Sonoma Pharmaceuticals, Inc. (SNOA) Q3 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. And welcome to the Oculus Innovative Sciences' Fiscal Third Quarter 2016 Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Dan McFadden. You may begin.

Thank you Michelle and good afternoon and thank you for joining us today. With me on the call are 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, followed by Jim Schutz's update on our business strategy moving forward. This afternoon Oculus issued a press release detailing fiscal third quarter 2016 financial results and recent corporate developments. 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 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 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, as well as the Company’s future capital needs and its ability to obtain additional funding and other risk 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 with that, I will now turn the call over to our CFO, COO Bob Miller.

Thank you, Dan. I’ll first discuss the financial presentation of our businesses; secondly, our key strategies to achieve strong revenue growth for fiscal year 2017; third, a review of the financial results of our derm strategy, and our overall financial results for the quarter -- the December quarter; and lastly, we’ll provide some revenue guidance for the quarter ending March 2016. First of all, we provided the detailed financial presentation of our businesses compared to last year, separating product revenues which are shown on the last page of the press release into two categories; one, revenue from direct product sales; and two, revenue in the form of product licensing and royalty fees. This provides more transparency on the true sales growth of our continuing products in various geographic areas, especially as we focus on growing the sales in US with our direct sales force. Secondly, what are our key strategies to ignite revenue growth for fiscal year 2017. Our key strategies for the growth for the rest of this year and next fiscal year, which have been the same since the beginning of the year are the following. Number one, strategy is to focus on growing revenue in the U.S. dermatology market with our direct sales force and a robust product pipeline. The U.S. derm segment provides us with a largest growth potential and will lead us to overall breakeven. Our number two strategy is to continue strong unit growth in our international business with new product launches and stronger partners. The international segment is 70% of our product revenue and generates cash to help us fund the U.S. derm growth. Jim will cover both completed and future action plans which are designed to execute our direct sales dermatology strategy. What have been our financial results for our dermatology actions starting in October 2014 through our third quarter ending December 31, 2015. There are several ways to look at our success in the derm market. One is the sales of our products which recognizes revenue when shipped to the wholesale distributors. This is a common way of recognizing revenue and reflected in the following reported revenue. Our total US product revenue was $356,000 for the September quarter 2014 last year, $621,000 for the March quarter of 2015, $787,000 for the June quarter, $1.2 million for the September quarter, and $1 million for the December quarter 2015. This method of recognition tends to be driven by the product load to the wholesalers, which explains the variation between September and December quarters. More specifically, our dermatology product revenue was $579,000 for the quarter ending December 31 compared to $290,000 in the same period last year, an increase of $299,000 or 19%. For the fiscal year-to-date or April through December 31, the US dermatology net product revenue was $1.8 million, up $1.3 million from $489,000. To give you a sense of the impact of the growth of the dermatology sales on Oculus, the US product revenue as a percentage of total product revenue has grown from 17% as of the quarter ending September 2014 to 30% for the most recent December quarter even with a 28% growth in the international product revenue for the year-to-date compared to last year. One way to keep this trend going is via introduction of new products and factors I mentioned earlier. During the December quarter, we introduced two new products to the wholesalers. Our target is to launch at least one new derm product per quarter, Jim will talk more about our product line of new products in just a few minutes. The bottom line is for the last four quarters the execution of our strategy to focusing on and grow the dermatology business with a direct sales force has been effective, meaningful and has shown a significant tangible impact on our overall financial results. Moving now to a review of our overall financial results. In summary, total revenue for the third quarter ended December 31 was $3.8 million, up 19% compared to $3.2 million for the same quarter last year. Total product revenue was up $1 million or 40% to $3.5 million from $2.5 million outstripping the decline in the royalty revenue of $435,000. During the third quarter, US product revenues increased $363,000, up 56%, mostly related to the increase in dermatology product revenue. International product revenue increased $636,000 or 35% to $2.5 million from $1.8 million caused by sharp increases in sales to Asia and the Middle East. Local currency growth in Europe was 36% and Latin America was 43%. Our new powerhouse partner in Latin America Sanfer continues to demonstrate a step-up level of revenue compared to that from our former partner last year. Operating expenses minus non-cash expenses for the third quarter were $4.1 million, up $858,000 compared to the same period last year. The increase in cash operating expenses was due to the higher sales and marketing expenses in the US related to the cost of our direct sales force and six product launches. On the balance sheet, our cash position at the end of December was $6.1 million and our long-term debt was zero. On the last earnings call we provided guidance for the US product revenue growth of 90% to 110% and for the international revenue growth of 12% to 18% resulting in a range of the total estimated revenue of $3.6 million to $3.9 million for the quarter. Even though we were off on the sector growth rates with 56% for the US and 38% for international, we were $3.8 million as mentioned earlier just under the high-end of the guidance for the total revenue. As you can tell it is difficult to forecast our sectors, our general guidance is that for the quarter –the total revenue for the quarter ending March 31, 2016 we will be less than $3.8 million due to the weak peso and lower unit volume related to warehouse [indiscernible] consolidation in Mexico. We expect the US product revenue will continue to grow in the 50% plus range for the quarter ending in March. For the fiscal year 2017, our Latin America partner, Sanfer has forecasted, not only a return to the higher levels of unit sales, but also strong unit growth. Our substantial growth in derm sales is reflecting in the growth of our total revenue. In the last four quarters, we’ve had positive year-over-year growth for total revenue, 37% for the March quarter last year, 8% for the June quarter, 24% for the September quarter, and now 19% for the December quarter. We continue to believe that Oculus remains a strong investment candidate for the value investor, who is also looking for strong revenue growth. We have a market cap of around $21 million, if one deducts the $6 million in cash from the market cap and the ratio of the adjusted market cap of $15 million compared to the 12-month trailing revenues is about 1 for 1. For the nine months of our fiscal quarter, product revenue grew at 47% and total revenue at 15%. The multiple of market cap to revenue for the typical derm companies tend to range from 3x to 6x. Let’s say potential investor can benefit not only from a strong derm product growth, but also from the potential expansion of the multiple. With that, I’ll turn it over to Jim.

