Sonoma Pharmaceuticals, Inc. (SNOA) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Oculus' Fiscal Fourth Quarter 2012 Conference Call. My name is Karen, and I'll be your coordinator for today's conference. [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.

Good afternoon, and 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 fourth quarter and fiscal year 2012 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is 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. Those listening to this call via a webcast over the Internet can also view a number of slides that corresponds to today's narrative. These slides are also available via an 8-K filed approximately 10 minutes ago with the SEC. 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 now turn the call over to Hoji Alimi, our CEO and Founder.

Thanks, Dan. Thank you, good afternoon, everyone, and thanks for joining us again for the Oculus Innovative Sciences Fourth Quarter Fiscal 2012 Earnings Conference Call. As Dan already introduced me, my name is Hoji Alimi, I'm President, Founder and Chief Executive Officer of Oculus Innovative Sciences. This afternoon, also, Bob Miller, our CFO, joins me on this call. There are 4 fundamental topics I would like to discuss during this call. First and foremost, is Oculus' main technology, Microcyn, and the competitive landscape. Secondly, a top-level view of our financial. Third, the existing as well as new partnerships that we have announced over the last quarter, and the corresponding commercial activities and sales from those partners in [indiscernible] markets. And then lastly, I'd like to cover our 12-month plan moving forward. So to begin, I would like to explain Oculus' position in the market from a technology point of view. As a lot of you are aware, hypochlorous acid, which is the main active ingredient in Microcyn, has demonstrated significant clinical benefits in a variety of healthcare-related markets. Oculus' key technology or technological advantage is our ability to reduce the concentration of hypochlorous acid within safe limits while delivering a prolonged shelf-life and a stable form of it, in some cases, more than 10 years, and still maintain the product antimicrobial efficacy. Today, we hold 14 issued patents and more than 90 pending patents on this technology. And most importantly, the technology works and is highly effective in treating a variety of infections and reducing the need for antibiotics. And we have well demonstrated that over the last few years in the international market, specifically. But we hear from time to time that there are other entities that they are trying to get into this space. So how do we compare ourselves to the peer group? We have 2 main competitors. One, is primarily focused on conducting drug trials to obtain regulatory approval for use of their specific product formulations in several medical indications. So far, they have lost 2 major partners, a major medical device company in the U.S., and second, being one of the largest drug manufacturers in the country. These partners, the solutions were due to specifically lack of long-term product stability and product effectiveness and compatibility. Our second competitor has generated the majority of their revenues by selling hypochlorous acid manufacturing machines into the food industry and endoscopy, or for disinfection of endoscopes in that specific market. The stability of their formulation relied on manufacturing a specific formulation with a wide spectrum of hypochlorous acid that rapidly degrades over time. Thus, delivering valuable and consistent results in treatment of wounds. And I have, personally, visited one hospital locally here that they have used the product and they have confirmed that. So our partnership strategy at Oculus, however, continues to gain momentum. In addition to our existing partnerships, we continue to monitor the market and as a potential new competitive products, we understand that competition is inevitable. However, the path to Oculus' success is to ensure that our partners are first to market with new and superior formulations, in concert with best methods of delivery as we continue to intelligently expand our IT portfolio. Secondly, I'd like to turn our attention to the financial side. Our Q4 earnings information was released following the close of the market today. We reported total revenues of $3.4 million in Q4 and total revenues of $12.7 million for the fiscal year 2012. As well, it was within our previous guidance of maintaining our cash operating expenses at $3 million per quarter. Our current revenue run rate of $13.6 million is above our cash operating expenses of about $12 million on a moving-forward basis. We had a 34% rate of growth in product sales during the last fiscal year, and I will let Bob Miller, who's going to discuss several assumptions and potential rates of growth in more detail and their relevance to our break even on a -- on a moving forward basis. But before he does that, a key data point that I would like to highlight related to our breakeven time line. Our fiscal 2012 product revenue growth rate was 34%. But even as a conservative CEO, if we reduced the product growth rate to 25% for analytical purposes, year-over-year, we get and we will maintain EBITDA's breakeven beginning in quarter 4 of 2013, if we maintain our cash operating expenses around $2.8 million and maintain product margins of 75%. For those who are viewing the slides that we are providing on the web presentation, I'd like to refer to the first slide entitled, Fiscal Expenses and Revenues, highlights our financial data from fiscal 2008 through fiscal 2012. For those who can't see the slides, I'll try to describe the slides to you. Number one, the cash operating expenses are shown in red; and the cost of goods sold in blue; and the revenue line is shown in green color. The key message here is that the train is on the right track. Our revenue, our annual revenue run rate of $13.6 million, now exceeds our cash operating expenses and this annual revenue has been generated primarily via 2 major sources. One, is our animal healthcare partner, Innovacyn, who have done a phenomenal job in marketing the products in animal healthcare markets; and secondly, the state of our marketing products internationally. Moving forward, what we can look forward to is that in addition to these 2 sources of revenue, we expect to recognize additional revenues from the launch of our Microcyn-based products in 2 major markets: in the U.S. dermatology; and the hospital acute care call points where Amneal, Quinnova and Eloquest, our new partners, have launched products. So as a result, we expect our top line revenues to continue to increase. So to that point, we'll move to Slide #2, which, for those of you, again, may not be able to see it, dramatically shows the ramp in the number of prescriptions written by dermatologists, specifically for our Microcyn products in the dermatology market. It's a pretty impressive graph. It indicates the heartiest accruals in a number of Microcyn dermatology prescriptions beginning in Q4 fiscal 2011. Our partners, Onset Therapeutics and Amneal/Quinnova, has successfully launched multiple new products for the management of skin dermatosis, including the challenge of atopic dermatitis, which inflects nearly 19 million patients. This is a substantial market in which Microcyn is establishing a meaningful presence amongst a number of existing standard of technologies including