Ladies and gentlemen, welcome to the NovaBay Pharmaceuticals Financial Results Conference Call. As a reminder, this conference is being recorded. And I would now like to turn the conference over to Bruce Voss. Please go ahead.

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's call. Joining me from NovaBay Pharmaceuticals are Justin Hall, Chief Executive Officer and General Counsel; and Tommy Law, Interim 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 be materially different from any anticipated results. In particular, there is uncertainty about circumstances beyond the company's control that impact the broader economy. This means that results could change at any time and the contemplated impact of such circumstances on NovaBay's operations, financial results and outlook is the best estimate based upon 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, which are available 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 9, 2024. NovaBay undertakes no obligation to revise or update 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, Bruce. Good afternoon, everybody, and thank you for joining us. I'm pleased to report that we hit an all-time record high ordered sales of Avenova products in the past 2 months on Amazon.com, our largest sales channel. We set a new record in March and then beat it in April. In fact, our April 2024 order product sales were more than 20% higher than April 2023. These records are even more impressive given that ordered sales in March and April eclipse months that even included record-breaking Amazon Prime Days. So it's not surprising that our first quarter sales increased 13% over the prior year, with that increase largely attributed to Avenova product sales through online channels. We saw an 8% increase in sales over the prior quarter through our online sales channels, with sales from this channel surpassing $2 million for the very first time. This growth is largely due to sales driven by our social media channel, which increased more than 160% year-over-year and from our email program, which has been on a sustained upward trajectory since mid-2023 being up more than 360% over the prior year. Even with these higher sales, we were able to reduce marketing spend in Q1 by 15% through our cost-efficient ad placement programs. We're excited and encouraged by these new records following the streamlining of our business to focus solely on eyecare. This is a testament to our marketing expertise, the high quality of our products, and our extremely loyal customer base. We also attribute these records to our recognition several years ago that dry eye can be a multifaceted, stubborn, and complex condition that may require more than one approach to manage. This prompted us to expand the Avenova branded portfolio to offer scientifically developed best-in-class products for each step of the dry eye treatment regimen. We built our dry eye franchise on a solid foundation of the Avenova spray, which is the #1 doctor-recommended hypochlorous acid lid and lash solution. Our Avenova product line now includes lubricating eye drops for instant relief, a WarmEye Compress to soothe irritated eyes, an antioxidant-rich dietary supplement with omega-3 oils, and the i-Chek to monitor physical eyelid health. Earlier this year, we took a major step to position NovaBay to pursue high-growth opportunities by focusing on the eyecare market with most of our products under the Avenova brand addressing dry eye. This is a large and growing market that offers us plenty of room to grow. Dry eye syndrome is one of the most commonly observed clinical diseases in the U.S., afflicting approximately 16 million Americans. In fact, the U.S. market for the treatment of dry eye and other ocular surface diseases is projected to grow from $3 billion in 2023 to $4.7 billion by 2030. Among the factors driving this growth are the escalating prevalence of dry eye due to increased computer time and smartphone screen usage, the aging population, and a heightened awareness of this condition and improved diagnostic capabilities. In the past, we've discussed marketing programs to better engage eyecare specialists in our physician dispense channel, noting the halo effects this channel has in transitioning their patients into our OTC customers. Throughout this period, we did not lose sight of our digital marketing programs aimed directly at our OTC customers. We're expanding our digital marketing to include text messages and targeted emails to build on the incredible success with our social media marketing to further enhance the Avenova brand, engage customers, and drive online sales of Avenova products. These programs meet our cost management measures to efficiently enhance customer loyalty and reach new prospective customers. Our text messaging programs provide an additional and immediate touchpoint with our customers and are producing encouraging strong initial results. We plan to use text messaging to share exclusive discounts, news, and value-added content such as tips for enhancing eye health and other tips to engage and encourage our audience to interact with the brand. We also recently refreshed our email campaign to include new creative and added automation. Both programs target our existing and highly loyal customer base to enhance retention while expanding reach to new audiences. Turning now to update everybody on our co-marketing agreement with Eyenovia that we announced in March. You may recall that Eyenovia received FDA approval for prescription-only clobetasol, a unique and differentiated steroid that's prescribed by cataract surgeons. Clobetasol provides ophthalmologists and ocular surgery patients with a compelling, rapid, and sustained solution for the treatment of postoperative inflammation and pain. This is the first new ophthalmic steroid to enter the U.S. market in more than 15 years. We expect it to launch in the third quarter. Eyenovia will market this program through their sales reps, while NovaBay will market it alongside Avenova in our physician dispense channel. Under the agreement, Eyenovia sales reps will also market our Avenova products. I'm pleased to report that we completed training of the Eyenovia sales team earlier this month.