Thanks, Bob. For my portion of the call today, I will cover just a few items in the next seven minutes or so. We have a terrific analytic at Maxim, who suggested we keep it simple and short addressing the following topics. First, we are now four quarters into our direct sales US dermatology efforts, how we done and have we hit our milestones? Second, the Maxim analyst suggested we give a bit of detail on our product pipeline for the next 12 months. And finally, he suggested that we should share our strategic overview where are we going in US dermatology in the next several years. To address the first point, we are now four quarters into our direct US dermatology efforts, how have we done and have we hit our milestones? We think we are off to a good start. You may remember that January 7, 2015 we announced the creation of our new US dermatology division, IntraDerm Pharmaceuticals. We started with 13.5 sales people, populating mostly the Board and West Coast selling three products, Celacyn, our scar management gel, Alevicyn Gel for atopic dermatitis and Alevicyn Spray for dermatology procedures. On June 3rd, we received an FDA approval for Alevicyn SG, which is a no-touch spray gel for atopic dermatitis specifically designed for hard to reach areas with excessive itch. On July 8, the US Patent and Trademark Office issued a new US patent for the use of our Microcyn Technology’s hypochlorous acid in the treatment of mitigation of atopic dermatitis. That patent expires in 2027. In October 2015, we added five new sales people who started covering the seller of the country. November 30, 2015, we received another FDA approval or clearance for Ceramax, which is an interesting product we in-licensed from Europe that contains a lipid structural matrix used in the treatment of skin disorders. December 17, we received an FDA approval for our in-house R&D product, SebDerm Gel, which is intended to manage and relieve seborrheic dermatitis. And as Bob said, on the revenue side, our US derm sales have generated $1.8 million just since April 1, 2015. So all in all, we think that the four quarters into our direct sales efforts for the US derm market that we are off to a good start and we think we are just scratching the surface of our bigger opportunity. So let’s switch gears and spend a minute on our second topic, our pipeline of products. I just mentioned, Ceramax, we got the FDA approval on hand and we are launching that terrific new product this spring. I also referenced SebDerm Gel, with the FDA approval on hand, we are going to launch it this summer, early summer. We also have RD0116 which is an interesting catalytic product we in-licensed from a German pharmaceutical company that has really good chronicles. We expect FDA approval in late summer. RD068-006 is also from our brilliant Head of Research and Development Dr. Robert Northey, which is indicated – which will be indicated for post-laser and chemical pills and again, we expect FDA approval this fall. And finally, TS-0216 and TS-0316 [ph], which our two additional in-license product candidates from Europe, both are atopic dermatitis that are showing great clinical promise when used in combination with our Alevicyn products. We expect FDA approval in 2017 for both. So we spent a few minutes on our successful scorecard for the first the first 12 months of our direct US dermatology efforts. We looked ahead to our full pipeline of new products. And finally, let’s spend a moment on our strategic overview, where are we going in US dermatology, especially from a revenue perspective in the next several years. Bob and I believe that with the pipeline of products I just described, combined with small additions to our growing US salesforce that we’ll generate $28 million to $35 million per year in revenue in the next 18 to 30 months and company-wide will be breakeven, excluding any future clinical trial expenses. As we said, we think that’s a good start – we think we are still scratching the surface. We believe that to achieve $100 million per year plus in revenue, we need to add a new drug application or NDA to our pipeline. To that end, we are starting two drug candidates. Our own R&D has formulated very interesting new topical products backed by solid new intellectual property and we are not going to share the IP with you today for obvious reasons, with drug indications for acne and atopic dermatitis. This spring and summer, we will be conducting proof-of-concept studies at several US clinics, expected to cost 100K each to help us determine the best pathway and to choose either the acne drug candidate or atopic dermatitis candidate based upon the efficacy and safety data. We will keep you posted on our thinking and of course on the data. Master of the obvious, but we will need to see compelling proof of principal data before we move into traditional Phase 1, 2 clinicals. We plan to share our proof-of-concept data with the Street if and when compelling in order to pay for our Phase 1 and 2 trials, which we estimate to be in the $3 million to $5 million range in total. If our Phase 2 data is compelling, we have some choices; we can either fund our Phase 3 ourselves, sell our rest of the world rights or even partner the entire opportunity at that time with a larger dermatology company. We are very enthusiastic about what’s coming out of our own R&D team, about our licensing efforts and the opportunities that lie ahead. Bob is our Stanford Grant and is again charting the if-then scenarios every which way to Sunday to make sure that this plan I just described is extremely well thought through. So in summary, Bob covered our numbers and provided guidance for the quarter ending March 31, 2016, I spent a few minutes on our scorecard for the first 12 months of our direct US derm efforts. We looked ahead to our pipeline of products, and finally, we described our pathway and timeline to achieve $28 million to $35 million in revenue per year and beat ahead is to how we believe that within the next five years we can reach $100 million plus per year in revenue. With that, operator, would you open the call for Q&A

