Sonoma Pharmaceuticals, Inc. (SNOA) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Oculus Fiscal Third Quarter 2012 Conference Call. My name is Ally, and I will be your coordinator for today's call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mr. Dan McFadden. Please proceed, sir.

Thank you, Ally, and good afternoon, everyone. Thank you for joining us. With me on the call today are our founder and CEO, Hoji Alimi; and our Chief Financial Officer, Bob Miller. We will open the call with Hoji's discussion of the business highlights since the last earnings call and the company's execution on our strategic business plan. Bob Miller will next review financial results, and then we will take questions. This afternoon, Oculus issued a press release detailing fiscal third quarter financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is at www.oculusis.com. That's O-C-U-L-U-S-I-S.com, or you can call Investor Relations at (425) 753-2105, and we'll be happy to assist you. Before we begin, I'll remind listeners that this conference call contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words as expect, to expand, would and anticipate, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risk inherent in the development and commercialization of potential products, the risk that potential clinical studies or trials will not proceed as anticipated or may not be successful or sufficient to meet regulatory standards or receive the regulatory clearance or approvals, the company's future capital needs and its ability to obtain additional funding and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q and the annual report on Form 10-K. Identified product applications and/or uses are intended to highlight potential applications for the investment community and does not infer that the company is marketing for these indications. The company does not provide any assurances that such applications will receive regulatory approvals. Oculus disclaims any obligation to update these forward-looking statements. So now, I will turn the call over to Hoji Alimi, our CEO and Founder.

