Sonoma Pharmaceuticals, Inc. (SNOA) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Oculus Innovative Sciences’ Fiscal Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference maybe recorded. I will like to introduce your host for today's conference Mr. Dan McFadden. Sir, please go ahead.

Thanks, Michelle. Good afternoon and thank you for joining us. With me on the call today our CEO, Jim Schutz; and our CFO, COO, Bob Miller. We will open the call with Bob Miller's review of our financial results for the quarter and year, followed by Jim's update on our business strategy moving forward. This afternoon Oculus issued a press release detailing fiscal fourth quarter 2015 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is at oculusis.com, that’s oculusis.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 such 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 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 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 I will now turn the call over to Bob Miller, our CFO and COO.

Thank you, Dan. As you all probably know, recently our trading volume has been extremely high. In fact, over the last 8 trading days according to our calculation, our trading volume in total was over 45 million, triple our 15 million shares outstanding and over the past two weeks our stock price and market cap has almost doubled. We appreciate the attention we are receiving as a small cap company and we are happy to see the recognition of higher value for our shareholders. As most companies, we believe we are still a strong value play with a high cash value of about $11 million, coupled with a $13 million of revenue with expectations of double-digit growth for the full fiscal year. I'll first discuss the financial presentation of our businesses, secondly our key strategies we successfully used to achieve the double-digit revenue growth for the fourth quarter in which we plan to use during fiscal year 2016, then summarize our financial results for the fourth quarter, and lastly provide some general revenue growth guidelines for fiscal year 2016. First of all, we have modified the detailed financial presentation of our businesses by separating the product revenues which are shown on the last page of the press release, on to new table into the two categories, one, revenue from direct product sales, and two revenue in the form of product licensing on royalty fees. For instance, all of our revenue related to our former partner Innovacyn in animal healthcare is a royalty. This provides more transparency on our true sales growth of our products in various geographic category areas, especially as we focus on growing the sales in the United States with our direct sales force. Secondly, one of our key strategies to ignite double-digit revenue growth for fiscal year 2016. Over the last five quarters, our total revenue has been relatively flat, ranging from $2.9 million to $3.4 million, a quarterly average of $3.2 million. During this time period in general, our increase in international sales mostly offset the decline in the animal healthcare, maintaining a flat $3.2 million revenue average. Our number one strategy to continue strong unit growth in our international business is to continue the strong inner growth in our international business with new product launches and stronger partners. The international segment is 81% of our product revenue and will give us the largest dollar growth and furthermore generates cash to help us fund the US derm growth. The number two strategy is to focus on growing revenue in the United States dermatology market with the direct sales force and a robust product pipeline. The US derm segment provides us with the largest long-term potential growth and will lead us to overall breakeven. The objective of these two strategies is to enhance our overall double-digit unit growth, while more than offsetting the loss from our discontinued animal healthcare and the strong dollar. How these strategies worked in the fourth quarter. During the fourth quarter, the revenue dollar growth in international segment was $1.2 million or up 79%, and US dermatology revenue increased $302,000, clearly outstripping the decline in the animal health royalty revenue related to the discontinued partner of $406,000. As a result, as pointed out in our press release, the total revenues are $4 million or up $1.1 million or 37% compared to $2.9 million for the same period last – same quarter last year and up 25% compared to the prior quarter. In general, the international product revenue increased 79% or $1.2 million to $2.6 million from $1.4 million, with very strong unit growth more than offsetting the 12% decline in the peso and the 18% decline in euro during the fourth quarter. And more specifically, in Europe, our dollar revenue growth for the quarter was 28% with a local currency growth of 43% with new products approved and introduced and new country specific distributors. In Mexico, our product revenue growth was 96% as our new powerhouse partner is focused on growing