Thank you, Justin, and good afternoon, everybody. I'll review Q1 results and then our cash position. Before we start, I'd like to mention that the financial results for the first quarters of 2024 and 2023 that I will be discussing today do not include results from DERMAdoctor. These results can be found in the Form 10-Q that we filed today under the heading Divestiture and Discontinued Operations. Total sales net for the first quarter of 2024 increased 12% over the prior year to $2.6 million. Sales from our eyecare business were $2.4 million, up from $2.2 million in the prior year, with the increase due to higher Avenova branded sales through online channels. We also benefited from a modestly higher contribution from branded Phase 1 wound care product sales during the quarter. Gross margin on net product revenue was 68% for the first quarters of both 2024 and 2023. Sales and marketing expenses decreased by 50% from the prior year to $1.1 million as we continue to leverage our digital advertising expertise, along with lower expenses for related consulting services. G&A expenses were $2.3 million for the quarter, up from $1.7 million due mainly to higher legal costs related to nonrecurring strategic initiatives. R&D expenses for the first quarter of 2024 were $19,000 versus $10,000 for the prior year period. Related to our DERMAdoctor divestiture, we recorded a noncash loss during the first quarter of $865,000, which is recorded as a loss from the divestiture of a subsidiary in operating expenses. In connection with this divestiture, we entered into a service agreement with the acquirer to provide for a customary and orderly business transition. This includes warehousing and logistical services. Costs incurred for these services will be included in continuing operations in future quarters with the service contract expiring at the end of this year. Among noncash items, we recorded gains of $194,000 on change in fair value of warrant liabilities and $65,000 on change in fair value of embedded derivative liability during the first quarter of 2024. Also during the quarter, we recorded accretion of discount on convertible notes of $433,000 and other expenses net of $480,000 primarily due to the issuance of the March 2024 warrant and the unsecured convertible notes issued in March 2024, with no comparable items in the first quarter of 2023. Net loss attributable to common stockholders for the first quarter of 2024 was $3.6 million or $0.15 per share. This compares with the net loss attributable to common stockholders for the first quarter of 2023 of $1.7 million or $0.85 per share. We reported cash and cash equivalents of $1.8 million as of March 31, 2024. And now I'll turn the call back to Justin.

Thank you, Tommy. To summarize, Avenova is a well-known brand with significant growth potential in the expanding dry eye market, which is expected to reach nearly $5 billion in the U.S. over the next six years. We are proud of our digital marketing expertise, and our recent successes validate its effectiveness with product sales hitting all-time highs on Amazon.com in the last two months. We are launching new digital programs to build on this success, focusing on our loyal customers while attracting new ones. Importantly, we're effectively promoting our products while managing our expenses efficiently. We are also taking advantage of strategic growth opportunities through our partnership with Eyenovia to co-promote each other's products. Under our agreement, Eyenovia sales representatives will market Avenova, and we will use our established relationships with thousands of eyecare specialists to promote the newly approved clobetasol product. Our physician-dispensed channel presents a ready-made opportunity to accelerate the commercialization of this product, complementing our Avenova line. Over the past year, we have launched programs that enhance our relationships in the physician dispense channel, which positively impacts sales in our OTC channel and supports our efforts in developing a marketing partnership for prescription product sales. With that overview of our business and recent financial performance, I appreciate your attention. Operator, we're now ready to take questions.

And your first question comes from the line of Jeffrey Cohen with Ladenburg Thalman.

A few questions from Avenova. And so can you talk about Amazon for a moment? And what type of data do you receive as far as geographies or demographics, et cetera, as far as their customers?

