Welcome to the NovaBay Pharmaceuticals 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 August 6, 2020. I would now like to turn the conference over to Yvonne Briggs. Please go ahead, ma'am.

Thank you. This is Yvonne Briggs with LHA. Thank you for participating in today's call. Joining me from NovaBay Pharmaceutical are Justin Hall, President and Chief Executive Officer and Andrew Jones, 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 law. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. In particular, there is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that results could change at any time and the contemplated impact of COVID-19 on NovaBay's operations and financial results, and its outlook is the best estimate based on the information available for today's discussion. For a list and description of risks and uncertainties, please review NovaBay's filings with the Securities and Exchange Commission at sec.gov. Furthermore, the contents of this conference call contains information that is accurate only as of the date of the live broadcast today, August 6, 2020. NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances except as required by law. Now, I'd like to turn over the call to Justin Hall. Justin?

Thank you, Yvonne. Good afternoon, everyone. And thank you for joining us. Today I'm very proud to share with you our second quarter results. At a time when many businesses struggled, we not only survived but thrived. We were reporting strong financial results for the second quarter with revenue of $4 million, up 122% over the prior year period, while narrowing our operating loss by 22%. We have also strengthened our cash balance significantly giving us financial security in a time of general uncertainty. Our strategic move a year ago to create a direct to consumer sales channel proved key to supporting year-over-year growth in unit volume. This channel allowed customers to order Avenova during the pandemic without ever leaving their homes and without a prescription while physician offices were largely closed and patient visits to eye care specialists virtually stopped. Second quarter revenue growth was driven by our ability to capitalize on our international health network to supply KN95 masks beginning in the early months of the pandemic when personal protective equipment was in short supply. Our team here in NovaBay demonstrated great agility in quickly creating the infrastructure to offer these masks with timely order fulfillment. As the COVID-19 pandemic continues, it's particularly gratifying to announce the results from a highly reputable independent laboratory confirming that Avenova kills the COVID-19 virus. Since Avenova's inception, we have known it to be a very powerful anti-microbial spray solution effective against all types of pathogens, including a wide variety of viruses, bacteria and fungi. Now we have the results from a highly reputable independent laboratory confirming Avenova kills the coronavirus that causes COVID-19. While many disinfectants kill the virus, Avenova is the only spray solution that is completely non-toxic and gentle enough for use on the sensitive skin around the eyes, nose and mouth. These parts of the body are known to be particularly susceptible to COVID-19 transmission. Avenova is formulated with our pure FDA cleared hypochlorous acid, which is a significant differentiator. I'd like to remind everybody that not all hypochlorous acid products are alike. Unlike some other well-known disinfectants made by familiar names like Lysol and Clorox, Avenova is specifically designed for use on skin. Avenova is pure manufactured in America and can be applied repeatedly throughout the day. As a cautionary note, I'd like to warn consumers to be careful of other hypochlorous acid products. Most are not pharmaceutical grade like Avenova and may not contain a sufficiently high concentration of hypochlorous acid to kill the COVID-19 virus. In times like these, the quality of our products really sets us apart from all other generic and copycat products. It's not surprising given the resurgence in COVID-19 cases that consumers and physicians are reacting favorably to these laboratory test results. Since announcing these results, we've seen an uptick in Avenova sales in both the consumer and physician dispense channels. Additionally, we're seeing some doctors come back to our brand after not having prescribed Avenova for several years. In addition to our regular customers, we are now fulfilling bulk orders for Avenova and other PPE from doctors and large medical institutions. These types of bulk orders are new for us, and they've shown us the opportunity that we currently have in front of us to truly grow our brand and expand into new markets. During these turbulent times, many low-quality healthcare products with false claims of effectiveness have flooded the marketplace. Consumers and professionals have become skeptical and thus our reputation for delivering quality products has become much more valuable. We are working with our marketing team to incorporate that message of quality into our digital advertising program. This is a cost-effective means for us to create awareness about Avenova's virus-killing capability with current customers while also expanding our customer base. We have been more active in advertising and in other media including San Francisco City kiosks, New York City subway signage, television and print. We are also submitting the laboratory test results to the Environmental Protection Agency for inclusion of Avenova on the EPA's approved list of disinfectants. The EPA's review process will likely require several weeks. We're also working towards a strong future with a significantly strengthened balance sheet to support our business strategy. During the second quarter, we sold stock through an aftermarket financing program and recently completed a very successful warrant transaction. We were able to exercise and renegotiate most of our outstanding warrants resulting in a stabilization of our balance sheet by eliminating the warrant liability and the related large non-cash swings in our P&L. With the addition of these funds, we will also maintain compliance with the continued listing requirements of the New York Stock Exchange. This is huge. Lastly, we continue to actively work with the FDA on the emergency use authorization or EUA for the Fluorecare SARS-CoV-2 antibody test kit. Since submitting the test kit for review, the FDA has requested a ton of additional data which we have provided. We recently received what we believe is the final round of questions and we continue to be hopeful in securing EUA for this kit. There currently continues to be a strong demand for these types of kits. Now, I'll turn the call over to Andy to review our financial performance in more detail.