[Operator Instructions] Our first question comes from Bob Robbins of Robbins Capital Management. Your line is open.

Thank you very much, gentlemen. That’s an extremely impressive array of products you’ve got and I just checked to see whether I missed the news releases. I don’t see releases on so many of these numerical products you’ve mentioned. Could you tell us more about the science that led to or is leading to these products? What are they? Are they antibiotics? How do they fit with microcyn or how do they add-on to or complement microcyn perhaps? Just tell us more about where we are going here.

Great question. Good to hear your voice, Bob. A handful of the products we described in the pipeline are hypochlorous acid are microcyn based, but our sales group is really starting to help us on the licensing process, identify new product candidates for their bag, for their sales bag. And let me spend just a moment on the licensed products that we're talking about. Two or three of these are specifically identified as new product areas by our sales force and by our customer base that we'd like to have in the bag. So, Bob, our Head of Sales, Jeff Day and I have been spending time with our Head of Research and Development, Bob Northey looking to in-license these interesting products. So we'll keep you posted. I don't think we’ve spent, to your point, very much time describing these products to shareholders, but as we get closer to launch, we will be sure to issue press releases and describe the science and even share clinicals. But we're really excited to start filling the bag with great products to complement our own hypochlorous acid and microcyn based products.

Okay, great. Very exciting.

Our next question comes from Laura Engel of Stonegate Capital. Your line is open.

Hi, good afternoon and thanks for all the information and sounds like a great quarter with new focus and you are off to a running start.

Thank you.

