I hate reverse stock splits. There, I said it. The reverse split, in a vacuum, is often a sign of a company that’s out of operational alternatives and desperate to hang onto its exchange listing by any means necessary. Every now and then, however, we see a company use a reverse split as just one part of an overarching corporate strategic shift. We examine one such company today – NovaBay Pharmaceuticals (NYSE: NBY) – that has executed a remarkable turnaround in just 18 months.
Source: NovaBay Pharmaceuticals
Corporate Restructuring in Q4 2015
In the 4th quarter of 2015, NovaBay was floundering as a company with a stock price measured in cents and a muddled corporate direction. In November 2015, the company announced a restructuring, installing then Chairman of the Board Mark Sieczkarek as President and CEO, replacing founder Ron Najafi. Going forward, the company would focus on the commercialization of its high margin prescription Avenova product for Lid and Lash Cleansing, while also committing to reducing operating expenses and achieving positive cash flow from operations by the end of 2016. December 2015 brought the 1-for-25 reverse split, taking the 10-cent stock to $2.50 per share.
Last month, NovaBay reported Q4 and full year 2016 results, and it’s clear that management has been executing on its plan. Net sales for 2016 were $11.9 million, up 172% from 2015, while the company narrowed its operating loss by 48% to $11.0 million from $21.1 million for 2015. Notably, NovaBay achieved its stated goal of positive cash flow from operations during the month of December. The stock is at $3.75 and trending better.
Mr. Sieczkarek was the right guy for the job, with a resume that included being CEO of Solta Medical [acquired by Valeant Pharmaceuticals (NYSE: VRX)] and of Conceptus [acquired by Bayer (Deutsche Börse XETRA: BAYN; OTC: BAYRY)], where he led the launch of the Essure medical device. Previously, he was SVP and President of The Americas and Europe for Bausch & Lomb (also acquired by Valeant), where he was responsible for overseeing multinational commercial launches of several leading products.
Source: NovaBay Pharmaceuticals Investor Presentation, Dec 2016
Focus on Avenova
Avenova is the only eye care product formulated with the company’s proprietary, stable and pure form of hypochlorous acid (marketed as Neutrox). By replicating the antimicrobial chemicals used by white blood cells to fight infection, Avenova has been proven to have broad antimicrobial properties, removing microorganisms and debris from the skin on the eyelids and lashes without burning or stinging. It is also the only commercial product clinically validated to reduce bacterial load on the ocular skin surface, the buildup of which can cause the chronic eye condition blepharitis.
NovaBay raised $20 million through private placements last year, brought its contract sales team in house and has assembled key opinion leaders for its Opthalmic Advisory Board and separate Optometry Advisory Board. In conjunction with its earnings release, the company guided investors to revenues increasing by more than 60% in 2017 to $19 million, with the gross margin in Avenova product sales remaining in the high 80% range. The company says it’s “barely scratched the surface” of a market it estimates at 41 million Americans.
Shareholder and Board Concentration
One possible area of concern is the shareholder concentration and limited float in NovaBay shares. China Pioneer Pharma (Hong Kong: 1345), an importer and marketer of pharmaceuticals and medical devices, owns 34%, while Mr. Jian Ping Fu, head of Greenwood Capital, an Australian investment firm, owns 26% of NovaBay.
Further, the company’s 10-K for 2016 includes this rather grim risk factor:
China Pioneer, Pioneer Hong Kong, Mr. Jian Ping Fu and/or China Kington might influence our corporate matters in a manner that is not in the best interest of our general stockholders.
Here’s the background:
- As mentioned, China Pioneer Pharma holds 34%
- One of the Board Directors of NovaBay is also the Chairman of the Board of China Pioneer.
- Another Board Director is an officer of China Kington, an asset management firm that agented most of what NovaBay raised through a bridge loan and private placements last year, and is a Board Director of Pioneer Hong Kong, a wholly owned subsidiary of China Pioneer.
- Another Board Director has worked closely with China Kington on other transactions in the past.
- Finally, China Kington was the agent for three purchases of NovaBay stock by Mr. Jian Ping Fu, the aforementioned 26% holder.
Thus far, Mr. Sieczkarek has certainly given the Board no reason whatsoever to doubt his management abilities. But we’re always watchful in situations like these where there is significant concentration of interests at the board or shareholder level.
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