Welcome to the NovaBay Pharmaceuticals Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in listen-only-mode. Following management's prepared remarks, we'll hold a question-and-answer session. As a reminder, this conference is being recorded. I'd 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 are Justin Hall, Chief Executive Officer and General Counsel; Andy Jones, Chief Financial Officer; and Kim Shartsis, the company's Vice President of Commercial. 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 indicated results. In particular, there is uncertainty about circumstances beyond the company's control that impact the broader economy such as the COVID-19 pandemic and the conflict between Russia and Ukraine. This means that results could change at any time and the contemplated impact of COVID-19 and circumstances that impact the broader economy on NovaBay's business operations, its financial results, and its outlook are the best estimates 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, August 11, 2022, and NovaBay undertakes no obligation to revise or update any statements to reflect events or circumstances, except as required by law. I'd now 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 report that our strategy to diversify and expand our product portfolio of high-quality products is paying off with product revenue for the quarter increasing 43% over the prior year. Additionally, online sales of the Avenova Spray unit increased year-over-year, which we attribute to the success of our shift to the more efficient online sales channel. We achieved this growth while holding our marketing spend steady even with the additional expenses associated with promoting DERMAdoctor products. The majority of Avenova unit sales once again were generated through the Amazon sales channel. You may have seen a recent announcement of record single-day sales of Avenova branded products during Amazon's Prime Day event in mid-July, with the sales of Avenova branded products increasing 27% over Prime Days 2021 and 48% over Prime Days 2020. We enjoy an extremely loyal customer base of Amazon customers with our Avenova Spray receiving 4.5 stars from more than 10,000 reviews, demonstrating the quality of our product and broad market acceptance. I'm pleased to say that we have many lifetime customers and in fact, about 17% of Avenova Spray orders have come through the subscribe-and-save feature. We are aggressively executing a multipronged strategy to create a stronger company with accelerated top-line growth. With Avenova and DERMAdoctor, we have a solid foundation of established brands in the large and growing eye care and skin care markets. Our growth initiatives include expanding and refreshing digital marketing campaigns, widening demographic targets for existing products, and increasing their accessibility while also expanding Avenova and DERMAdoctor brands with new, innovative, and scientifically developed OTC products. I'd like to share some of the initiatives we've taken so far this year, starting with the recent step in expanding into the beauty market with Avenova. Last month, we announced the launch of a new marketing campaign for Avenova, targeting the large and growing number of women turning to eyelash extensions to enhance their appearance while eliminating the need for mascara. Unfortunately, lash extensions can attract oil, dust, dirt, and debris and that may lead to irritation and increase the likelihood of eye infections. Avenova offers an ideal solution for proper lid and lash hygiene. Our antimicrobial formulation is highly differentiated from the water-based cleansers and creams currently on the market. Avenova is also differentiated from other hypochlorous acid products in that it is the only cleanser that is clinically proven to kill infection-causing bacteria and remove the irritants under lids and lashes. Most importantly, Avenova will not damage the adhesive that holds extensions in place and can actually extend the life of the lashes. We are addressing an entirely new and younger customer demographic with this marketing campaign. To reach this younger demographic, we are promoting Avenova through new social media platforms such as TikTok. Among the growth opportunities we envision for the DERMAdoctor brand is the trend for beauty products to be increasingly purchased online. According to the research firm Insider Intelligence, online sales of beauty products this year are expected to be more than double than those of 2019. By 2026, e-commerce sales are expected to account for nearly one-third of the category's total retail sales. We have developed robust social media programs across all digital channels to take advantage of this growing market. Just this week, we launched a new advertising campaign for one of DERMAdoctor's products, Kakadu C, and KP Duty. This product was the original solution for keratosis pilaris. After its initial launch many years ago, it became so popular that many others tried to copy it. With this marketing campaign, we intend to take back market share from those copycat products. Expanding into international markets is also 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. Friend influencers and social media platforms like TikTok are particularly effective ways to attract new customers in China, and our new marketing partners bring an extensive network of bloggers and influencers, as well as strong brand-building capabilities. Lastly, we continue to expand our Avenova and DERMAdoctor product offerings, having launched seven new products since the beginning of 2022. Our newest addition includes DERMAdoctor's Picture Perfect, oil-free moisturizer, which is perfectly formulated with oily and acne-prone skin in mind. This lightweight gel rejuvenates and refines skin texture, leaving it softer to the touch, hydrated, and without clogging pores. These new products keep us highly relevant in an industry that is rapidly changing, and importantly, they keep the DERMAdoctor brand in the minds of consumers. All of our new offerings complement our corporate purpose of offering proprietary OTC products that are scientifically developed, clinically proven, and gentle, addressing common yet underserved conditions. Our launches are 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. Looking forward, we are extremely excited about a sizable order that we anticipate receiving in the second half of the year for DERMAdoctor's top-selling product, Kakadu C, from one of the largest U.S. retailers. Kakadu C is formulated from Kakadu plums, which are thought to be one of the most concentrated sources of vitamin C on the planet, along with ferulic acid and vitamin E to help protect against free radical damage and improve skin elasticity and firmness. We also expect a seasonal increase in DERMAdoctor sales during the fall, which is typically stronger for skin care products. I'm pleased to say that as we gain traction from these initiatives already in place and those underway, we are confident that the majority of our growth in 2022 will come in the remaining half of the year. I'd also like to welcome Kim Shartsis to today's call. Kim recently joined us as our new VP of Commercial, to support our many growth initiatives. Her skill set is ideally suited for NovaBay, with more than 20 years of experience in consumer brand management and hyper-growth brand building, and a strong track record of driving growth through traditional retail, DTC, e-commerce, and other direct sales channels.