Thank you. Good afternoon, everyone, and thanks for joining us on this call. This is obviously the earnings call for Oculus Innovative Sciences for the third quarter fiscal 2012 earnings conference call. I'm Hoji Alimi, President and Chief Executive Officer of the company. And I have Bob Miller, our Chief Financial Officer, who joins me today on this call as well. Our Q3 earnings information was released following the close of the market today, as we do. It's a standard. Our total revenues for the first 9 months of this fiscal year was $9.4 million. This shows a 37% or $2.4 million product revenue increase over the same 9-month period over the last year. Our operating expenses minus non-cash charges remained consistent in the range of the $3 million per quarter. And on EBITDAS basis, we had an improvement of $1.6 million for the 9 months ending this last December of 2011 versus last year. We anticipate that our revenue continue to grow. We will improve our earnings per share and cost threshold eventually to profitability. We are entering the fourth quarter with a great deal of excitement and we keep our eyes on 2 very important partner product launches that includes 9 SKUs or different products in the United States. Eloquest Healthcare and Quinnova Pharmaceuticals are preparing their launch of these products for dermatology and hospital wound care call points. As we continue to diversify our revenue sources, international, debt [ph] and Rx, we expect these new product launches to further modulate potential seasonality and reduce risks associated with other markets as we move forward. So let me take a moment and explain how we view internally the wound care hospital market opportunity that we have partnered with Eloquest. The wound care market is highly fragmented and is flooded with large number of therapies and products that either they are not reimbursable or don't necessarily do their job, which is why there is no single standard of care in U.S. hospitals today. So Microcyn products provide the following advantages: one, the Microcyn hydrogel formulation cleared by FDA in management of wounds is reimbursed by Medicare and this is very key; second, Microcyn-based liquid and hydrogel products can be used in combination with other therapies for treatment of chronic, trauma, post-surgical and acute wounds; Microcyn has a strong safety profile and there are no drug-to-drug or device contraindications, but then again safely it that can be used with other therapies; fourth, Microcyn efficacy and safety has been validated in more than 30 clinical trials and has been used on more than 3 million patients worldwide without any significant adverse effects. In other words, Microcyn works and it is safe. Most recently, the results of our controlled and randomized clinical data against level which the $2.4 billion antibiotic has been recently peer-reviewed and published and is available. In that study, Microcyn showed significant statistical significance in improvement of and clinical cure of mildly [ph] diabetic ulcers versus level. We believe over time, Microcyn will reduce the overall use of antibiotics, steroid-based products and other topical antiseptics in the hospital market. In this study that was recently peer-reviewed and published, it will be a significant, I believe, asset in marketing our product in the hospital market. This is a significant and immediate near-term revenue opportunity when we are talking about the U.S. hospital market to Oculus and we are in position of a strong clinical data, approvals, reimbursements, premium pricing and seasoned train sales force. So our newest partner, Eloquest, provides us with a seasoned sales force of about 40 people focused primarily on hospital call points. And more importantly, Microcyn becomes a core and premium priced product in the portfolio. Next, I would like to address the significant opportunity we see in the dermatology market. In dermatology, we are working with Amneal Quinnova on 2 separate fronts: one, the immediate launch of our atopic dermatitis products as an Rx to the dermatologists in the U.S; and secondly, a potential acting drug deal for unique Microcyn product formulation to be used and replace leading brands such as Proactiv in the market. Though Amneal Quinnova is targeting 2 products for atopic dermatitis market as early as this month, the Microcyn-based solution and hydrogel will be sold as a stand-alone therapy. The premium pricing will be significantly higher than our current wound care and other consumer products. There are no reinvestment challenges and our partner is focusing on co-pay and a coupon strategy to introduce the products initially in the market. In derma space, the total population of patients with atopic dermatitis is approximately around 19 million patients in the U.S. and 40 million patients worldwide. And I most recently attended derm conference with this partner and the initial sampling of targeted dermatologists has generated a great deal of positive impact. For the Microcyn derm products are aimed at replacing a steroid-based therapy focused on reducing itch. So we are starting the year with these 2 new product launches while we continue to see further growth in our base revenue in other areas such as the international markets. So moving forward as a business, we anticipate our foreign partnerships and international revenue which has positioned our business on track to achieve revenues of $4 million per quarter and provide positive earnings per share as we move forward on the world. But we believe this process can be further accelerated beyond expanded product portfolio, include 3 things: number one, more Microcyn products as a stand-alone formulations for specific therapeutic indications; two, more Microcyn formulations in combination with other devices or therapies; and then third, new non-Microcyn technologies that they're synergistic with our current healthcare business models. And most importantly, they are able to accomplish this within the framework of the financial operating guidance I previously provided. So the point in case, we are in final stages of discussions with Amneal regarding a potential acne licensing agreement in which Amneal would underwrite and direct the clinical trials required secured FDA drug approval of Microcyn for treatment of acne. We're optimistic this agreement will be finalized in the near future, at which time, we will issue a press release for our investors of today. So moving forward, for the review of our new Microcyn-based business opportunities. We recently underwent a rigorous FDA side audit, which is a standard in the industry. We have not received any notifications of any product quality issues or 483s. In other words, there were no reported quality violations related to manufacturing of our products or the quality of the product itself. The FDA's currently evaluating our current pending and future regulative planning as a potential device and drug combination. This is the reason for our continued discussions with FDA on several fronts, including our oral indications. We are successfully completing the requirements to satisfy the FDA on one of our new