Good afternoon and welcome to NovaBay Pharmaceuticals First Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. 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 are Justin Hall, Chief Executive Officer and General Counsel; and Andy 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 the federal securities laws. 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 uncertainty about the integration of DERMAdoctor into NovaBay’s operations and circumstances beyond the company's control that could impact the broader economic such as COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of DERMAdoctor acquisition, COVID-19 and circumstances that impact the boarder economy on NovaBay’s operations, its 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 content of this conference call contains information that is accurate only as of the date of the live broadcast, May 12, 2022. NovaBay undertakes no obligation to revise or update any statements to reflect the events or circumstances except as required by law. And now, I'd like to turn the call over to Justin Hall, Justin?

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. I'm pleased to begin by reporting another quarter of record high Avenova Spray unit sales through our over-the-counter channel, which increased by 16% year-over-year, and by 7% from Q4. We are also reporting progress in integrating NovaBay and DERMAdoctor operations and I'd like to welcome the DERMAdoctor team to today's call. Importantly, we are aggressively executing on various initiatives to drive further top-line gains as we build on our presence in the large and growing eye care and skincare markets. A key component of our strategy is expanding our Avenova and DERMAdoctor portfolios with highly-effective problem solving products for common conditions. Earlier this week, we announced the launch of new next generation cutting edge anti-aging products within two of our most popular DERMAdoctor collections. Our newest products were created by our Chief Product Officer, Audrey Kunin, who is a board-certified dermatologist and Founder of DERMAdoctor. Using her extensive knowledge of skincare, she devised these unique and clinically proven formulas to help reduce the appearance of wrinkles, fine lines, pores and discoloration for a brighter, more youthful appearance. Joining our top selling Kakadu C product family is Kakadu C with Retinol. This new product combines high potency retinol to resurface and exfoliate skin with vitamin C, ferulic acid and vitamin E. The combination of these particular ingredients creates a highly effective hydrating emulsion to fight free radical damage caused by environmental toxins or ultraviolet light. You may know that the Kakadu plum, which is harvested in a remote Australian territory, contains on average 55 times more vitamin C than Florida oranges. Our new Calm Cool + Corrected, Bakuchiol Retinol Alternative Serum is specifically created for those with sensitive skin rosacea or eczema prone skin and marks the third expansion this year of our Calm Cool + Corrected collection. This new product features high performance Bakuchiol, which is a natural plant based alternative to retinol that gently increases cellular turnover and collagen production. This ingredient is combined with a moisturizer and gentle natural exfoliant into a luxe serum with skin-soothing and calming benefits. Also, since our last call in late March, we launched Calm Cool + Corrected Hydrating Cleansing Oil. That's a soap-free and pH balanced product designed to moisturize skin and remove makeup while keeping the skin hydrated. All told, so far in 2022, we have introduced five new products and have several more that are under development or are being prepared for commercial launch. All of our new offerings complement our corporate vision and purpose of offering proprietary OTC products that are effective, scientifically developed and clinically proven yet gentle, and importantly, address common yet underserved conditions. All of our products are conveniently available through amazon.com. However, they are of course available through our own websites, avenova.com and dermadoctor.com. All launches are being executed under our low cost model which allows us to test market acceptance before committing to a larger investment associated with a broader commercial launch. Beyond our product pipeline, we're pursuing growth by tapping into the complementary skill sets of our NovaBay and DERMAdoctor teams to expand marketing and distribution of our existing products. This includes leveraging our collective expertise in developing robust social media programs and our strong marketing presence across all digital channels to create programs that allow consumers to engage with our brand through social media and influencer campaigns. Among these, we are building upon Audrey's position as a skincare thought leader, through interviews with popular online consumer publications. Just in the past month, Audrey has been quoted in articles appearing in Women's Wear Daily, Good + Well and Oprah Daily. Audrey also made her second appearance this year as a guest on the QVC Network featuring DERMAdoctor Calm Cool + Corrected Eczema Balm. This time on the program entitled Get Ready, Gorgeous with Elise. We expect Audrey to make additional QVC appearances later this year. Expanding marketing activities to international markets is a key priority. To this end, our new partner in China is now managing DERMAdoctor's flagship store on tmall.com, which is the leading business-to-consumer online retailer in China. Social media platforms like TikTok