Welcome to the NovaBay Pharmaceuticals Third Quarter 2019 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 today, November 7, 2019. 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. Joining me from NovaBay Pharmaceuticals are Justin Hall, President and Chief Executive Officer; and Jason Raleigh, the Company's Chief Financial Officer. 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's 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 7, 2019. NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law. And now, I would like to turn the call over to Justin Hall. Justin.

Thank you, Jodi, good afternoon everybody and thank you for joining us. I'm excited to share our outlook for a brighter future for NovaBay. With a significantly strength in the cash position following several recent financings, we are launching new marketing and branding initiatives aimed at enhancing and expanding our business with economics that keep us on the path towards profitability. We are broadening our product offerings by capitalizing on additional applications for our peer hypochlorous acid formulation, as well as leveraging our commercial organization and establish relationships with ophthalmologists and optometrists. I'm pleased to report that we have already had a number of strategic initiatives in place that I will discuss in a moment and we fully expect to be announcing additional actions in the future. Our goal is to build an Avenova’s position as the number one lid and lash spray through our new non-prescription direct-to-consumer sales channel. In Avenova, we have a product with distinct advantages that is based on our patented FDA cleared pure hypochlorous acid formulation. Our marketing edge and competitive advantage is just that, Avenova is the only pure hypochlorous lid and lash spray on the market. Feedback from doctors and patients reinforce our belief that Avenova is the best product to treat chronic bacterial infections that affects approximately 85% of all dry eyes sufferers. In reviewing our third quarter results, unit sales of Avenova were up 16% from the second quarter of 2019. It is encouraging that we generated this unit volume despite our significantly smaller salesforce. You may recall that we reduced the size of our sales force by 40% in March going from 50 people to 15 nationwide. So that is just our salesforce going from 50 to 15. The reduction was part of a new commercial strategy, aimed at increasing Avenova’s accessibility and enhancing the patient experience under economics that make more sense for NovaBay. As previously discussed, the industry trend towards higher deductible health care plans have had a significant and negative impact on branded prescription drugs industry wide, including dollar sales of Avenova, where we were compelled to offer more coupons and rebates to maintain products affordability for our customers. As part of our commercial shifts to stabilize unit sales and revenue, in early June, we announced the launch of Avenova Direct. In this new sales channel prescription strength Avenova is available to consumers in the U.S. without a prescription on Amazon. com. In the short time since launch, we have seen strong sales momentum through this channel and Avenova Direct accounted for about 30% of all unit volume for the third quarter. However, during this initial transition period, we found that units previously sold to the higher margin prescription channel including those through our partner pharmacies and through the buy and sell channel in which eye care specialist sell Avenova directly to their patients. We are transitioning to Avenova Direct. Due to the lower gross-to-net pricing on sales through Amazon. com Avenova revenue for the quarter was down from the prior year and was roughly equivalent to the second quarter of 2019 despite the higher unit volume. That said I wanted to affirm that we remain on-track to reach our previously announced 2019 revenue guidance six to eight million. In essence, we advanced our strategy across the Board during the third quarter. We increased accessibility to Avenova through direct-to-consumer sales and improve the patient access through Amazon.com’s rapid and efficient product distribution. This channel capitalizes on the trend of marketing pharmaceuticals directly to consumers, allowing them to forego time consuming doctor visits and trips to the pharmacy. This also helps consumers to offset costs in a high deductible healthcare environment. We also realized another goal in our strategic shift in moving NovaBay closer to profitability, while lower gross-to-net unit revenue impacted Avenova revenue, operating expenses for the quarter were down 37% from the prior year, mainly due to a reduction in our sales organization. This resulted in a slight narrowing of our operating loss for the quarter versus the prior year, which is an indication of progress. Now, I will turn things over to Jason to review our financial performance in more detail.