I wanted to see for someone just rejoining the story, can you give any color on how the revenue you talked about of the six products, maybe four are main products, kind of how that revenue is weighted or how big is that and maybe just a little color on the different areas as far as growth going forward, how quickly maybe each area will gain ground?

Okay. So our largest product in terms of scripts, let me first of all mention that the microcyn products which are our scar product, Celacyn which is our biggest seller, the Alevicyn is both a gel, actually there are two types of gels. There is a spray gel and a gel that comes out of the tube. And then there is a dermal spray product. All those are about $80 or thereabouts, $85 in terms of price. The scar product is the largest and represents - of those four it probably represents maybe 30%. My point being is that they are all relatively equal. The dermal spray is the least and maybe represents 15% or thereabouts of the total of the four. And then the two spray gels are the rest if you will. The no-touch spray gel that Jim described is the latest launch, is the smallest, but if you put them together, they represent the rest of that component, if you will. Now, the Mondoxyne that we just launched and just launched in October, November time frame in effect and that is a drug that we licensed and branded. A doxycycline type that’s priced at a generic price and that price tag is about $580 to $600 on a rack basis. So as you could see that's going to help our growth. It doesn’t take too many scripts in the growth of that to grow our revenue pretty nicely with that. And we expect that to be a fairly dominant dollar number in comparison to the others.

Okay.

Does that help? Did that answer your question?

Yeah. And then in the healthcare realm with the new partner, new products, the recent press release, what’s the direction of that as far as part your company and potential for growth and contributing to the top line?

Well, at this point it’s relatively small and we are actually working with some other people potentially in terms of partners that will occur in the near future. But we can't say much about it at this point in time, but SLA has been a good partner for us in the pet area, but the revenue has not been a major contributor at this point.

Right. Okay. And the product that was described as a derm product, is it going to be derm for everything or will there be other products under the animal healthcare if you are considering that as separate segment.

It’s interesting that you ask that question, Laura. The dermatology animal health products were specifically requested by our partner and customers, but we're also hearing about a handful of other opportunities and R&D is burning the midnight oil looking at other skin diseases in the animal health space. It could be really interesting, so apologies for doing this to you, but we will repeat what we told the previous questioner Bob Robbins. We will keep you posted on some of those new product opportunities, but they are not all necessarily derm.

Right, okay. Sounds good. Thank you.

Thanks a lot.

Our next question comes from Ray Mullaney of Mullaney Consultants. Your line is open.

Hi, gentlemen. Thank you for the terrific presentation and I am very pleased with the results. I think our colleagues before me got to most of the questions I had around the science actually. And I hope to learn more about that by reading and I want to applaud and congratulate you. You've done great work and I look forward to learning more about your company. So, no questions.

Thank you. Okay, thank you, Ray, and as you know, Jim and I are going to be in New York next week and we look forward to meeting you in person.

Great. We are having lunch on Monday and I am looking forward to it as well.

Yes.

Thank you, gentlemen.

[Operator Instructions] Our next question comes from Russ Huffington of Calton & Associates. Your line is open.

Good afternoon, gentlemen.

Hey, Russ, it’s been a while.

Yeah, good to hear your voice.

Just going through the release, just looking at some of the accounting things like SG&A, it was up 920,000. Could you just give me a brief explanation?

Yeah. Well, we've added since in comparison to last year, the December quarter last year, we had some of the sales people in, but we've added more sales people at this point in time. And we've also launched, since then, about three or four new products. So it's and quite frankly last year, we just hired the sales force in the middle of that quarter last year. So it didn’t reflect the full amount of the sales force. So, it’s really the salaries and differential in salaries and the cost in launching some of the products actually. And that's the primary difference, we’ve not taken on any other significant expenses.

Okay. And just one thing that Jim had mentioned and it's going to take 18 to 30 months to break even, is that what I heard right?

That is correct. At the same time, we’re being -- in terms of trying to get a breakeven forecast, we’re being fairly conservative and as we get closer and go through each quarter, we’ll try to fine tune that a little bit more.

Okay. Thank you, all. I appreciate it.

Thank you, Russ.

Thanks. Good talking to you.

Okay. Thanks, Russ.

Our next question comes from Art Mettle [ph]. Your line is open.