product applications for reduction of the scars. We have put this as a high-priority since Amneal has expressed interest in this indication. The scar product can also be brought to the dermatology market quicker than other applications pending, such as the allergy application, which we have also discussed in the past. Furthermore in conjunction with FDA, we also voluntarily replaced several products due to labeling discussions with the FDA. And this action was not due to any product quality issues nor was it financially material to us. Our partner, Innovacyn, is also evaluating the possible filing of new FDA applications for expansion of their existing Vetericyn label indications in the animal health care market. We're currently working with them and the FDA to better understand these new indications. FDA's newest position on Microcyn indications on both human, as well as the vet, and prioritize these in order to efficiently execute on these in a timely manner. So when you look at Oculus, our strength has been in research and development and the regulatory arena. So while our partners, with good solid marketing and sales teams, are selling our current product formulations, one, we continue to work with FDA to secure additional potential approvals for these clearances; two, we have also undertaken a number of initiatives internally to further accelerate our revenue growth, that unveiling today to discuss those on this call. So going back to Microcyn for a moment in terms of priorities. Our first priority remains to support our existing partners in their respective markets. This support focuses primarily on providing new product formulations and SKUs based on market feedback we received from our partners. This is a significant undertaking by our new team. And today, they've developed more than 30 SKUs to our partner in animal health care market, 7 SKUs to Eloquest for the launch in the U.S. hospital market and more than 4 SKUs in the dermatology Rx market. So therefore, we are maximizing our opportunities with products formulated with Microcyn Technology, and that's the key point. We continue to grow our international market as we have mentioned previously. We also see a consistent growth pattern in orders coming from Asia, Europe and the Middle East. Mexico continues to grow on a calculated and sustainable formula while keeping their expenses low. The growth in Mexico is primarily driven through new products introductions, specifically in dermatology and pediatrics while we maintain our market share in both the hospital and pharmacy sales. For the next item is in terms of combination therapy. Using Microcyn with other devices, we have reported previously that Oculus has in-license an endotracheal tube from National Institute of Health. This unique delivery system can be effectively marketed with Microcyn to reduce the incidences of ventilator-associated pneumonia or short, is known as VAP. This device is designed to reduce the potential for VAP. VAP is the second most common hospital acquired infection. It accounts for 15% of all hospital acquired infections and may lead to longer stays in ICU and an increase in hospital stays of 1 to 3 weeks. The mortality rate associated with VAP can be up to 55%, especially when you consider you're dealing with elderly patients who suffer from compromised immune system or other systemic medical conditions that may lead to worsening of their potential overall health. We are currently pursuing partnerships in this arena, both domestically as well as internationally, and we do have our eyes on Europe. So at this point, let me take a moment and talk about our internal initiatives that may not be directly associated with Microcyn, but yet can provide significant capital in near term. During the previous earnings call, I promised you all to keep you up-to-date on our new R&D fronts, product formulation, innovations, which we are undertaking in R&D, while maintaining our operating expense guidance. Over the last year, we have reviewed and screened multiple new innovations internally that may have synergy with Microcyn Technology. These new innovations, compounds or delivery systems will be designed to accelerate our current commercial efforts to existing partners or anticipated new partnerships. So the criteria that we use to evaluate these innovations are 3 items. One, they must meet the same safety profile of Microcyn. In other words, they must be safe and green. Second, show regulatory time line to meet a significant unmet medical need with solid clinical trial data behind it. These types of opportunities will translate into faster adoption and revenue growth. And lastly, most likely at this point, we would market these products through existing partners where the synergy is right. So we have most recently in-licensed and we formulated a unique compound for prediabetic and diabetic patients, to safely stabilized their glucose and assist in weight loss. This is an oral or systemic compound with more than 500,000 patient study in a retrospective study that was conducted. It will be marketed as a Rx product and it is ready to be marketed on the regulatory point of view. Our facility has also undergone through a whole new regulatory revamp in order to meet the FDA's standards for production of such compound and we have successfully passed this inspection by the state, FDA and cleared our production for this new product immediately. So we hope to finalize the partner in this arena as early as this year. Again I'll point out that we are looking at both internationally as well as domestically. So just to give you a data point, what you're looking at in terms of this compound and the market as it compares to Microcyn. According to the research organization, net market diligence [ph], the U.S. market for products in the management of diabetes represents roughly around 38% of a $41 billion global annual market in 2010. So this is a significant market. But more importantly, our compound not only helps in the stabilizing the glucose, but also allows for weight loss, which is very cheap for diabetic patients. And most of us, if not all, know at least one friend or loved one that has been touched by this disorder. With new market opportunities, with minimum increasing our overhead can address key unmet medical needs and relatively fast tracks to market. So by collaborating with potential partners, we are then able to expand our product portfolio to include both Microcyn and non-Microcyn offerings domestically and internationally. So I'm passionately committed to the vision of the up side growth potential for Oculus in the triangular or 3-point portfolio: number one, maximize the revenue for all Microcyn products as a stand-alone therapy; two, Microcyn used in conjunction with other devices or therapy; and then last, is new technologies that synergistically benefit from our current health care business models and partners. This vision and my own personal passion is based on creating and commercializing products. And at the end of the day, they improve patient outcomes globally. So at this point, I will hand the phone to Oculus' CFO and he will cover the financials.