the wound care business and stocking their substantial distribution network. Number three, the rest of world sales were up 77% driven by a bigger than normal shipment to the Middle East of 431,000. As we mentioned last quarter, we are focusing on growing revenue in the dermatology market with our direct sales force which was hired in October. We launched our first three dermatology products, Alevicyn Gel for the treatment of atopic dermatitis, Alevicyn Dermal Spray for the treatment of skin procedures such as most skin surgery. And thirdly, the only prescription product in the market for scars branded Celacyn. The number of unit sold to patients of Alevicyn and Celacyn was just below 2000 units in the month of April. We will be launching an additional 4 products in the June and July timeframe, which includes the no-touch gel spray for atopic dermatitis which was just cleared by the FDA, which Jim will talk about more in a few minutes. Our US dermatology sales for the quarter were 412,000, up 310,000 from 110,000 for the same period last year, including sales related to our direct sales force and our current dermatology partner. Gross product margins of 52% was as the same as last year. Operating expenses minus non-cash expenses for the fourth quarter were $3.3 million, up 101,000 compared to the same period last year. The increase in the cash operating expenses was a result of higher sales and marketing expenses in the US related to hiring a direct sales force, partially offset by lower expenses related to our former Ruthigen subsidiary. On the balance sheet, our cash position at the end of March was $6.2 million, and our long-term debt was zero. Relating to the balance sheet and our financial strength, we agreed to sell 1.6 million shares of Ruthigen for $4.5 million to certain investors in Ruthigen and their merger partner at the time of the merger. The Pulmatrix Ruthigen merger was approved by the SEC and is expected to be approved by the shareholders this month. I especially think the sales of the Ruthigen shares will occur this month. In fact, we have already received 1.8 million of the 4.5 million as a partial payment for the shares of – the sale of Ruthigen shares with the remainder at the time of closing of the merger. If you combine our total cash positions 6.2 million along with 4.5 million from the sale of Rughigen shares then our combined pro forma cash position would be 10.7 million. What does our future growth and revenue look like? One, the international product revenue will continue to grow we believe in the 10% to 20% plus range in constant currency. Our most recent revenue growth of 37% over the last 12 months tends to substantiate this expectation. Furthermore this segment currently represents as I mentioned before over 81% of our product revenue, that's a major driver in our short term growth. Sanfer, our new partner in Mexico is a powerhouse sales and marketing company, 10 times bigger than our former partner. We are seriously promoting and selling MicroDysis [ph] in Mexico and other Latin America companies. The high unit growth will be dampened by the strong dollar. Number two, in the US, the direct sales force for the dermatology will continue to grow revenue rapidly as current and new products brought the sales ramp curve from a relatively small base. We will be launching six new products over the next nine months. This branded prescription market in the US is more than a 100% this quarter compared to the prior quarter ending on December [ph] We expect to see continued high growth in this segment albeit from a small base. Number three, the year-over-year total revenue growth in June quarter will be lower than the 37%. In the March quarter due to lower Middle East revenue, a strong dollar, high animal health royalty revenue in the June quarter last year, with strong expected sales growth in the last three quarters of fiscal year 2016. And before our animal health royalty has bottomed down and now we expect to see this growth as we launched our MicrocynAH animal health products with a very strong new animal healthcare partner in March 2015. As a result, we are continuing to target double-digit product revenue growth. We are focused for the year 2016. Also we continue to believe that Oculus is still a good investment candidate for the value investor results are looking for strong revenue growth. Even with the market cap of now about $25 million which doubled over the last two weeks, one interesting comparable company for us is NovaBay Pharmaceuticals, which has several [ph] technology has converted to becoming a commercial company focused on the eye care market which we had thought and has a market cap of $50 million, double than of Oculus. Our combination of high cash value of $11 million and $13 million of total revenue with double-digit growth expected for the full fiscal year based on a highly effective technology with a focus on branded, high priced products and the attractive utilized dermatology market to justify a comparable valuation. With that I'll pass it over to Jim.

