Novabay Pharmaceuticals - Q2 2024
August 13, 2024
Executive Summary
- Net sales were $2.40M, down year-over-year due to the absence of a large, low-margin wound care order in Q2 2023; eyecare product revenue grew 8% YoY and drove gross margin expansion to 66% from 49%.
- Sales and marketing expense fell 13% YoY to $1.02M amid continued digital advertising efficiencies; G&A held steady at $1.62M.
- Net loss attributable to common stockholders improved to $1.6M ($1.37 per share) versus $4.0M ($44.43 per share) in Q2 2023; six-month net loss was $5.2M ($5.57 per share).
- Management reaffirmed confidence in ~ $10.0M 2024 eyecare net revenue, highlighted subscription-driven recurring sales (~24% of online Avenova revenue YTD), and completed a $3.9M financing in July that strengthens liquidity and positions the company to pursue strategic/fundamental transactions—management teased a possible transaction that could fundamentally change the business.
What Went Well and What Went Wrong
What Went Well
- Eyecare product revenue rose 8% YoY with higher Avenova sales through online channels; gross margin expanded to 66% from 49% on product mix shift away from low-margin wound care.
- Subscription base momentum: “Subscribe & Save customers on Amazon.com increased 16% during the first half of the year… subscriber sales… accounted for approximately 24% of all online Avenova sales year to date”.
- Operating discipline: “sales and marketing spend for the quarter down 13% over the prior year… testament to our digital marketing expertise” (Justin Hall).
What Went Wrong
- Total net sales declined to $2.40M from $3.53M in Q2 2023 due to the lack of a one-off NeutroPhase wound care order that benefited the prior-year quarter (Q2 2023: $1.3M wound care).
- Cash at quarter-end was $0.75–$0.80M pre-offering, underscoring near-term liquidity sensitivity prior to the July raise.
- Continued net losses, with H1 2024 net loss attributable of $5.2M, and increased G&A in H1 tied to strategic initiatives and divestiture costs.
Transcript
Operator (participant)
Welcome to the NovaBay Pharmaceuticals Second Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jody Cain. Please go ahead.
Jody Cain (SVP)
This is Jody Cain with LHA. Thank you 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'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 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 and is accurate only as of the date of the live broadcast, August 13, 2024. NovaBay undertakes no obligation to revise or update statements to reflect events or circumstances except as required by law. Now I'd like to turn the call over to Justin Hall. Justin?
Justin Hall (CEO)
Thank you, Jody. Good afternoon, everyone, and thank you for joining us. We are reporting another quarter of growth in our eye care business, driven by sales of Avenova-branded products through our OTC online channels. For the first half of 2024, sales from eye care products reached $4.8 million, giving us confidence in reaching our goal of approximately $10 million for the year. This revenue growth is efficient growth, with sales and marketing spend for the quarter down 13% over the prior year. Our ability to continue growing our eye care product sales while lowering marketing expenses is a testament to our digital marketing expertise and to the high quality of our products, which has given rise to an extremely loyal base of customers who generate recurring revenue. Over the past several years, our base of repeat customers has grown steadily and consistently.
In fact, the number of Avenova Subscribe & Save customers on Amazon, our largest sales channel, increased by a formidable 123% since the beginning of 2022, and is up 64% since the beginning of 2023, and is up 16% for the first six months of 2024. It's no surprise that given these increases, that satisfaction with our products is exceedingly high, with the Avenova Lid & Lash Solution online rating from more than 14,000 customers averaging an impressive 4.5 stars. The importance of our loyal customer base cannot be overstated. In fact, subscription sales accounted for approximately 24% of all online Avenova revenue for the first half of this year.