Okay, thank you, Hoji. I'll first review the guidance we've provided for the third quarter of fiscal year 2012 followed by guidance for the fourth quarter, and then summarize our financial results for the third quarter and the 9 months. How did we do on our guidance for the third quarter ended December 31, 2011? First of all, our total revenue for the quarter was $2.8 million, above our guidance of greater than $2.6 million. Secondly, our cash operating expenses of $3.2 million were close to the $3 million range. And third, the actual EBITDAS is $1.3 million versus guidance in the range of $1.4 million. As we mentioned on the last earnings call, the quarter ending December was negatively impacted by the seasonality of the animal health care products. Our Innovacyn is expecting to reduce the impact of this seasonality moving forward by growing sales in such less seasonal animal markets as those to veterinarians in several large livestock applications. In addition, future sales to atopic dermatitis patients tends to increase during the winter months, partially offsetting the seasonality in animal health care. What is our guidance for the quarter ending March 31, 2012? We expect our revenue to be greater than $3 million, EBITDAS to be less than $1 million and our cash operating expenses to be in the $3 million range. The product revenue for the quarter ending March 31, 2012, will be positively impacted by product launches of our partners Ferndale/Eloquest and Quinnova, Amneal as Hoji described earlier. Moving now to the results of our third fiscal quarter. Total product revenues increased $594,000 or 30% with increases in the U.S., Mexico, Europe, China, India, partially offset by decline in the Middle East. Product revenues in the U.S. increased $528,000 or 111%, primarily due to increased unit growth and higher royalty fees received from our partner, Innovacyn. Additionally, revenue growth in the U.S. was driven by increased demand for our products in the professional human wound care and dermatology markets. The revenue to Oculus from Innovacyn increased $368,000 or 124% to $665,000 from $297,000 in the same period last year. The revenue from the prescription business increased $160,000 or 89% to $340,000. Revenue in Mexico increased $86,000 or 8%, primarily due to 15% growth in the sales of our 5-liter presentations and 2% growth in the 120-ml and 240-ml presentations. The growth in both categories were curtailed by a 7% strengthening in the Mexican peso. Mexico's revenue growth in local currency was 16% when compared to the prior periods last year. Oculus reported gross profit related to our Microcyn products of $1.8 million or 71% of product revenues during the quarter compared to a gross profit of $1.1 million or 54% in the prior year period. The improved gross profit is the result of higher gross margins in all business segments. Our margins in Mexico were 75% during the quarter compared to 54% in the prior year. Operating expenses minus non-cash expenses during the quarter were $3.2 million up from $2.8 million in the same period last year. R&D expense increased 9%, mostly due to higher stock compensation charges. SG&A expense increased $937,000 or 34% to $3.7 million during the quarter compared to the same period last year. This increase was primarily due to higher stock compensation charges of $618,000 and increased sales related and legal costs in Mexico. As of December 31, 2011, Oculus had cash of $5 million compared to $4.4 million as of March 31, 2011. What are the results for the last 9 months? Total revenues were $9.4 million for the 9 months ended December 31, 2011, compared to $7 million in the prior year period. Product revenues increased $2.4 million or 37%, primarily driven by increases in U.S., Mexico, Europe, China and India. Gross profitability for the product revenue for the 9 months increased to 75% from 64% in the prior year period, attributable to higher profitability across all business segments. Total operating expenses minus non-cash charges increased $795,000 or 9% for the 9-month period compared to the same period last year, mostly due to higher sales related costs in Mexico and Europe. In our earnings call for the quarter ended June 2011, Hoji categorized Oculus into different business groups for analytical purposes. We also provided expected ranges of revenue growth rates for each of these groups for the entire fiscal year, which I will now summarize and update with one quarter to go. First of all for the Innovacyn Group, which includes the animal healthcare and human over-the-counter markets, we provided revenue growth guidance of 70% to 90% for the full fiscal year. For Innovacyn in the 9 months, we had revenue growth of 71%. Currently, almost all of the segment is animal healthcare. We are narrowing this growth guidance in the range of, 2, in a range of 73% to 77% for the full fiscal year. Secondly, for the Rx U.S. group, which includes all other non-Innovacyn U.S. markets, we have provided revenue growth guidance earlier on of 50% to 100% for the full fiscal year. In the 9 months, this group's revenue growth was 74%. And now we're narrowing that to a guidance of 50% to 60% growth for the full fiscal year. For the international group, the revenue growth guidance of 10% to 25% for the full fiscal year was provided. In the 9 months, the revenue growth for the international group was 22%. We are now narrowing this guidance to 15% to 20%. Fourth, for the total product revenue growth for the full fiscal year, we provided guidance of 40% to 80% growth. In the 9 months, we achieved product revenue growth of 37%. We are now narrowing the overall growth guidance to the 32% to 35% for the full fiscal year. What is the pattern and trend of our sales over the next 3 quarters ending September 2012? First of all, the seasonality in the animal healthcare market is such that the December quarter is the weakest, followed by March, then June, the September quarter being the strongest. This strong seasonal pattern creates a strong quarter-over-quarter growth for us. Secondly, the product launches of Quinnova into the dermatology market and Eloquest into the hospital call points also bolsters our quarter-over-quarter growth. Lastly, the growth of the international businesses will also add to this quarter-over-quarter growth. This concludes my remarks. And now, I'll turn it back to the operator for questions.

