Welcome to the NovaBay Pharmaceuticals 2019 Fourth Quarter and Full Years' Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, March 26, 2020. I would now like to turn the conference over to Jody Cain. Please go ahead.

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'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's filings with the Securities and Exchange Commission at sec.gov. Furthermore, the content of this conference call contains information that is accurate only as of the date of the live broadcast, March 26, 2020. NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law. And now, I'd like to turn the call to Justin Hall. Justin?

Thank you, Jodi, and good afternoon everyone, and thank you for joining us. I would first like to begin with a topic on many people’s mind, COVID-19 and the impact on our business. First and foremost, we are gratified to honor our commitment at NovaBay to the health and well-being of people everywhere, by tapping into our global supply network to locate and make available high-quality, KN95 masks at the most reasonable price possible. Online ordering of these masks is available through our website, Avenova.com. These KN95 rated masks are effective at filtering out at least 95% of airborne particles, including micro-organisms, dust, pollen, and air pollution. They are constructed with a three layer filtration system of nonwoven, soft and breathable fibre for effective protection. The mask feature an extra soft in comfortable elastic ear lubes in having adjustable nose bridge strip. Our first small shipment of KN95 mask came in last week, and we sold out online very quickly. We received our second large inventory of masks yesterday, published a press release and began shipping immediately. These masks are available in quantities of 10 or 30 through our website avenova.com. However, because of our direct access to a large supplier, we're able to fulfill individual high-volume orders of quantities of 50,000 masks or more. Special pricing for these large orders is available in anybody interested in placing a large order of 50,000 masks or more should contact us directly at sales@novabay.com. Demand has been brisk, and we're working diligently to ship orders as quickly as possible. Although, these are just a temporary item for us, we plan to continue providing KN95 mask for as long as the demand remains. In the current environment, we've been asked if our current hydrochloric acid base products, which include AVENOVA, CELLERX and NEUTROPHASE may be used as an antiseptic to combat the coronavirus. NovaBay does not have the appropriate clearance, nor as have we conducted the extensive testing necessary to make this claim. Further, the FDA has announced that there are no approved vaccines, drugs, or investigational products currently available to treat or prevent the coronavirus. That said, we do have a line of anti-microbial products, that are scientifically proven to kill a broad spectrum of bacteria, virus and fungi. Now more than ever, people are understanding the value of a powerful yet, gentle antimicrobial solution. Turning to Avenova, I'm pleased to report that the global pandemic has had minimal impact on NovaBay's operations to date. NovaBay's stock price had hit an eight month high at $1.58 last week on March 19th. Because of the strong demand for antimicrobial products, NovaBay currently does not anticipate any structural changes to its operations or workforce, all of whom are U.S. based. Like all companies during this unprecedented and trying time, we will continue to assess as circumstances evolve. At our headquarters in the San Francisco Bay Area, we're complying with the requirements of the shelter-in-place mandate, with all of our employees having work from home capabilities. In terms of product availability, we're confident in having sufficient supply. Avenova manufacturing has been uninterrupted at our few contract manufacturers. All raw materials and other supplies used in the manufacturing of Avenova are available from various third-party suppliers in quantities, we believe will be adequate to meet our needs. Switching now to a review of our results, NovaBay ended a year of transition on a high note, with Avenova unit sales for December reaching their highest monthly level for all of 2019. Our momentum was largely driven by our new direct-to-consumer sales channel. You may recall that slightly more than a year ago, we shifted our U.S. commercial strategy for Avenova to focus on opportunities with economics that make the best sense for NovaBay. This shift included a significant reduction in our sales force that had been promoting prescription Avenova to eye care specialist, and was followed by the launch of non-prescription Avenova directly to consumers on Amazon.com in June. From that time, we launched the consumer channel in early June, unit sales from amazon.com grew each successive month. By the fourth quarter, nearly half of all Avenova units were sold on Amazon, up from 36% in the third quarter. We are encouraged by consumer reception to Avenova on Amazon, as we view this channel as holding the greatest opportunity for Avenova growth going forward. With the online consumer sales becoming an increasing percentage of our overall sales, we are pursuing a strategy to cost