Sonoma Pharmaceuticals, Inc. (SNOA) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Oculus Innovative Sciences Fiscal Second Quarter 2013 Conference Call. My name is Mary, 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.

Thank you, Mary. 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. Next, Bob Miller will review financial results and then we will take questions. This afternoon Oculus issued a press release detailing fiscal second quarter 2013 financial results and recent corporate developments. A copy of the release can be downloaded from our website which is www.oculusis.com, and that's O-C-U-L-U-S-I-S dot 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 anticipate, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially including risks inherent in the development and commercialization of potential products, the risks 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 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 I will now turn the call over to Hoji Alimi, our CEO and Founder.

Thank you, Dan. Good afternoon, everyone and thank you so much for joining our second quarter fiscal 2013 earnings call. I truly appreciate your time and continued support and your -- we have some exciting developments to relay on this call as well as progress to report. Bob Miller, our Chief Financial Officer, is also joining me today on this call. First and foremost, as it relates to our NASDAQ listing, as of October 31, 2012, we are pleased to report that we believe we have regained compliance with NASDAQ's net worth requirement for continued listing of our stock on NASDAQ exchange, and we plan to issue a news release to this effect early next week. Now that we have resolved the more complicated of our 2 NASDAQ listing issues and as long as we continue to remain compliant with other NASDAQ listing requirements which is a standard, we fully expect a 6-month extension on our minimum dollar bid price for our stock trading. So once again, please expect a news release and an 8-K next week regarding our NASDAQ compliance to be issued. So we are extremely excited about this milestone. Bob Miller later on this call, he will provide additional detail as well. Moving on to more good news. So [ph] our press release earlier today in regards to our earnings for the second quarter for fiscal 2013, we reported record revenues of $4.5 million or total revenues of $8.6 million for the first half of fiscal 2013, which is substantially higher than last year. Our cash position of $8.3 million at the end of our second quarter, that is September. And for EBITDAS we had only a negative $235,000 for the entire last 2 quarters, which is a substantial markdown for us. So based on our agreement with More Pharmaceuticals, Oculus also received an infusion of $5.1 million non-diluted cash during last quarter, which substantially strengthened our balance sheet. This resulted in an $8.3 million cash position at the end of September. For the first 6 months of the current fiscal year, we have reported $8.6 million in revenues. That's off 30% over the same 6-month period over the prior year, resulting as EBITDAS negative of $235,000 for the same period. That is extremely exciting for us in terms of how we are managing bottom line while the top line is continuing to grow. Moreover, if you would adjust for the onetime severance related to transition of sales and marketing function with More Pharma in Mexico, Oculus would have reported a positive EBITDAS for the first half of the current fiscal year. So we are seeing more and more improvement on bottom line as we are showing more progress on top line. Based on our partnership agreement with More Pharmaceuticals in Mexico, we also expect to lower our SG&A cost in Mexico as it relates to that region by nearly about $2.5 million per year. On the clinical and development front, in the last quarter, we successfully initiated a multi-centered, randomized, controlled clinical trial in U.S. using a specific Microcyn-based HydroGel foundation for the scar management indication. This study, as many of you may know, is conducted per FDA-approved protocol and we are excited to report that we have enrolled 37 out of the 40 required patients to be enrolled in this study. We are targeting to announce our top line data from this trial early next year and anticipating FDA clearance and subsequent product launch by our partner Amneal Quinnova next year. So this is another step in providing our partners with a robust pipeline of products and in this case, specifically, dermatology in the U.S. market. In regards to business outlook for March 2014 fiscal or March calendar 2013 moving forward looking into our next year, our focus moving forward will be to drive our revenues aggressively as we have continued to improve our bottom line so far. So our previous guidance, our core and revenues, which Bob is going to speak in more detail, is on track to grow for the current fiscal year at the range of 15% to 25%. However, looking past next March, based on new product introductions specifically in U.S. dermatology and new product rollouts internationally, we are driving the company and our team to achieve revenues of $20 million and reach EBITDAS profitability during next fiscal year. This obviously depends on a number of things, including our strategy in Europe, which I'm going to discuss momentarily, as well as the rollout of several key products internationally and domestically, which we plan to update you on each earnings calls moving forward. But please keep in mind that we are still typically -- year-over-year, we are still experiencing a slow revenue growth in our third quarter and in December, primarily due to seasonality associated with the Animal Healthcare and the -- Mexico's market. But as we move forward with these new product launches, we hope to see that that goes away. To create further sustainable revenue growth in the next several years as we are building Oculus, we also are turning our attention to Europe. Over the last few years, we have been primarily focused on U.S. partnerships, as well as commercialization of a series of products in Mexico. Our expansion plan, moving forward, includes a series of new theme [ph] [indiscernible] products for the European market. This strategy will enable our team and our partners to move the theme [ph], our products into self-channels and open those markets and therefore, grow the international revenues much more quicker. We expect further improvements to our balance sheet, as well as a result of restructuring a significant portion of our debt, which was indicated in our 8-K earlier today. After the market closed today, we also issued an 8-K on that -- we are restructuring our debt with Western Technologies Inc. The purpose behind this restructuring is actually twofold. One, is meeting NASDAQ's minimum net worth requirement of $2.5 million, which we have accomplished that. And as Bob will mention, we reached a net worth of -- on a pro forma base, $5 million. And second, improve our balance sheet. Bob Miller is going to actually provide much more -- greater detail into this transaction. At this time, I will transfer the call to Bob.