are effective ways to attract new customers in China. And our marketing partner brings an extensive network of bloggers and influencers along with strong social media brand building capabilities. We continue to evaluate ways to leverage our network of international distributors and retailers to drive sales of our products throughout the world. And lastly, we are now offering Avenova Spray bottles, three Avenova Spray bottles as a kitted bundle on Amazon, which is particularly appealing to those who tell us that they simply can't live without our product. We have more loyal customers now than ever before. The bundle is sold at a slight discount providing savings to our most loyal customers. We're taking advantage of this bundled sale to include a DERMAdoctor product sample to encourage cross-selling opportunities. Our kitted bundle is a high margin sale that allows us to capitalize on the operational synergy with DERMAdoctor of consolidating our warehouse operations. All orders placed through our Avenova website are now being fulfilled by DERMAdoctor’s facility in Kansas City. By combining warehouse operations, we gain greater control over product fulfillment in our supply chain. This is especially critical during a time when many companies have been struggling with supply chain issues and the related effects on fulfillment, inflation and margins. Now, I'd like to turn the call over to Andy Jones to review our Q1 financial performance. Andy? Andy Jones : Thank you, Justin, and good afternoon, everybody. As a reminder, we closed the DERMAdoctor acquisition in November 2021. So our financial results for the first quarter of 2022 reflect a full quarter of combined NovaBay and DERMAdoctor results. Product revenue in Q1 2022 was $2.6 million. That's up 46% from $1.8 million for the prior year period and includes $0.9 million of DERMAdoctor product sales. Avenova Spray sales for the first quarter of 2022 were $1.4 million versus $1.6 million for the first quarter of 2021. The decrease reflects an unanticipated increase in the rate of return of expired Avenova Spray units which were purchased by retail pharmacy distributors during our period of prescription sales decline in 2019 and 2020 when we launched our OTC Avenova Spray product and the impact of the COVID-19 pandemic took hold. We derive our estimated accrual for future product returns from historical data and therefore have increased our accrual accordingly for this actual increase. There is always a risk that the actual rate of return and/or our accrual for future returns can increase again in the future. That said, our overall exposure to returns is declining over time as higher volumes of inventory purchased in the past become no longer subject to return. The decrease in Avenova Spray revenue for the 2022 quarter was partially offset by an increase in the number of units sold through the OTC and physician-dispensed channel, although at an average net selling price that is lower than units sold through the pharmacy channel. Gross margin for the 2022 first quarter was 58%, down from 75% for the 2021 quarter. This decrease was a result of the increase in prescription product returns, as well as the additional sales from DERMAdoctor products and NeutroPhase sales in the 2022 period with no comparable revenue in the prior year quarter. Total operating expenses for Q1 2021 were $3.9 million, compared with $2.9 million in the prior year quarter. Sales and marketing expenses were unchanged at $1.7 million, with $0.4 million in DERMAdoctor sales and marketing costs in the current year quarter, offset by a decrease in NovaBay sales headcount, which took place in early 2021, as well as non-recurring marketing costs incurred in 2021. G&A expenses were $2.2 million in Q1 of 2022. This compares with $1.2 million a year ago. The 2022 period, of course included DERMAdoctor G&A costs, as well as onetime costs associated with our Special Meeting of Stockholders and higher personnel costs. Additionally, G&A expenses for the prior year period were impacted by a reduction or an offset for the receipt of an insurance reimbursement. With the majority of DERMAdoctor integration and financing costs behind us, we do anticipate that our ongoing G&A expenses will decrease from current levels. R&D expenses for the first quarter of 2022 were $28,000. This compares with $5,000 for the prior year period. And this is reflective of the fact that we can create, develop and release new products without incurring significant R&D costs. Our operating loss for the first quarter of 2022 was $2.4 million. This compares with an operating loss for the prior year quarter of $1.5 million. We recorded a non-cash gain on changes in fair value of warrant liability in the 2022 first quarter of $2.1 million. This liability was reclassified to equity during the quarter and will no longer require fair value adjustments in the future, which could impact our statement of operations. The net loss attributable to common stockholders for Q1 of 2022 was $111,000 or $0.00 per share. This includes the impact of the non-cash gain on changes in fair value of warrant liability. The prior year quarter net loss attributable to common stockholders was $1.5 million or $0.04 per share. As of the end of the first quarter of 2022, we had cash and cash equivalents of $5.6 million. I'm pleased to report that we believe our current cash is sufficient to fund operations throughout the coming year, including the cost effective development and launch of new products under both the Avenova and DERMAdoctor names. And with that, I'll turn the call back over to Justin.