Thank you, Justin. Good afternoon, everyone, starting with our Q3 top-line. Net sales for the third quarter of 2019 were $1.6 million compared with $3.1 million for the prior year period. The decrease is primarily due to a lower net selling price of Avenova. In reviewing Q3 2019 sales by channel, Avenova sales into the retail pharmacy channel were $1.1 million or 68% of Avenova sales. Sales through our Avenova Direct were $341,000 and sales through our in-office direct channel were $171,00. Gross margin on net product revenue for the third quarter of 2019 was 75% compared with 89% in the year ago period, with the decrease due to product mix. Operating expenses for the third quarter of 2019 decreased 37% to $2.9 million from $4.6 million a year ago, reflecting the strategic shift in our U.S. commercial organization in March 2019. This is in-line with our previously stated expectations to reduce operating expenses in 2019 related to the reduction in force. In reviewing Q3 expenses by line item, sales and marketing expense were $1.5 million, a 52% decrease from $3.2 million for the prior year period. The decline was primarily due to the reduction in sales headcount and employee related costs. G&A expenses for the third quarter of 2019 and 2018 were $1.3 million and R&D expense for Q3 2019 were $49,000 compared with $45,000 in the year ago period. Operating loss for the third quarter of 2019 was 1.7 million, which is an improvement from 1.8 million for the third quarter of 2018. The non-cash gain on the fair value of warrant liability for Q3 2019 was $1.5 million, which compares with a non-cash gain $267,000 for Q3 2018. Non-cash gain on embedded derivatives associated with the convertible note for the third quarter of 2019 was $669,000. The convertible notes are associated with the loan completed in March 2019, so that there is no comparable gain or loss for the prior year period. Other expenses for third quarter of 2019 was 719,000 compared with other income of $4,000 in the prior year period. The other expenses were due to interest on the promissory notes issued in February 2019. The amortization of discount in issuance cost related to the convertible note issued in March 2019. In the issuance costs related to issuance of common stock series preferred A - preferred stock and warrants in August 2019. We reported a net loss for the 2019 third quarter of $342,000 or $0.01 per share. This compares with a net loss for the 2018 third quarter of $1.5 million or $0.09 per share. Turning to our nine-months results, net sales for the nine-months ended September 30, 2019 were $4.9 million compared with $8.9 million for the nine-months ended September 30, 2018. Gross Margin on the product revenue was 77% for the first nine-months of 2019 compared with 88% for the first nine-months of 2018. Operating expense for the first nine-months of 2019 decreased 23% to $10.9 million from $14.1 million for the first nine-months of 2018. And including sales and marketing expense of $6.6 million G&A expense of $4.1 million and R&D expense of $166,000. Non- cash gain on the fair value of warrant liability for the first nine-months of 2019 was $936,000 compared with a non-cash gain on the first nine-months of 2018 of $971,000. Non-cash gain on the embedded derivatives associated with the convertible note for the first nine-months of 2019 was $423,000. Other expense for the nine-months of 2019 was $1.2 million compared with other income of $13,000 for the same period of 2018. The net loss on the nine-months ended September 30, 2019 was $7 million or $0.36 per share compared with a net loss for the first nine-months of 2018 of $5.3 million or $0.31 per share. In reviewing our balance sheet, we had cash and cash equivalents of $9 million as of September 30, 2019. We raised $6.7 million in August through a registered direct offering of common stock and a private placement of convertible preferred stock. And lastly, we are affirming our 2019 outlook. We expect net sales for 2019 to be in the range of $6 million to $8 million due to the reduction in force at March 2019, we are expecting a significant reduction in our operating expenses in 2019 from the 2018 levels. With that I will turn the call back to Justin.