effectively expand our customer base on Amazon. To that end, earlier this week, we unveiled new consumer branding for Avenova with fresh packaging and reinvigorated messages, that emphasize quality of life themes. The refreshed branding is accompanied by a social media program, specifically directed towards broadening Avenova's appeal and expanding the universe of customers. I invite you to view this new exciting look online at avenova.com or on Amazon. Our refreshed branding and new marketing campaign were developed by a leading digital branding firm, and it highlights Avenova's distinct advantages in the marketplace. Avenova is formulated with our patented FDA cleared pure hypochlorous acid, and is the only pure hypochlorous acid solution on the market today. This pure formulation supports our assertion that Avenova is the best product available today, to topically treat chronic bacterial infections that affect approximately 85% of the dry eye market. Our hypochlorous acid formulation has antimicrobial properties, and is clinically proven to reduce bacteria on the ocular skin, by more than 90%, but yet is gentle, soothing and completely nontoxic. We're capturing these advantages through attractive packaging and consumer friendly messaging. Our new packaging encompasses a color palette that conveys concepts such as purity, premium, modern and science, as well as imagery representing the iris of the eye. It's highly distinctive from other competitor products, as you can see on Amazon. Our new consumer messaging focuses on quality of life attributes, such as the fact that hypochlorous acid replicates a substance naturally made by the body to fight bacteria, and that having a site interrupted by inflammation and irritation is more than a nuisance. It can rob you of the moments that really matter. Our messaging also features ease of incorporating Avenova into twice daily grooming routines, right alongside brushing your teeth and combing your hair. We're excited to reach consumers with new taglines such as purely you, skincare for your eyes, and we have lid and lash care down to a science. You may recall that we embarked on our consumer channel, as one of several strategies to address the issues we experienced with our prescription channel. Over the past several years prescription branded pharmaceuticals Avenova among them, have been significantly and negatively impacted by the trend towards higher deductible health care plans. In our efforts to maintain Avenova's affordability, we were compelled to offer more and more coupons and rebates. To mitigate the impact of coupon and rebating, we built relationships with partner pharmacies who sell prescription Avenova at the best possible price to their customers, and through our physician dispense channel in which eye care specialists resell Avenova directly to their patients. We are seeing a stabilization from these prescription based channels, providing us with the opportunity to focus on expanding our customer base. Notably, for all prescription sales, we are retaining our former packaging, which has a look and feel of a prescription product. And messaging and promotion for the prescription only product will continue to focus on eye care specialists who write prescriptions. Our decision to pursue the non-prescription direct-to-consumer channel was in response to our desire, to control the distribution of our own product, and also to increase the accessibility with customers purchasing Avenova through Amazon's rapid and efficient infrastructure. This channel capitalizes on the trend of marketing pharmaceuticals by allowing customers to forego a time consuming doctor's visit and a subsequent trip to the pharmacy, with the added potential benefit of offsetting costs in a high deductible health care environment. That said sale to consumers on Amazon come at a lower gross to net pricing in the prescription sales. As a result, while 48% of all Avenova units sold for the fourth quarter came from the consumer channel, and accounted for only 35% of total revenue. While these lower gross to net unit revenues impacted Avenova sales figures, we've reduced operating expenses for 2019 by 24% from the prior year, mainly due to the reduction of the size of our sales force. And as a final topic, our Chief Financial Officer, Jason Raleigh has tendered his resignation from NovaBay effective March 31, in order to take a job that's much closer to his home. Jason has been a significant asset to our company over the past four years, and has been instrumental in our transition since stepping into the CFO position last year. We wish him the best for continued professional success. I'm pleased to welcome Lynn Christopher to NovaBay, as our Interim CFO and Treasurer. We are delighted to be able to quickly fill this position through a consulting and executive services firm RoseRyan, with a highly qualified financial professional who has public company experience in the Life Sciences industry. Lynn joined us this Monday, and is working closely with Jason and our strong finance team here at NovaBay to support a seamless transition. I'm confident that we're in good hands until we're able to secure a permanent replacement for Jason. Now I'll turn the things over to Jason, so he can review our financial performance in more detail.