steroids, all of which have major shortcomings. Independent data have turned this dramatic ramp in the number of scripts written by dermatologists for our Microcyn-based dermatology products. The other point that I'd like to highlight specifically to this slide, that the products sold in the dermatology market are premium-priced. Priced anywhere from $70 to $100, well over our wound care products. This provides a solid and strong contribution on net revenue basis for Oculus. Now we will move to Slide #3, which shows, in part, our partner, Eloquest, launch -- that they have launched a total of 6 Microcyn SKUs into the hospital and acute care markets as of last quarter. Again, for those of you can't see the slides, this slide is broken down into 4 sections. On the top shows our specific partners, the number of SKUs, and the specific markets where they have launched. Starting with Innovacyn, launched more than 40 SKUs in animal healthcare. They have more than 20 SKUs that they have launched internationally. Amneal/Quinnova, more than 3 SKUs, they have just launched in dermatology Rx. Eloquest Healthcare, 6 SKUs in the hospital acute care. And Onset Therapeutics, 2 SKUs in the dermatology Rx. So the current sale of Microcyn in the acute care specific markets, we believe, is not yet fully realized since we have yet to obtain FDA approval to market Microcyn as a drug to replace the use of antibiotics in surgery. So as importantly, Oculus still needs to secure Medicare and Medicaid reimbursement for our liquid product to better afford our partners opportunity to tap into the home healthcare and nursing home markets. So remaining on -- for a moment on Slide #3, considering our cash and keeping our expenses flat, our next 12 months roadmap include the following: We plan to initiate a cost benefit study related to our reimbursement for the liquid wound care product, along with the sale of our products into home healthcare and nursing home markets. We believe that by achieving this milestone, we can begin to introduce the use of Microcyn into larger healthcare markets beyond hospital acute care points, which is where Oculus is currently marketing our products. This trial will be conducted at single site and targeting to enroll about 100 patients who suffer from chronic wounds. In addition, we are preparing our FDA strategy for its Microcyn-based surgical products. This plan capitalizes on Microcyn's highly anti-microbial advantages beginning with the surgical suite. The technology's mode of action is well understood, significant amount of clinical data have been generated over the last few years, that we have used to a specifically formulate a new solution to increase the product's compatibility with internal organs and effectiveness during surgery. Lastly, we remain optimistic about an agreement with our existing partner, Amneal/Quinnova, regarding the use of Microcyn as a drug for treatment of acne. And in addition to that, we talked about a clinical trial for reduction of scars, which I'm going to momentarily get into. Moving on to Slide #4. You will see the process relative to initiation of scar management trial based on an FDA review protocol. Again, for those of you can't see the slide, this is a trial designed specifically for evaluation of the Microcyn technology for scar management. The protocol for this specific trial has been already reviewed by FDA, and we have the sufficient funds to complete the trial, and to be reimbursed by our partner at the time of FDA approval. And we expect to announce top line data by the middle of 2013. So let me remind everyone on this call, that although we do not have any control of the studies evaluating the use of Microcyn for scar reduction, there is, however, substantial market feedback evidence of Microcyn's efficacy in this specific application in multiple international markets to date. For those who follow healthcare mergers and acquisitions, you may remember the acquisition of Excaliard, and it's a scar management product of Pfizer last year. So we are the first to follow that initiative with our own FDA-reviewed protocol in that niche, and we intend to earn a significant share of the scar reduction market. The key takeaway is that we see a substantial upside in partnering this scar reduction application allowing us to create additional growth for next year. So in short, with 4 solid U.S. partners now actively marketing a vast array of Microcyn-based products in animal healthcare, dermatology and acute care, we are now in a position to initiate new clinical trials that can lead to addressing even larger market opportunity for a user market end. My vision and our team's objectives is to create an entity at Oculus that is capable of producing quality products to support its existing partners in the U.S. and internationally, initiate clinical trial to provide new market opportunities for sale of Microcyn products to build revenue momentum for next year, initiate new trials to gain reimbursement for our Microcyn liquid products to boost our wound care sales in the U.S., specifically in the home healthcare and nursing homes where reimbursement plays a great role. We continue our discussions with Amneal/Quinnova, as I mentioned earlier, regarding an acne agreement, and therefore, we remain optimistic. Finally, we have the funds to complete the above trials, from initiation to approval, while maintaining our cash operating expenses within a range of $3 million per quarter, which Bob will speak in more detail. So in the past, we have discussed also the in-licensing opportunities that some of you may recall as a means to diversify our technology portfolio. Just as a very brief and short update, we continue to pursue several key products that we believe they fit well with our product development strategy and partner interest. This past quarter, we announced the launch of Glucorein in the diabetes market. The initial sampling of physicians and patients in Northern California, Atlanta and Seattle area, is continuing to result in solid positive clinical feedback from the medical professional, which is very, very optimistic. So here is the final takeaway. The trend is clear and positive. As I said, the train is on the right track. Oculus has been substantially reduced, with revenues run rate of $13.6 million, we are nearing EBITDAS breakeven on a consistent basis. Our multiple partners are now requesting new product offerings within their respective markets, and examples of which are scar reductions and acne drug indications amongst other SKUs we are providing for our existing partners. Oculus is focused on delivering the best of both worlds. First, a commercial healthcare company delivering near-term revenues in tandem with partners who are targeting significant markets, including animal healthcare, dermatology, hospital, acute care. And secondly, again, with the support of our partners, we are investing in clinical trials and R&D to build a longer-term pipeline of innovative and robust products, both 510(k)s and drugs. This business strategy with near-term revenues moving towards profitability, allows Oculus to move away from dependence on the capital markets, while the long-term initiative capitalizes on a number of high-value opportunities, such as surgical market, the Microcyn Technology's multiple modes of actions can address many of the current product deficiencies in that market. With that, I will now turn the call to Bob Miller, our CFO, to discuss the financials from the last quarter.

