Sonoma Pharmaceuticals, Inc. (SNOA) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Oculus Innovative Sciences Fiscal Fourth Quarter 2016 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Dan McFadden. You may begin.

Thank you, Latoya. Good afternoon and thank you for joining us. With me on the call today are 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 fiscal year followed by Jim’s update on the business strategy moving forward. This afternoon, Oculus issued a press release detailing fiscal fourth quarter 2016 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is oculusis.com or you can call Investor Relations at 425-753-2105 and we will 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 as expect, to expand, would and anticipate among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risk inherent in the development and commercialization of potential products, the risk that potential clinical studies or trials will not proceed as anticipated or may not be successful, or sufficient to meet regulatory standards, or receive the regulatory clearance or approvals. The company’s future capital needs and its ability to obtain addition 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 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, Bob Miller.

Thank you, Dan. I will 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 for our derm strategy and our overall financial results for the fiscal year and fourth quarter ending March 31, 2016; and lastly, we will provide some revenue guidance for first quarter ending June 2016. First of all, we have 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 the U.S. with our direct dermatology sales force. Secondly, what are our key strategies to ignite revenue growth for fiscal year 2017? Our key strategies for growth for the rest of this fiscal year, which have been the same since the beginning of 2015 are the following. The number one strategy is to focus on growing revenue in the U.S. dermatology market with our direct sales force and a robust product line – product pipeline with both Microcyn and non-Microcyn products. The U.S. dermatology segment provides us with the largest potential growth 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 was 66% of our product revenue for fiscal year 2016 and generates cash to help 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 in a few minutes. What have been our financial results of our dermatology focus starting in October 2014 through our fourth quarter ending March 31, 2016? As a preface to discussing these dermatology results, starting from scratch in late 2014, we have built a strong dermatology foundation over a year and a half upon which to continue to grow. One, we now have 20 plus experienced field salespeople, directed by three highly talented senior managers, each with over 20 years of sales and marketing dermatology experience. Number two, we now have 7 new unique and effective prescription dermatology products, a strong and growing product portfolio with Microcyn and other technologies. Number three we now have a strong base of over 550 consistent dermatology large prescribers. Number four starting from zero, in late 2014 until the end of March 2015 we have filled over 33,000 prescriptions to dermatology patients. There are several ways to measure our success in the derm market. One is the sales of our products, which are recognized as revenue when shipped to the wholesaler distributors. This is the common way of recognizing revenue and is reflected in the following reported revenue. Our total U.S. product revenue was $356,000 for the September quarter 2014, $615,000 for the March quarter 2015, $787,000 for the June quarter, $1.2 million for the September quarter 2015, and for the recently reported quarter $1.4 million for the March quarter. This method of recognition tends to be driven by the product load-ins to the wholesalers. More specifically, our U.S. dermatology product revenue was $832,000 for the quarter ending March 31, 2016 compared to $326,000 in the same period last year, an increase of $497,000 or 152%. For the fiscal year 2016, U.S. dermatology net product revenue was $2.6 million, up $1.8 million or 220% from $815,000. While we recognize our derm revenue, when we ship to the wholesalers, as I mentioned earlier, a second method to objectively gauge the Oculus dermatology performance is the number of prescriptions sold to patients, via the pharmacies multiplied times of price paid to us by the wholesalers. This is sometimes called demand dollars. This information is available to the public for a fee via several well-known databases. According to the Symphony monthly data, the total prescriptions sold to patients via the pharmacy times the average price paid by the wholesalers for all of our derm products to give you a sense of our quarter-over-quarter derm growth, was $151,000 for the March quarter 2015, $227,000 for the June quarter, $331,000 for the September quarter, $631,000 for the December quarter, and $1 million for the March 2016 quarter. This represents an average quarterly growth of 62% for the last four quarters. Please keep in mind that wholesaler fees, rebate fees and