Welcome to the NovaBay Pharmaceuticals Fourth Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 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 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 federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially 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 anticipated impact of COVID-19 on NovaBay's operations, its financial results, and its outlook is the best estimate based on 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, March 25, 2021. 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 over to Justin Hall. Justin?

Thank you, Jody. Good afternoon, everyone, and thank you for joining us. 2020 was a transformative year for NovaBay. During a tumultuous year, we increased product revenue by an impressive 50% over the prior year. We transformed our marketing by developing and deploying more sophisticated strategies that more than tripled our online sales of Avenova. We transformed our sales efforts by reducing our field sales force and focusing more on telephonic outreach by our internal sales team. We pivoted quickly when PPE was in short supply and added to our top line revenue. Lastly, we transformed our balance sheet by raising cash and eliminating all major debt instruments. Over the counter, Avenova continues to be our number one priority and where we see the most potential for continued growth. More than 50% of our revenue in 2020 and more than 60% of our revenue in Q4 came through our online sales channel. Additionally, Avenova is becoming available at a growing number of CVS stores nationwide, thereby greatly expanding consumer access and marking our entry into brick and mortar retail stores. Avenova is also available for purchase at CVS.com. More people than ever are using Avenova due in large part to the ease of access through these multiple channels, but also due to the continued strong support from physicians. Doctors and patients love Avenova. We continue to grow our customer base and increase the number of repeat users. As a reminder, chronic dry eye disease affects approximately 30 million Americans with ocular bacteria accounting for about 85% of these cases. Avenova is the only commercial hypochlorous acid lid and lash product clinically proven to reduce the bacterial load on ocular skin surfaces, thus effectively addressing the underlying cause of bacterial dry eye. We believe Avenova is the product of choice for consumers and eye care specialists alike due to its unique formulation of pharmaceutical-grade hypochlorous acid, making it the purest lid and lash solution on the market. Unlike many of our competitors, Avenova provides the consumer with the added comfort of knowing it's manufactured in the United States. I'm pleased to report that Avenova unit sales for 2020 reached an all-time record high, up 50% over the prior year. We experienced a negative impact on Avenova unit sales during the second quarter of 2020 due to widespread COVID-19 disruptions, but sales rebounded in the second half of the year. As we are reporting today, Avenova unit sales reached a new quarterly record in the fourth quarter breaking the previous record set in the third quarter. Online sales of Avenova continued to be our fastest-growing channel last year, with unit sales up over 200% over the prior year. Just under two years ago, we expanded accessibility to Avenova by offering the full prescription-strength product for sale directly to consumers online without a prescription. It’s no surprise that this direct-to-consumer channel proved critically important during 2020, allowing consumers to order Avenova without leaving their homes and without a trip to the doctor during the pandemic. Among our actions last year to support Avenova sales, in September, we were able to add the Subscribe & Save feature on Amazon.com and Avenova.com. This feature provides a discount to customers who automate recurring orders and has the positive benefit to NovaBay of increasing repeat customers, increasing recurring revenue, and improving visibility on future sales. A large number of customers who have signed up for this provide a strong indication of a very loyal following for Avenova. Last year, we expanded consumer access by making Avenova available through Walmart.com, another one of our nation's largest online retailers. In our physician-dispensed channel, we benefited from a 17% year-over-year growth in unit sales. Of the total unit sales from this channel in 2020, approximately two-thirds came during the second half of the year, as physician offices began to reopen and operate under limited hours. This physician-dispensed channel is important not only for its revenue but also for the halo effect it creates around the Avenova brand. With a record number of units being sold directly from doctors, Avenova is clearly the premier doctor-recommended brand. With approximately 40,000 licensed eye care professionals in the United States, we still have plenty of opportunity to expand in the sales channel and plan to do so by utilizing our cost-effective in-house sales team. This year, in addition to growing our physician-dispensed channel, we are supercharging our online sales channel with new digital data-driven marketing programs. These programs are comprehensive and combine customized storytelling with a cohesive, consistent creative strategy. This approach ensures that we're using the right message for the right customer segments. The effectiveness of our new programs will be tracked to real-time analytics, reporting, and optimization to ensure that these programs truly deliver results. Turning now to CelleRx Clinical Reset, we introduced this unique pharmaceutical product into the beauty market in late 2020. Clinical Reset is a gentle, calming, soothing facial spray that disrupts the layer of bacteria that settles and grows on the face. It keeps the skin's natural barrier intact, which is important because when the barrier is out of balance, acne, rosacea, and infection can set in. During the pandemic, we have all learned the importance of personal care and that skincare is an essential part of that routine. Using Clinical Reset is highly complementary to a daily beauty regimen and can be used by both men and women. This product, formulated with our pure hypochlorous acid, provides consumers with access to an entirely new level of clinical research and rigor that is often missing from the traditional beauty industry. We will be launching digital media campaigns this year for Clinical Reset. The beauty market is crowded, and the success of Clinical Reset will be linked to our ability to develop branding that sets it apart as a distinct new category with a product that penetrates the skin's biofilm and empowers all other beauty products to work their best. As an initial step, our media partner is researching consumer insights that can be used to drive branding and messaging. Our objective is to build a strategic targeting effort that aligns a compelling brand story and advertising to secure new and repeat customers. We look forward to providing updates on this branding during future calls. Lastly, our other key corporate priority for 2021 is to pursue opportunities that will expand our commercial product portfolio in the large ophthalmic and skincare markets.