Yes, Jeff, that's a good question. We are actually just looking at that this week. So we do get geographies, and, not surprisingly, we are very heavily weighted in California, Texas, and the Eastern Seaboard. So we do get some good data around geography, and we do know where to focus a lot of our efforts. But with that said, I think everybody knows that Amazon does limit the amount of interaction that you're able to get with those customers. So it is a little bit of push and pull. It's our largest sales channel. It's also our most efficient sales channel. But we do have somewhat limited data on the customers that buy from there.

I see that you currently have about 12 SKUs on avenova.com, and it seems that over half of them are available on Amazon. Could you discuss the percentage of sales from products other than the spray, specifically regarding the supplements, wipes, compresses, eye check, or eye drops?

Yes. So that percentage really gives good insight into our business. So our hero SKU is really the antimicrobial lid and lash spray. And that's the one that doctors recommend the most. That's also our most differentiated product. So there's no other product on the market that I think comes close to the efficacy and purity of the spray. So the majority of our revenue does come from the spray, but an increasing amount of revenue also comes from the bundles and the other product line, but it's sort of, without a doubt, heavily weighted on the spray.

Got it. And then any commentary on pricing? It looks like on Avenova Direct, if you sign up for texting, it's 10% off. I don't know if that's your first order or beyond that. But any commentary on pricing differentials or potential differentials between Avenova Direct and Amazon?

Yes, we are in a similar position as many vendors on Amazon, facing the same challenges and opportunities. While Amazon operates efficiently for us, it also limits our interaction with customers. Therefore, we try to attract as many customers to our own website so that they are direct customers of ours rather than relying solely on Amazon. However, it's a significant challenge because Amazon makes it so easy for customers to purchase, often with next-day delivery. We aim to simplify purchases on our website with options like Apple Pay and one-click purchasing, but Amazon still accounts for the majority of our revenue. We are working to entice customers to our site with unique bundles and discounts so that we can better engage with them, own their data, and foster loyalty to Avenova.

Got it. Okay. And one more, if I may. Could you talk about the training reference with the Eyenovia team as far as what's the size of their team now? And are they all 1099s or W-2s and what geographic presence? Do they have some domestic?

We are very excited about the partnership with Eyenovia. They currently have seven field representatives in major metropolitan areas. One of the main reasons we feel optimistic is that Avenova has not had field sales representatives in the field visiting doctors face-to-face since before the pandemic. This marks a return to a business model we haven't practiced in the past four years, and nothing truly replaces that face-to-face contact. Even though the cost of field sales representatives is high, the relationship-building aspect is something that cannot be substituted with phone calls or Zoom meetings. We are thrilled to have them on board, and under our co-promotion agreement, we will be selling clobetasol through our inside sales force where they do not have a physical sales rep. Meanwhile, they will be selling both their products and ours in the field where they have their representatives. They have their earnings call next week on Tuesday, and we should listen to hear the details directly from Michael Rowe. We are excited on our end, and the training we completed was for both clobetasol and Avenova.

And your next question comes from the line of Edward Woo with Ascendiant Capital.

Congratulations on the progress. My question is on your marketing strategy for the rest of the year, particularly for the consumers on your direct channel on Amazon? How are you going to reach them? Are you going to be able to spend more money to reach them? Or what is your overall marketing strategy?

Yes, that's an important question, Ed. We've been discussing this recently because there is a delicate balance between operating efficiently and expanding the business. Over the past year, we have made significant strides in becoming more efficient, particularly in how we engage with customers. However, acquiring new customers is challenging and costly, so we are cautious about spending on that front. Nonetheless, it is difficult to grow without bringing in new customers. Our strategy for the remainder of the year will focus on maintaining our efficiency in the online sales channel while working to increase the conversion of customers from our physician-dispensed channel and doctor's offices to our OTC channel. There is considerable growth potential here. When customers receive their first bottle of Avenova from a doctor, they are educated about the product and tend to trust it more because it comes with a doctor's recommendation. However, we recognize that customers prefer to purchase consumable products online rather than visit a doctor just for that purpose. Therefore, we aim to attract these customers through our website, avenova.com, or we welcome them to find the product on Amazon and eventually become subscribe and save customers. So it looks like that is our last question. So I thank everybody for joining us today and their interest in NovaBay. We're excited about our strategic focus in the large and growing dry eye market in our established eyecare business. We look forward to providing another update on our quarterly call in August. Thanks again, and have a nice day.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.