return reserves are deducted from gross revenues or gross demand dollars to derive a net revenue number. One way to keep this revenue growth trend going is via the introduction of new products. In fact, as I mentioned earlier, during the March quarter, we sold Ceramax, a skin repair product for atopic dermatitis to the wholesalers. Our target is to launch at least one new derm product per quarter. Jim will talk more about our pipeline and new products in just a few minutes. To give you a sense of the impact of the growth of dermatology sales on Oculus, the product revenue in the U.S. as a percentage of the total product revenue has grown to 43% in the March 2016 quarter, up from 19% in the same quarter last year. The bottom line is that for the last four quarters, the execution of our strategy to focus and grow the dermatology business with the direct sales force has been effective, meaningful and shown a significant tangible impact on our overall financial results. Moving now to a review of our financial results for the fiscal quarter 2016 and covering only the highlights with the details in the press release. Total revenues of $15.1 million increased by $1.2 million or 9% for the fiscal year ended March 31, 2016, as compared to $13.9 million for the 12 months ended March 31, 2015, despite a decline of $2.1 million in licensing and royalty fees. Product revenues of $13 million increased $3.1 million or 31%, when compared to the same period in 2015. This increase was a result of strong product revenue growth in the United States of $2.4 million or 121% and rest of world up $799,000 or 27%, partially offset by a 2% decrease in Latin America due to the decline in the peso. Operating loss less non-cash expenses, EBITDAS for the 12 months ended March 31, 2016 was up $3.3 million due to the cost of the direct sales force in dermatology. For the full fiscal year 2016, the 31% product revenue increase of $3.1 million, caused by growth in dermatology and international segments, more than offset a $2.1 million decline in licensing and royalty fees resulting in a 9% growth in total revenue. The quarterly licensing and royalty fees have been reduced to almost zero and thus the drag from this decline on our total revenue growth will be negligible going forward. Now looking at the results for the quarter, total revenue was $3.5 million for the fourth quarter, a decrease of 11%, when compared to $4 million for the same period in 2015, due to a decline in royalty and licensing fees of $390,000. The product revenues were flat with the same period last year with strong growth in U.S. dermatology sales offset by a decrease in revenue from Latin America. More specifically, during the fourth quarter, U.S. product revenue increased $765,000 up 122% to $1.4 million, mostly related to an increase in dermatology product revenue and higher sales through our new animal healthcare partner. On the other hand, international product revenue decreased $787,000 or 30% to $1.9 million from $2.7 million caused by decreases in sales to Latin America, due to a 22% decline in peso, a very robust quarter last year and a warehouse consolidation. Furthermore, revenue increases in Asia and Europe were mostly offset by lower revenue in the Middle East. Operating expenses minus non-cash expenses for the fourth quarter were $4.1 million, up $850,000 compared to the same period last year. The increase in cash operating expenses was due to the higher sales and marketing expenses in the United States related to the cost of our direct dermatology sales force and seven new product launches. On the balance sheet, our cash position at the end of March was $7.5 million and our long-term debt was zero. How do we do compared to our guidance for the quarter ending March 31, 2016, the following has provided to you on the last earnings call “a general guidance that our total revenue for the quarter ending March 31, 2016 will be less than $3.8 million due to weak peso and lower volume related to warehouse consolidation in Mexico, we expect the U.S. product revenue will continue to grow in the 50%-plus range for the quarter ending in March.” As we already mentioned the total revenue for the March quarter was less than $3.8 million caused by lower revenue in Mexico, as we also mentioned before the U.S. product revenue for the quarter was up 123% well over 50%. What is our guidance for the June quarter, for the June quarter we expect total revenue to be in the $4 million range with U.S. revenue growth of 50% plus led by growth in the dermatology segment. As we mentioned on previous calls, 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 about $20.5 million, if one deducts the $7.5 million of cash from the market cap, the ratio of the adjusted market cap of $30 million, compared to fiscal year 2016 product revenue is about one to one. For the fiscal year 2016, as I mentioned several times, product revenue grew at 31%. The multiple of market capital revenue for the typical derm companies tend to range from 3x to 5x to 6x. Thus a potential investor can benefit not only from strong derm product growth, but also the potential expansion of the multiple. With that, I will turn it over to Jim.

