarily caused by the decrease in our stock price, of our stock price during the quarter versus a gain of $2 million for the prior year quarter. The net loss for the fourth quarter of 2016 improved by $2.1 million from $3.7 million for the third quarter of 2016. Now turning to 2016 results net sales for the year were 11.9 million as Mark mentioned up a 172% from 2015 due to significantly higher sales of Avenova, Avenova sales for 2016 of 10.9 million increased by 175% from 2015. Total gross margin for 2016 was 79% compared to 71% in 2015 and gross profit margin on Avenova sales is 6% for 2016. Our operating loss for 2016 narrowed by 48% to $11 million down from $21.1 million in the prior year. The lower operating loss in 2016 reflects declines of 76% in R&D expenses and 10% in G&A expenses and a 12% increase in sales and marketing expenses over the prior year to grow the top line. Non-cash warrant liability laws for 2016 was $2.1 million versus $2.1 million again in 2015. The non-operating charge in 2016 was primarily due to the increase in our stock price if since 2015 year-end, this is a non-cash item. The net loss for 2016 was $32.2 million or [Technical Difficulty] and improvement from the net loss of $19 million or $6.82 per share for 2015. In reviewing our balance sheet as of December 31, 2016 we had cash and equivalence of $9.5 million, our highest level in over two years. Turning to cash flow, we are reporting another quarter of substantially reduced cash burn from operations of only $700,000. This is down from a burn of $4.5 million for the fourth quarter of 2015 and down from a burn of $3.8 million for the third quarter of last year. This demonstrates our growing Avenova sales and managing costs are significantly reducing our cash consumption as promised. As Mark stated earlier our new marketing and pricing strategy as cost reduction measures helped us achieve our goal of positive adjusted cash flow from operations in December which we define as GAAP cash flow from operations minus changes in operating assets and liabilities and finally we are introducing our 2017 financial guidance as follows. We expect total sales for 2017 to reach $19 million which is a 60% increase over 2016 with growth driven by higher Avenova sales. We experienced gross profit on Avenova sales to be in the high 80% range. Net loss of 6.2 million is expected of course this excludes the effect of non-cash gain or loss on changes in fair market value of our warrant liability and finally a cash burn of $3 million and also we expect to continue to invest in revenue growth while appropriately managing our expenses and balance sheet. With that I will turn the call back to Mark.

Yes. Thanks, Tom. So as we're moving forward here we're clearly excited about the prospects Avenova certainly in 2017 and beyond. We intend to continue driving sales growth and supporting key metrics including the number of total prescriptions, the number of total prescribers and the number of prescribers writing multiple prescriptions. We'll also continue to direct our sales activities towards the more profitable ophthalmology channel and benefit from reimbursed pricing. Now the answer [Technical Difficulty] fourth quarter of another commercial product in the dry eye marketplace has brought renewed heavy interest and investment in the category where Avenova serves as a strong complementary product the current first line and dry eye therapy both. So we plan to capitalize on this growth momentum and also our strength and balance sheet this year by opportunistically expanding our sales force. We currently address only about 1/3rd of the geographic market opportunity with our 50 sales representatives where all in major metropolitan areas across the United States. Again we intend to balance sales force expansion with our goal of managing expenses and our available cash. Let me remind you that late January we successfully transition our contract samples force to be direct employees in NovaBay with the move made successfully in conjunction with our national sales meeting that was held in January, our sales representatives are definitely excited about becoming direct employees and our joint commitment to the company's success. I'm pleased to report that we have an enthusiastic highly energized team that right now is solely focused on Avenova's success. We also plan to invest in post-marketing clinical studies this year to provide eye care specialists with additional clinical support for prescribing Avenova to their patients for a wide array of uses that they have identified as practitioners. You may recall that last year we reported clinical data that supports Avenova's effectiveness in the management of Blepharitis. So now we certainly have a high level of confidence in reaching our growth objectives for this coming year. We have a superior and well-tolerated product in Avenova based on its formulation with 100% pure hypochlorous acid with no bleach impurities. We see continued evidence of customer satisfaction and patient testimonials and strong reorder rates. We believe we have ample room for growth in the U.S. for Avenova which again we estimate at 41 million Americans. Now this includes an estimated 30 million who suffer from blepharitis and dry eye. Many physicians have found that these chronic conditions are best managed by regular twice daily use of Avenova. The remaining 11 million in our market count includes use for ophthalmic procedures such as pre and post-lasik and cataract surgeries as well as for contact lens wearers with tolerance issues. We're also going to continue to pursue opportunities to monetize the non-core NovaBay assets to bring in additional capital while we focus on building our core Avenova franchise. So in conclusion we have accomplished a great deal having successfully transitioned our company to focus on Avenova commercialization, we executed on a new strategy and increased sales and margin, we managed expenses and rebuilt the balance sheet to sustain our high growth. This is resulted in growing our market cap by over five times this past year as the market has recognized the long term potential of Avenova in this large market. We plan to support continued revenue growth by executing on our now proven strategy as we focus on continuing to enhance value for all our shareholders. So with that overview of our business and our plans for '17 we're ready to take your questions. Operator?