Importantly, recurring sales from these customers provides us with predictable revenue upon which to build future sales, which in turn allows us to efficiently manage our sales and marketing spend. We also attribute growth in our eye care business to the expansion of our Avenova-branded product portfolio, in recognition that dry eye can be a multifaceted, stubborn, and complex condition that may require more than one approach to manage. We now have products that address each step of the standard at-home dry eye treatment regimen. Our scientifically developed best-in-class portfolio includes our flagship Avenova Lid & Lash Solution, as well as lubricating eye drops for instant relief, a warm eye compress to soothe irritated eyes, and the i-Chek to monitor physical eyelid health. The US dry eye market is rapidly growing and is expected to exceed $4.8 billion by 2030.
Among the factors impacting the prevalence of dry eye are increased computer time and smart screen usage, the aging population, heightened awareness of this condition, and improved diagnostic capabilities. The fact that dry eye can be a complex condition was corroborated by a recent survey of 337 optometrists across the U.S. that was published in the Eyes On Eyecare 2024 Dry Eye Report. According to the survey, more than 80% of respondents found dry eye diagnosis and treatment moderately to extremely important in generating revenue for their practices, and respondents estimated that more than two-thirds of their patients have some form of dry eye disease. Dry eye was ranked as the second leading area of specialization, exceeded only by primary eye care, and it's expected to account for 43% of their clinical focus over the coming 12 months.
This is up from only 17% in 2023. Importantly, the report recommended that a personalized treatment approach may be essential in the successful management of dry eye. In a further effort to help manage the multifactorial nature of dry eye, we expanded our Avenova product bundles to provide personalized collections. Our new Avenova Total Eye Health, Dry Eye Essentials, and the Clean & Relieve bundles provide individuals with personalized product options at a discounted price. The Eyes On Eyecare survey specifically identified daily lid and lash hygiene as one of the top three approaches for patients with dry eye disease, and hypochlorous acid as a top approach for lid and lash hygiene.
The cornerstone of each of our new personalized product bundles is the Avenova Lid & Lash Solution, which is formulated with our proprietary pure hypochlorous acid, differentiating it from other hypochlorous acid sprays on the market. You may have seen our recent announcement regarding record Amazon Prime Day sales of our Avenova products. During the two-day event, which was held on July sixteenth and seventeenth, we offered a 20% discount to reward loyal customers with great pricing on the products that they rely on, while attracting new customers and providing us with the opportunity to convert them into subscribers. Over this year's two-day event, Avenova sales were 17% higher than Prime Day 2023, and 40% higher than Prime Day 2022. Now I'd like to turn the call over to Tommy to review our financial results. Tommy?
Tommy Law (Interim CFO)
Thank you, Justin, and good afternoon, everybody. I'll review Q2 and the six months results, followed by our cash position. But before we start, I'd like to mention that the financial results for all the periods I'll be discussing today do not include any results from DERMAdoctor. Financial information related to DERMAdoctor can be found in the Form 10-Q that we are filing today under the heading Divestiture and Discontinued Operations. Now, turning to our quarterly results. Total sales net for the second quarter of 2024 were $2.4 million. Essentially, all revenue for the quarter was derived from sales of eye care product, which increased 8% over the prior year and were driven by higher Avenova branded products sold through our OTC online channels. Total sales net for the second quarter of 2023 were $3.5 million.
Those sales were comprised of $2.2 million from eye care products and $1.3 million from wound care products, which included an unusually large order of the NeutroPhase-branded wound care product. Gross margin on net product revenue for the second quarter of 2024 was 66%, compared with 49% for the second quarter of 2023. The improvement was primarily due to the increase in sales of higher-margin eye care products and a decrease in sales of lower-margin wound care products. Sales and marketing expenses for the second quarter of 2024 of $1 million declined 13% from the prior year, as we continue to benefit from efficiencies from our digital advertising expertise. G&A expenses for the second quarters of 2024 and 2023 remained consistent at $1.6 million.