[Operator Instructions] Our first question comes from Laura Engel of Stonegate Securities.

Okay, a few questions. I guess first related to the 2 launches. How certain are you that those will occur in the next quarter? And also, do you have any feel for the market opportunity as it relates to Oculus and how quickly you can add to the top line with those product launches?

Okay. So in regards to how certain we are, we actually have manufactured chips, trained their sales people. So I think on the Amneal, Quinnova, it's very certain that this quarter is taking place. We also have shipped partial product to Eloquest and begin all the training of the sales people have been done. Sampling of some of the hospitals have been in process and so on. So this has been a very active 6, 7 months collaboration between Oculus and Eloquest, as well as Amneal. So this is not just an overnight receiving a purchase order of your shipping product. So I think we are getting to the point that now -- that we're ready to start shipping products out. And as I said as of today, Amneal, Quinnova's dermatology conference, they already sampled a lot of dermatologists with fantastic feedback. As we would have guessed, they're coming back with more than atopic dermatitis indications that they can treat, but again overall extremely positive. In terms of adding to the top line, I will let Bob answer that. But let me just for a minute, overview. We mentioned that in any product launch, there will be an initial sampling. And we will be charging our partners for those samples. They've receive the samples. They're going to sample as many as they can in hospitals with their sales force behind it. Based on the feedback they get, then they're going to go ahead and continue, hopefully taking orders and we ship products. So I think it's going to be a ramp up over several quarters. But again, a lot of leg work has been done. Bob, do you want to add something there?

Yes, the only thing I would add to that is that we recognize the samples as we ship them. And we already shipped some samples at this point, so there will be some impact on the bottom line fairly quickly. And we also recognize -- we don't recognize the trade units until it's actually blocked by the end user. We have data that shows that off our databases. So that it's a conservative approach, but it will give us fairly quick revenue on the samples and more extended revenue on the trade units.

Okay. And then on the -- I guess, the diabetic and weight-loss product as you mentioned was an FDA prescription approved product? Is that correct?

The product is just -- I'll let you get to one comment and then I answer the question. The reason we remain vague on this call because we are trying not to educate our competitors out there until this product is out in the market and our partners have a few steps ahead of the competition. So the product under FDA, the only thing that it required was a site inspection and enough clinical data to condense and that we can clinically demonstrate the effectiveness of the product. And this is from a physician from Harvard Medical School, 500,000-patient study that Federal respectively conducted. And so we have pretty solid data pass the FDA inspection. So we are ready to go. The only thing is we need to have the right partner focused on the prescription market because that's the market this product is going to be aimed at. It cannot be sold over-the-counter.

Okay. And I guess can you give us a little color on how this came to be and how you've made the decision to kind of add this third prong of your strategy as far as prescription drug products, expanding the portfolio in that direction as well.

Yes, I think the way I see the role of the entire management here at Oculus, be very candid. We are not going to clock-in and clock-out, 8 in the morning to 5, and then send products to our partners and say, "Let's see what are they going to do?" I think the market expects more of us, our families expect more of us, and I demand more of us. So the way we look at our business opportunity is the bottom line is how can we build a successful company that generally when you speak to Wall Street in Wall Street's languages, how fast can you accelerate revenue to close to $100 million? That's the market on "views" to look at the growth potential. So the way we are looking at it is the current platform that we have is the, we are maximizing that is paying off. It's like a black box, the input output, you can see, you're formulating, getting approvals, getting the right partners, they're putting into market and our revenues are increasing, our expense's remaining flat. But also, let's rely on our core competency. And our core competency is science and regulatory. And that's one of the reasons we are not raising money, $25 million and build a sales force and take the risk because we haven't done that in the past. We are not going to take that risk right now. And that's where the partners come in. So on the science part, is there are 2 approaches. Microcyn right now, we have a whole school of different formulations that gets very technical. Some are specific to surgical that is vastly different than the current products we have in the market because that's a drug that's [ph] much tighter, is a different PH and the whole chemistry of it is different. So we are maximizing the Microcyn as a stand-alone therapy in different indications building those formulations in our spatial partnerships if they are willing to pay for clinicals in UTI, surgical and so on. The second thing is at the board level, we are saying, "Okay, we got a great product, to be very candid and be blunt." And one of the questions coming back from the market is if this management is sitting on this fantastic product, how come they can't sell it? And the limitation comes from the FDA. So now we are trying to figure out where can we combine this fantastic product with another device within the guidelines with the FDA that they would allow us to start commercializing and dig the revenue up. And then lastly, is, again going to back to our core competency, we've been able to take a very safe product. We formulated in so many ways in getting into the market and can we do it with other products without the need of raising $120 million. So we got several very intelligent physicians from Harvard Medical School involved and started screening compounds after compounds after compounds. And this was the one really caught our eyes. One, it touches me personally because I do suffer from Type 2 diabetes and I know how big of a market this is and what impact it has on my own personal life. And from the discussions we have had with patients, with doctors, Microcyn is a topical product but what's really missing is we don't have anything systemic. So this has that going for us. It is safe, nontoxic, and ready-to-go product. But ready-to-go, meaning we really spend 6, 7 months reformulating. Thanks to our R&D team. So we are looking, we are on the hunt for additional technologies where it makes sense. And the bottom line is -- the big question is [indiscernible] premium pricing margin and then we have the right target it that can commercialize it. So those are the criterias we go through. Sorry for the long answer.