Thank you, Hoji. I'll first review the guidance we provided for the fourth quarter of fiscal year 2012, followed by guidance for the first quarter of fiscal year 2013, and then summarize our financial results for the fourth quarter and the fiscal year 2012. In conclusion, I will provide the key assumptions which Oculus needs to achieve in order to reach EBITDAS breakeven. How did we do in our guidance for the fourth quarter ended March 31, 2012? First of all, our total revenue for the quarter was $3.4 million, above our guidance of greater than $3 million. Secondly, our cash operating expenses of $3.1 million were close to the $3 million range. And third, the actual EBITDAS was $924,000 versus the guidance of to be less than $1 million. What is our guidance for the quarter ending June 30, 2012? We expect our revenue to be -- to exceed $3.3 million, EBITDAS to be less than $1 million, and our cash operating expenses to be in the $3 million to $3.2 million range. The cash operating expenses can be slightly higher in the June quarter due to higher accounting costs associated with the year-end closing. Moving now to the results for the fourth fiscal quarter ending March 31, 2012. Product revenues increased $660,000 or 26% for the fourth quarter compared with the same period this year, with increases in the U.S., Mexico, India and Singapore, partially offset by declines in Europe and China. Product revenue in the United States increased $556,000 or 64%, primarily due to the increased unit growth and royalty fees received from our partner, Innovacyn, Inc., and to a lesser extent the sales entered the dermatology markets sold by of our partners, partially offset by declines from sales from Union Springs. Last year's revenue from the -- for the quarter from Union Springs, represent a onetime payment of about $152,000, which did not occur during the same quarter this year. The revenue to Oculus from Innovacyn increased $545,000 or 132% to $957,000 from $412,000 in the same period last year. The revenue from the prescription Rx business increased $13,000 or 3% to $469,000. The increase from the dermatology partners was significantly offset by the decline in revenues from Union Springs. To further clarify this slide and graph, which Hoji discussed earlier, showing the number of trade unit sales of Microcyn-based products over to dermatologists by our 2 term partners, Amneal/Quinnova and Onset/PreCision, for the quarters starting as of March 31, 2012, through March 31, -- I'm sorry, March 31, 2011 through March 31, 2012. In addition, we have data for the first 8 weeks of the current quarter ending June 30, 2012. We portalized -- and yes, that's a new word -- the actual 8 weeks of data to provide an estimate for the quarter ending June 30, 2012. This data is collected and distributed by an independent third party, which sells the data to the public, including one of our consultants. In terms of background, Onset launched the first Microcyn-based dermatology kit in February 2011, and their second kit a year later in February 2012. In addition, Quinnova launched 2 Microcyn-based dermatology products in February 2012 as well. In total, they have about 60 salespeople selling throughout the U.S. For those of you who do not have the graphs in front of you, the number of trade units sold to dermatologists for the 5 quarters ending June 30, 2011, through estimated June 30, 2012, were -- and excuse all the numbers -- 1,823 in the first quarter, 2,664, 2,497, 5,189 and 12,632, respectively. We are pleased with the progress, growth and clinical success of our Microcyn-based products in the dermatology market. Moving onto the revenue in Mexico, increased $166,000 or 14%, primarily due to 30% growth in sales of our 5-liter presentations, and 6% growth in that 120, 240 in new gel products. The growth in both categories was offset by a 5% strengthening in the Mexican peso. Mexico's revenue growth in local currency was 19% when compared to the prior period. Revenue in Europe and the rest of the world declined $62,000 or 14% over the prior-year period. The decline is primarily the result of a decrease of $174,000 in revenue from China, partially offset by increases in India and Singapore. Oculus reported gross profit related to Microcyn products of $2.1 million or 67% of product revenues compared to a gross profit of $1.9 million or 75% in the prior-year period. The lower gross profitability is a result of higher manufacturing costs related to the new product launches and frequent label changes. The company's margins in Mexico were 74% compared to 78% in the prior year. Operating expenses minus noncash expenses during the quarter were $3.1 million, up from $2.7 million in the same period. R&D decreased $154,000 or 24%, mostly due to lower cost of various testing studies. SG&A expense increased $438,000 or 16%, primarily due to higher sales related costs in Mexico and the United States, and higher consulting and patent cost in the United States. As of March 31, 2012, we had cash of $3.4 million compared to $4.4 million as of March 31 last year. As you know, we raised an additional $3.1 million on April 23, 2012, with one investor, bolstering our cash position to a pro forma amount of $6.5 million. Results for the fiscal year 2012. Total revenue were $12.7 million for the fiscal year 2012 compared to $9.8 million in the prior year. Product revenues increased $3 million or 34%, primarily driven by increases in the United States, Mexico, Europe, China, India, offset by a slight decline in the Middle East. Gross