Thank you, Justin. Good afternoon, everyone. Let's start with Q4 top line results. Total net product revenue for the fourth quarter of 2020 was $1.9 million, that's up 10% from $1.7 million for the prior year quarter. The 2020 quarter included approximately $350,000 from sales of NeutroPhase, our FDA-cleared skin and wound cleanser. Avenova product revenue for the fourth quarter of 2020 was $1.5 million, which is down from $1.7 million for the fourth quarter of 2019. The 2020 quarter was impacted by a $400,000 increase in our reserve for potential future product returns after we experienced an increase in actual expired prescription product returns in the latter months of 2020. The adjustment to the reserve also impacted our gross margin for the fourth quarter of 2020, which was 57%, down from 65% for the fourth quarter of 2019. Although there is always uncertainty about potential returns, even with the increase that we experienced in our actual return rate last year, we expect the potential number of expiring units in the prescription channel to decline over time and the related reserve to decrease. Total operating expenses in the fourth quarter of 2020 were $2.8 million. This is down from $3.3 million for the prior year period. This result includes G&A expenses for Q4 2020, which were up slightly to $1.3 million from $1.2 million for Q4 2019. Sales and marketing expenses, however, were down to $1.5 million compared with $2.2 million for Q4 2019. This decrease in spending was primarily the result of a reduction in field sales headcount as we began our transformation towards a more cost-effective telephonic outreach by our in-house sales team, as described by Justin. This decrease was partially offset by an increase in marketing expenses as we introduced Clinical Reset during the 2020 quarter and continued our increase in investment in online digital marketing programs for Avenova. For these digital programs, we're working closely with reputable outside ad placement agencies. And as Justin mentioned, we are carefully monitoring real-time campaign performance metrics, such as click-through and conversion rates, and customer acquisition costs to direct spend across multiple advertising platforms while maximizing our return on ad spend. The net result of our increase in product revenue and decrease in sales and marketing expenses was an operating loss for the fourth quarter of 2020 that narrowed to $1.8 million from a $2.2 million operating loss for the fourth quarter of 2019. We're also pleased to report that we had no notable results below operating loss in the 2020 Q4 period. This was a direct result of our 2020 initiatives which successfully improved our capital structure and simplified our balance sheet. During the prior 2019 period, we recorded a $187,000 net loss on changes in the fair value of warrant liabilities and other expenses of $259,000, primarily related to interest expense on a convertible note. The warrants and convertible note, which drove these results, were eliminated or amended favorably to the company prior to the fourth quarter of 2020. Our net loss attributable to common stockholders for the 2020 fourth quarter was $1.8 million or $0.04 per share, a notable improvement over the net loss attributable to common stockholders for the prior fourth quarter of $3.5 million or $0.13 per share. For our full year financial results, net product revenue for 2020 increased 51% to $9.9 million from $6.6 million for 2019. The 2020 result includes a decline in unit sales from our prescription Avenova pharmacy channels, which was offset by the dramatic increase in unit sales of non-prescription Avenova that Justin described. As he also mentioned, we added to top line revenue from sales of personal protective equipment that totaled $3.1 million in 2020. Gross margin on product revenue for 2020 was 60% compared with 74% for 2019. The lower overall margin reflects the lower unit margin from the sales of personal protective equipment. We do not anticipate notable sales from personal protective equipment in future periods. Operating expenses for 2020 were $12.4 million, which was down from $14.3 million for 2019. Operating expenses for 2020 included sales and marketing expenses of $6.2 million, G&A expenses of $5.9 million and R&D expenses of $285,000. As with our fourth quarter results, our full year 2020 operating loss narrowed as compared to the 2019 period due to both increases in revenue and decreases in expenses, improving by 32% to $6.4 million. The net loss attributable to common stockholders for 2020 was $11 million or $0.31 per share. This compares with a net loss attributable to common stockholders for 2019 of $10.5 million or $0.48 per share. The net loss for 2020 reflects a $5.2 million non-cash net loss on a change in the fair value of warrant liabilities, which as previously noted will not have an impact on our operating results in future periods. As of December 31, 2020, we had cash and cash equivalents of $12 million; this compares with $6.9 million at the end of 2019. During 2020, we were pleased to raise net cash proceeds of over $12 million from an aftermarket offering and the exercise of warrants. We believe our current year-end funds are sufficient to support operations into 2022, including a continued increase in investment in our sales and marketing programs for both Avenova and CelleRx. With that, I'll turn it back to Justin.