Thank you, Hoji. As Hoji mentioned, I will first discuss the status of our listing requirements on the NASDAQ, then provide the guidance for the third quarter of fiscal year 2013 and the expected full year revenue growth rates. And lastly, summarize our financial results for the second quarter. In summary, as Hoji mentioned, we executed 2 agreements earlier this week, which on a pro forma basis increased our net worth by $5 million, which we believe will enable Oculus to satisfy the NASDAQ listing requirement of maintaining a net worth of greater than $2.5 million. As you may recall, earlier this year, the NASDAQ notified us that we had until November 19, 2012, to maintain a market cap with greater than $35 million for 10 consecutive days or achieve a net worth of greater than $2.5 million. At the end of September, Oculus had a negative net worth of $501,000 as you can see on our September balance sheet. We executed 2 transactions earlier this week, as I just mentioned, which increased our net worth by about $5 million. First, we received a waiver from Sabby investors relating to a Black-Scholes clause in their warrant agreements which had forced us to record a $1.5 million liability as of September 30, 2012. Secondly, we issued 4.3 million restricted shares or $3.5 million to our primary lender, Western Technologies Institute or WTI in exchange for the reduction and offset of some of our debt liabilities with them. The proceed of the sale of these shares will be used to pay off some of the debt liabilities to WTI. As a result of these 2 transactions, on a pro forma basis, as of September 30, 2012, Oculus will have a net worth of $4.5 million, $2 million more than required by the NASDAQ. Details of these transactions, as Hoji mentioned earlier, were filed today in an 8-K. Based on exceeding the $2.5 million net worth criteria by about $2 million on a pro forma basis, we expect that Oculus will meet the net worth test of the NASDAQ and therefore, receive a conditional satisfaction of a listing requirement sometime next week from the NASDAQ. Moving on to a discussion of the guidance. At the time of our last earnings call in August of this year, we did not feel that it was appropriate to provide guidance for the September quarter because we were in the middle of working on the More Pharma transaction and did not know the accounting treatment of the transaction at that time. What is our guidance for the quarter ending December 31, 2012? Due to the seasonality of the Animal Healthcare business, this quarter tends to be our lowest quarter of the year. Furthermore, this will be the first full quarter following the More Pharma transaction. Subsequently, the revenue from Mexico will be reduced to about 55% of what it would have been when we sold directly into the market. At the same time, the operating expenses are lower than last year since we transferred the sales and marketing functions in Mexico to More Pharma. As a result of these factors, we expect revenue to be in the range of $3.4 million to $3.2 million for the quarter ending December 31. Even though this revenue range is below that of the September quarter, the product revenue growth rate for this guidance is 22% and 13%, respectively, above the same period last year. The cash operating expenses for the December quarter will be in the $2.8 million range due to some higher consulting and investor relations expenses. Our more typical quarterly cash operating expenses are anticipated to be in the $2.5 million after the More Pharma transaction compared to the $3 million range prior to the More Pharma transaction. EBITDAS for the December quarter should be in the negative $1 million range. In the last several earnings call this, we provided revenue growth rate guidance for our 3 business groups for the full fiscal year 2013. How did we do for the first half and second quarter of fiscal year 2013 compared to that fiscal year guidance? One, for the Innovacyn group, which includes the Animal Healthcare and 2 human over-the-counter products, last quarter, we provided revenue growth guidance of 0% to 20% for the full fiscal year. In the first half, we achieved a revenue growth rate of 36%, most of which was due to the higher royalty compared to the same period last year and a 5% growth for the second quarter. We would not change -- we will not change the guidance for this business group at this time. Number two, for the Rx U.S. group, which includes all other non-Innovacyn U.S. markets such as dermatology and wound care, last quarter, we provided revenue growth guidance of 40% to 60% for the full fiscal year. We achieved a revenue growth of 221% for the first half. This reflected the growth of AmDerma, Quinnova, an onset into the dermatology market with 3 product launches. Due to