profitability for product revenue for the fiscal year increased to 73% from 67% in the prior year with higher profitability in all business segments. In our earning call for the quarter ended June 2011, Hoji categorized Oculus into different business groups for analytical purposes and provided revenue guidance for fiscal year 2012 for these business groups. Our revenue guidance for these business groups for our fiscal year 2013 is as follows: One, for the Innovacyn group, which includes the animal healthcare and human over-the-counter products, we are providing a revenue growth guidance of 0% to 20% for the full fiscal year 2013. Innovacyn has grown extremely quickly over the last 2 years and has captured strong market share positions in the wound care equine market and the independent pet store market. Now they're in the process of penetrating PetCo and PetSmart stores and the feedstock animals in our transition. If successful in penetrating these new large markets, then we could realize even higher growth rates; Number two, for the Rx U.S. group, which includes all other non-Innovacyn U.S. markets, such as dermatology and wound care. We are providing revenue guidance growth for -- growth guidance of 60% to -- 40% to 60% for the full fiscal year 2013. This reflects the growth of Quinnova and Onset in the dermatology markets, which we just discussed, and Eloquest/Ferndale in the hospital acute care market; Number three, for the international group, we are providing revenue growth of -- growth guidance of 15% to 25% for fiscal year 2013. This reflects the continued growth in Mexico and the Middle and Far East; Number four, for the total product revenue growth for the full fiscal year, we are providing product revenue guidance of 15% to 30% growth. Before going into the breakeven analysis, I want to make a few comments about the delisting notice we received from the NASDAQ. NASDAQ has a listing rule, which requires the maintenance of a $35 million market cap or a network of greater than $2.5 million. Our network as of March 31, 2012, was a negative $868,000 prior to the $3.1 million financing closed on April 23, 2012, producing a pro forma network of about $2.2 million. On May 21, we were below the $35 million market cap for 30 consecutive days, and therefore, received the notice. We have 6 months to correct this deficiency, until November 19, 2012. To correct this, we can increase our market cap above $35 million for 10 consecutive days, or we can increase our networks above $2.5 million. To go above the $35 million market cap, based on the current shares outstanding, our stock price must go above $1.08. Obviously, that is impossible to predict. What we do believe, that the signing of acne deal with Amneal, could provide a catalyst to the stock price. In addition, we're talking to several current and potential partners about licensing, current and/or new products. Some of these transactions involve non-dilutive, upfront funds, which can potentially increase our network. In conclusion, I will identify the key assumptions, which Oculus needs to achieve in order to obtain an EBITDAS breakeven, which Hoji referred to earlier. Our key assumptions, which most influence our EBITDAS breakeven, are product revenue growth, product gross margins and cash operating expenses. We have just provided you with our guidance for the range of product revenue growth for our business groups and the entire company, that is a range from 15% to 30% for the fiscal year 2013. However, attempting to forecast exact growth rates is very difficult, as Hoji mentioned earlier, especially with the recent product launches such as those for Eloquest and Amneal/Quinnova; and two, for partners in general since they are in control of the data and priorities of the sales force, and the related investments in advertising and promotion. To provide some background for the other key assumptions, the product gross margins for fiscal year 2012 were 72% and the average quarterly cash operating expenses for the full year -- the fiscal year ending 2012 was $3.1 million. One can perform the math using a range of growth rates for the revenue and see the range of possible breakeven points or EBITDAS. If you go through this analysis, you will find that if one assumes: One, a year-over-year product sales growth rate of 20% for several years; two, product gross margins of 75%; and three, quarterly cash operating expenses of $2.8 million, Oculus will hit or be close to EBITDAS breakeven in the fourth quarter ending March 31, 2013, and will be close to or above the breakeven levels for several years. Another scenario is that at a year-over-year 25% product revenue growth for several years, along with assumptions from cash operating expenses and gross margins mentioned above, Oculus should be above the EBITDAS breakeven in the fourth quarter ending March 31, 2013, and remain so for those several years. Please note, that we are not providing guidance for the fourth quarter of fiscal year 2013, but we are simply stating the results if certain key assumptions occur. For the cash flow breakeven, it is even more difficult to make this calculation but one needs some additional facts. One is, we have about $650,000 of principal and interest payments per quarter for our debt obligations during fiscal year 2013; two, our net working capital represents about 20% of our net sales; and three, our capital expenditures are quite small, at less than $75,000 per quarter. That concludes my remarks. And now I'll turn it back to the operator for questions.