Thank you, Bob. I'd like to cover two areas in the next seven minutes or so and then open the call up for question and answers. So two topics. The first, I are often asked why we picked dermatology and plastic surgery as our core markets to focus on. Why focus on derm and plastics and why not focus on our other therapeutic areas. I'll share a few thoughts in those core markets. And then topic two, spend just a few minutes on our recent FDA approval clearance for our new atopic dermatitis product. And by the way you will often hear healthcare professionals interchange the words atopic dermatitis and eczema and we'll do the same in today's presentation. But back to topic two, I'll share a little bit of color on Monday's FDA news. So topic one, Bob and I are often asked why we picked dermatology and plastic surgery for our core markets. I use to have a long convoluted answer when speaking with shareholders and then I saw David Steinberg, who is the Managing Director of Equity Research for Jefferies. I saw him present during JPMorgan week in January and then again at a Satellite event associated with American Academy of Dermatology in March. David's power point and message focused on dermatology up hue [ph] from Wall Street and why dermatology is hot. So with apologies to David, and because his answer was much better than mine, I share his thoughts with you today. So why is derm hot, why are investors positive on the dermatology sector. David had six answers. One, shorter development timelines, two, lower clinical trial costs, three, perceived lower regulatory hurdles, four, high cash pay compounded for aesthetics, five, our recent track record of success and finally, six are really active M&A market which David described as a second way for shareholders to win. So Bob and I add just four more thoughts based upon our own experience in dermatology starting in the fall of 2014 when we picked derm to our core market. Our four thoughts in addition to David's. Seven derm has strong pricing product margins and insurance coverage, eight, it’s a concentrated core point, meaning we don’t need an enormous sales force to cover, nine, derm has fast sales ramps, meaning that new sales people pay for themselves quickly and 10 and this is Bob's favorite, dermatology has great valuations or multiples on revenue. Specific to M&A, David went on his presentation to highlight that there is been substantial consolidation in the dermatology space both in the public and private side of things. On the private company side, there were nine private companies of note in 2008 all of whom were purchased for an aggregate of $9 billion. Those names includes, Stiefel, Graceway, Tuggerah [ph] SkinMedica and our neighbors down the street here in Petaluma, Dow Pharmaceuticals. So overstating the obvious, Bob and I really like the derm and plastic space. We like the traction that we've seen since we jumped into this core market with both the last fall. Second topic, why are we bullish on atopic dermatitis and what's the significance of this Monday news regarding an FDA approval and clearance. Atopic dermatitis or eczema prescriptions are dominated by topical steroids. Bob's data shows 13.5 million prescriptions were written last year in the United States for topical steroids. So how does our new products stack up against topical steroids, the standard of care here? We have solid clinical data proving reduction in both itch and pain associated with atopic dermatitis and no side effects. So let's spend a minute discussing the challenges associated with the market leader topical steroids. And again at the risk of borrowing some others, we thought the recent National Eczema Association publication volume 27 said it really well, so we wanted to borrow just for a moment. The author of their publication Dr. Eric Simpson, the Director of the Oregon Health & Science University Dermatology Department clinical studies unit had four terrific sentence that I like to read here quickly and if you'll bear with me Dr. Simpon's fourth sentence is the most memorable. So I “what causes eczema, we now know that immune cells release chemical messengers that cause the skin [ph] redness, swelling and discomfort in their skin. Topical steroids wiped out most of the immune cells indiscriminately, which in turns wipes out most of the chemical messengers too and that’s what causes you know, to feel better and here is four sentence which we've highlighted, but destroying cells indiscriminately can also cause patients to experience side effects” As you may know most doctors limit the use of topical steroids to 14 days because the local side effects of topical steroids are [indiscernible] and I'll highlight just a few, burning of stinging of the skin, worsening of a pre-existing skin infection and in fact you shouldn’t use topical steroids on excoriated or open skin. Folliculitis which are inflamed hair follicles, thinning of the skin, which especially concerning in children and in the elderly, stretch marks, contact dermatitis, acme or worsening of existing acne, rosacea, changes in skin color and excessive hair growth. So when we speak with our dermatologist customers, our sales team really focuses on our product benefits, our clinical trial data, our un-parallel safety profile, our products can be used on open excoriated skin unlike topical steroids. And finally, there is no 14 day time limitation for our products for this chronic atopic dermatitis condition. All in all, we think our products will shine in this interesting space, especially since as Dr. Simpson said, topical steroids are indiscriminate self killers. So Bob covered our numbers for the quarter and for the yea. He gave guidance on our revenue targets for our year ending March 31, 2016. I spent a few minutes detailing why we picked derm and plastics as our core markets, and why we are enthusiastic about our Monday news regarding our new atopic dermatitis product approval. And Michelle, if you will, we'd like to open the call up for question and answers.