Thanks, Andy. Before we open the call to your questions, let me summarize our near-term plans. We'll continue to focus on driving Avenova consumer sales with our entry into CVS brick and mortar stores and accessibility online through cvs.com. We're excited about building on our Avenova business, particularly with the momentum generated in the second half of 2020. In April, we plan to launch our new digital media campaigns that feature customized storytelling and data analytics to attract new Avenova customers and encourage repeat usage. And we are developing new branding for Clinical Reset to properly situate this breakthrough product in the beauty marketplace. In addition to organic growth, we are evaluating opportunities to support profitable growth through acquisition or licensing of ophthalmic and skincare products. Our experienced commercial organization improved the balance sheet and established industry relationships, which gives us confidence that now is the opportune time to leverage these assets to generate new sources of revenue and increase shareholder value. With that, I thank you for your attention. Operator, we're now ready to take questions.

Thank you. We will now begin the question-and-answer session.

While we're waiting for the first question, I want to mention that we're launching some complimentary products to Avenova on our website. Check out the warm eye compress that, when used with Avenova, helps clear oil glands and allows natural oils to float back onto the eye to relieve dry eye discomfort. We're also doing some online promotions and giveaways for World Optometry Week. Check out Avenova Eye Care on social media for details. All right, operator, we are ready for the first question.

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

Hi Justin and Andy. How are you?

Great. Hey Jeff.

So firstly, what we're curious about is some of the marketing strategies and key performance indicators. Has there been much change at all over the past quarter? And could you also kind of tie that into the situation with CVS both bricks and mortar as well as online there?

Yes, sure. So we are excited about CVS, but I think we're more excited about some of the new marketing initiatives that we have for both Avenova and CelleRx. So, as I tried to convey on the call, we are really supercharging and upgrading our entire online marketing strategy. I think 2020 really taught us the importance of online marketing, and that's especially good for us because that is truly where our greatest opportunity for growth is. While we continue to nurture the physician relationships, as I said, we really love that support from doctors, but our future revenue growth is really going to come from the online channel. We've done a couple of things in late Q4 and then during Q1 to really transform the way that we look at our online marketing. We brought on some new partners and really done, I think – I won't get too much into the detail because we're going to really start rolling it out in Q2. But yes, we are sort of full speed ahead on the online sales here, and I think we're pretty excited about our new approach to it.

Okay, got it. And then could you talk about any notable changes with your demographics as far as the rebrand for Avenova, and then discuss with us a little bit more about the search engine optimization and search engine marketing and where you're seeing the most traction, whether it’d be one over the other or both channels?

Yes. This is going to sound like a lot of buzzwords, but we are – we spent really the last three months creating a brand story around Avenova. I think we're going to see that rollout. So it's less about search engine optimization because we did that last year, we did that sort of early 2020, and definitely reaped the benefits of that. Our demographics, I think one of the most beautiful things about Avenova is that it has many use cases in many target demographics. We have done a really good job of targeting what I call the medical use of Avenova for blepharitis and dry eye, and doctors prescribe it for that, and people love it. But really what we haven't done yet is move into the beauty market and the makeup market. There are a lot of women who use a lot of makeup every day, like on their eyes. They get eye infections that don't really require medical attention or a trip to the doctor's office, but they will go online and say, 'Hey, my eyes are kind of irritated. I have a stye or chalazion on my eye. What can I order online that can be sent to my home to try?' Avenova is a very good and effective product for that. Now it's really sort of the onus is on us to make sure that when they're online searching for a product to help them in the eye care space, that we pop up and educate them on the effectiveness of Avenova. Although we have a very strong demographic that we have targeted online for the past year and a half, there are lots of different use cases that I think we're going to start targeting very effectively now.

Okay. Got it. And then lastly for us on the NeutroPhase in the fourth quarter, was that one-time in nature? Do you expect it recurring throughout 2021 and onward, or is that periodic?

Well, NeutroPhase is the wound care product that a very staunch supporter and distributor in China buys from us. We have been manufacturing NeutroPhase for many, many years. While it's small incremental revenue, we have had it sort of episodically over the years, when demand over there has either increased or decreased. For the rest of this year, we should see a few more of those orders.

Okay. Got it. That does it for us. Thanks for taking the questions.

Pleasure, as always Jeff.

Our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

Yes, sounds great. I am glad that you guys were able to get additional revenue from NeutroPhase this quarter. And what about some of your other products? I know you guys are launching a couple of other new products. Would that be material to your revenue this year?

Well, we will continue to manufacture NeutroPhase, as I just said. I think we will have a few orders for Phase 1, which is for the U.S. wound care market. We will have some orders for both NeutroPhase and Phase 1 this fiscal year. And we are rolling out a few ancillary products like I mentioned, like the warm eye compress. But the other products that are complementary to Avenova are meant to augment sales of Avenova and create more of an eye care brand around Avenova. However, I think those won't be very large revenue drivers.

And also you probably won't need a lot of capital for you guys to invest as well, right?

It's very little, very little. It's almost like no capital investment other than buying the inventory. I say that they won't be big revenue drivers, but we can always be surprised. Bruder has made an incredible business out of selling these masks. We would love to infringe upon their dominance in the eye care, I mean, in the eye mask market by creating an eye mask that's better than Bruder.

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

All right, thanks Ed.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.

Thank you once again for joining us today and for your interest in NovaBay. We look forward to updating you during our next call in May, when we'll discuss the 2021 first quarter financial results and progress. In the meantime, have a good day. Thanks very much.

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