Operator, before you jump in, this is Hoji Alimi. Just one more time if I can just -- first of all, thanks, Bob. We are at a tipping point where on top of a solid partner like Innovacyn, who's been doing a fantastic job selling more than 40,000 units in animal healthcare. To be candid, 2 years ago, some people rolled their eyes and said, "What you guys are doing?" And they have proven to the entire market that they have done a phenomenal job. And first of all, I want to compliment our Innovacyn partners in that market. And now, they're even investing and pursuing larger market upside in food, animal, and other areas. And we are here providing in full support in whatever we need to do to make sure that they succeed because this -- all success is tied to our partner's success. In addition to the growth in animal healthcare, international business has continued to grow. Now on top of that, we have added 2 solid partners with high-margin products in dermatology and hospital -- U.S. hospital call points, which we had no presence in. And on top of those, now we are financially in a position to start seaming the market and initiating new trials, carefully managed and fiscally being responsible not to overspend, but to create huge clinical upsize for additional partnership and product launches and momentum for next year and years after that. So this is to us, exciting, and once again, I appreciate everybody being on the call, and turn it to operator for any Q&A session.

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

I wanted to see if we could start with just some basics. On the margins, how quickly do you think you can, I guess, regain some of those margins, and at what rate do think we should expect to see improvements in the next year?