these product launches, we are increasing our revenue growth guidance to 150% to 200% over the last year for the full fiscal year of 2013. Number three, for the international group, we had a revenue growth guidance of 5% to 10% for the full year. We achieved the growth of 4% for the first half and we'll keep the same revenue growth guidance for international. For the total revenue product growth for the full fiscal year 2013, we provided product revenue guidance of 15% to 30% growth. Even with a 32% product revenue growth for the first half and 26% for the second quarter, we have reduced the top side growth rate from 30% to 25% as the More Pharma transaction tends to lower the sales growth, while reducing our operating expenses year-over-year. Moving now to the results for the second fiscal quarter ending September 2012. Product revenues increased $874,000 or 26% compared to the same quarter last year, with in increases in United States, Mexico and Singapore partially offset by declines in the other international regions. Product revenue in the United States increased $452,000 or 31% due to both strong unit growth and new product launches into the dermatology market and slightly higher unit growth from our Animal Healthcare partner Innovacyn. The revenue reported of Innovacyn of $1.2 million for the 3 months ended September was up $52,000 from the same period last year. The revenue from the prescription business increased $528,000 or 196% to $798,000, primarily driven by the growth in sales to dermatologists. We are pleased with the progress, growth and clinical success of our Microcyn-based products in the dermatology market. Furthermore, Quinnova is launching 3 new Microcyn-based products over the next 6 to 9 months. Revenue in Mexico increased $558,000 or 43%, when compared to the same period last year. The increase was driven by a 14% increase in sales to pharmacies, a 67% increase in sales to the hospitals and the recognition of $189,000 related to the amortization of upfront fees paid by More Pharma. The distribution agreement with More Pharma was completed on August 15, 2012. Due to the transfer of the sales function of More Pharma, Oculus reduced our -- or reduced or transferred the cost of the salespeople and promotions, thus eliminating, as Hoji mentioned earlier, operating cost of about $2.5 million to $2.8 million per year. As a result of these reductions, we incurred about $410,000 of severance and related onetime costs. In addition, the upfront payment of $5.1 million is to be recognized as revenue over a 3- to 5-year period, resulting in $189,000 of revenue in this quarter, as I've just mentioned, and $375,000 in each future quarter. Revenue in Europe and the rest of the world for the quarter ended September decreased $136,000 or 21% over the prior year period, primarily as a result of decreases in sales in those regions. Our gross profitability for the quarter ended September 30 was 74% compared to 80% for the same period last year. The lower gross profitability is primarily the result of product mix in the United States and the impact of the More Pharma transaction in Mexico. Operating expenses minus noncash expenses during the quarter were $3.5 million, up from $2.9 million in the same period last year. The increase was primarily due to the $410,000 that I mentioned earlier, a onetime severance cost in Mexico and higher expenses related to new products, compensation and investor-related costs in the United States. EBITDAS for the quarter ending September 30 was negative $212,000 compared to a negative $31,000 in the same period last year and a negative $22,000 in the quarter ending June 30. If one adjusts the EBITDAS for the $410,000 onetime severance cost, then the EBITDAS for the quarter and the 6 months would have been positive. As of September 30, 2012, we had cash of $8.3 million compared to $3.4 million as of March 31, 2012. What are the results for the first 6 months of the fiscal year 2013? Hoji covered some of these, but let me just briefly repeat some of them. Total revenue was $8.6 million in the 6 months ended September compared to $6.6 million in the same period last year. Product revenue was $8.1 million, up 32% from $6.1 million with revenue increases in the United States and Mexico, partially offset by declines in the international area. Cash operating expenses increased $441,000 for the 6-month period primarily because of the onetime severance cost of the $410,000. Operating loss minus noncash expenses to EBITDAS for the 6 months was $235,000 compared to $1.1 million in the same period last year. If we adjust, as I mentioned earlier, the 6-month EBITDAS for the onetime severance cost then it would have been positive. That concludes my remarks. And I'll now turn it back to Hoji for questions.

