Market Overview

NovaBay Pharmaceuticals Reports 2016 Full Year and Fourth Quarter Financial Results and Provides 2017 Financial Guidance

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NovaBay®
Pharmaceuticals, Inc.
(NYSE MKT: NBY), a pharmaceutical company
focusing on commercializing its prescription Avenova® lid and
lash hygiene product for the domestic eye care market, reports financial
results for the three and 12 months ended December 31, 2016 and provides
2017 financial guidance.

"We made major strides in a dramatic turnaround at NovaBay in 2016 with
Avenova sales increasing 175% while we narrowed our operating loss by
nearly half versus the prior year, allowing us to reach our goal of
positive adjusted cash flow from operations in the month of December,"
said Mark M. Sieczkarek, NovaBay's President and CEO. "We realized
across-the-board improvements in key operating metrics including
prescribing physicians and reorder rates, and successfully implemented
our marketing strategy to increase sales through the higher-margin
prescription ophthalmology channel. By the fourth quarter more than 77%
of our sales came from this channel, up from 68% in the prior quarter
and up from 30% in fourth quarter of 2015. We executed on every promise
made in 2016 to our stakeholders.

"We finished the year on a strong note with Avenova sales for the fourth
quarter reaching a record $3.9 million, up 26% from the third quarter,
and gross margin on Avenova sales reaching 87%," he said. "But most
importantly, we ended 2016 with $9.5 million of cash and equivalents and
no debt, providing us with what we believe to be sufficient financial
resources to fund our operations throughout 2017, even while expanding
our sales force and investing in targeted Avenova clinical studies.

"We expect another year of exceptional performance in 2017," Sieczkarek
added. "Our expected outlook is for revenues to reach $19 million, up
60% over 2016, and gross margin from Avenova product sales in the high
80% range. We have ample room for continued growth for years to come as
we've barely tapped into a market we estimate at 41 million Americans
with product that is producing compelling results. We plan to capitalize
on this substantial commercial opportunity by continuing to invest in
our sales organization to grow the top line while managing expenses
throughout the organization."

NovaBay defines adjusted cash flow from operations as GAAP cash flow
from operations less changes in operating assets and liabilities.

Key Fourth Quarter Avenova Metrics

  • Avenova sales of $3.9 million increased 146% year-over-year and 26%
    over 3Q16;
  • Prescription sales into the pharmacy channel were $3.0 million, up
    550% year-over-year and up 45% over 3Q16;
  • New prescribers increased by over 1,000;
  • Total number of medical professionals who have prescribed Avenova
    increased by 17% from the third quarter of 2016 to more than 8,700.

Fourth Quarter 2016 Financial Results

Net sales for the fourth quarter of 2016 were $4.1 million, up 149% from
$1.6 million for the fourth quarter of 2015 and up 19% from $3.4 million
for the third quarter of 2016. Product revenue was $4.0 million for the
fourth quarter of 2016, up 155% from $1.6 million for the fourth quarter
of 2015 and up 24% from $3.3 million for the third quarter of 2016.
Total gross profit margin was 80% for the fourth quarter of 2016, up
from 64% for the prior-year period with the increase due to higher sales
of Avenova and the impact of an accrual for rebates in the fourth
quarter of 2015. The gross profit margin on Avenova sales for the fourth
quarter of 2016 was 87%.

Operating loss for the fourth quarter of 2016 of $2.0 million improved
by 67% from $6.2 million for the fourth quarter of 2015 and by 2% from
$2.1 million for the third quarter of 2016. R&D expenses were $0.2
million for the fourth quarter of 2016 versus $1.2 million for the
fourth quarter of 2015, primarily due to lower spending on clinical
trials that were completed and the focus of resources on Avenova
commercialization, and increased from $4,000 for the third quarter of
2016, due to a third quarter of 2016 gain on the exchange of laboratory
equipment for R&D services that were valued in excess of the net book
value of the equipment. Sales and marketing expenses for the fourth
quarter of 2016 decreased slightly to $3.1 million from $3.3 million for
the fourth quarter of 2015 and increased 18% from $2.7 million for the
third quarter of 2016 due to higher outsourced sales force expenses. G&A
expenses for the fourth quarter of 2016 of $2.0 million compared with
$2.7 million for the prior-year period, primarily due to
reorganizational changes in the fourth quarter of 2015, and with $2.3
million for the third quarter of 2016, primarily due to modification of
the exercise price for warrants issued in May 2015 in the third quarter
of 2016.