Hi, good afternoon. Yes. First question, the big show going down in Washington and Boston in the summer, are you guys going to be there, are you guys going to get a booth for it?

Are you referring to American Academy of Dermatology?

That’s the one.

Got you. We are attending, we will not have a booth, we like to campout across the street from the conference and have advisory board meetings and the like, but lots of customer time and face time at AAD. We very much look forward to the conference to learn and to talk to our customers.

Art, are you going to be there?

No, I will not. But I've been online and I've been reading. I'm familiar with it. I think it would be beneficial for the company to attend, but I understand that there are reasons you may not want to.

We definitely attend, we just don't pay for an expensive booth there. We use it as a hopping point to meet with our customers.

Sure, awesome. You got 6 million left, you're looking at breaking even in 18 to 30 months, how are the numbers going to work for that?

Well, at some point, not in the near future, we may need some additional cash, but it’s -- we don't -- we may need some additional cash to get us there.

Okay. Any guidance for the next quarter as far as sales.

We did give guidance actually and I will repeat it. As we said, for the reasons of the weak peso and warehouse consolidation down in Mexico, we expect it to be less than 3.8 million in total and that's our best shot out at this point. We want to try to be -- give a fair expectation of the next quarter to people and that's our best shot at this point in time.

The one thing I would add, Art, I think you may be new to the story or at least we haven't talked to you at this point, we do have a expert doctor call that we’ll be sending out invitations to, there will be a conference call on February 25th. Right through the close course of the market, we will have three dermatologists on it that will and it will be moderated by one of our analysts and then we will have each doctor talk about how we use our products and the benefits of our products and they’re going to take question so that you could actually get a chance to ask one of the doctors about the use of our product and the effectiveness.

Okay. And again for this Q, how many products are in the sales bag and how many sales reps do you actually have, including the managers as of today?

Yeah. So we will answer the first, we won’t answer the second. We have six products in the bag at the moment and we’re not going to share sales rep numbers or locations.

Okay. That’s fine. That's it for me. Again, thank you for answering and things sound great and I appreciate your time.

Thank you, Art.

[Operator Instructions] We have a follow-up question from Bob Robbins of Robbins Capital Management. Your line is open.

Yes. Could you comment on this new product announced January 14 in Europe, CE Mark product, says it’s four years, muco, what is it, mucolense, MucoClyns, correct me on pronunciation. If I use on mucous membranes, on mucous membranes, the more we get there into the mucous membranes and nasal cavity and so forth, the stronger the confidence of the regulatory authorities and the safety of this product. So I think that's highly significant, I don't recall anything like that being improved in the US. Could you comment on all that please?

Great question, and you’re dead on, Bob. MucoClyns, you pronounced it right and Dan, who introduced the call today was the creator of that unusual name, but it is intended to highlight the exact point that you pointed out that you can use our hypochlorous acid in microcyn technology in the mouth, in the nose, in the eyes, in Europe for the indication. Really excited by that product, because as you may know, the brave men and women who are first responders need a product to use on patients, but they also need a product to use on themselves and we've learned over the years that they often are so focused on the patient that they ignore the saliva blood impact to their own person. So really excited by that product opportunity and we’re looking to partner as we mentioned in Dan’s press release.

And in the US, you're looking to expand that in the next year to replicate that approval?

The US FDA process is significantly different than the CE Mark process. Frankly, we would love to get that claim in the US and we will work towards it, but no promise on timeline or the ability to get there.

Alright. Good luck with that.

Thank you, Bob.

Our next question is a follow-up from Ray Mullaney of Mullaney Consultants. Your line is open.

The MucoClyns product, was tried on sinus infections?

Yes.

And?

Yeah. It is indicated as a first responder first-aid product, so that the goal is to reduce microbial load in those mucous membrane areas where first responders need that help. So, we’ll stay on label in Europe and we will keep our answer on label to you today, Ray, but yes, CE Mark notified body approved our product to reduce microbial load in those mucous membranes, including the nose.

Wonderful.

There are no further questions. I’d like to turn the call back over to CEO, Jim Schutz for any closing remarks.

Hey, thank you all for joining us today and as Bob mentioned, if you can, we look forward to you joining us on February 25 at 1:30 PM Pacific Time for our expert doctor call. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.