Thanks, Jason. I would like to now share with you some strategic initiatives that we have in place to build our business starting with Avenova. We continue to expect our greatest growth for Avenova to come through our direct sales channel on Amazon. com. We have an established prescription base with more than 15,000 doctors prescribing nationwide. Now that we are stabilizing our Avenova business with our current customer base, we are taking the next steps and reaching new customers. We have engaged and accomplished online branding firm to reach beyond or current population to drive online sales of Avenova. We have many supportive testimonials that we use for our communications, including that Avenova is easy to use, soothing to the eye and clinically proven to reduce bacteria on the ocular service. Yet, most importantly Avenova is not an antibiotic. Avenova is free from bleach impurities found in other hypochlorous acid products and a safe and effective for long-term use. In another initiative later this month, we will begin a 90-day trial distributing of the NuLids System. This is an innovative treatment for dry eye that we will be evaluating beginning in six territories in the Mid Atlantic region. The NuLids System is an FDA approved handheld cordless device for home use that safely and effectively removes accumulated scurf from eyelids and eyelashes while stimulating the meibomian gland production in dry eye and [bloodphoritus] (Ph) patients. This product has produced exceptional results in ending or substantially reducing that scratchy, itchy, gritty feeling that is associated with dry eyes. In fact, one year patient survey data shows that after a 30 day trial, fully 96% of patients reported being either satisfied or very satisfied with NuLids. We have used the NuLids System as highly complementary to Avenova and in fact we believed that anybody using the NuLids System should also be using Avenova. We also see the addition of this product as having a reinvigorating effect on our sales call. We are using our buy and sell channel to offer NuLids to optometrist and ophthalmologist for sale directly to patients. Eye care specialist benefit from a new source of revenue and patients benefit from a new treatment to reduce the annoying symptoms of bloodphoritus and dry eyes. Earlier this week, we also announced the direct-to-consumer launch of our CelleRx skin and wound cleanser in the U.S. through our own website CelleRx.com. CelleRx is a unique topical solution based on the same pure hypochlorous acid formulation as Avenova. As such it requires only minimal investment by NovaBay to make this product commercially viable. CelleRx is specifically designed to gently clean and ease discomfort following aesthetic dermatology and plastic surgery procedures. Among the advantages of CelleRx for acute skincare, it has been shown to be effective against bacterial infection and biofilm which impair wound healing. Additionally, pure hypochlorous acid is known to be a potent broad spectrum antimicrobial agent that is safe for human tissue. We see opportunities to market CelleRx as a post treatment for a variety of cosmetic laser surgeries including laser resurfacing, chemical peels, liposuction, tattoo removal, laser hair removal and micro demogration. Our initial soft launch is aimed at creating brand awareness and seeding the channel. We plan to step up marketing for this product in early 2020 and look forward to unveiling our broader commercial strategy in the coming months. So in summary, in the current competitive environment and high deductible market, we have been able to rapidly make changes not only to protect and increase the sales of Avenova, but also increase accessibility, affordability and a positive patient experience. We have successfully raised funds to support broader business initiatives, we are expanding our marketing efforts focused on expanding our customer base for sales through Avenova and Amazon.com. We are leveraging our established commercial organization to evaluate complimentary product offerings to Avenova. We are capitalizing on our proprietary technology to cost effectively introduced CelleRx to the dermatology market. Importantly, we are seeing evidence that our strategic shift away from high expenses and our ability to maintain unit sales. And we have additional strategic initiatives underway including product line extensions and other complimentary products that we are targeting for future cost effective growth and we are seeking opportunities to future leverage our domestic commercial organization and establish relationships with eye care professionals. With that overview of our business and our plans. I thank you for your attention. Operator, we are now ready for questions.

[Operator Instructions]

While we are waiting for questions, I want to mention that we will be meeting with investors and analysts during the JP Morgan Healthcare Conference in San Francisco from January 13 to 15. If you would like to schedule a meeting, please contact LHA at 310-691-7100.

And our first question is from Jeffrey Cohen with Ladenburg Thalmann.

Hi Justin and Jason, how are you.

Very good, how are you Jeff.

Just fine. So handful of questions for you. Firstly, can you talk about OpEx a little bit. This feel like this quarterly $3 million numbers about where you plan I'm saying for the near-term or medium term?

Yes. So, short answer is yes.

Okay, I imagine the long answer is same. Okay.

Yes. The long answer is there is a variety of things that could affect that, but we don't anticipate any additional hires in the field salesforce and probably not a reduction either.

Okay. And you say that now with the addition or the coming additional CelleRx as well.

Correct. Yes. CelleRx will be what we call a digitally native brands and we are not going to have any dedicated field sales reps for that product.

Okay, perfect. And then could you talk about the units as far as the - surprise to see that the evaluations time for the product is just three months, but was there a particular number of folks that you were hoping that you could gain evaluations from was that why it was short-ish in nature?