Thank you, Justin, and good afternoon, everyone. I'll begin my financial review with top-line results for the second quarter of 2020. As Justin mentioned, net product revenue increased 122% to $4 million, up from $1.8 million for the second quarter of 2019. The increase was due to $2.8 million from net sales of KN95 masks with no comparable revenue in the second quarter of 2019. Avenova revenue for the quarter was $1.1 million, down from $1.6 million for the second quarter of 2019. Although we sold more Avenova units in the current year quarter versus the prior year quarter, our net average selling price was lower. This was primarily due to lower insurance coverage by national payers and our related launch of Avenova Direct in June 2019 with lower relative pricing. Gross margin on net sales for Q2 of 2020 was 49%. This compares with 77% in the year ago period. This decline reflects the addition of the KN95 masks which are sold with a lower relative margin. Operating expenses for the second quarter of 2020 were $3 million, up from $2.8 million a year ago. Specifically, sales and marketing expenses were $1.4 million, decreasing from $1.5 million in the prior year period. This was primarily due to lower headcount, which was partially offset by an increase in direct marketing expenses. G&A expenses were $1.5 million, up from $1.2 million a year ago, due primarily to higher legal fees. R&D expenses for Q2 were $115,000 and this compares to $32,000 for the year ago period. Operating loss for the second quarter of 2020 was $1.1 million which is a 21% improvement from the $1.4 million operating loss that we reported for the second quarter of 2019. The non-cash loss on the fair value of warrant liability for Q2 2020 was $3.8 million versus a non-cash loss of $487,000 for Q2 of 2019. As Justin just mentioned, subsequent to the end of the second quarter of this year nearly all of the warrants associated with this liability were renegotiated and exercised. The non-cash loss from the adjustments to the fair value of derivative liability for the second quarter of 2019 was $246,000. We did not record a comparable loss or gain for the second quarter of 2020. Net other income for the second quarter of 2020 was $362,000. This consisted primarily of income recognized related to qualified expenses incurred under the Payroll Protection Program. This compares with net other expense of $387,000 for the second quarter of 2019, which primarily consisted of interest expenses related to a convertible note, which was issued in March 2019. The net loss for the 2020 second quarter was $4.5 million or $0.5 per share. This compares with a net loss for the second quarter of 2019 of $2.5 million or $0.14 per share. And now briefly for our six months' results; net product revenue for the first half of 2020 increased 79% to $5.9 million. Gross margin on product revenue was 55% compared with 77% for the first half of 2019. Operating expenses for the first half of 2020 were $5.9 million which is 26% less than the prior year period and includes sales and marketing expenses of $3 million, G&A expenses of $2.8 million and R&D expenses of $124,000. Our operating loss for the first half of 2020 narrowed by 53% to $2.6 million from $5.5 million for the first half of 2019. The net loss for the six months ended June 30, 2020, was $6.1 million or $0.21 per share compared with a net loss for the first six months of 2019 of $6.7 million or $0.38 per share. In reviewing our balance sheet as of the end of the second quarter of 2020, we had cash and cash equivalents of $8.8 million, compared with $6.9 million as of the end of 2019. During the second quarter, as Justin mentioned, we raised proceeds from the sale of common stock through an ATM facility resulting in net proceeds of $5.2 million. As mentioned, subsequent to the close of the quarter in July, we raised net proceeds of $6.4 million through the exercise of the warrants. With that, I'll turn the call back to Justin.