[Operator Instructions] Our next question comes from George Dahl of Newport Coast Securities.

Is there anything you can do to bring down your expenses instead of having them run continually at $3 million? Or is that just a fixed cost that can't be brought down?

We can. And in fact, we've had these discussions at the board level. So there are 2 things we are looking at, George, here, is we got R&D expense. We consolidated our European facility back into California. We squeezed literally as much as we could on the operational side. Where we are going to get into is whether we want to spend time penny-pinching or are we willing to spend a little bit of money and get additional upside potential such as this new compound for our investors to actually build a new catalyst. And I think building those kinds of catalysts is being the much faster ROI for office [ph] investors than if you don't do it. I don't know Bob, do you want to answer?

We look at -- and Hoji's covered a number of potential opportunities for the companies -- for the company we tend to adopt and look at ones that have relatively low-cost and high return, obviously. And so there are some things that -- so we kept our operating earnings to $3 million per quarter level even though we've looked at a number of opportunities that would cost more because we don't want to take our expenses up. So long way of saying is that we sort of maintained that level. We kept it to -- most of them an awful lot of the expenses that we look at are for growth of revenue either currently or in the future.

And, George, can I just add one more thing because this is a fantastic discussion because this is what we discussed at the board level. As evidenced by quarter ending September and I just came back from some several [indiscernible] in New York and Boston in meeting with several funds. We got to EBITDAS breakeven. I used to get calls from a lot of shareholders, "Oh my God, you guys hit EBITDAS breakeven. This is phenomenal." Your stock is going to jump, double, triple and so on. That didn't happen. And then you immediately speak to sophisticated people on Wall Street. They're not really only looking at EBITDAS and profitability because that's great for a privately held company. What they're looking for is a validated model that gets you to profitability, but more importantly, is there is growth. And if you cannot mention the growth and show that you have your own intact growth pattern and our partners cannot execute and bring that kind of growth, then other profitable company there are lots of companies that are profitable. So again I think if you look at how fast we can grow our revenues in the right channels. But again, don't get in a position that we need to raise $25 million.

Our next question comes from John Heerdink of Vista Partners.

Just one quick question here. It's kind of a loaded question in a sense that I was wondering if you could help us understand a little bit more maybe give us some color on each of the markets that you and your partners are targeting here over the next year and in the future? And possibly identify a market leader in each of these and the revenues that they generated in 2010 and possibly '11? And lastly, where do you see yourself playing? Will you be displacing them or will you simply be as a complement in these respective markets?