Thank you for those kind words, Justin, and good afternoon everyone. Let's start my financial review with Q4. Net sales for the fourth quarter of 2019 were $1.7 million, as this compares with $3.6 million from the prior year quarter. The decrease in net sales was primarily result of the decrease in the net selling price of Avenova products. Along with a decrease in the number of Avenova unit sold, largely due to a decrease in insurance coverage on the product by national payers. In response to the price pressure, we launched Avenova through Amazon, which helped to stabilize Avenova unit sales in 2019, but has a lower net selling price. In reviewing Q4, 2019 sales by channel, Avenova sales in the retail pharmacy channel were $897,000 or 53% of Avenova sales. Sales through the Avenova Direct were $601,000. And sales through our in-office direct channel were $202,000. Gross margin on net product revenue for the fourth quarter of 2019 was 65%, compared with 88% in the year-ago period, with the decrease due to lower gross net prices. Operating expenses for the fourth quarter of 2019 decreased 30% to $3.3 million, from $4.8 million a year-ago, reflecting the strategic shift in our U.S. commercial organization, in March of 2019. This is in line with our previously stated expectation to reduce operating expenses in 2019 related to the reduction in force. In reviewing Q4 expenses by line items, sales and marketing expense were $2.2 million, a 32% decrease from $3.2 million from the prior year period. The decrease was primarily due to a reduction in headcount, partly offset by an increase in direct marketing expenses. G&A expenses for the fourth quarter of 2019 were $1.2 million, a 22% decrease from $1.5 million from the prior year period. With the decline due to reduced headcount, offset by severance payments and consulting fees. R&D expense for Q4, 2019 were $18,000 compared with $107,000 in the year-ago period. Noncash loss on the fair value of warrant liability for Q4, 2019 was $187,000, which compared with a noncash gain of $340,000 for Q4 of 2018. Noncash gain on the embedded derivative associated with the convertible note for the fourth quarter of 2019 was up $1,000. The convertible note are associated with the loan completed in 2019, so there is no comparable gain or loss for the prior year period. Other expense for the fourth quarter of 2019 was $259,000, compared with other income of $6,000 in the prior year period. The other expenses reflect interest due on the promissory note issued in February 2019. The amortization of discount and the issuance costs related to the convertible note issued in March 2019. A beneficial conversion feature of $0.8 million was recorded in the fourth quarter of 2019, related to conversion of 2.7 million shares, series A preferred stock into 2.7 million shares of common stock. The transaction was recorded as a discount to preferred stock and an increase to additional paid-in capital. The company recorded no comparable item in the fourth quarter of 2018. NovaBay recorded a loss attributable to common shareholders for the 2019 fourth quarter of $3.5 million or $0.13 per share. This compares with a net loss for the 2018 fourth quarter of $1.3 million or $0.07 per share. Turning now to a full year financial results. Net sales for 2019 were $6.6 million and this compares with $12.5 million for 2018. The decrease was primarily due to the loss of insurance reimbursement, and the resulting lower Avenova gross to net pricing, offset by an increase in direct sales in the fourth quarter. Gross margin on product revenue was 74% for 2019, compared with 88% for 2018. Operating expense for 2019 decreased 24% to $14.2 million from $18.9 million for 2018. Sales and marketing expense declined 31% to $8.8 million from $12.8 million in 2018. But the decrease due to reduced sales representative headcount, partly offset by an increase in direct marketing expense. G&A expense decreased 11% to $5.3 million, from $5.8 million in 2018, with the decrease due to reduced headcount. R&D expense for 2019 were $184,000, compared with $259,000 in 2018. The noncash gain on the fair value of warrant liability for 2019 was $149,000, compared with a noncash gain for 2018 of $1.3 million. The noncash gain on the embedded derivative associated with a convertible note for 2019 was $424,000. The company recorded no comparable item in 2018. Other expenses for 2019 were $1.4 million compared with other income of $19,000 for 2018. The other expense was due to interest on the promissory note issued in February 2019. The amortization of discount and issuance of costs related to the convertible note issued in March 2019, and the issuance costs related to the issuance of warrants in August 2019. A beneficial conversion feature of $0.8 million was recorded in 2019, related to the conversion of 2.7 million shares of series A preferred stock into 1.7 million shares of common stock, as discussed in the quarterly financial results. The net loss attributable to common shareholders for 2019 was $10.4 million or $0.48 per share, compared with a net loss for 2018 of $6.5 million, or $0.39 per share. In reviewing our balance sheet, we had cash and cash equivalents of $6.9 million as of December 31, 2019. With that, I'll turn the call back to Justin.