[Operator Instructions]. You have a question from Yi Chen from Rodman & Renshaw.

My first question is do you expect to continue to bring new prescribers at a rate you are observing first quarter of 2016 and from the feedback of prescribers do you see that the blepharitis and dry represent a majority of the patients that are being treated by Avenova currently?

Thanks for the questions, I will start with the second question first. Yes the majority of Avenova is prescribed for blepharitis and dry eye sufferers. We're seeing a lot -- many more doctors who are beginning to use this for what they call first level therapy and let me define first level therapy that basically in the past doctors have prescribed baby shampoo, hot compresses and detergent based lead cleaners for first level therapy. Obviously that's big market by itself and we're seeing more and more people move to Avenova again to replace what I've previously mentioned as first line therapy. Relative to your first question in terms of continued prescription growth, yes we obviously expect to see continued uptake. We now have good years' worth of data that substantiates the high prescribe in the market place across the U.S. and we're very targeted there in going after these high prescribers not only of Avenova of dry eye product such as Restasis and Xiidra and these are also prescribers that have a good commercial business which is you know really important on the reimbursement side as well. So I think you know from that perspective we're going to have a much more efficient sales force as we continue to grow prescriptions. I just want to remind you that you know again as you look -- again we've given full year guidance and as you look at this business just recall that because of co-pays and deductibles typically we do see some seasonality in revenues in the first quarter and to a degree in the third as well because of the summer season. So that's something that you know everybody should you know take a look at but all signs are currently are even current prescribers are using the product on a more wide basis again that was a broad answer to your questions but I think hopefully I'll answer lot of the other follow up questions and I'm sure will come. Thanks Yi for the question.

Yes, that’s very helpful. Thank you. Just a quick question on the financial side so I guess you will continue to invest in your sales forces and the sales and marketing expenses in fourth quarter is on the same level of the first quarter, a little bit higher than the second and third quarter. So going forward I think we should probably -- is it okay to expect that the sales and marketing expenses will be a bit higher but not too significantly, is that correct?

Yes, that's a good assumption, Yi. Again they are all at that one line as we pointed out the clinical expenses we have some clinicals that -- again these are marketing clinicals that are carry-over from last year as well some new programs in 2017 and as we indicated we've added to sales force at the beginning of this year, all those people are in place and in their respective territories and again we will add opportunistically and with respect to both managing expenses and the balance sheet.

Your next question comes from the line of Ed Woo from Ascendiant Capital.

I also want to ask about the sales force, you mentioned that in January you transitioned [indiscernible] contract sales rep to employees. Was there any changes to I guess something to look forward, would there be any disruptions or anything like that?