Non-cash items for the second quarter of 2024 included a loss on the change in fair value of warrant liabilities of $80,000, and a loss on the change in fair value of embedded derivative liability of $83,000. Non-cash items for the second quarter of 2023 included a gain on changes in fair value of warrant liabilities of $216,000, and a gain on change in fair value of embedded derivative liability of $40,000. Accretion of interest and amortization of discount on convertible notes for the second quarter of 2024 was $0.3 million, compared with $0.5 million for the second quarter of 2023.
Other expense net for the second quarter of 2024 was $69,000, compared with $0.4 million for the second quarter of 2023, with the decrease due primarily to higher finance costs in the prior year period. Net loss attributable to common stockholders for the second quarter of 2024 was $1.6 million, or $1.37 per share. This compared with the net loss attributable to common stockholders for the second quarter of 2023 of $4 million, or $44.43 per share, which included a $2 million non-cash increase to accumulated deficit due to adjustment to preferred stock conversion price. Turning to the six months results. Net sales for the six months ended June 30, 2024, were $5 million.
This compares with $5.9 million for the six months ended June 30, 2023, which included the large wound care product order, as mentioned earlier. Sales of eye care products for the first half of 2024 are $4.8 million, compared with $4.4 million for the prior year period. Gross margin on net product sales for the first half of 2024 increased to 67% from 57% for the first half of 2023. For the six months ended June 30, 2024, sales and marketing expenses decreased 14%, and G&A expenses increased 18%, both compared with the six months ended June 30, 2023. The increase in G&A expenses were primarily due to higher non-reoccurring strategic initiative costs, including the DERMAdoctor divestiture.
We also incurred a $0.9 million expense in the first half of 2024 related to the DERMAdoctor divestiture, with no comparable item in the first half of 2023. Net loss attributable to common stockholders for the first half of 2024 was $5.2 million, or $5.57 per share. This compared with the net loss attributable to common stockholders for the first half of 2023 of $5.8 million, or $77.42 per share. Turning to our balance sheet. We had cash and cash equivalents of $0.8 million as of June 30, 2024. We completed an underwritten public offering late last month, raising gross proceeds of approximately $3.9 million, which included a partial underwriter's over-allotment.
Investors have since exercised all the pre-funded warrants from the public offering, with the outstanding share count now at approximately 4.9 million shares. The F-1, F-2, and F-3 warrants remain outstanding, each with a one-time reset of the exercise price to the lesser of the current exercise price, or 90% of the volume weighted average prices for the five trading days immediately preceding the sixtieth calendar day after issuance. Now I'll turn the call back to Justin.
Justin Hall (CEO)
Thanks, Tommy. As Tommy just mentioned, we completed a capital raise last month that will allow us to pursue some strategic and fundamental transactions from a position of strength. Among these options is a possible transaction that would fundamentally change our business, and we look forward to providing more details at the appropriate time. In the meantime, we continue to focus on our established position in the large U.S. dry eye market and to continue efficiently growing our sales of our best-in-class Avenova products. We're managing our sales and marketing expenses through optimized digital programs, which allow us to build on the predictable, recurring sales from our loyal customer base. With that overview of our business and our recent financial performance, I thank you for your attention. Operator, we're now ready to take questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star, then two. Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Jeffrey Cohen (Managing Director of Equity Research)
Hey, Justin and Tommy, this is actually Destiny on for Jeff. Thank you for taking our questions. I wanted to start... I know in the, the comparable period, you did have some revenue based on the wound care product. I'm just wondering if you have anything to call out there, or should we expect any other kind of stocking orders? I know it's really lumpy and hard to kind of predict, but I'm just curious if you have any commentary around that.
Justin Hall (CEO)
Yeah, so we should see some orders in the remainder of the year. But they're not going to be, I think, as material or as large as they were in 2023.
Jeffrey Cohen (Managing Director of Equity Research)
Mm-hmm.