Thanks, Andy. Before we open the call to questions, let me summarize our recent progress in near term plans. We are maintaining our supply of Avenova with no manufacturing issues. We have seen a recent increase in Avenova orders following the announcement of the independent lab testing confirming that our pure proprietary hypochlorous acid solution kills the COVID-19 virus. We continue to focus on online sales which enables consumers to buy Avenova without a prescription and without leaving home. Our sales force continues to engage with eye care specialists through phone and email while in-person visits are not feasible, as well as focusing on opportunities for bulk sales of PPE. Our team has successfully built the infrastructure to fulfill PPE orders responsibly and with reasonably quick turnaround times. We have added additional PPE products as the pandemic continues in order to meet the safety needs of our fellow Americans. Importantly, we have significantly strengthened our balance sheet giving us the resources we need to grow the business. From a business development perspective, we continue targeting ophthalmic and skincare products in line extensions that will allow us to leverage our sales force and utilize our established sales channels under economic terms that makes sense for NovaBay. We are regularly evaluating new products to support profitable growth. I'm proud of our ability to thrive in a rapidly changing COVID-19 environment, while we position the company for a bright future in a post-pandemic world. With that overview, I thank you for your attention. Operator, ready to take questions.

[Operator Instructions]

While we're waiting for the first question, I want to mention that we have received close to 50 doctor testimonials over the past three months supporting Avenova as the preferred lid and lash solution. Okay, operator, we're ready for the first question.

Our first question will come from the line of Jeffrey Cohen with Ladenburg Thalmann.

Hi, Justin and Andy, how are you? I might start with Andy. Cash was at including the ATM last quarter so you netted $6.4 million. Can you give us a guesstimate what it is spot now and can you give us a better guesstimate on the number of outstanding shares now, please?

Sure, so our cash balance is in the $13 million to $14 million range after the recent warrant exercises and the outstanding shares is I'll give you the number from the cover of our queue. It's 41,739,904.

Okay, got it. And then on the debt side, you peel off that $7.6 million warrant liability from Q2 so that'll go to zero?

Yes, so after we renegotiated the warrants, we anticipate that that liability will come off the books and be reclassed to equity.

Okay, I got it. Then Justin, could you talk a little bit about Avenova specifically and the more recent trajectory that you've seen, perhaps, made in April and June and May and July and June?

Yes, actually very gladly. This is a little bit of a wild ride. We did see a dip in Avenova sales during Q2 because of the shutdown. So ophthalmologists and optometrists like everybody else, were not in the office working and they weren't writing prescriptions as they normally would for Avenova in eye care prescription product. So we did see a dip there, but we always knew that Avenova was a very powerful antimicrobial. We didn't want people just to take our word for it so we engaged a lab to do that testing for us and it took a long time because the lab just like eye care professionals and all NovaBay employees are all trying to work remotely and sort of figure things out. But this is not testing that can be done remotely. So it took a little bit longer to do it, but the results were tremendous. We were really happy with them. So that has, as I mentioned in the script, really created an entirely new market for us. It's really a market that I'll describe as a sort of facial sanitizer of which there really is no dominant market player. Everybody knows Lysol wipes, Clorox hand sanitizer. Everybody's just going crazy for hand sanitizer. We can't even keep it in stock around the office here. What I think Americans really need instead of hand sanitizer and wiping down surfaces is they need a facial sanitizer and in Avenova, we have that. Those results we announced really only three weeks ago and put it out to our existing universe and it was really well accepted. Now, I think, Andy and I feel the burden along with our marketing department to really get that message out beyond our current universe. So it's not just ophthalmologists, optometrists, people who have been prescribed our product or purchased it before. It's really something that I think everybody needs. So that's our next challenge, which I think we gladly accept.