Thanks, Bob. Operator, we are ready to open up the Q&A. Thank you.

[Operator Instructions] Our first question comes from Marco Rodriguez from Stonegate Securities.

I just want a quick clarification. The $5.1 million upfront fee that you received, the milestone payment, did you say that was going to be recognized $376,000 per quarter starting in December?

Yes. $375,000.

$375,000, got it. Okay. And then in regard to the More Pharma transition, if you will, the revenue recognition that's changed here midway through the quarter, can you talk a little bit about that as far as what drove that?

Yes. Well, obviously, we're now selling -- before we used to recognize it -- part of it when we shipped and part of it when we collected. And that was when we were selling directly to the customer. Now we're recognizing it on a sell-through basis, in other words, when we ship it to More Pharma, we get inventory reports from them, so we see how much they've actually sold into the market. And that's when we recognize it, based on those inventory reports and how much we've shipped to them.

Okay. Got it. And in regard to the scar management trial that you guys started in your last fiscal quarter, do you have any updates there or any kind of color that you can provide there?

Well, I think -- this is Hoji. I think we summarized the update. So this is for reduction of the scar on, I would say, mostly wounds that -- they are less than 1 year old. This has been a request from our dermatology partner Amneal Quinnova. They are looking for new products that they can continue launching in the U.S. market. They think that's a sizable market. I don't have the exact market size for you on the call, but we have had really good, I would say, clinical -- positive clinical indications for that specific indication internationally and more specifically in Mexico. So therefore, we optimized the formulation and we filed the 510(k). This is a device and still -- FDA is reviewing this as a combo device drug and they're requiring clinical trials. So we initiated the controlled randomized trial in multi-centers, I believe is in 4 different clinical sites in the U.S. Patient enrollment, we expect to complete within the next couple of weeks. There are 3 more patients left for us to enroll. The follow-up on these patients are less than a month, and so we are expecting to finalize and complete all the follow-up by first quarter of next year. And on the top line data, we expect it to be positive because we have experience with this product internationally. And right after that, then we expect to file with the FDA. The standard "review time" for FDA is about 3 months, but as the majority of you guys know, you can't hold the FDA to that. But if they clear that, then Quinnova will reimburse us for the cost of the clinical trial, which is roughly less than $0.5 million and they will launch this product as their -- one of their next products into the U.S. dermatology market. Does that answer your question?

Yes. Yes, that does. Very helpful. And in regard to the agreement with AmDerma for the -- their acne drug there or the acne application, how are you guys thinking as far as the ramp on revenues there?

That's a -- clearly, it serves a marketing function and that's why we have partners, because we don't have the sales and marketing arm. But let me tell you my views on that. I think it's going to really depend on the efficacy that they're going to get out of our clinical trials, once we conduct the drug trials in the U.S. Well, it's going to be conducted by them not us. That data is going to really drive how strong the sales is going to be. So that's usually when you do, obviously, clinical trials, you want to run it against a product that you want to compete with. And the better the efficacy, then you have a -- you're in much better position to convince physicians to write prescriptions for that. So those are the discussions we are having with our partner in terms of the clinical trial designs. There are certainly process of preparing for an IND. But that is my take. Bob, do you want to add anything to that?

No. You covered everything.

Perfect. And then any progress that you can share with us in regard to educating the market on Atopic Dermatitis?