Justin Hall (CEO)
But we'll continue to see some orders later this year and then, of course, into 2025.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, got it. So largely unchanged. Got it. And then can you give us some more idea or not idea, more color on the changes in these efficiencies for your marketing strategy? Is it an increased ROAS or return on ad spend? Is there another metric that you're using to kind of determine what's working and what's not? Can you give us a little more color there?
Justin Hall (CEO)
Sure. Absolutely. That's... It's a good question because it's a main focus of our business. We are trying to become just really better at what we're doing. So, you know, we really shifted the strategy about a year ago, where we moved away from spending a lot of money in the top of the funnel and spending a lot of money in customer acquisition costs, and turned our approach on its head, where we're really focusing on our Subscribe & Save customers right now. So after being in the market for, you know, eight or nine years, almost ten years now with Avenova, a lot of people have tried the product, and they just need reminders to buy the product again.
So the best case scenario for us is, those customers, because it's a personal consumable product, best case scenario is for those customers to become a Subscribe & Save customer. But we realize that not everybody is. So I think we have done a really good job of getting people into, subscriptions on our website and also on Amazon. So when, we get somebody into the Subscribe & Save program, that means that we don't need to spend any money to make that money, and that is incredibly efficient for us. So that frees up a little bit more money to go after, new customer acquisition or just reminding those customers who want to repeat, purchase, that they need to, you know, go on and do a one-time repeat purchase.
So, you know, over the past 12 years, we've really changed the strategy from, you know, filling the top end of the funnel, which is inefficient, to really focusing and growing that community of users and getting them into the Subscribe & Save program, where we don't have to spend any money to make that money.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, that makes sense. Got it. And then what, what portion of your revenue is now generated from those Subscribe and Save programs? And then, I'm also curious, how often are your customers receiving product? Is it monthly? Is it every two months, three months? Can you give more color there?
Justin Hall (CEO)
... Sure. Yeah, absolutely. So, you know, one of the metrics that is easy to remember and that, you know, that we like to share, is that about a quarter of all of our online revenue comes from Subscribe and Save. So that, that's pretty substantial. So, just having a, you know, a quarter of our revenue, we know that it's going to come in every single month, you know, and we know exactly what it's going to be. And then, as I mentioned earlier, we don't need to spend any money to make that money. So, you know, it's a significant chunk, about, you know, a quarter. So we, we really like that. And, customers tend to buy, about every month.
There are some people who like to be a little bit more thrifty with their use of the spray, and they may stretch it out so they get one bottle every 45 days. On the outside end, it's one every 60 days. But looking at our data, it's the majority of our Subscribe & Save customers buy one bottle per month.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, got it. And then with the with Prime Day being in the third quarter, when you're looking at Q3, would we see a bit of a a bump up compared to Q2 and Q4? Or do you think it's going to be pretty aligned with the growth throughout the remainder of the year? I guess what I'm asking is, could Is there still, even with the Prime Day, is there still the potential that Q4 could grow sequentially in terms of revenue?
Justin Hall (CEO)
Yeah, Destiny, I know you're looking for numbers to plug into the model. No, I understand what you're asking, and it's a fair question. We normally have a stronger Q4. We do, you know, a push in our physician dispense channel towards the end of the year. We also do a back-to-school push. So we tend to have a stronger Q4. So you know, what we're looking at is, you know, incremental increases in Q3 with a pretty strong Q4.
Jeffrey Cohen (Managing Director of Equity Research)
Okay. Okay, got it. That's, that's enough for my model. I appreciate that. And then you touched on the physician dispense channels. Can we talk a little bit more about that? I didn't hear too much commentary in your prepared remarks.
Justin Hall (CEO)
Yeah. So the physician dispense channel plays an outsized role sort of strategically in building the brand. So our lowest customer acquisition cost, which is one of the metrics that we look at, you know, for efficiency and success in the online sales channel. Our lowest customer acquisition cost and our stickiest customer is when a patient learns about Avenova through their doctor. So we really try and push the physician dispense channel, not only for the revenue that it creates on its own and independently as its own sales channel, but the way that it introduces new customers to the online sales channel.