Okay. So while you don't put out any specific guidance, it sounds like what I'm hearing is perhaps an uptick from the Q2 number back toward some more recent historic numbers like Q4 and Q1 and with plenty of upside from there?

Absolutely.

Okay. On the PPE side, could you talk about the masks a little bit? It looks like that's your second SKU and the mask lot being slightly different from the first batch of providers or suppliers. Any comment there as far as pricing or supply or pull-through?

Sure. Well, actually, Jeff, I remember talking to you during our first quarter call and you said, hey, I hope these masks are only temporary. I think they have been really great for us in Q2, and I think we'll continue to supply them for as long as demand persists but it's not going to be the name of the game here going forward. We have two different SKUs that are available. One is a lower-cost option that's not on the CDC whitelist. And then the second one is on the CDC whitelist and it's a little bit more substantial. It is I'll say less comfortable to wear. It's not something that when I'm going to go on a walk around the neighborhood that I want to have on my face but when I am in an office or around people who are closer than six feet, I would much prefer the second option, which is a KN95 mask that's on the CDC whitelist. We have the two different options because I think that there's - I think everybody has different needs for a mask and sometimes you want a little bit more protection and you're willing to pay a little bit more for that. And then other times, you just kind of want a sanitary and disposable facial covering and so we offer both.

Okay. That's pretty clear, but it sounds like big picture the PPE business would not necessarily be your focus on primary business I'll say next year?

Absolutely. When we're looking out to 2021 I think, we'll see a return to sort of a - can't believe I'm saying this, like a normal selling motion and business environment hopefully. I think we need to be prepared when PPE can no longer be an item for us to tout in top-line revenue. We're preparing for that now because I see that as sort of an inevitable future, but in the meantime, we find it really gratifying just to be able to fulfill these needs. When we are talking to physicians and institutions, all the way from hospital groups all the way down to public schools, people say, Hey, what can you get for me, and we can fulfill that need. I think it would be foolhardy not to help people when they need it and I think it would also be foolhardy from a business perspective not to make those sales when it's available to us.

Which is a perfect segue into my last question, if you could talk about the M&A front and other products and activities there if you have any comments? Thanks a lot.

Sure. Jeff, I cannot wait for the day when we have a formal announcement of either a product acquisition or something. We don't have anything right now that we would like to announce, but we do have things in the hopper. I look forward to when it's appropriate to publicly announce this.

That's very helpful. Thanks, guys. I appreciate it.

Our next question will come from the line of [indiscernible] with the Sidian Capital.

Thank you for taking my question. My question is, again, on the mask and the PPE products. Are you still seeing robust demand for the mask and how is the supply chain for masks right now?

Things have really dramatically changed. And we have broadened our offering quite a bit because there was a - I'll characterize it as an extreme shortage back in March and April, but the supply, I'll say the global supply has caught up and got up to speed. Masks are no longer in huge demand but interestingly, what we have received a lot of requests for and seeing a growing demand and somewhat of a shortage is gloves, nitrile gloves. I think as restaurants start to open up and that service industry tries to open back up, gloves is the next big shortage and demand and so we're trying to fulfill some of those. It's just a part of the evolving environment that we're trying to be a part of.

Great. I know you said in 2021 you expect PPE to not be a focus for you guys but what about Q3 and Q4 or do you think there's going to be a drop off even before that?

A very interesting question because I don't think anybody knows. I think we would be foolhardy to try and predict towards the end of the year because if you had told me in March at the end of Q1 that we were going to have a Q2 like we did both from a business perspective, market perspective and operational perspective, I would have never predicted that. So really towards the end of the year, I simply don't know. I do see a market saturation with supply and it certainly is not the Wild West that we saw in March and April.

That sounds good. Well, thank you for answering my questions and I wish you guys good luck. Thank you.

There are no further questions at this time. Please proceed with your closing remarks.

Thank you once again for joining us today and your interest in NovaBay. We look forward to updating you during our next call in November to discuss the third quarter financial results and progress. In the meantime, 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.