Thank you, Jason. Our strategy this year is to build shareholder value by cost effectively expanding our customer base for Avenova, while leveraging our online and physician dispense channels, with product line extensions and new product offerings. As discussed, we are already executing on this strategy with the launch of our reinvigorated quality of life consumer branding for Avenova and there's more to come. In summary, the consumer response to having Avenova available on Amazon has been great and we expect continued growth from this channel throughout 2020. We are unveiling fresh consumer branding in a cost effective new social media campaign to build our customer base for Avenova through amazon.com. We are seeing stabilization in our prescription based sales for Avenova, and are continuing our commercial activities directed to those channels. We are targeting atomic and skincare products in line extensions. That will allow us to leverage our sales force in our physician dispense channels, under economics that makes sense for NovaBay. And we're evaluating new products to support cost efficient growth. And finally, in these most unusual circumstances, our NovaBay team is pleased to provide a source for the much needed KN95 mask, which is keeping in line with our commitment to the health and well-being of people worldwide. We got to be here to accomplish this objective during and after this crisis. With that overview, I thank you for your attention. Operator, we're now ready to take questions.

[Operator Instructions]

While we're waiting for the first question, I wanted to mention that earlier this week one of our large shareholders exercised their option to purchase approximately $200,000 worth of warrants, which were issued in a private placement in June 2019. These warrants were exercisable at $0.87 per share, and we believe this action is a vote of confidence in our company's future.

Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead with your question.

Hi, Justin, Jason and Lynn. How are you?

Good.

I got a bunch of questions. So I'll just run through them and you cut me off when you feel you need to. So, do you expect to see any mask revenue hit the first quarter?

Yes, of course. So, we are not taking returns on the masks because they are a disposable item and also a temporary item. So, as soon as we receive payment and ship them, that's when we record that revenue. So we will see a little bit of that in March, sort of just in the last two weeks here, but I think most of the significant revenue will be in April.

Got it. Okay. And then comment a little bit about the margins. I know that they were lagging than what we thought. And how that relates to -- pretty slow with how that relates to online versus direct? But can you talk about the margins as it relates to actual units? Was the actual units for Q4 greater than or less than Q3?

Yes. So we pushed out and sold more units in Q4 than we did in Q3. And December was a particularly strong month with more units being sold in December than any other month of the year. But a lot of that growth came from the lower GP channels of the online sales and the physician dispense channel.

Okay. And then how would that relate to your DTC activities? And in a perfect world, what would you like the composition to be of online versus your direct channel, versus the physician channel?

Yes. So, that's a great question. Right now, about half of our revenue is coming from the traditional physician and pharmacy channel. And I think that, that as I mentioned on the call, is I think going to stabilize and I'd like it to stay exactly I think where it is. But, I do see our future growth all coming from that direct-to-consumer channel. The market, I feel is very large for that channel. And there's a lot of potential there. And really looking for growth out of that channel, while the physician dispense and Rx omni-channels I think are going to stay right about where they are.

Okay. Got it. And then as far as the KN95. Could you talk to us a little bit about your supplier and the potential number of units, which could be available as far as their capacity? And your exclusiveness or not in North America?

Yes. So, this was something that I think was just born out of pure need in the marketplace, and our ability to meet that need. So, the supplier is one that's in China, because we have a lot of Chinese connections both with distribution and with our large majority shareholders. That's how we came in contact with the supplier called Earntz. And Earntz luckily has a huge capacity to manufacture these masks. So that's why I mentioned on the call, any large orders of 50,000 masks or more, can be met and we can deliver straight from the factory to a designated delivery address, anywhere in the United States. So I think, very pleased at this time to sort of help out people at large, because it is something that people are really clamoring for. And for us, to be able to provide this product that's -- and desperate need is, I think, especially gratifying for us.

Okay. And could you quantify huge and could you talk about competitive forces as far as ordering from Earntz into other territories or countries?

Well, so we heard that the Spanish government just ordered 1 million masks from Earntz. And Earntz is going to be able to provide that over the next couple of weeks. So I think that's indicative of their capacity to produce these masks. So, when I say, that their capacity is -- I don't want to say limitless but their capacity to produce these masks I think is, greater than any demand that we'll be able to conjure up here in the United States. So, the numbers that we'll be able to sell here in the United States, I couldn't even begin to guess at that. If you had asked me a month ago, if we would be selling mask I would have told you no. And now we are hustling up to try and meet demand and every shipment that shows up here at NovaBay is already sold out by the time it arrives.