Thank you. [Operator Instructions] Our first question comes from the line of Bob Robbins with Robins Capital Management. Your line is open. Please go ahead.

Thank you. Well, a whole lot of congratulations for a great quarter. It’s been a while and you guys deserve to – the best and [ph] all you hard work. I've got two questions. One is, is there a common thread of why so many things went right, in so many different areas of geography and product and government bid and so forth, jut a lot of things seemed very desperate and more than coincidental with maybe some management initiative or whatever. And then the other question I have is kind of the other side of the coin, what if anything is – well there is something unsustainable about this surge with – for example the inventory stocking, how much of the revenues are unsustainable related to you – any unsustainable factors?

Good questions. Thanks, Bob. You want to me handle one, you handle two.

Sure.

So let me summarize one, I’d make sure I get the question, why we had such a terrific quarter, and we have two terrific answers for that Bob. We have a terrific team in place that really helped us design the plan that we're all executing towards. And I know that sounds basic, but the fact that this terrific team made up of sales experts, regulatory people, manufacturing, R&D and the like. The fact that they helped us craft the plan that we're executing towards, means all of us sort of pushing and pulling in same direction. And I can't tell you how meaningful that is. Bob you've got the more difficult question on the inventory stocking.

Yes. So there were a couple of things and I guess your question also was, is this sustainable. And there are a couple of things that occurred during the quarter that are probably really not, one is the stocking that was about $400,000 worth of revenue actually or close to it, that we would not say that would be happening going forward. The other thing, the large order for the Middle East is probably not – that’s a larger order than we’d normally get. We're more generally in the 250 range if we would see for a quarter for that business. So at the same time, on the other scale, we also had a fairly strong dollar. So the impact of the peso that’s going to – that’s going to continue at least the difference that exist now between now and last year both for the peso and the euro, it will terribly [ph] depress our growth going forward, but that was also a factor relating to this quarter too. So I think those are probably the areas that were not continuous, the Sanfer Group as brand new. We think that they are going to expand – they've expanded a lot in Mexico, and they put the product not in pharmacies, not only behind the counter, but in front of the counter at this point and expanded that substantially. But they've also started taking it to other Latin Americans countries, and we haven’t seen much of that in this quarter at this time. Does that answer your question Bob?

Yes. Let's see how many other questions there are, I may have more later. Thank you.

Thank you.

Thank you. And our next question comes from the line of [indiscernible] with Crawford Group. Your line is open. Please go ahead.

Hello. Can you guys hear me?

Yes.

Okay. Sorry I just kind of stepped out. So I just wanted to ask two big questions. The first of which is so with the [Technical Difficulty] as a shareholder, how do you view that. I just wanted to ask who you guys believe to be a closer competitor with for eczema specifically.

Okay. Good question. We think we heard it’s a big question, but why don’t we repeat it to make sure that we heard it correctly. Who is the closest competitors in the atopic dermatitis eczema space? Why don’t we just assume - that hope is the question, did you hear a different question?

You're breaking up a little bit.

Sorry about that. I just stepped out, let me – I'll ask again. Basically so two questions, two big questions. The first one is who do you guys believe to be the main competitors for your new eczema drug, that’s one? And second of all, I heard that you said that you don’t believe there are any side effects with this drug, which really set it apart from atopical steroid. I am a bit vary about that I mean, I feel like almost all drugs have side effects, whether they be minor or major. Now do you believe there to be no side effects or whatsoever or do you believe there are minor side effect that really won't have impact for the drug in general?