No, as a matter of fact I had point out in my remarks we had our sales meeting, a kickoff if you will in January with them all together. I think they were extremely enthusiastic about coming over. As a matter of fact I think between the transition we only lost one sales rep, I should point out you know there is always is fairly good turnover either voluntary or involuntary in the sales force. As I sit here today on March 23 every person who basically signed up with us on January 1st is still here which is pretty, pretty amazing when you think about it. Again in my years in business you know that number is close to 40 now. Quite frankly I've never been more enthusiastic a national sales meeting than the one I just encountered in January. So we're all pretty jazzed up if you will as we're heading into 2017.

You mentioned that you are actually kind of targeting some of your high prescribers or definitely targeting the pharmacy channel. I think your sales force is pretty well seasoned now or do you see it worth kind of just still somewhat lumpy with a certain concentration of top sales people and the [indiscernible] ramp up.

I think we have a good group of professionals on board, as we went through last year we turned the sales force over again both voluntarily and involuntary and I think now that people see the security if you will and the growth with NovaBay they're pretty excited, I think we offer a pretty attractive overall compensation package. It's heavily based on their ability to be productive and they're all in on it as I said and I think from an experience standpoint we have a really good mix of people who are experienced certainly in ophthalmology but I think sprinkled with people from other categories as well and in my history again my experience I think it's a very productive mix.

And one last final question is, you feel that you guys have enough broad coverage across all the major markets in the U.S. right now.

Yes, the major markets I think are covered well but I think again as I said in my remarks we're about 1/3rd of the way that where we'd like to be I think in terms of the sales force. But you know again we're going to do -- we're going to execute on the expansion that sales force based on the metrics that we closely we watch on a week to week, month to month basis. So we don't want to pull that cord too soon but as we see a tipping point even in the market place we're going to be able to react very quickly.

[Operator Instructions]. Your next question comes from the line of Lauren Chung with Maxim Group.

I also have a question on the sales force, so you have safety now and your guidance -- do you think your guys for the next year, you said you will add opportunistically but that’s the number that you feel comfortable with at least in the next year correct, and you look to expand that in the following years?

Right now we are at 50 that’s again reps obviously with managers and administration or higher than that but 50 is kind of the number that we have in the plan that we put out in front of you in terms of the guidance and like I said if we see some uptake if you will in the payback period we'll be quick to add more to the sales forces as we go so I think that will be a key metric for us going forward because obviously we like to cover more geography as we move forward here.

Great. And also on the comment about the post-marketing clinical studies, is your guidance for next year include those studies and how do you project doing additional studies to help the traction with the doctors that you will be calling on?

The expenses for those yes are in that plan, I think as we currently sit we started three programs last year. Hopefully one will be coming to fruition in terms of published peer recognized publication and we have three newer ones for this year planned as well and budgeted. So again we're going to have a steady case of clinicals and again peer reviewed papers as we're moving forward. Tom Paulson : Lauren, the point of addressing these is limited and targeted means these are multiple $100,000 studies not dollars that is not multiple $1 million studies. We're keeping a tight control on that to get the essence of the result we want.

Sure. And also just lastly your prescriptions do you have a sense of what percentage of that are resales as opposed to new prescriptions and new patients?

Yes, we do. We don't have that data in front of us if you want to give us a call later we can probably talk more at a lower level.

[Operator Instructions]. There are no further questions at this time.

Okay. Well you know thanks again for joining us and for your interest in NovaBay. Just looking at the number who joined us today I think we're gaining more interest as I think we deserve. We're certainly excited about our progress and the opportunity that obviously we see with Avenova now and in the future. And just to let you know actually we'll be on the road next week in New York and Boston as we continue to spread the Avenova story and we look forward to updating you during the next quarterly call to discuss the first quarter financial results. So again thanks for joining us and have a great day.

This concludes today's conference call. You may now disconnect.