I think we've given guidance in the past that we expect to be at around the 75% gross margins going forward. That's something that I would hope that sometime this year, we could get to that level on a quarterly basis.

Okay. And I guess this next one is a little bit involved. You discussed -- you talked about Microcyn and the different Rx approvals that you could look to going forward. You also, obviously, gave a lot of information on your cash and how you're going to maintain certain cash expenditures going forward. Could you kind of walk us through some of these indications you're looking at, say, acute wound care, surgical, maybe the acne? And just kind of walk us through how those are going to be funded, if there is a partner already in place, what the expectations are? And then also, maybe, as you mention that, if you could touch on timing of those?

Good question, Laura, this is Hoji. So let me start by reduction of the scar or management of the scar. This is a clinical study that we intend to initiate. The development is done. The site selection has been completed. We are going through the IRB process. Conservatively, we are looking at about a year to complete and announce top line data. With a solid partner, Amneal/Quinnova, who has already communicated they are willing to partner and is now commercializing this product on the heels of launch -- already launched products in dermatology of other Microcyn products. The cost for this trial, I want to give you a ballpark, is, I would say, less than $400,000, well below that. And once we have completed the trial, we plan to get reimbursed from our partner for the cost of this study. Does that answer your question on this one before I move on?

Yes, yes.

Okay. This is a -- and if you want a little bit more information, I can tell you, this is going to be at least at 4 different clinical sites, and we are looking at certain scars that it just -- this is a very large market, so we are enrolling patients with different parts of a scar to capture as larger market as possible. To be honest with you, it's a very sexy, fancy and high-margin market, and we are only a year away from getting into that. So enough about that one. The cost-effective study that we mentioned is directly related to the sale of our product, not in hospital market, but in home healthcare and nursing homes. For any of the company to penetrate the market, you need to make sure -- you can have the best product possible, and making sure that you have the best solution to save patient life, it's sad to say, but those products and solutions will not be adopted because hospitals don't have the money to spend money, so it needs to be covered on their insurance. So this cost-benefit study is a single site. We're going to be enrolling approximately about 100 patients, primarily with chronic wounds. The cost of the study, currently, roughly, is less than $100,000, but it is a long study. You're looking at approximately about 1.5 year to 2 years. And we are in direct discussions with the agency on that. So we think this is a huge catalyst for us to open up. We have had a lot of anecdotal success in the nursing home and home healthcare, but again, the missing ingredient is that reimbursement and that's where we're focused on. So less than $100,000, and about 1.5 years to 2 to complete that. If I may move on, there are 2 other indications that are extremely important to us, one of them is acne, and because I know the product works. We have the data internationally and domestically, and I know it's going to be funny to say this as a CEO, but my own kids have used this and I've seen success on them. Acne, it's a large market. You can clearly look at Proactiv, you can look at other products, a lot of me-too products are often mostly a branding strategy. We are coming in with a very unique product, and hopefully with a strong clinical base, hopefully, it's -- once this clinical trial is done, to support the use of the product for treatment of acne. The agreement with Amneal/Quinnova is that they are paying for the entire cost of this acne study. This is literally your -- again, going back to what I have said on the previous earnings call, we are extremely strong in R&D and regulatory, but when it comes to self-marketing, that's where we're going to partner, and we're going to be very smart about partnering drug opportunities, and we want partners to pay for that cost. So in short, the cost is going to taken up by Amneal/Quinnova on that one. One of the question from some shareholders say this is taking a little bit longer, do you guys expect to turn on this earlier. We are not seeing any bad news on the acne and just -- there are some final tweaks in terms of inclusion and exclusion of Europe, other territories, or what type of acne are they going to include in these trials and so on. That -- that's the discussion with them. Have I answered the question on acne before I go to the surgical, Laura?

Yes.