Non-cash gain on the change of fair value of warrant liability for the
three months ended December 31, 2016 was $0.4 million, compared with a
gain of $2.0 million for the three months ended December 31, 2015.

The net loss for the fourth quarter of 2016 was $1.6 million, or $0.11
per share on a basic basis, compared with a net loss for the fourth
quarter of 2015 of $4.2 million, or $1.26 per share on a basic basis.

Full Year 2016 Financial Results

Net sales for 2016 were $11.9 million, up 172% from $4.4 million for
2015 with the increase due to the higher sales of Avenova. Product
revenue for 2016 increased 180% to $11.6 million. Gross profit margin
was 79% for 2016, compared with 71% for 2015. Gross profit margin on
Avenova sales was 86% for 2016.

Operating loss for 2016 narrowed by 48% to $11.0 million from $21.1
million for 2015. R&D expenses for 2016 declined 76% to $1.4 million,
sales and marketing expenses increased 12% to $11.8 million and G&A
expenses declined 10% to $7.2 million, all compared with 2015.

Non-cash loss on the change of fair value of warrant liability for 2016
was $2.1 million, compared with a gain of $2.1 million for 2015. The
non-cash loss on changes in fair value of warrant liability was
primarily due to the increase in the price of the Company's common stock
since December 31, 2015.

The net loss for 2016 was $13.2 million, or $1.40 per share, compared
with a net loss for 2015 of $19.0 million, or $6.82 per share. The
operating cash burn attributable to this loss for 2016 was $12.1 million.

NovaBay reported cash and cash equivalents of $9.5 million as of
December 31, 2016, compared with $2.4 million as of December 31, 2015.
On May 5, 2016, the Company closed the first tranche of a financing for
gross proceeds of $7.8 million and on July 31, 2016, the Company closed
the second and final tranche for gross proceeds of $4.0 million.
Warrants were exercised for net proceeds to the Company of $6.6 million
and $0.9 million during the third and fourth quarters of 2016,
respectively.

The Company used approximately $0.7 million in cash to fund operations
during the fourth quarter of 2016 compared with $4.5 million used during
the fourth quarter of 2015 and $3.8 million used during the third
quarter of 2016. The decrease in cash to fund operations in the fourth
quarter of 2016 from the prior year was primarily due to higher gross
profit from Avenova sales and lower operating expenses achieved through
companywide cost-reduction programs.

2017 Financial Outlook

NovaBay is introducing financial guidance for 2017. The Company's
expectations are as follows:

  • Total sales of $19 million, up 60% over 2016;
  • Gross profit margin on Avenova sales in the high 80% range;
  • Net loss of $6.2 million, excluding the effect of non-cash gain (loss)
    on change in fair value of warrant liability;
  • Cash burn of $3 million.

Conference Call

NovaBay management will host an investment community conference call
today beginning at 4:30 p.m. Eastern time (1:30 p.m. Pacific time) to
discuss the Company's financial and operational results and to answer
questions. Shareholders and other interested parties may participate in
the conference call by dialing 800-608-8202 from within the U.S. or
702-495-1913 from outside the U.S., with the conference identification
number 68570527.

A live webcast of the call will be available at http://novabay.com/investors/events
and will be archived for 90 days.

A replay of the call will be available beginning two hours after call
completion through 11:59 p.m. Eastern time April 23, by dialing
855-859-2056 from within the U.S. or 404-537-3406 from outside the U.S.
and entering the conference identification number 68570527.

About NovaBay Pharmaceuticals, Inc.: Going Beyond Antibiotics®

Avenova is formulated with Neutrox®, which is cleared by the
U.S. Food and Drug Administration (FDA) as a 510(k) medical device.
Neutrox is NovaBay's commercial name for its proprietary pure
hypochlorous acid. Data from a multicenter clinical study show that
Avenova reduced bacterial load, the underlying cause of blepharitis, on
ocular skin surface by more than 90%. Laboratory tests show that
hypochlorous acid has potent antimicrobial activity in solution yet is
non-toxic to mammalian cells and also neutralizes bacterial toxins.
Avenova is marketed to optometrists and ophthalmologists throughout the
U.S. by NovaBay's direct salesforce. It is accessible from more than 90%
of retail pharmacies in the U.S. through agreements with McKesson
Corporation, Cardinal Health and AmerisourceBergen.