Thanks, Justin. I'm thrilled to join NovaBay and to use my experience to support our company's continued success. Since joining, I've become familiar with the high-quality Avenova and DERMAdoctor products and the exceptional team that is actively executing on a wide range of initiatives to broaden market reach and build on the success of existing products. This is a tremendous opportunity, and I look forward to making a meaningful contribution to the profitability of the company. Now I'd like to turn the call over to Andy Jones to review our Q2 financial performance.

Thank you, Kim. We are very excited to welcome you to the call and to the NovaBay team. Your experience and skills are very clearly a great complement to Justin and I, and I look forward to working with you as we continue to get the word out and increase the number of people that we count as Avenova and DERMAdoctor lovers. As a reminder, we closed the DERMAdoctor acquisition in November 2021, so our financial results for the second quarter and first six months of 2022 reflect combined NovaBay and DERMAdoctor results. I'm very happy to report that net product revenue for the second quarter of 2022 was $3 million, which is up 43% from $2.1 million for the prior year period. Second quarter results included $0.6 million of DERMAdoctor product sales. The quarter also included $1.8 million of Avenova branded product sales. As Justin mentioned, we are excited to report that over-the-counter Avenova unit sales through our most critical online channels have increased over the prior year period while our related direct advertising costs have decreased. The second quarter of 2022 also included $0.6 million of NeutroPhase and Phase 1 branded wound care product sales. Sales of these products are somewhat sporadic; however, we do anticipate fulfilling additional orders for these products in the second half of the year. Gross margin for the 2022 second quarter was 51%. This compares with 71% for the 2021 quarter. The decrease was primarily due to the addition of DERMAdoctor product sales and higher sales of the wound care products. Total operating expenses for Q2 2022 were $3.7 million, which compares with $3.4 million in the prior year quarter. Sales and marketing expenses were unchanged at $1.8 million, with $0.7 million in DERMAdoctor sales and marketing costs, which were offset by lower Avenova digital advertising and related consulting costs as we continue to focus on optimizing the cost-effectiveness of our online engagement with new and existing customers. G&A expenses were $1.9 million in Q2 of 2022, and this compares with $1.6 million a year ago. The 2022 period included $0.5 million in DERMAdoctor costs, which were partially offset by a decrease in corporate professional services, consultants, and employee costs. R&D expenses for the second quarter of 2022 were $40,000 compared with $20,000 for the prior year period, as we continue to create, develop, and release new products without incurring significant R&D costs. The net loss attributable to common stockholders for Q2 of 2022 was $2.2 million or $0.04 per share, which compares with a net loss attributable to common stockholders for Q2 of 2021 of $1.9 million, also $0.04 per share. Turning to year-to-date financial results, product revenue for the first six months of 2022 was $5.7 million, a 44% increase over the prior year period. Gross margin on net product revenue for the first half of 2022 was 54% compared with 73% for the first half of 2021. For the first half of 2022, sales and marketing expenses were down slightly and G&A expenses increased 49%, both compared with the first half of 2021. R&D expenses were $68,000 for the first six months of 2022 versus $26,000 for the prior year period. The net loss for the first six months of 2022 was $2.2 million or $0.04 a share, which included a noncash gain on changes in the fair value of warrant liabilities of $2.1 million. You might remember this liability was reclassified to equity during the first quarter of 2022 and will no longer require fair value adjustments affecting our operating results in the future. The net loss for the first six months ended June 30, 2022, was $3.4 million or $0.08 per share. As of June 30, 2022, we had cash and cash equivalents of $3.9 million. And with that, I'll turn the call back over to Justin.