Well, let me take a shot and then I'll let Bob jump in too because that is a loaded question and this is going to be a half an hour discussion. So let's just highlight a few things. Let's go down the list. I think the simplest one I can talk about is our veterinarian market partner, Innovacyn. They've done a phenomenal job. And what they're really replacing is a whole host of new [ph] products. There is no standard of care again, in that market, either. So when you sit down or go to have vet, there's a whole different bunch of products that they're replacing. They're going in there with a unique product patented. But the question is what's the addressable market in that market? So the way we look at it is there is nothing like Microcyn, or it's called Vetericyn in that market. You're dealing with 10 million to 12 million horse owners, 170 million dog and cat owners and plus there's a cattle market that is much, much larger, beyond the small animal. So I think they have significant room for growth, but they need to -- again, just like any commercial partner, they have to go through all the ups and downs of regulations and investments, the right marketing places and so on. But they have a tremendous opportunity in front of them and we're 200% committed, right behind them to support them, as evidenced by all the SKUs we have given them. On the Eloquest Healthcare in the hospital, we really didn't have any presence in the U.S. hospitals so far. So this needs to be understood by our shareholders. This is a very unique opportunity for the first time that 40 sales people, very professionally trained on label, and what they are doing is -- if you have asked me this question actually, one institution asked me the same question. I told them that if you would have asked me 10 years go as an entrepreneur, I would have given you a list of things that I hoped to replace in the market. But now with a little amount of gray hair, I think you have more experience in the market. And what we have really seeing is that we are not changing physician behavior. What they are doing is getting physicians to use our product with their existing VAC negative pressure which is almost $1 billion industry. KCI, Smith & Nephew and a whole bunch out there that they're selling products in the market. And these are going to be at a very, very premium pricing, way above I would say our vet or consumer or even existing wound care product that they're selling. They're selling the hydrogel and the liquid. What they will replace though as we are seeing and as we are experiencing the doctors is, once they start using it, initially they are going to start using antibiotics. But over time, you will see less and less antibiotics used, less and less antibiotic in combination with say, managed [ph] used. There's significant amount of savings and in certain cases the oxygen therapy is replaced, because our product does oxygenate tissues. So what we replaced? Topical antiseptics, topical antibiotics and reduce the use of overall systemic antibiotics. And if you want to put a number on that, into just our clinical trials against ciprofloxacin $2.4 billion antibiotic, we beat that -- that drug in that study. So we have a good opportunity ahead of us now with Eloquest to really push it in getting into market. Not just 1, 2 but 6, 7 new product opportunities. Going to on the derm side. On the derm side again, I told you the number of patients, 19 million in general, patients are suffering from atopic dermatitis as a lot of them are in teens. It is a severe skin disorder where they scratch to the point that it bleeds and gets infected. Most pediatrics and dermatologists and parents are headed into use steroids on a long-term basis on these children. So this is a perfect match to go in and instead of using steroids, use this product and they're pricing it at a very high price. So it's not a low priced product that replaces steroid in that market. So those are the 3 significant markets that we're dealing with in U.S.

Our next question comes from Prashant Mehta [ph] of NetGain Financials.

I just have a follow-up on the earlier question on diabetes product. Can you give a little more detail in terms of is this product ready for commercialization or is it still under development? That's one. And the other question is what realistic market -- addressable market with this compound -- or this drug, on the new diabetes opportunity, if you can kindly elaborate on that please?

Okay. So question number one, it's ready to be marketed as of today. We have gone through -- one thing we have learned is we are not going to overpromise to the market. We are not going to say anything to the market as evidenced by this until we have gone full FDA inspection, development, we have all the trial data and then we come to the market and report to you guys that now we are looking at a multibillion dollar opportunity to be opened for our shareholders at no minimal [indiscernible] going back to George Dahl, in terms of cost versus opportunity. Now we have opened up additional multibillion dollar opportunity for our shareholders at almost single dilution. So this is something that gets me excited. And I don't mind saying this on the call because we are talking to investors. This is a product I personally use. And for the very first time I'm seeing no sugar spikes, I'm losing weight. And the doctors said I no longer need any medication in terms of controlling my diabetes. This is a product that I'm personally using and I'm seeing the impact of it. So this is ready for commercialization. We need a partner that understands that market, understands the branding and understands the doctor, the prescription, the pricing, all that. So it's another thing that I think -- endotracheal tube gets me excited, but I tell you, this compound gets me more excited than in the endotracheal tube strategy. Number two, real estate. As I told you, I mean the numbers are too big, 38% of a $10 billion market. I can tell you conservatively it's well over $1 billion. Been online to see a doctor -- I apologize, one patient [indiscernible] then I go to see my doctor, they have a whole bunch of products that they are not natural. So there's no long-term toxicity done. It's when you ask for safety, it's short-term, acute. They give it to patients to make them lose weight and then hopefully you manage your weight and your glucose. This is all natural. So it's almost half a million patients' retrospective data behind it. That's a rock solid product that we can sit across a partner and hopefully get a good partnership. So what I see and what gets me excited, I know I get calls from some investors, we are at $1.06, we are at $1.40. It really doesn't matter. I mean, what really matters to me is I can see long-term this product, a combination with this new compound with Microcyn, with dermatology, with our animal health care partner, international, all these, we are building a great platform for success.

Yes. As a quick follow-up, if I have a second. This is very refreshing to see that new direction Oculus is going in with this diabetes. It's exciting. It's no question. But going forward, how do we look upon it as we invest in Oculus? How do we look upon this company? As a microbiology company, as a veterinary company or as a diabetes company? Is there some directional theme that we are looking at?