Forward-Looking Statements

This release contains forward-looking statements that are based upon
management's current expectations, assumptions, estimates, projections
and beliefs. These statements include, but are not limited to,
statements regarding the size of our potential market, the future sales
of our products, what we believe to be sufficient future financial
resources, our expected gross margin, and generally the Company's
expected future financial results. Forward-looking statements can be
identified with words like (and variations of): "plan," "estimate,"
"believe," and "expect." These statements involve known and unknown
risks, uncertainties and other factors that may cause actual results or
achievements to be materially different and adverse from those expressed
in or implied by the forward-looking statements. Factors that might
cause or contribute to such differences include, but are not limited to,
risks and uncertainties relating to difficulties or delays in
manufacturing, distributing, and selling the Company's products,
unexpected adverse side effects or inadequate therapeutic efficacy of
our product, the uncertainty of patent protection for the Company's
intellectual property, and any potential regulatory problems. Other
risks relating to NovaBay's business, including risks that could cause
results to differ materially from those projected in the forward-looking
statements in this press release, are detailed in NovaBay's latest Form
10-K and Form 10-Q filings with the Securities and Exchange Commission,
especially under the heading "Risk Factors." The forward-looking
statements in this release speak only as of this date, and NovaBay
disclaims any intent or obligation to revise or update publicly any
forward-looking statement except as required by law.

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NOVABAY PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
      December 31,      

December 31,

2016 2015
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 9,512 $ 2,385
Accounts receivable, net of allowance for doubtful accounts ($10 and
$40 at December 31, 2016 and 2015, respectively)
2,120 536
Inventory, net of allowance for excess and obsolete inventory ($196
and $45 at December 31, 2016 and 2015, respectively)
873 1,345
Prepaid expenses and other current assets   1,966     261  
Total current assets 14,471 4,527
Property and equipment, net 371 395
Other assets   539     155  
TOTAL ASSETS   15,381     5,077  
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Current liabilities:
Accounts payable 455 2,483
Accrued liabilities 1,801 1,980
Deferred revenue   2,067     170  
Total current liabilities 4,323 4,633
Deferred revenue - non-current 1,986 2,248
Deferred rent 327 189
Notes payable, related party - 1,655
Warrant liability 1,446 1,450
Other liabilities   198     -  
Total liabilities   8,280     10,175  
 
Stockholders' equity (deficit):
Preferred stock: 5,000 shares authorized; none outstanding at
December 31, 2016 and 2015
- -
Common stock, $0.01 par value; 240,000 shares authorized 15,269 and
3,486 shares issued and outstanding at December 31, 2016 and 2015,
respectively
153 35
Additional paid-in capital 110,619 85,387
Accumulated deficit   (103,671 )   (90,520 )
Total stockholders' equity (deficit)   7,101     (5,098 )
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 15,381   $ 5,077  
 
 
NOVABAY PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands,except per share data)
 
    Three Months Ended     Year Ended
December 31, December 31,
(in thousands, except per share data) 2016     2015 2016     2015
Sales:        
Product revenue, net $ 4,046 $ 1,587 $ 11,617 $ 4,146
Other revenue, net   31     48     280     235  
Total sales, net 4,077 1,635 11,897 4,381
 
Product cost of goods sold   808     591     2,464     1,261  
Gross profit   3,269     1,044     9,433     3,120  
 
Research and development 156 1,225 1,371 5,728
Sales and marketing 3,149 3,263 11,809 10,523
General and administrative   1,994     2,742     7,235     8,006  
Total Operating Expenses   5,299     7,230     20,415     24,257  
Operating Loss (2,030 ) (6,186 ) (10,982 ) (21,137 )
 
Non-cash (loss) gain on changes in fair value of warrant liability 381 1,976 (2,099 ) 2,149
Other income (expense), net   1     6     (68 )   17  
 
Loss before provision for income taxes (1,648 ) (4,204 ) (13,149 ) (18,971 )
Provision for income tax   -     -     (2 )   (2 )
Net loss and comprehensive loss $ (1,648 ) $ (4,204 ) $ (13,151 ) $ (18,973 )
 
Net loss per share attributable to common stockholders, basic $ (0.11 ) $ (1.26 ) $ (1.40 ) $ (6.82 )
Net loss per share attributable to common stockholders, diluted $ (0.13 ) $ (1.26 ) $ (1.40 ) $ (6.82 )
Weighted-average shares of common stock outstanding used in
computing net loss per share of common stock:
Basic 15,148 3,337 9,408 2,784
Diluted 15,459 3,337 9,408 2,784
 

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