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NovaBay Pharmaceuticals, Inc. (NBY)·Q2 2019 Earnings Summary

Executive Summary

  • Q2 2019 net sales were $1.79M, down 36% year over year, but up 19% sequentially; Avenova contributed $1.6M while NeutroPhase added $0.2M from a stocking order . Gross margin on net product revenue was 77% (vs. 83% YoY), with Avenova-specific gross margin at 84% .
  • Operating expenses fell 37% YoY to $2.77M as management executed a 67% salesforce reduction and shifted to partner pharmacies and direct-to-consumer channels; operating loss narrowed to $1.38M vs. $2.08M YoY .
  • Management affirmed FY2019 net sales guidance of $6–$8M and expects a “significant reduction” in operating expenses vs. 2018; further guidance revisions may come as Avenova Direct (Amazon) scales .
  • Strategic pivot catalysts: ramp in partner pharmacy channel (52% of Rx units in Q2 vs. 38% in Q1) and launch of Avenova Direct on Amazon in mid-June, supporting gross-to-net improvement and access amid high-deductible headwinds .

What Went Well and What Went Wrong

What Went Well

  • Sequential sales recovery with Avenova sales +9% QoQ despite 67% reduction in salesforce; partner pharmacies doubled and accounted for 52% of prescription units in Q2 (vs. ~38% in Q1) .
  • Launch of Avenova Direct on Amazon, providing “stable gross-to-net pricing” and easier access without a prescription; management expects this channel to drive the greatest future growth .
  • Cost discipline: operating expenses declined 37% YoY and 47% QoQ, reflecting restructuring and focusing reps in high-volume, favorable reimbursement territories . Quote: “We are having success with our strategy to increase Avenova sales...while operating expenses decreased 47%” .

What Went Wrong

  • Year-over-year compression: net sales fell to $1.79M from $2.79M in Q2 2018 due to lower Avenova unit sales and lower net selling prices amid reimbursement deterioration; gross margin declined to 77% from 83% .
  • Higher non-cash and financing costs: Q2 recorded a $0.49M non-cash warrant liability loss, $0.25M embedded derivative loss, and $0.39M other expense (interest and amortization on new debt), widening net loss to $2.50M vs. $1.59M YoY .
  • Persistent reimbursement headwinds and high-deductible plans weighed on unit sales and gross-to-net pricing; management reiterated the need to counteract via channel strategy .

Financial Results

Quarterly Trends (oldest → newest)

MetricQ4 2018Q1 2019Q2 2019
Net Sales ($USD Millions)$3.60 $1.491 $1.789
Gross Margin (%)88% 77% 77%
Operating Loss ($USD Millions)$(1.60) $(4.071) $(1.379)
Net Loss ($USD Millions)$(1.30) $(4.794) $(2.501)
EPS (Basic, $USD)$(0.07) $(0.28) $(0.14)
EPS (Diluted, $USD)N/A$(0.28) $(0.14)

Year-over-Year (Q2 2019 vs. Q2 2018)

MetricQ2 2018Q2 2019
Net Sales ($USD Millions)$2.794 $1.789
Gross Margin (%)83% 77%
Operating Loss ($USD Millions)$(2.083) $(1.379)
Net Loss ($USD Millions)$(1.589) $(2.501)
EPS (Basic, $USD)$(0.09) $(0.14)

Segment and Channel Breakdown

MetricQ1 2019Q2 2019
Avenova Sales ($USD Millions)$1.450 $1.600
NeutroPhase Sales ($USD Millions)$0.041 $0.200
Retail Pharmacy Avenova ($USD Millions)$1.200 $1.300
In-Office Direct Avenova ($USD Millions)$0.218 $0.209
Avenova Direct (Amazon) ($USD Millions)N/A (pre-launch)Modest (launched mid-June)