On Atopic Dermatitis, again, Quinnova, they are doing a fantastic job. They have registered in that, participated in multiple dermatology conferences. So far they have several key opinion leaders that are doing some marketing trials for them. So they're trying to get as much exposure as they can in these dermatology conferences. I attended one of them. They had several key opinion leaders there. And most importantly what they are doing is they are asking physicians not so much marketing, but they're asking them, "Where do you use this product," and how else can we go back to other dermatologists and say, "Hey, based on these types of feedback you're getting, this is how best you want to use the product to get the best efficacy." So I think that's the majority focus on the Atopic Dermatitis. Again, 19 million patients, large market. But please keep in mind, there are other products in the market as well. What they see and what we see in terms of visions we are sharing in dermatology is, this is one of the Microcyn-based products in dermatology that they're putting into the market. And as they're getting really good feedback, then the next one would be the scar reduction, hopefully, is going to get launched followed by, there are 2 additional products, Microcyn-based, that they already have planned, which we will not announce until they're ready and they will launch. So there will be multiples of this product that they would be marketing, hopefully, next year. And that's why we're so excited about the dermatology market. Also, last point is we will have a New York Analyst Conference Day, which are we are going to make this announcement, actually, I just remembered. The announcement will come out -- we announced this in regards to an Analyst Day next Monday in New York. But as you're all aware, based on the damage that has been caused by the storm on the East Coast, we are canceling that event, and then we are rescheduling it for the end of November and please stay tuned for that announcement. The reason I bring that up is that there are 2 key dermatologists that are going to be on the panel and 2 surgical physicians, and none of them are paid by us. And that would be moderated by analysts and it will be open to institutional investors, high net worth, and analysts, and we will be broadcasting that both on the Internet and they can actually attend via phone. So you guys can directly ask them if you have any questions about their feedback on safety and efficacy. Sorry for the long explanation.

Perfect. Absolutely. Last quick question for me. Just wondering if you can give us a sense on how you guys are thinking about gross margins as we progress through the year?

Yes. With the More Pharma deal, well, our gross margins were down a little bit compared to last year and we're going to see -- in the past, we have suggested that -- people -- that we be at maybe a 75% gross margin. With the More Pharma deal, it would probably be pulled down to a 70% gross margin, instead of the 75%.

Our next question comes from Elemer Piros from Burrill & Company. Elemer Piros - Burrill & Company: Now from a different platform from Burrill & Company. Hoji, if you could please help me understand because I had a little bit of a break in terms of exposure to -- as you're evolving into a -- or have evolved into a commercial stage company. If you could help me to understand how the regulatory aspect would play out once you have the 510(k) approval for the scar indication. What other indications could be folded into that regulatory framework? Would you have to do additional studies from the regulatory standpoint or would those studies be more geared towards marketing the product for -- the versions of the product for different indications, please?

Absolutely. So Elemer, we are currently no longer, even though we are saying we have filed for the 510(k) clearance, which mostly everyone is familiar with that as a device. It's really important to mention that FDA is considering Microcyn Technology a combo-drug device, for obvious reasons that it has so many drug properties as well. So when we file the 510(k), in this case is for a reduction of a scar in, as I said, in certain wounds that they are less than a year old, the clinical study that we are currently doing is specifically to support that indication. So if there are any further expansion or potential expansion of indications that we plan to do, we have to go back and file additional 510(k)s in order to obtain the expanded indication. But in regards to the 510(k) clearance, once we are cleared, there would be a series of marketing clinicals that Amneal Quinnova will be conducting and that would give them the marketing ammunition that they can go back and say, "Here's the control randomized trials conducted in support of this indication, but now here are additional marketing trials we have done at different centers," and -- so that's the current plan. Elemer Piros - Burrill & Company: And what are the end points, I'm sorry, Hoji, I may have missed that, for this 30-patient trial. How [indiscernible]?

It's actually 40 patients total. Elemer Piros - Burrill & Company: 40, sorry.

It's a scoring system on the various characteristics of the scar itself. Like redness, raised, the percentage that it's raised. A lot of that scoring, I think, it's on a 10-point scale, but a lot of scoring is a subjective scoring by the doctor. And that's the primary end point. Elemer Piros - Burrill & Company: And it would be comparing to any control patients with [ph] currently treated?

Exactly. Elemer Piros - Burrill & Company: Okay. And is there a hurdle here, Hoji or Bob, on -- from the FDA side? That, what, sort of -- is it like a conventional clinical study venue? It would have to achieve statistical significance for it to be a reliable measure for the potential label?