So the physician dispense channel for us is, you know, incredibly important to the brand, and it's incredibly important to the online sales channel, because that's really how we're feeding new customers into, you know, that efficient sales channel. So we continue to push that. And we have, you know, our loyal doctors who are Avenova believers, and they buy from us every month. And then, you know, we always have a push where we do continuing education events and just, you know, continuous outreach to bring new doctors into the fold, as well. But from a revenue perspective, the online sales channels really dwarf that wholesale physician dispense channel.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, got it. And then maybe, Tommy, this one's for you. The margins continue to look pretty solid. They look good. So can you tell me a bit more about any changes in your supply chain, and at what level, what revenue level do you think you're really at that optimal level or that optimal economy of scale?
Tommy Law (Interim CFO)
No, there isn't really a whole lot of change in our supply chain. So...
Justin Hall (CEO)
Yeah, so, Destiny, our margins improved over last year, just because this year we didn't have a very large, low margin wound care order. So-
Jeffrey Cohen (Managing Director of Equity Research)
Oh, okay.
Justin Hall (CEO)
Yeah. So you take a little bit off of the top line, because we didn't have that $1 million order of NeutroPhase, which we had last year. So, you know, a little bit of a blessing and a curse last year. We had a larger top line, but it's a low-margin product, so it dragged down our gross margin quite a bit. So what you see this year is consistent margins around the eye care unit, and those are all around 65%. They have remained steady. Is that right, Tommy? 65%? Yeah. So, that has remained steady over the past year, and we also expect that to remain constant going forward.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, and then one more, if I may. I'm curious about some of the partnerships or co-promotion agreements you have going on. Can you talk a bit about the agreement with Eyenovia and how that's going? And then, I know you are collaborating with another company for some international markets. Are there any international markets you're looking to go in direct on your own?
Justin Hall (CEO)
Yeah, so that, that last question is the easiest question to answer. We don't anticipate doing any expansion all on our own, because it's just we don't have the existing footprint, we don't have existing relationships, and it's just it would be too heavy of an investment for us to go on our own. So we are working on partnerships and partnerships of all sorts and sizes. So while our base business continues to be solid, our eye care business is efficient, it's growing incrementally, and we think that will continue. Really, the main focus for the remainder of the year is all partnerships for us.
At this time, all I can really tell you, Destiny, is that these strategic partnerships and possible fundamental transactions are our main focus for the remainder of the year.
Jeffrey Cohen (Managing Director of Equity Research)
Okay, excellent. Thank you so much. I'll get back in queue.
Justin Hall (CEO)
Okay.
Operator (participant)
Our next question comes from Edward Woo with Ascendiant Capital. Please go ahead.
Edward Woo (Director of Research and Senior Analyst)
Yeah, thanks for my question. Has there been any change in distribution costs, or advertising on Amazon? Thank you.
Justin Hall (CEO)
Yeah. Hey, Ed, nice to hear from you. You know, good question, because I think industry-wide, prices are, you know, advertising costs are increasing. Fortunately for us, we haven't really seen that, and so our costs tend to be pretty consistent. We haven't really seen much of an increase there. We keep an eye, a close eye on the Google and Meta ads, and really try to pull back spend when those become inefficient. But those are a much smaller portion of our spend, and most of our customer acquisition, as I mentioned, comes from the physician dispense channel, and also advertising within the Amazon environment.
Edward Woo (Director of Research and Senior Analyst)
Great. Well, thanks for answering my questions, and I wish you guys good luck. Thank you.
Justin Hall (CEO)
Terrific. Thanks, Ed.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Justin Hall for any closing remarks.
Justin Hall (CEO)
Thank you for joining us today and your interest in NovaBay. We're excited about our strategic focus on the large and growing eye care market within our established eye care business. We look forward to providing an update on our next quarterly call in November. Thanks again, and have a nice day.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.