Thanks, Andy. In closing, I'm enthusiastic about NovaBay's future. We are executing on our focused strategy and have already accomplished a lot this year with more to come. Again, given the timing of our initiatives and the seasonality of our products, we continue to expect the majority of our growth in 2022 will come in the remaining half of the year. With that, I thank you for your attention. And operator, we're now ready to take questions.

Before we take questions, I'd like to mention that we will be presenting at the Ladenburg Common 2022 Healthcare Conference being held in person in New York on September 29. A webcast will be posted to the NovaBay website. Okay, operator, we're ready for the first question.

Hi, Justin, Andy, and Kim. How are you?

Good.

So just a bunch of questions I'm going to jump around here. It looks, Andy, like the OpEx for Q2 was lighter than we had thought. How does that pull through into the back half of the year? I think it sounded like it's going to be closer to $4 million versus $5 million. Is that an accurate statement?

Yes, that's correct. You might see a little uptick in sales and marketing side, but I think a small uptick there and G&A, I think, will remain consistent through the rest of the year.

Could you discuss the largest retail opportunity you mentioned? If it is significant, will it be sampled in a few core facilities or possibly in thousands? Any thoughts on that?

Yes, sure. So this is a retailer that DERMAdoctor has worked with for years and has placed a similar order in years past, and they typically order for Black Friday and then the holiday season. So they have committed to these orders. We will see them in the tail end of Q3 and mostly in Q4.

Okay. And is that for one SKU, the one outside?

Yes. This is the Kakadu C serum.

Got it. Okay. I can see it. And could you talk a little bit about any trends that you've noticed or any patterns worth calling out from either or both Avenova or DERMAdoctor, in relation to online versus Amazon versus bricks and mortar?

Yes. We are primarily an online channel, and of course, we love it when people buy through DERMAdoctor.com or avenova.com. But what we have seen is that it is just easier and cheaper to acquire new customers on Amazon. So we have seen increases in sales, both on our own sites and on Amazon. It kind of goes back and forth. I think Amazon is a very efficient sales channel for us. We have ways of advertising for that. For example, we had a nice sort of event that happened in Q2 with DERMAdoctor and an influencer, and the influencer didn't say where to buy it. Most people just went to Amazon, searched for the DERMAdoctor product, and purchased there. So we have said in the past, and I continue to believe that our largest opportunity for growth is in that online sales channel.

Okay. Got it. And then lastly for us, I guess, Andy, talk a little bit about gross margins, a common theme in our space in these past couple of weeks. So the puts and takes there. I know it's on a smaller base, but what we should anticipate for the back half and forward.

Yes. So it is a smaller volume. So there are some fixed costs that are attributed there that keep our margins smaller when the volumes are lower. I think in the second half of the year, you're going to see those come back up. Of course, you had the expectation and we did too that the DERMAdoctor products have a smaller margin than Avenova traditionally has, which is over 70%, whereas DERMAdoctor has been in the 50% to 60%. So I'm looking forward to ending up somewhere in between in the last couple of quarters of this year.

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

Please go ahead.

Hi, Professor Edwood from Maxim Capital Markets. Are you seeing any or do you expect any macroeconomic slowdowns?

Yes. Typically, people like to say that skin care and beauty products are recession-proof, but we don't always see that as the case. So even though we haven't seen any impact from macroeconomic movements, that doesn't mean that we won't see them in the future if there is a larger downturn. But if things, I think, in the broader economy with consumer sentiment remain about where it is, we don't anticipate a material impact on the business.

Okay. Great. And how is the international part doing?

So actually, two of our largest opportunities for growth on the DERMAdoctor side are international. We have some great connections through investors and also on our Board for the China market, and we are in the process of building those markets and relationships and really trying to expand in the China market. This is a great opportunity and does continue to hold a lot of opportunity for us going into the rest of this year and then hopefully throughout next year as well. Expanding into the EU is also sort of top of mind. We have a couple of great opportunities that we're pursuing in that market. So international expansion is definitely a big part of our plan.

Great. Thank you very much.

Thank you.

This concludes our question-and-answer session. I'd like to hand the call back over to Mr. Justin Hall for closing remarks.

Thank you once again for joining us today and your interest in NovaBay. We are extremely excited about our progress and the very bright future we envision. We look forward to reporting our progress during our Q3 2022 investor call in November. In the meantime, have a great day. Thank you.

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