Well, I think that we were very interested in this product, because it is perfectly complimentary right off the bat and I don't think that we will need more than three-months to gain a lot of market feedback and the market feedback that we need. We started with six of our top performing reps in top producing territories and so we are going to get I think a good sample size in the next three months. We are doing a training for the six next week and then they are going to go out into field after that. So, I think we are going to know right away from the six whether it truly is complimentary if doctors like it, if patients like it and then after that we will have the option of going back to new site medical in NuLids and possibly really negotiating a larger agreement hopefully.

Okay, and if that is done, the follow on would look like a lot from our standpoint, is the particular transfer price and perhaps you would be breaking out that revenue on a separate line item?

Yes, really you know hard to say right now, if it is a runaway success, it could be more than that, but if it turns out that we really don't have a foothold in the marketplace with it, we also have the option of just walking away completely. So it really ranges and it is really hard to say.

Got it, okay, and then could you talk about the CelleRx self launch you were discussing. So what is the current status of the manufacturing and production, where is that taking place and how would that look toward January and February, I mean as far as the soft launch, could you kind of better define the force as far as the soft launch versus a full launch at least for onsite, online?

Sure. Yes, so the dermatology market is a new one for us and we didn't want to jump in headfirst without doing some market research. So the manufacturing of CelleRx is all set up. It is manufactured not far from our corporate office here in California. So from a manufacturing side it is already set up and running that is up in going, but we want to make sure that we get the right KOLs on-board that we are targeting our marketing towards the right places and we are going to do that over the next two to three months. And once we have the marketplace sort of very laser focused and identified we will start putting a little bit more marketing money towards that, but I wanted to at least get this out there and get this in the hands of some KOLs and get that market feedback before jumping in headfirst.

Got it. So it is more of just a general awareness particularly amongst aesthetics syndromes?

It is, and we want to make sure that we have KOLs on-board and it is really hard to get those KOLs on-board if you can't put product in their hands. So we wanted to do the soft launch, we could get product in their hands, so they could start selling it to some patients and giving us that feedback.

Okay, and then lastly for me is on the margin side it looks like - I mean the margins remain strong, but they were a little shy of what we anticipated. I think it is sounding like as the online channel increases that is going to hamper margins slightly versus what we previously thought. Is that an accurate statement?

That is true. We saw a little bit more cannibalization in the month of September from Amazon from the retail pharmacy channels. So that is where the difference is, but it is probably where it will be for Q4.

Okay. That is it for me. Thanks for taking my questions.

Alright. Thanks.

Our next question is from Ed Woo with Ascendiant.

Thanks for taking my question. My question is with the NuLids and CelleRx, should we ask would you guys are rolling out more new product initiatives in the near-term?

We will have some new product line extensions in the near-term.

Great. And will that be pretty minimal operating investment or some of these will actually require more investment than what you have right now?

Yes. No that is a really good question. The name of the game right now is capitalizing on our current infrastructure to have a very low cost product line extension, so nothing that we are doing is going to cost a whole lot. Everything will be sort of leveraging our current infrastructure.

Alright that sounds good. Then my last question is on the Avenova Direct where you are selling through Amazon, you mentioned that you had a lot of transition from higher price channels to Avenova Direct. Do you feel that the transition is done or do you still see this transitioning over the next couple more quarters?

Well, so typically what we have seen especially in years past where Avenova was just an RX only product, we saw a really strong Q4 because patient deductibles were filled and their insurance reimbursements started to kick in, just the exact mix of sales between the four channels. So now Avenova is sold through for channels, I'm sure you already know this, but I will share this for everybody else. We have a retail pharmacy channel, a partner pharmacy channel, a buy and sell channel, and then a direct-to-consumer channel. The future mix of those, I think is going to change quarter-by-quarter. I think in Q4 the partner pharmacy channel will probably hold up the strongest, but if we are looking out beyond just Q4 that is retail pharmacy channel in Q1 tends to see the biggest drop, because patient deductibles are reset and then they have to start filling those again. So it is going to be different sort of quarter-by-quarter.

Great. Well thank you for answering my questions and wish you guys good luck. Thank you.

Terrific. Thanks Ed.

[Operator Instructions]

Well, I would like to thank everybody for joining us today and your interest in NovaBay. We look forward to updating you on our next call in March to further discuss financial results for the fourth quarter and the full-year 2019. In the meantime, have a great day. Thank you.

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