Okay, got it. One for you, Jason. Could you kind of give me a sense for the consulting and severance portion of the sales and marketing for the quarter? I'm just trying to get a sense of what a baseline might look at on the sales and marketing kind of at a normalized level.

Yes. So, I'll let Jason answer that. But, I don't think that there is any severance.

There wasn't significant severance with the sales folks. It was limited to a two-week severance upon their departure of the sales team at the first part of the year. So there wasn't anything significant from a go forward run rate.

Okay, got it. And we're getting down toward the end. So any specific status that you could fill us in on either or both NovaWipes as well as CelleRx from the quarter?

Yes. So, NovaBay were always meant to be a small product line extension, and to take up the online real estate on Amazon. Just to improve the sort of storefront for Avenova and NovaBay storefront on Amazon. And people really do like those wipes a lot. And I've always been a big fan of those, because I think, people who use Avenova with the NovaWipes are going to get the best clinical result by using those two together. When you tell somebody to use a cotton pad or something like that oftentimes, they don't apply it right or they're not using the right application method. So, I'm a big fan of those wipes, but those were never meant to be sort of a huge revenue driver. They're, just more of a product line extension. And as far as a CelleRx is concern, we did launch that direct-to-consumer campaign, and doing a lot of social media and online advertising for that, because we're just trying to take advantage of that foundation that we created with Avenova and duplicating that for CelleRx. And so, we're getting some good recognition and brand recognition in the marketplace, but I think we will rebrand that similar to how we rebranded Avenova to reach a much broader audience.

Okay, got it. And last one if I may. Ramifications of the masks on your margins based off your Q4 margins. Would you expect it to be to drag that lower or drag that higher?

So the GP per mask, of course, is much lower, but I think as a percentage, it will probably match that, Avenova maybe it's a little bit less. But, just kind of happy to have those out on the market and adding to our topline.

Okay, perfect. Thanks, folks. That's it from me. I appreciate it.

Yes. So, Jeff the last thing I'll say about that without giving specifics, we're very cognizant of the price gouging that's going on in the marketplace. And I think we wanted to really keep our hands clean and our brand clean, and not in any way be participatory in that. So the masks are priced at a level that is I think, very reasonable. And we definitely don't want to price them high, so people would accuse us of price gouging. But one of the main drivers of these masks is the immediate need, so we're flying them in from China, which makes the shipping cost quite expensive. So, you're not going to see rock bottom prices there. So, we are making, I think a very small reasonable profit on those. Something that I think balances very well, the public need with our cost of doing business.

Perfect. Thanks, Justin.

Thank you. Great to talk to you.

[Operator instructions] Our next question comes from Edward Woo with Ascendiant Capital. Please go ahead with your question.

Yes. Congratulations on getting the masks. Have you thought about introducing other products that may be needed at the moment?

Yes, we absolutely have. Some of the other products that we're looking at are a little bit more complicated with greater lead time, but I think we're definitely tapping into our global supply network to see, if we can bring in any additional items that have a strong demand in the marketplace.

Great. And then, I know the impact obviously, on possible sales. But, since you do so much sales through Amazon, and there has been discussion about Amazon being overwhelmed and some delayed shipping times. Has that impacted your business at all?

Well, so Amazon is a behemoth and sometimes a little difficult to navigate. So, the great thing about Amazon is that, during normal times, their reach is very broad. And our advertising on Amazon actually has the greatest rate of return out of any of our advertising channel. So, in that respect Amazon is good. But, Amazon is also bad in the sense that you lose control over that distribution network. And if they push out your ship date, there's really not much you can do about that. So, Amazon I think is both good and bad. And, in relation to the mask, the first thing that we did when we heard that they were available for us to sell, of course, like we went to Amazon to see if we could list them, alongside Avenova. And they refused the listing and we couldn't get the mask up on Amazon. So, that's why we just decided to take control of it ourselves, and list them on our website and sell them directly. So, Amazon is both good and bad.

Great. Well, thank you for answering my questions and good luck. And thank you again for being proactive on during this crisis. Thank you.

Oh yes, absolutely. Great to talk to you, Ed.

There are no further questions at this time. Justin Hall, please proceed with the presentation or any closing remark.

Thank you once again for joining us and your interest in NovaBay. We look forward to updating you on our next call in May, to discuss our financial results for the first quarter of 2020. In the meantime, please have a good day.

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