Good question. We had the same discussion at the board level. I sat across several funds in New York, they asked the same question. We are a health care company. How do you look at Johnson & Johnson? You want to get the multiples of the wound care company sales or do you want to get the multiples of their antibiotics? In our case -- and I am not doing a pitch on this call, I'm just a CEO and as I sit down with my wife and look at our financials and how I predict my personal wealth down the road is, I'm looking at multiples of premium products. And I'm talking about premium products, I'm talking about products, if I may, well over $100 that is going to be sold in dermatology field and replacing the significant product, which is steroid. You give it multiples down the road. This is a very, very healthy company with significant catalysts. So I would brand it as a health care company and primarily focused on Rx because our diabetic compound is oral. It's sold under Rx, dermatology is Rx, our Eloquest products are Rx, most of our products internationally are Rx, including in Europe. So I look at the company as a commercial health care company in the Rx products.

Our next question comes from Russ Huffington of Choice Investment.

I just want to get back to the expenses for a little bit, maybe you can clear something up for me. On the SG&A, increased $937,000. I know you're trying to decrease expenses. Can we look forward to some kind of decreases so we can get towards profitability in the future. I know it's a hard question but an increase of that magnitude kind of disturbs me.

Okay. We have said for many quarters at this point in time that we're going to maintain our operating expenses at about $3 million per quarter. And we've been pretty consistent. In our June quarter, pops up a little because we got audit costs and that type of thing. Now the increases that you're talking about, 6 -- of the $900,000, $618,000 of those expenses are a stock op charge. So I'm sure you're aware of the stock op charge, it's non-cash charge as a result of options that we issued. That's the predominant component of the increase. The other increases are related to year-over-year. And again, we maintained a pretty steady -- over almost 2-year period of about $3 million per quarter. We go up and down a little bit year-over-year, from $2.8 million to $3.2 million in the prior year. So most of those increases related to increases in costs, both the sales related costs in Mexico. We're introducing 3 new products down in Mexico [indiscernible] to maintain our growth in Mexico, which currently represents about 50% of our sales. And there's also some legal costs that were down in Mexico. Those are the predominant difference -- the difference between the 618 and the 937, 950. Does that answer your question?

Yes. And could you also answer, the interest expense increased $151,000 during the quarter. What was that?

As you probably know, we've increased our debt. We did a $2.5 million debt funding that we are paying over time. So we increased our debt position and the total debt position is over $4 million at this point. And because of the increase in the debt position, obviously your interest increases.

Okay. And that number, $151,000, hopefully be going down in the future?

Yes. We're paying -- the debt is over a 3-year period, we are paying down that debt each quarter, and so it's a pretty significant reduction in net debt each quarter. Yes, you'll see a decline in net debt over the next 3 years.

Russ, while I have you on the phone, I just add one more thing. And it's really good to have this kind of discussions on this call because we get to do it once every quarter. When I get called and [indiscernible] we have shareholders who investing in the company and they're looking at the stock price and they're hoping that as soon as we hit profitability then the stock is going to jump, in their opinion. And let me just give you a little bit feedback, I've been spending my time in front of sophisticated funds in New York and Boston and candidly that's what is going to eventually drive our stock price, is when they then get involved and start buying our shares. The way they're looking at it is the profitability is a two-edged sword. One is right now -- and I'm going to be blunt, if right now I decide to cut as much as expenses out, and take half of the management's salary and cut R&D out and get on the phone and say we're very profitable. The bad side of it is the market is going to say, "Okay, no U-turn. You know you're profitable, and now we're going to give you multiples of your earnings." If you have no growth, you've increased your earnings your debt company will pinch you [ph]. What we need to do -- and this is are big broad discussions we had on our board level is that, "Okay, how do we get the stock from $1.05 to $5 to $10. We used to be at $11 or $14. And based on those major cabinets that we can fund. And so that's the balance they're very tactfully trying to balance things out. Again I'm personally proud of the new compound which we will announce later, and the endotracheal tube. All the SKUs we are providing to our partners who are doing a fantastic job in the health care and [indiscernible] so on. So I think it's back to New York and Boston and show them what a great upside this company has now at $1.05. So I'll stop right there, but I'll welcome any comments if you have.

No, I think you all are trying to get this company going again, and I know you’re holding down expenses as much as possible. And the future, as we’ve seen many times in the past, does look better. So I commend you all for keeping everything together and look forward to couple of good years coming up, hopefully.

Thank you.

I'm showing no further questions at this time. I'd like to turn the conference back over to Hoji Alimi for any closing remarks.

We want to thank everybody's support and being with us on the call, giving us the opportunity to explain our quarter numbers and we definitely look forward to having the same discussion in the next 3 months. Hopefully, with much more accomplishments coming out of our R&D and partnerships and so we're definitely excited to be on the call next time. Thanks to everyone. Have a great afternoon.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.