NovaBay Pharmaceuticals, Inc. (NYSE American: NBY) is a company laser-focused on the development and sale of scientifically-created and clinically-proven eyecare products, with a particular emphasis on the large and growing dry eye market. The company's flagship product, Avenova® Antimicrobial Lid and Lash Solution, has proven in laboratory testing to have broad antimicrobial properties, making it an effective solution for removing foreign material, including microorganisms and debris, from the skin around the eye, including the eyelid.

Business Overview

NovaBay's Avenova Spray is formulated with the company's proprietary, stable and pure form of hypochlorous acid and is cleared by the FDA for sale in the United States. The product is available direct to consumers, primarily through online distribution channels, and is also available by prescription and dispensed by eyecare professionals for the treatment of blepharitis and dry eye disease.

Recognizing that dry eye is a complex condition, NovaBay has built a complementary portfolio of scientifically-developed products to address each step of the standard at-home treatment regimen. This includes the Avenova Eye Health Support antioxidant-rich oral supplement, Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health.

In addition to its eyecare products, NovaBay also manufactures and sells its proprietary form of hypochlorous acid for the wound care market through its NeutroPhase and PhaseOne branded products. These products are used for the cleansing and irrigation as part of surgical procedures, as well as treating wounds, burns, ulcers and other injuries, and are sold through distributors.

Financials

For the full year 2023, NovaBay reported annual net income of -$9.64 million, annual revenue of $14.73 million, annual operating cash flow of -$4.31 million, and annual free cash flow of -$4.33 million.

In the first quarter of 2024, the company reported a 12% increase in total net sales to $2.63 million, compared to $2.34 million in the prior year period. This increase was largely driven by a 13% rise in product revenue, net, to $2.62 million, up from $2.33 million in Q1 2023. The company's eyecare products, including Avenova Spray, saw a $0.2 million increase in revenue to $2.4 million, while revenue from the company's PhaseOne branded wound care product increased $0.1 million to $0.2 million.

Gross profit for the first quarter of 2024 increased 12% to $1.79 million, compared to $1.60 million in the prior year period, with the gross margin on net product revenue remaining consistent at 68% in both periods.

Sales and marketing expenses decreased 15% to $1.06 million in Q1 2024, down from $1.24 million in the prior year quarter, due primarily to lower digital advertising and related consulting costs. General and administrative expenses, however, increased 35% to $2.29 million, up from $1.70 million, driven by higher legal costs related to non-recurring strategic initiatives.

The company reported a net loss from continuing operations of $3.09 million, or $0.14 per share, in the first quarter of 2024, compared to a net loss from continuing operations of $1.35 million, or $0.66 per share, in the prior year period. This increase in net loss was largely attributable to the $0.87 million loss on the divestiture of the company's former skincare subsidiary, DERMAdoctor, as well as higher interest and amortization expenses related to the company's convertible notes.

Liquidity

As of March 31, 2024, NovaBay had cash and cash equivalents of $1.8 million, compared to $2.9 million as of December 31, 2023. The decrease in cash was primarily due to the $0.6 million in monthly redemption payments made on the company's Secured Convertible Notes, as well as $0.1 million in debt issuance costs related to the Unsecured Convertible Notes issued in March 2024.

The company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of the Q1 2024 financial statements.

To address its liquidity and capital needs, NovaBay is evaluating various plans and strategic transactions, including raising additional capital through debt or equity financing, reducing operating expenses, out-licensing product rights, and exploring potential divestiture or acquisition opportunities. The company may also issue securities, such as common stock, preferred stock, convertible debt, and warrants, through private placements or registered public offerings.

Dry Eye Market Opportunity

NovaBay's primary focus on the eyecare market, particularly the large and growing dry eye segment, positions the company well to capitalize on significant industry tailwinds. Dry eye syndrome is one of the most commonly observed clinical diseases in the U.S., affecting approximately 16 million Americans. 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, driven by factors such as the increasing prevalence of dry eye due to greater computer and smartphone usage, an aging population, and improved diagnostic capabilities.

The company's Avenova branded product line, anchored by the Avenova Spray, has established itself as a leading solution for blepharitis and dry eye disease. NovaBay has further strengthened its position in the dry eye market by expanding the Avenova portfolio to include a range of complementary products addressing each step of the standard at-home treatment regimen.

Digital Marketing Expertise Driving Growth

NovaBay has demonstrated strong expertise in digital marketing, which has been a key driver of the company's recent sales growth. In the first quarter of 2024, the company reported record-breaking ordered sales of Avenova products through its largest sales channel, Amazon.com, with March and April 2024 setting new all-time highs. This growth was fueled by a 160% year-over-year increase in sales through the company's social media channels and a 360% increase in revenue from its email marketing program.

To build on this success, NovaBay is introducing new digital initiatives, including text messaging programs to provide customers with exclusive discounts, news, and value-added content, as well as refreshed email campaigns targeting the company's existing loyal customer base and expanding reach to new audiences. These cost-efficient digital marketing strategies have allowed NovaBay to drive top-line growth while managing its sales and marketing expenses, which decreased 15% year-over-year in the first quarter of 2024.

Strategic Partnership with Eyenovia

In March 2024, NovaBay announced a co-marketing agreement with Eyenovia, a company that recently received FDA approval for a new ophthalmic steroid product, clobetasol. Under the agreement, Eyenovia's sales representatives will market NovaBay's Avenova products, while NovaBay will market the clobetasol product alongside Avenova in its physician-dispensed channel.

This partnership provides NovaBay with an opportunity to leverage Eyenovia's sales force to expand the reach of Avenova among eyecare specialists, while also giving the company a new product to offer its existing customer base. The clobetasol product, the first new ophthalmic steroid to enter the U.S. market in more than 15 years, is expected to launch in the third quarter of 2024.

Risks and Challenges

Despite the company's focus on the attractive dry eye market and its success in digital marketing, NovaBay faces several risks and challenges that investors should consider. The company's ability to continue as a going concern is dependent on its success in executing additional capital-raising strategies or other strategic transactions to address its ongoing liquidity needs.

Additionally, NovaBay operates in a highly competitive environment, with larger, well-established pharmaceutical and medical device companies offering competing products for the treatment of dry eye and other ocular conditions. The company's reliance on third-party manufacturers and distributors also exposes it to supply chain disruptions and the potential loss of key partners.

Outlook

NovaBay is well-positioned to capitalize on the significant growth opportunities in the dry eye market with its portfolio of scientifically-developed, clinically-proven Avenova branded products. The company's expertise in digital marketing has driven record-breaking sales through its online channels, and its new strategic partnership with Eyenovia provides a pathway to further expand the reach of its products among eyecare specialists.

While the company faces liquidity challenges and competitive pressures, NovaBay's laser-focus on the dry eye market, diversified product portfolio, and innovative marketing strategies position it for potential long-term success. Investors should closely monitor the company's progress in executing its capital-raising and strategic initiatives to address its near-term liquidity needs and position the business for sustainable growth.