Actually, Elemer, we need to show equivalent to the other product. So when you file a 510(k) on market drug in the drug world, and you remember we were doing drug trials in modeling sector data [ph], also, there are always superiority involved. But in regards to the 510(k), you want to show equivalency. And in this case that's just equivalency to the standard care. And so 40 patients are being treated with a chosen product that the FDA is comfortable with and 40 patients are being treated with Microcyn, and then at the end, we need to show equivalency. Now if we do better, then that's great. But the bar, in other words, is lower to get their approval on 510(k). Elemer Piros - Burrill & Company: So if you looked out a few years, 3 to 5 years, how well do you think the product could do in the United States? And I'm not asking for you to give a specific revenue guidance for 2015 or 2017. What is the order of magnitude that you would expect from Microcyn if you take out the veterinary market for a moment?

If you take out the veterinarian market? So, let me bring you up to speed because, obviously, we haven't spoken for a while. Since 2008, during the financial meltdown when we eliminated those clinical trials and we focused on commercialization and we started pursuing a series of 510(k) approvals, we are at a point that we have 5 510(k) clearances in wound care and 2 510(k) clearances in dermatology, so -- and that's what we are now commercializing to important partners in the United States. And the outlook that I have over the next 3 or 4 years is that these 510(k) approvals, they're going to enable Oculus to build -- since you asked for -- not to give guidance, which I really appreciate, but in concept, over the next 3 or 4 years, you will see that we are able to build a profitable company with sustained growth using our medical clearances and approvals in the United States, as well as in Europe and internationally. The most important thing is -- and I think this is really important for our stockholders to understand is that, while your commercial is in [indiscernible] today and the ramp is not up to 50 million, 100 million, the benefit that we are getting is that although we are moving slowly to a profitability, we are really educating the medical community in regards to efficacy and safety of this product in terms of the platform technology. How safe it is, how -- they're gaining a lot of experience using it in wound care model. Right now, Eloquest is marketing it, 7 different formulations in chronic wound care in U.S. hospitals, and dermatology by Quinnova. And so while in parallel, we are building this profitable business on sustainable growth, in parallel, we are -- right now, we are at a point that we are in discussions with the FDA to file an IND to pursue the largest market opportunity for Microcyn, which is the surgical market. The surgical market, there are approximately about 40 million patients annually, that's surgical and trauma. On an average basis they use about [indiscernible], so about $100. So the total addressable market is roughly around $4 billion. Why am I, personally, as a CEO of the company excited about that market is that one, we have not harnessed the largest market opportunity to a partner. We still save that for our shareholders. We are using peripheral markets that are smaller, we are partnering those to get the company to profitability and building sustained growth. Then using our funds to start funding the IND towards the surgical trial. In the surgical market, I think, once physicians have been using it on chronic wounds, they understand Microcyn -- for example, I was in a dermatology market. One dermatologist pulled me aside and said, "This is great on Atopic Dermatitis, but I'm using this for this indication, this indication, this indication," and I stopped her. I said, "[indiscernible] are off-label. We don't market it for those indications." She said, "I don't care. I'm using it because I can see how safe and effective it is." So we are building that medical awareness about Microcyn so when we get that drug approval, I think we have a great chance of success to become a significant player in the drug market in the surgical market.

[Operator Instructions] Our next question comes from Prachant Mahir [ph] from NetGain Financial.

Hoji, 2 quick questions. Number one is, you made a remark in the passing about Europe strategy. Can you elaborate on that? Number one.

Can you say that again, Prachant [ph], I didn't hear you.

The Europe strategy. If you can elaborate on that, that would be great. You made a remark in the passing. And number two is, a little clarification on, of course, the great news that the NASDAQ compliance is back on and you guys have restructured the debt. I wonder if you could just clarify how do -- I thought I heard you mentioned restricted shares to negotiate the debt restructuring? Can you clarify that once again?