Thanks, Andy. I'm enthusiastic about NovaBay's future. We are executing on a focused strategy at aiming -- that's aimed at creating a stronger company with a broad and expanded product mix and faster top-line growth. With Avenova and DERMAdoctor, we have two established high margin brands in the large and growing skincare and eye care markets. Both brands offer predictably -- predictable, large reoccurring revenue from customers who are extremely loyal to our high quality products. We are generating organic sales by expanding digital marketing campaigns to reach new customers and widen our customer demographics and are building out our Avenova and DERMAdoctor brands with new, innovative, scientifically developed OTC products with launches planned throughout the year. We are already executing on our strategy and we have much more to accomplish as we progress through the year. Given the timing of our initiatives, we expect the majority of our growth in 2022 will come in the second half of the year. We are just getting started. With that, I will thank you for your attention. Operator, we're now ready to take questions.

[Operator Instructions]

Before we take questions, I'd like to thank our stockholders for their support in passing all proposals as put forth in our 2022 proxy. We are pleased to announce that the results of voting at our Annual Meeting of Stockholders which was held yesterday, everything passed. So with that operator, we're ready for questions.

Our first question will come from Jeffrey Cohen with Ladenburg Thalmann. Destiny Hance : Hi, Justin and Andy. This is actually Destiny on for Jeff, thank you for taking our question. Andy, maybe first, we can just circle back to the margins for modeling purposes. How should we be thinking about those throughout the remainder of 2022 given your commentary around some of the additional potential returns you could see throughout the year?

I Destiny, good to talk to you. Yes, so we feel comfortable with where we're at in terms of our accrual at the end of the first quarter for returns. As I mentioned, there's always a risk of increase. But we believe that risk and the pool of potential returns is declining over time. So, at this time, we don't anticipate any impacts on the returns. As you know, our product mix has an impact on our margins. DERMAdoctor has traditionally been right around 60% and we've been right around 70%. So we'll land somewhere in between those two, depending on the mix of products this year. Destiny Hance : And then I know you had some commentary around the synergies from consolidating the warehouse. I'm just wondering if you could talk a bit more about any supply chain disruptions you're noticing? And have you had to take pricing at all to kind of offset the current inflationary pressures?

Yes, so we are, as we said, grateful for the timing and the fact that we can put inventory and components into the DERMAdoctor warehouse and have greater control over our logistics and supply chain. So, thankfully, and I'll knock on wood here, we haven't seen a material impact to our business from the supply chain. There is, of course, always a marginal increase, but I wouldn't say one that has materially affected our business. And I think with our manufacturing, we have prices locked in at least through the rest of the year. So that pressure on our supply chain shouldn't be too great. And as far as our price increase, we are considering it. But we also want to be conscious about our consumers and not raise prices and sort of defer any purchases or ability to obtain new customers. So I think that is -- to be fair, I'll say that we're considering it, but haven't implemented it yet. Destiny Hance : And then I heard you mention some additional sales to those physician-dispensed channels. Is there anything to call out here in terms of trends? Or do you think additional sales here were more just from the reopening after the surge of COVID in January? Or how was that looking and how do you think about that?