Well, two good questions. Closest competitors for atopic dermatitis, Bob you want to recite the script data, because I think that’s…

Yes, actually if you look at the script that is there, as Jim pointed out they are about, our best estimate on topical scripts for atopic dermatitis is 13.5 million. We think about 12.5 million of that are the steroids and there are a whole different set of strengths of steroids that can be used down to the 1% that’s in the over-the-counter front stores. And there is – the Tim's [ph] product in the large…

Yes, the two big products they are Post Topic [ph] and Eligo both of whom have black box warnings which are somewhat controversial, great products but safety issues.

And they sell about 8000 of the 13.5 million, and so right now our – the HRC [ph] product is 100,000 to 200,000 small in light of this whole market. In terms of the safety profile, we – our product is, Hypochlorous Acid, it’s actually part of the body process that kills the bacteria in the body, and because of that it’s a very safe product we can use on – we estimate over 4 million patients at this point, both wound care and dermatology, and we really have not had one adverse affect. We're clear that we used around the eyes, nose, and mouth. We actually have a clearance for in the mouth. We know other people that are actually using it outside and had clearance outside the US to use it in the eye. So it’s a very safe chemical compound.

Thank you. [Operator Instructions] And our next question comes from the line of Raymond Patel. Please go ahead.

My question is you had about 21 employees last quarter I believe, so what is the headcount now and how do you expect to grow them in the year. And the second question was you have projected around $10 million in all cash, and how are you planning to use that? Thank you.

Apology, it could be phone, but the two questions I heard, $10 million in cash how do we intend to use it and then second one was headcount. We – headcount hasn’t changed from last quarter, by a good size manufacturing group in Mexico and in the US sales forces in Philadelphia and Atlanta, handful of folks in Europe. But I don’t think headcount had substantially changed from the last quarter. Bob?

No. And another way to benchmark our sort of our expenses other than headcount is the number that we use in the press release, our cash operating expenses that are now about three – for the quarter they were $2.3 million and we would expect them to be in that range to maybe up to the $3.5 million. In terms of the cash, how do we plan to use it, we are currently - have a EBITDAS negative even though for the quarter it was $1.1 million. We are using the cash outlay for quarter of about $1.5 million which will decline as our sales and especially in the derm business grow. So we will be using it to make sure that we can grow that business aggressively and - but we think it should be an up cash to get us about through that – through the breakeven process.

Thank you. And I am showing a follow up question from the line of Bob Robbins with Robins Capital Management. Your line is open. Please go ahead.

Okay. Thank you, again. Sanfer, a couple of questions on Sanfer, roughly what percent of Sanfer's Mexico – Mexican business, for example number of pharmacies, roughly what percent of that have been stocked that will – that are eligible for I assume all of it would be selling your products, and same question on all other Sanfer Central and South American business?

Yes. Well, right now we don’t really have much in it. They don’t have much sales in the other Latin American countries at this point. But in – Sanfer is a very, they are about $400 million US dollar company. They are Mexican company privately held there and be going through the IPO process they tell us. So in terms of – I think at this point they probably covered most of the pharmacies throughout Mexico with our product at this point. In terms of the number, I am not sure I can point at that at this point, I can get back to you Bob on that number.

I don’t need the exact number. I get the picture pretty much. All right. And I am sure I have to think if I got one more quick question for you. India, yes, tell us a little bit more about India, why now or why not earlier, what's - can India become as big potentially, is Mexico in a few years bigger?

Good question. We're excited to have a new partner in India. We know we got quite a few telephone calls and quite a bit of interest from our partner’s press release. So the regulatory process we've learned in India is that the new partner has to get through the regulatory approval process in India under their name. And our gurus [ph] there tell us that’s close to being finalized and we're working on stocking and voting in our partner as we speak. Second good question, why now? Our former partner contractual agreement came to a friendly end. We [indiscernible] it had some robust interest from good guys companies and I'll tell you they guy who runs India for us was very, very enthusiastic about Genentech.

Great. Okay.

Thank you. And I am showing no further questions at this time. And I would like to turn the call back to Mr. Jim Schutz for any further remarks.

Hey, thanks for joining us. We're on standby for questions.