Absolutely. So let me first of all talk about Europe. I'll try to keep my responses short. [indiscernible]. I'm not really going into too much detail. But as you guys have been listening to our earnings call for the last couple of years we've been extremely focused on the U.S. market, building the Animal Healthcare market with this fantastic partners, and they're doing a great job. Followed by, now, Amneal Quinnova in dermatology and then Eloquest now is commercializing in hospital wound care. And then secondarily, we've been focused really in Mexico. The one large territory that we really haven't talked about much has been Europe, for good reasons. That we haven't had the resources because we've been really so focused on these 2 territories I just mentioned earlier. So we have made Europe a priority as of -- for next year. There will be a series of approvals that we will file. These are device approvals that they can be obtained quickly or I should say quicker than a drug indication. And as we build those portfolio of new products both in dermatology and wound care, we believe then we are building a great value for a partner that can to step up with the needed sales and marketing muscle and say, "Now I'm willing to do same thing More Pharma did. We pay you x amount of dollars up front to boost your balance sheet, non-diluted, but we're going to also improve your revenue by taking this product and start selling them." So this is now become the priority for our management team internally. So we think Europe is going to be a great catalyst moving forward for us. In regards to NASDAQ and the debt, specific to the debt, I think, that was a great message to us as management, that we have 2 large shareholders in form of Western Technologies and Sabby, that they have been so flexible to negotiate and allow us to get back into compliance, obviously, because they do see a significant growth opportunity for Oculus ahead of us. Otherwise, they wouldn't be doing this. In regards to Sabby, we did not grant additional shares, money, warrants. All they did was only extend their existing warrants by 2 years. In regards to WTI, this is an important point I want to make is that the restructuring of the debt and the shares that were issued, these shares are restricted. I would -- you guys should not expect these shares to be trading tomorrow and that there'll be pressure on the stock. So that was a very good deal for us to grant them with restricted shares. And then down the road, they will be working with us very closely in terms of if and when these shares need to be sold. So I hope I've answered that question.

Our next question comes from Jack Wallace from Sidoti.

Most of my other questions have been answered, just touching a little bit on the EU sales and again in Mexico. First, let's talk Mexico. Obviously, you've seen some incredible growth there, 43% since the More Pharma deal. Is this growth just the beginning in Mexico and with your guidance for the rest of the year, is there an increase in growth rate in Mexico that might be offset by a lower growth rate elsewhere in the world? And then my other question would just be to see what other types of approvals you'd be looking for in the EU and any specific partners in the EU that you might be able to identify?

So let me answer your Mexico question from a top level point of view and then I'll let Bob Miller to jump in and give you much more detail. So Mexico, as you mentioned, I mean, they were showing growth. But short term as we cut this deal with More Pharma, obviously, because now they are the middle person and we sell to them, and they sell directly into market, we are improving our bottom line, but short term the revenue top line is lower from Mexico. But one thing that I do want to highlight for everyone on this call is that they have been extremely proactive in terms of filing additional regulatory approvals in Southern America and Latin America for a vast number of indications in those regions. Actually, we just shipped a very, very small order to one of those countries. It's just the beginning of commercialization in those areas. So I think, long term, that the growth is going to be significant from those regions including in Mexico because you will be providing with additional product formulations and also in terms of indications that they need to file. So as we get clinical data from here, we may use some of that clinical data and help them to file in those regions. Do you want to add?

The only thing I'd say on the 43% growth is that because it was sort of split in half for this quarter, because it was effective in the middle of August, we had really 2 strong months that were sales directly to customers. And then we also had a strong month in terms of sales and sell-through by our partner. So that's the reason for the 43%. That was a little bit stronger than we would -- there would be -- the percentage that would be going forward.

Jack, you also have a question regarding Europe and of type of approvals there?

Yes. Sorry, I was just wondering what approvals you'd be seeking there and if there are any partners that you could identify that may be potential partners for you?

So I hope we answered your question regarding Mexico. My experience in regulatory has been it is much, much easier to approach and notify in Europe with an existing FDA approval. So if you have an approval or FDA clearance it's much easier. So that's what we are doing. We are taking now our 7 and hopefully, it's going to be 8 or 9 clearances soon, and take them back into Europe and file and start getting additional approval. These approvals are going to be primarily expansion of indications in human wound care. Currently, we have significant limitations in terms of size of products we are selling into the U.S. hospitals. Some of them aren't even appropriate for use in surgical or in other areas like 5-liter drugs. What they want is smaller sizes, bigger spray for small pressure -- combined with pressure devices then actually they can take liberate [ph] wounds. So there will be significant expansion of our wound care indications in Europe alongside with derm approvals. So we'll be going after both derm and wound care.