So I'll say that is Q1 of 2021 was still impacted by COVID and I would say Q1 of 2022 was less so. So nationwide, we really didn't see a shutdown, doctors were back in their offices, reselling of Avenova and also writing prescriptions. So I think a lot of it is due to environmental factors there. Although, I will say that we are sort of ramping up our digital marketing within the physician-dispensed channel. But the Q1 difference is mostly just environmental. Destiny Hance : And then maybe sticking with the topic of marketing. Could you discuss customer acquisition costs currently compared to your initial launch throughout your digital platforms? And then what is anticipated to be going forward?

Yes, so our customer acquisition costs. When we originally launched the OTC version of Avenova in June 2019, our customer acquisition cost was absurdly small. Because, we had a certain loyal following, and this pent up demand and sort of this problem where people loved the product, but couldn't get their hands on it. So initially, we took advantage a lot of that sort of brand awareness within the clinical and medical arena. But as we move more into the consumer arena, our customer acquisition cost is getting higher. And so I've talked about in the past how we think that Avenova is a really great product for people with lash extensions and false eyelashes. And expanding into that market, the customer acquisition costs will be higher than what we have seen in the past. But one of our big initiatives to break into new markets is through corporate partnerships, brands that have established themselves in that market and have a customer base of their own, and would like to co-market or co-brand Avenova with us. So I think there are definitely cost effective ways for us to acquire entirely new customers in entirely new segments. Destiny Hance : You answered my next question about the lash extension market. So that’s great. Maybe I'll just circle back to my last couple of questions to DERMAdoctor. Could you talk about the pipeline currently, not too much detail, obviously, for competitive reasons, but maybe how many products you anticipate to launch in total throughout 2022?

Yes, so, we really can't say, not only for competitive purposes, but we're evaluating all of those. So sorry, Destiny. Well, you'll have to keep your eye on us to know.

Okay, fair enough. And then lastly for us, you mentioned bundling with the Avenova products. I'm curious, are you also doing that with some of your DERMAdoctor products? And then if you could just touch additionally on some of the feedback, maybe sales trends after Dr. Audrey's last appearance on QVC?

Yes, so I love these kitted bundles. They are a new addition. And, sort of, not surprisingly, they really took off. And I wish that we had done it sooner. But the kitted bundles for both Avenova and DERMAdoctor, customers just really love them. And as far as Audrey and QVC, both of her appearances this year have gone over really, really well. Not only have we gotten good feedback from QVC itself, but we've gotten really good feedback from customers. And it's one of those things when you just are out there in the world promoting your products, and you have good products and a very relatable person selling them, a rising tide lifts all boats. So, we saw an increase in DERMAdoctor sales on our own website, and then also through Amazon after her QVC appearances. So I would say they were a big success.

Our next question comes from [Rafi Khaleed] with Ascendiant Capital Markets. Edward Woo : Hi, this is Edward Woo with Ascendiant Capital. Thanks for taking my call. A quick question. Any changes in the competitive environment?

Well, the skincare market is very crowded and competitive. But it has been for a very long time. And both DERMAdoctor and Avenova have been solid brands for many years. So, I do not see any changes in the recent environment that haven't been around for years before. Edward Woo : Okay, great. Now, are you seeing the macroeconomic slowdowns?

We have not yet. We are keeping our eye on that. And always keeping an eye on consumer confidence, because that plays a big part in our success and ability to sell, but we have not so far seen any of that affect our business.

This concludes our question-and-answer session. I'd like to turn the conference back over to the Chief Executive Officer, Justin Hall, for any closing remarks.

Thank you once again for joining us and your interest in NovaBay. We are extremely excited about our progress and the very bright future we envision. We look forward to reporting progress during our Q2 2022 investor call in August. In the meantime, have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.