Thank you, Bob. We promised shareholders in late 2014 that we would execute on the strategy with four key steps that we continue to believe will transform the company. For my portion of today’s call, I will cover each of those four key strategic initiatives and then breakdown one, what we promised two, how we are doing to get that promise and three, take a brief look at the future. So first, we promised shareholders that we were going to pick U.S. dermatology as our core market, with our own direct sales force using our Microcyn technology as the cornerstone, building a pipeline of unique affordable and branded products. So how are we going in that first step, as Bob said, we now have 20-plus salespeople, selling seven prescription products and our U.S. derm sales revenue grew more than 120% in the last 12 months. So what’s the future of our U.S. dermatology efforts, we would eventually want to like to get to that 35 sales reps range covering 3,000 to 5,000 dermatologists in the United States and adding one to two new reps in new territories each quarter to get to that 35. Our sales team is enthusiastically looking for to our first product for the esthetic dermatology space. As you may remember, we just received an approval for Lasersyn a product for post lasers, chemical fields and derm operations. Something we believe will be great play in the aesthetic dermatology space. We forecasted our U.S. derm revenue is going to grow more than 50% over the next 12 months. So step two in our strategic plan is that we promised shareholders that all of our non-core markets, you may remember non-core markets are Latin America, Europe, Asia, animal health and our own advanced wound care businesses. We promised all those non-core markets will be breakeven by now and throwing off cash so we can grow our core market U.S. dermatology faster. So how have we done on that step two promise, we are pleased to report that all of our non-core businesses Latin America, Europe, Asia animal healthcare and our advanced wound care businesses were all breakeven as of June 30, 2016. So what’s the future for our non-core businesses, the team continues to work diligently on taking our terrific U.S. line of products and monetizing them around the world. We sell in more than 42 countries and in particular, we are starting to show growth in our international dermatology product sales in Asia and the Middle East. We look forward to Latin America and Europe picking up steam in our derm partnering efforts soon. Step three in our strategic plan is that we promised shareholders that we would diversify into non-microcyn based technologies via license or acquisition to become a multi-technology dermatology company. So how have we done on that step three promise, as you may remember, we in licensed Ceramax from a well known European formulator with an FDA claim for atopic dermatitis. We finalized the license, achieved an FDA approval and launched Ceramax in April. Our sales team believes Ceramax could become our top seller in the next six months. We also acquired U.S. marketing license to Mondoxyne and NDA indicated for severe acne. Mondoxyne has become our best seller by dollars and is supported by robust clinical trials. So what’s the future for our step three, which was to diversify into non-microcyn based technologies. We recently finalized a license for our third product from a German pharma company as the descaler for atopic dermatitis and eventually psoriasis. We hope to file with the FDA this summer and are planning our sales launch within about six months. We also licensed two more interesting European products for our pipeline and we will provide more information in the future. Stay tuned for more products here, more new products here. Our approach with these innovator companies, especially outside the United States has become a real plus. We can now tell these innovator companies, we have 20 plus U.S. sales people, and our territory footprint is growing every quarter. What do you have that we can put in the bag and sell here in the United States? Finally, we promised shareholders in our fourth and final step in our strategic plan is that we would identify orphan drugs or low-cost NDAs to develop for our growing sales team to sell in the future. So how are we doing in that fourth and final step? We filed an interesting orphan indication with the FDA earlier this spring and hope to have news we can share with you on that orphan designation for rashes associated with – excuse me for rashes associated with certain chemotherapy agents. And again we will keep you posted on news as it becomes available. We are also enrolling patients in North Carolina for a proof-of-concept trial for the use of an interesting new hypochlorous acid-based topical formulation from our own R&D for moderate acne. Again, we will keep you posted on clinical results shortly. In summary, we will continue to grow in four ways. One, we will grow by selling more of our current 7 products, and remember please that we are selling Alevicyn and Ceramax product lines for atopic dermatitis, Mondoxyne for sever acne and Celacyn for scar management. The second where you want to continue to grow is by adding additional products to our sales bag. And as Bob mentioned, our target is one new product per quarter, including SebDerm for seborrheic dermatitis, the skin descaler product that we licensed from this German pharma company, and Lasercyn for post-laser chemical peels and dermabrasion procedures. The third way we will grow is by adding new sales reps in new territories. And finally, our fourth way we are going to grow is by gentle price increases. Thus far, using these four growth tools, we have grown our U.S. derm business, as Bob said, at an average quarterly growth rate of 62% for the last four quarters. Going forward, we will use the same four growth tools to keep our U.S. derm business growing at more than our forecasted 50% over the next 12 months. So, Bob covered our numbers and provided guidance for the quarter ending June 30, 2016. I covered each of our four strategic steps that we were working on to transform this company, and then for each broke down what we promised how we are doing against that promise and then a brief look at the future. So with that, operator, please open the call for Q&A.