Great. And is there an approximate time line, say, or say a reduction time, say, if you were to come in with an existing FDA approval versus if you were to come in cold?

Yes. Because from my experience, again, if you walk into the notified [ph] and you want to get, for example, certain wound care approval, which we did a few years ago in Europe, they will ask for some clinical study. But if we already have done controlled randomized trial on Atopic Dermatitis and that's getting cleared, that's a lot of clout to walk into there. So you can say 6 months, 8 months in terms of doing the logistics of clinical and additional expenditures in Europe.

Our next question comes from Russ Huffington [ph] from Calton & Associates.

I just want to get into a little bit of the expenses, like operating expenses increased $609,000. I know sometimes that's out of your -- out of order. Do you expect that to -- that number to come down a bit?

Which number are you referring to?

Operating expenses increased $609,000.

For the quarter?

Yes, sir.

Okay. So yes. As I mentioned $410,000 that was onetime severance costs and then we have some new products that we were working on that were -- and then -- so that explains everything but $200,000. And then we've got $200,000 that was really a combination of new product expenses. We're working on some new products; some compensation expenses, most of which related to the More Pharma transaction that we did; and some expenses relating to Investor Relations that we've ramped that effort up so as to increase stock price to try to get above $1.

Okay. And on the SG&A that also increased. Is that another line item? That went up $656,000, and underneath that you say "compensation and investor-related cost." Without me being too specific or asking too much in depth, what is investor-related cost?

Russ [ph], can I jump in? Maybe I can answer that. So that investor relationship, that's the amount of money it's going to take us to do some non-deal [ph] road shows, meeting with the investors, building [ph] conferences, for example, the Analyst Meeting that we are holding in New York [indiscernible] we all know, for free. So -- and please expect that cost also -- everyone should expect that cost for the existing quarter as we are holding a few of these events. But hopefully as the stock starts improving, we can take some of that off. And as we hope -- I'm hoping as we start getting into the next quarter announcing our core management, clinical data and so on so we are called a catalyst [ph] and we can continue maintaining our stock and reduce those expenses. So for the time being, we are hoping that.

And one last thing as far as the 8-K goes. I see that there are 2 transactions. That kind of confused me. There's one on the warrants and then there's one on the issuing additional shares. Is that additional shares -- so that's 4.320 million at $0.81, is that correct?

That is correct.

And how long is that restricted for?

Restriction, according to SEC regulations, is for 6 months. And then one other thing I just want to again communicate on this call with all our investors, one, they are restricted. So they are not trading tomorrow. They are restricted for 6 months. Even after 6 months the discussion between Western Technologies and us is that we will be assisting them in terms of transfer of any loss of those shares. So this is not something that WTI is going to be dumping all of a sudden $4 million next day into the market. It's not good for them. It's not good for us.

Right. It -- should be no more need to issue any more stock or do any reverse split or anything like that, right?

I'm sorry?

There should be no need to -- since you have a real good cash position right now, there should be no more need to be issuing any more stock or do a reverse split or anything.

Okay. So in terms of raising additional shares, we have no plans of raising money at $0.83. So you're correct. And in terms of reverse split, we are doing everything possible not to go that route. So obviously, I feel, regaining our compliance, there will not be any need for that. So I don't see anybody including management on this call who wants to do a reverse split.

There are no further questions, and I would like to turn the conference back to the speakers for closing remarks.

Well, again, on behalf of the management, I would like to thank all of you guys for being on the call. And we are excited with regards to, not only on our numbers so far, but in terms of what we have accomplished so far. But a lot of it is also due to a lot of support from a lot of our shareholders. It's not just WTI and Sabby that are showing a lot of support but from the majority of you guys almost on a daily basis, if I'm not exaggerating, and it means a lot to us how much support we are getting from you guys during this time. And so if any of you guys can attend the New York Analyst Day, that would be phenomenal. If not, there will be a phone call available, you guys can dial in and listen. If not from management, it would be actually the physicians directly talking about the use of our products in dermatology and surgical. And with that, again, thank you and have a wonderful afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.