KPIs

KPIQ1 2019Q2 2019
Partner Pharmacy Share of Rx Units (%)~38% ~52%
Salesforce Size (Field Reps)15 15
Territories Covered (Metropolitan Areas)26 26
Avenova Gross Margin (%)N/A84%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales ($USD Millions)FY 2019$6–$8 $6–$8 Maintained
Operating Expenses vs. 2018FY 2019“Significantly reduce” vs. 2018 “Significant reduction” vs. 2018 Maintained
Outlook Revision TimingFY 2019May adjust as visibility improves May revise later in year as Direct channel impact becomes clearer Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2018, Q1 2019)Current Period (Q2 2019)Trend
Reimbursement & High DeductiblesAcceleration of high-deductible plans; rebate/coupon dependency; loss of coverage from some payers Continued pressure; strategy to offset via partner pharmacies and direct channels Structural headwind; mitigation improving
Partner Pharmacy ProgramExpanded to 50-state coverage; target to increase unit mix 52% of Rx units via partners; improved gross-to-net Scaling positively
Direct-to-Consumer (Amazon)Planned launch later in 2019 Launched mid-June; expected growth driver Early traction; growth focus
Salesforce RestructuringReduced to 15 reps covering 26 metros Maintained; deployed in high-volume, favorable reimbursement territories Stabilized footprint
Product Performance (Avenova)Best-in-class hypochlorous; strong prescriber base Avenova-only 84% gross margin; brand remains favored vs. copycats Positive brand equity
Financing/Other ExpenseNew debt; warrant and derivative fair value effects Higher other expense ($0.39M); non-cash losses on warrants/derivatives Financing costs weigh on net loss
Pipeline/Adjacencies (CelleRx)Mentioned aesthetic dermatology opportunity U.S. launch planned late 2019; first manufacturing run started Advancing launch plans

Management Commentary

  • “We are having success with our strategy to increase Avenova sales…Avenova sales for the 2019 second quarter of $1.6 million increased 9% over the first quarter while operating expenses decreased 47%.” — Justin Hall, President & CEO .
  • “Avenova Direct is our new direct-to-consumer channel launched in mid-June through Amazon.com…We expect our greatest growth for Avenova in the future to come through this channel.” — Justin Hall .
  • “Gross margin on net product revenue for the second quarter of 2019 was 77%, which included gross margin of Avenova sales of 84%.” — Jason Raleigh, CFO .
  • “Avenova is the only truly pure hypochlorous formulation on the market today…safe for long-term use, which is important and it's what makes us different in the marketplace.” — Justin Hall .

Q&A Highlights

  • The provided Q2 2019 transcript captured prepared remarks; Q&A content was not available in the retrieved document. Management nonetheless clarified FY2019 guidance was affirmed ($6–$8M) and noted potential future revisions as Avenova Direct scales .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2019 EPS and revenue was unavailable due to data access limits at the time of request; therefore, comparison to estimates could not be performed [Values retrieved from S&P Global unavailable due to API limit].

Key Takeaways for Investors

  • Sequential recovery amid structural reimbursement headwinds signals the new channel mix is working; partner pharmacies and Amazon Direct should continue to improve gross-to-net and access .
  • Cost reset is material: OpEx down 37% YoY and 47% QoQ, narrowing operating loss; further reductions vs. 2018 expected, supporting a path to lower cash burn .
  • Financing costs and non-cash items (warrant/derivative) currently weigh on net income; monitor progress on reducing interest and stabilizing fair value swings .
  • FY2019 sales guidance of $6–$8M is maintained; watch for potential updates as Avenova Direct adoption grows and partner pharmacy share rises .
  • Near-term trading: catalysts include Amazon channel ramp, partner pharmacy expansion, and late-2019 CelleRx launch updates; risks remain from reimbursement and unit price pressure .
  • Medium-term thesis: Avenova’s differentiation (pure hypochlorous, clinician/patient endorsement) plus DTC scaling may drive higher-volume, better-margin growth if access and awareness continue to improve .
  • Watch KPIs: partner-pharmacy unit mix, Avenova gross margin, DTC revenue contribution, and operating expense trajectory to gauge sustainability of margin improvement .