Okay. On surgical, I can tell you very bluntly, we are not ready to initiate clinical study, but, and I'll tell you for a couple of reasons. One is, it has taken us a significant amount of funds and time to develop a specific formulation that can actually be used in peritoneal cavity, surgical heart surgery, lung surgery, joints and so on. The formulation is done and we needed to go through a rigorous study by certain protocols, which FDA has suggested to make sure that we maintain certain stability once we go through those processes. All that have been paid, all that have been completed, now we are now involving some key opinion leaders in terms of what specific surgical indication we will want to use to conduct this trial, at least in our Phase I, Phase II. And currently, what we would like to do, the ideal task for us is while we are working on the reimbursement, reduction of the scar, supporting all our trials and our partners in U.S., we would like to look for a new partner that is going to say, "Well, you have fantastic data, all of it international." We have spoken with the FDA. This is a very specific formulation. Other formulations are not going to cannibalize in this market, and then partner that similar, like acne, and now, and you have a second drug fully paid by our partner for a specific surgical indication. So all of the legwork has been done in anticipation of getting a partner in that front.

Okay, okay. And then I didn't really here you talk much about the release that came out a little bit, maybe it's last month or the month before last, the Napa Valley Nutritionals. You talked about the product on the previous call, but I didn't really hear you kind of give us any updates. Is there anything you can tell us about that, how that's going?

Absolutely. Unfortunately, I do get calls from shareholders after the earnings call, and we get 10 to 12 minutes max to speak about everything. And sometimes, there isn't enough time. So we get criticized afterwards, they think we are sitting on some bad news because they didn't mention something. So on Glucorein, as I mentioned before, it's a product in-licensed from a practicing physician from Harvard Medical School. To be very candid, out of the first team that -- of the Type 2 diabetic patients, I tested on myself. It took us a greater time to develop this product. Now I can literally brag about the presentation, the product labeling and everything. And we took a serious look at a regional rollout. This is not national. And we are not -- we're going to be very, very fiscally responsible. What we are doing is we are rolling this out in Atlanta, Northern California, including here, we are in Sonoma County, San Francisco and Seattle area. And we are selling this through medical professionals and then listening to them, what they think about the use of this product. I can tell you the feedback has been -- we are targeting pre- and Type 2 diabetic patients, is very well known, they are the most noncompliant patients, they don't control their glucose. They eat, they smoke, they don't work out, their ideal thing is watch TV, eat a bowl of rice, and, eventually, they're going to end with insulin injection. With this product, the feedback has been people are -- they're stabilizing their sugar, and they are seeing not a yo-yo -- this is my terminology, not a yo-yo, you're going to lose weight and gain weight, but a sustainable weight loss in these patients. Where they eat, but they're losing anywhere from 1 to 7 pounds, in certain cases, even in the first week of using this product. It's been a phenomenal thing, and then now, we are getting feedback from some physicians that this product is actually working in other indications, which we would like to hold off on that, until we come up with the appropriate product and labeling for them. But very, very successful, all, again, we are looking at building exactly what you need from Microcyn. Get it into the market, don't sit on your behind as management, get in the market, get as many patients and doctors behind it. Then when you have a presence -- the only reason Eloquest and other people came to us and marketed -- I mean, partnered with us on Microcyn, was because we were already pushing the product in hospitals and they saw the benefits of the product. So we want to gather enough data and then, eventually, partner with Glucorein on a much larger scale. And this is a play that's literally [indiscernible], I mean, they are larger players in that market, that they're trying to put a product for diabetic patients. And again, being a diabetic patient, I go to CVS, the first aisle I'll go to is the diabetic aisle, there is nothing there. And so, we have something very innovative. So, sorry, go ahead.

I guess -- and this is one last quick on. When might we see your K filed?

It's going to be at the end of next week.

And our next question comes from the line of Russ Huffington from Calton & Associates.

Just want to go over a couple of things on the expense side. On the total operating expenses, just want to know how -- they increased by $284,000, is that under control? Are you all going to be able to, hopefully, bring some of those down?

Yes. A lot of those -- I'm not sure where you're referring to this $280,000, is that the total operating?

Yes, sir. Total operating expenses increased $284,000, off your release.

Yes. We would plan, as we said, that we would be in the range of $3 million. We're going to stay in that range for total operating expenses for quite some time. Now that range would, as I mentioned, for the June quarter, is probably going to be 3% to 3.2%. And the reason that's a higher range than normal, is because we are -- if you go back and look at our June quarter, every quarter it's a little bit higher, a couple -- $100,000 or $200,000 higher than the other quarters, because the accounting costs relating to the year-end closing. But other than that, you will see our operating expenses remain at about the $3 million level.

Okay. And let's go to the SG&A, that increased $438,000. And then you have on the second line, this increase is due -- what is -- it says, "Higher consulting and patent costs." What are the "higher consulting," is that just a onetime deal?

The patent costs relates to the endotracheal tube that we patent from the NIH. And we paid them a fee for it to do that, and then we paid them on an ongoing fee to do that. So but the upfront fee was much larger than the ongoing fee, so that actually will -- that's a onetime kind of fee. The -- some of the consulting is an ongoing consulting, like for Investor Relations, but...

Russ, also, one of the consulting that I do want to mention is we do use is in research and development. In certain areas, we do hire a specific expertise to -- whether it's Microcyn-related or Glucorein-related, or endotracheal tube-related. Those are some of the expertise that we do need to either for patent purposes or for designing trials, and things of that sort. Go ahead.

Okay, sure. And just one last thing, I didn't know if you all saw that article in Seeking Alpha, just referring to Oculus in association with Abbott Labs, and you have any comment on that?

Russ, can I say something because sometimes, when I went public, I can tell you the first day I woke up and looked at the message board, and [indiscernible] play. Literally, I was blown away. And then after a while, as I got more gray hair and talking to more people, and the board, they were saying, "You don't run the company based on some people who have no clue what they are talking about. They're going to write something on your message board, you don't pay attention." So I can tell you, the answer is no. And as a Founder of this company, I didn't bring this company to this point -- I mean, I didn't sell a single share, when we went public at $8, then to $11 a share and I didn't sell any shares, and we are at $0.74, I'm not planning to sell any shares. I have a big vision for this company and selling this company through [indiscernible] it would be, I think would be a mistake at these prices. So short answer is, no. And one other thing I do want to mention because I do get a lot of call from shareholders based on comments on Yahoo! message boards, all I want to say is, with confidence as a human being, that there are a lot of people that they will get on message boards with total ignorance, regarding whether it's Oculus or any other company, I don't care if it is our competitor, you're in business of manufacturing a product that literally -- I know you guys have not had the pleasure of having this experience, I've been in clinics where a mom has hugged me and cried because we have save people. And so there are people who get on message boards of our company or any other companies, create a hype, run the stock up to make money, or on the other side, short it and make -- create panic so everybody can sell and then they can make money off of that stock going down. It's just, I don't see that as a responsible human being behavior. So I'll just stop right there. But my short answer, I think...

And we also have a question from the line of Bob Robbins from Robbins Capital Management.

The slides in the presentation, I would like to know, where to access those slides during the next conference call, as I couldn't find them on your website?

There's a file that's part of our 8-K. And I will be speaking -- this is the first time we have done it, Bob, so it is with SEC filing. You can always get it from there. But in the future, we'll try to -- based on our SEC counsel's advice, if we can't put it on our website, there's a easier way for you guys to access those, we'll definitely do that.

Okay. And also, Union Springs, as you pointed out, didn't pay a royalty fee this time because, I guess, obviously, they didn't do so well. And I'd like you to comment on their evolving role with Oculus?

Some partners are going to do phenomenal in the active list of licensing. And some partners are not going to do well, some are going to go excel really fast, and then they're going to plateau. You -- and we see that with the Union Springs, that was one of our partners in the beginning. Their rights are limited to a very small presentation of this product in a pen-like applicator. They've been trying to sell this product internationally and domestically. But more and more, they're becoming a smaller player in the portfolio of our partners as we are dealing with companies like Innovacyn or Amneal or Onset and so on. So materially, that -- I mean, they are not a material partner. But we continue to support them, and my job as a CEO is to put our best foot forward with all our partners and make sure that they have the best chance to succeed. So I hope that answers your question, Bob.

And that concludes the question-and-answer session of today's call. I would like to turn the conference back to management for any concluding remarks.

Well, I'd like to thank all of you guys, again, and I appreciate your patience to listen to my long answers. But we look forward, definitely, to speaking with you guys, I believe it will be in August. And hopefully by then, we'll have more updates on our clinical trials, updates from our partners, especially in the dermatology field, and we're going to have more and more exciting quarters as we get closer to our breakeven. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.