Thank you. [Operator Instructions] The first question is from Laura Engel of Stonegate Capital. Your line is open.

Thank you. Appreciate all the detail. Love the U.S. sales ramp that’s looking great. I had just a few questions. So, tell us a little bit about the sales team as far as the numbers you have added, the performance you expected versus what you have gotten? And then, how they are penetrating these new markets with what’s currently in their bag for sale versus what the expectations were?

So, we initially started out with about 10 and as – we have been adding, periodically on average one or two a quarter and we are now up to 20. We have done an analysis of rate of return on our salespeople, which we do every quarter and for the quarter ending March, we were in a position to cover all of their cost, their direct cost. And so we feel like we have done a good job of covering that big expense item and we will continue to grow it to get that business to breakeven and then continue to grow that business to get to breakeven. Now, did you want a little more detail on the salespeople? Most of the salespeople are people that we initially hired. A couple of people that were not, that familiar with derm. And we fairly quickly replaced them with people that are familiar with derm and have a book of business and we – even though we have to pay them a little more we found that, that is far better approach and they go up to ramp. The sales ramp is generally in the 6 to 9-month period for a salesperson. It’s pretty quick in dermatology. That’s a little more color. Anymore specific questions?

Yes, no, no, no, that’s great. Just trying to get a feel for how that’s breaking up. And then related to the Latin American numbers as far as do you expect any additional issues with Sanfer and the warehouse closings? And going forward, how should – how should we and how are you kind of thinking about the Latin American segment?

Well, we are very bullish on our partner. In fact, their Sanfer Laboratories, we have told them that this is public information. It is very interested in going public down in Mexico. And they are a 400, 500 and actually they maybe bigger than that now, because they acquired another company, a good company. They are our powerhouse. Now, when they acquired More Pharma, which was our partner, they acquired a number of warehouses, which they closed down in the quarter in March. And as a result of that, they didn’t need as much in the way of units, so they cut back on what they purchased. They have told us that, that’s over. They have given us reasonably good forecast for the rest of the year in local currency. Obviously, there is an impact of peso on our revenue growth down there, even though we are in a pretty square position overall from the peso perspective. So, we would expect it to see a return to normal, if you will and then over the years see unit growth in Mexico.

Okay. And then I am also interested and I didn’t hear you mentioned any update from the animal healthcare business?

Well, we used to happen to have an animal healthcare guru on the line with us. Dan, you want to jump in?

Sure, this is Dan. On the animal wellness, guru or czars as Jim refers to, we are very happy, we have if you have read previous press releases we partnered our U.S. and North American animal health care with Manna Pro out of St. Louis, great private company doing very well. And even though we don’t breakout our financials separately for the animal health, they are doing a great job, have placed us in a national farm and ranch chain with over 1,500 locations with 9 of our SKUs. So, it’s all looking great. We are seeing the numbers grow quarter-over-quarter. At the same time, we are now expanding our footprint into Europe. We just returned from Interzoo and then, in the U.S. we have Superzoo coming up in August. Also we are now starting to focus on the ethical market going after the North American veterinarians. So, number of opportunities there and we think they are all really robust opportunities.

Great. Well, I appreciate the information. I will hop back in the queue and let some others have a shot at it. Thank you and again great information and impressive sales.

Thank you.

Thank you.

Thank you. [Operator Instructions] I am not showing any further questions in the queue. I would like to turn the call back over for any closing remarks.

Hey, thank you very much for joining us. We look forward to talking to you again in the earnings call in August for the quarter ending June 30, 2016. Thanks very much.

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect.