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Oculus Innovative Sciences, Inc. (NASDAQ:OCLS)

Q4 2014 Earnings Conference Call

June 12, 2014 05:00 PM ET

Executives

Dan McFadden - IR

Jim Schutz - CEO

Bob Miller - CFO and COO

Analysts

Dan Trang - Stonegate Securities

Bob Robbins - Robins Capital Management

Operator

Good afternoon. And welcome to the Oculus Innovative Sciences Fiscal Fourth Quarter 2014 Conference Call. My name is Karen and I will be your coordinator for today's conference. At this time all participants are in listen-only mode. At the end of the call we will be holding a question-and-answer session with company management. (Operator Instructions) As a reminder, this call is being recorded for replaying purposes.

I will now turn the call over to Mr. Dan McFadden. Please proceed, sir.

Dan McFadden

Thank you, Karen and good afternoon. And thank you to everyone for joining us today. With me on the call 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, as well as for the year following by Jim Schutz’s update on current activities, as well as our business strategy moving forward.

This afternoon Oculus issued a press release detailing fiscal fourth quarter and fiscal year-end 2014 financial results and recent corporate developments. The copy of the release can be downloaded from our website which is at oculusis.com, that's O-C-U-L-U-S-I-S dot com, where 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 does contain 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 risks detailed from time to time in the company's filings with the Securities and Exchange Commission included in 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 said, I will now turn the call over to, Bob Miller, our CFO/COO.

Bob Miller

Thank you, Dan. I’ll first discuss how we did in our guidance for the fourth quarter ending March 31, 2014. Secondly, provide guidance for the first quarter ending June 30th. And lastly, to summarize our financial results for the fourth quarter and discuss the impact of the Ruthigen IPO transaction on Oculus.

How did we do on our financial guidance for the quarter ending March 31? We provided guidance for total revenue of in the range of $3.2 million and achieved $3.9 million. We provided guidance of the $2.9 million range for cash operating expenses and spent $3.2 million with $570,000 spend on Ruthigen which was repay.

We also provided guidance of in the range of $900,000 negative for EBITDAS and had a $1.7 million negative including Ruthigen expenses and $1.1 million without Ruthigen expenses.

What is our guidance for the quarter ending June 30, 2014? For the quarter ending June, we expect total revenue to be in the range of $3.1 million, cash operating expenses in the $2.9 million range and EBITDAS to be in the range of $1.2 million negative.

Moving now to the summary of the results for our fourth fiscal quarter ended March 31. Instead of repeating our financial results, which already written in the press release similar to what I have done in the past, I will only cover the highlights of the financials and then also talk about the impact to the completion of the Ruthigen IPO on the Oculus financial statements.

Product revenue were down 16% compare to the same quarter last year with decreases in U.S., Mexico, China partially offset by revenue growth in Europe, Middle East, India and Singapore. The decline in quarterly revenue growth compared to last year was primarily the result of three factors.

The decline in one, the animal health care business due to impacted increased competition, lower prices and a severe winter weather; two, dermatology sales due to the discontinuance of one of our U.S. dermal partners and integration issues with Quinnova which was recently acquired by Chemo, and three, More Pharma sales due to some issues with one of their key distributors and lower sales of the HydroGel products.

Gross margins were down to 52% from 69% due to decline in the higher margin sales in the U.S. Partially offset by higher international margins. Operating expenses not as non-cash expenses for the fourth quarter were $3.2 million, down 185,000 from $3.4 million. Operating expenses minus non-cash charges and Ruthigen expenses for the fourth quarter were $2.6 million, down $298,000 from $2.9 million in same period last year through the lower SG&A and R&D expense in the U.S.

On the balance sheet, our cash position at the end of March was $5.5 million and our long-term debt was $4000, in effect we’re debt free. As you probably know, we’re not happy with our negative revenue growth for the quarter and year regardless of the reasons. Our major initiative for fiscal year 2015 is to restore our revenue growth rate by launching new products in U.S., Europe and Mexico.

What are some of the key product launches, which we can positively affect, that can positively affect this growth? One, More Pharma is in the middle of launching new products in the oral/dental area and will be launching into the scar markets after they complete a supporting clinical study as well as expanding into additional Latin American countries. Revenue for Mexico represents 43% of our total product revenue for the quarter. On average over the next several quarters, we expect the Mexico product revenue to grow in the range of 10% to 15% compared to the same type period last year.

Number two, in the U.S. dermatology market. We will be launching two new products in late 2014, one of which is the scar management product in the U.S. wound care markets. We transfer the wound care sales early this year in January from our key care partner Eloquest to our 15 salesperson force. And we’re now re-launching the wound care products including an innovative 3 oz. hydrogel spray and a patient friendly and economic 2 ounces spray solution that they focus on the wound care centers and hospitals.

Number three, in Europe, we received additional CE marked approvals for one mild-to-moderate acne, two, a wide range of oral and dental applications including the mouth rinse, and three, a variety of prescriptions SKUs for advanced wound care Microcyn solution and the HydroGel.

We have launched the new advanced wound care products through our 10 wound care distributors in 11 Europe countries. In addition, we will be launching into the oral and dental and the dermatology markets in Europe through a separate network of distributors, which we’ll be working on during the second half of this year. In dermatology in Europe, we expect to receive additional clearances for atopic dermatitis, scar and dermal procedures in the near term providing us with a very strong derm portfolio.

International revenue excluding Mexico represents 21% of our total product revenue for the quarter. We expect our international revenue excluding Mexico to grow a 20% plus over the next several quarters. In total, we have six to ten new product launches scheduled in U.S., Europe, and Mexico for this fiscal year, which we believe will restore our product revenue growth for this fiscal year.

As most of your aware our wholly owned subsidiary Ruthigen completed its IPO on March 26, 2014, right before our fiscal year end March 31, launching impact of the Ruthigen IPO on our future cash and financing. First of all Ruthigen paid us $1 million at the time of IPO reflected in our cash position and 0.5 million several weeks later as repayment for some of the financial support we provided to Ruthigen. Secondly, Ruthigen owes us $8 million of milestone payments related to the achievement of certain clinical milestones. The first one is for the $1.5 million upon the enrollment of the lab patient in Phase I, II, which is expected to occur in the first half of calendar year 2015 in fact Ruthigen issued a press release about that today.

Number three, we owned 2 million shares of Ruthigen which have a market value of 12 million to 14 million based on the Ruthigen stock price on the NASDAQ even though there are certain restrictions on our sale of these shares. We expect that at sometime over the next several years, we will be able to sell these shares and use this cash to develop our businesses, in other words, non-diluted funding. Since distribution of Ruthigen shares of a taxable event to both the investor and Oculus, we do not think it is economically proved to distribute the shares at this time.

Where is the impact of the IPO on our financial statements? As you can see from the financial statements that were released, Oculus had other income gain through the income statement of $11.1 million, which causes a very nice increase in our net worth to $12.2 million. There are two factors that account to this. The largest factor is the value of the 2 million Ruthigen shares which Oculus owns. The calculus, we had a valuation expert complete an analysis of the appropriate discount rate, since the shares are not raised showing that that’s not tradable. As we were viewing this with the auditors there was a 30% discount applied to the shares. Thus 2 million times 7.25, times 70% related to the discount equals $10.1 million; thus contributing $10.1 million to the total $11.1 million gain in our income statement. And reduction of the total Ruthigen balance sheet of 3.3 million, once the Oculus investment with Ruthigen of 2.3 million, at the time of the IPO, Ruthigen lead to assume about $1 million of liabilities which produced this gain.

With that final confusing accounting comment, I will turn it over to Jim.

Jim Schutz

Thank you, Bob. I'd like to cover up a few topics before we open the call for Q&A. We exhaustively updated shareholders over the past 18 to 24 months regarding the Ruthigen IPO and as Bob mentioned the IPO occurred late March 2014 and Ruthigen’s management team and their new board are now actively focused on moving their clinical trials. So this is good news for Oculus for four reasons. One, it’s a great validator, another great validator of our Microcyn technology and in particular RUT58-60. Two, as Bob mentioned, Ruthigen will be paying ongoing clinical milestone payments of up to $8 million. Three, once their new product is commercialized, once through the FDA Ruthigen will also pay Oculus ongoing royalty payments. Four, we can now focus our entire attention on our own business including a broad spectrum of new Microcyn applications, products and territories.

This is truly an inflection point or watershed moment for us during which we intend to make a number of refinements to our business strategy going forward. As a whole, these refinements or course corrections if you will, are designed to return Oculus to the double-digit revenue growth, over the long-term that we weren’t growing accustomed to. But beyond that we believe it also provide us with opportunity to expand our technology portfolio beyond our current markets and even beyond our current Microcyn technology platform. In setting into due course, we have been asking ourselves some difficult questions and I will note just a few of them.

Are we going to delay the achievement of short-term breakeven in an effort to build a stronger more diversified company in the longer term? Are we willing to invest the resources needed to expand beyond the advancement and care in dermatology and bring the Microcyn technology to other healthcare disciplines? And the last one is partnering our technology, our best route, or might maybe better serve to expand our own sales force? To that last question, let me address that issue for a moment. With one’s first handed partnering of various products and indications is a double sided sword.

Partnering has gotten us this far, that Bob and I believe, may be an impediment to the future growth. Partnering allowed us to keep our costs down initially and provided initial revenue that often exceeded our own projections. But we’ve also experienced the lack of control over our key products in these relationships. And at times we’ve not been able to control the level of our partners’ marketing and sales activities, and as such sales levels are not as robust as where we think they should be. As a result we determined that it best suits us longer term to bring many of these products opportunities back under our control, migrating from the partner model that has been our focus for the past four years and one that makes sense taking those marketing and sales efforts in-house to our internal marketing abilities.

As part of this transition, we will be moving out animal healthcare partner and [Indiscernible] through a non-exclusive agreement. While this will reduce our animal health royalties initially, in doing so, we hope the license our [indiscernible] animal health care products to perhaps a larger more significant one. So how about your nuts and bolts? What are we doing , as Bob mentioned to reverse the recent decline in revenue, both short and longer term.

First, we continued to preach to the team our three phrase mantra that we’ve employed successfully at previous companies. One, new products; two, new territories; and three, new people. Specific of the new people; very enthusiastic about some new distributors that we picked up in Europe, Asia, the Middle East and the growth of our own sales team. Second, as Bob mentioned, we have 6 to 10 new product launches in fiscal 2015, in Europe, Mexico and the U.S. including an oral and throat antiseptic that we are excited about in Mexico. And scar management products in various territories that we make our short-term paths to increasing our revenue.

And third, in the longer-term while we’re not in a position to announce all of the new strategic changes on today’s call, we look forward to sharing with you some exciting news before the end of the year regarding longer-term structural changes that we believe will deliver longer-term sustainable growth that will transform Oculus into a diversified healthcare company with multiple technologies.

So we covered the numbers, a confusing accounting treatment of the Ruthigen IPO transaction, we discussed short-term adjustments to increase our revenue and offer the peak ahead in our longer-term structural changes that we think bode well for our future growth.

Now we’ll be quiet and ask Karen the operator to open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Dan Trang from Stonegate Securities.

Dan Trang - Stonegate Securities

Jim you mentioned the double-digit revenue growth. I was wondering if you could give any color as to when you guys think that might occur timeframe wise.

Bob Miller

Yeah, hey Dan this is Bob. We think that a number of these new launches we’re talking about occurring later on in the fiscal year in the second half. And so we would suspect that will give us some growth. But the stronger double-digit growth are going to be in the years after that in general. We’ll see that pick up somewhat this year but most of the double-digit growth will occur in the following years actually.

Dan Trang - Stonegate Securities

And now that you’re moving innovations away from the agreement you had previously. What kind of growth can we expect from innovation in this as a result of this?

Bob Miller

As the earnings press release mentioned, we’re discussing a transition agreement with them at this point. The timeframe with that at this point and discussions is over the next 12 months. So we would envision that they would probably be phased out over that time period and then it’s a question of new partner and revenue relating to a new partner at that point. And so it’s really difficult for us to give you any specific time period that point.

Operator

Thank you. Our next question comes from the line of Bob Robbins from Robins Capital.

Bob Robbins - Robins Capital Management

Thank you for your presentation, tough quarter. What I want to try to focus on is the short fall in revenues for you to try to tell us more about, it sounds like a fair amount of it was with More Pharma and their short fall and then the reorganization involving Quinnova. Was any of this foreseeable? Was this just unlucky perfect storm, put that in context words please?

Jim Schutz

I think in terms of the dermatology, we knew that they were that purchase I think occurred in December there about last year with Chemo. We were hoping that it would just get flowed right through but there were a lot of changes that occurred, a lot of transition issues that occurred relaying to that acquisition. It had a negative impact on our revenue. And that was probably an equal amount with the drop off in the animal healthcare business, which mostly occurred as a result of the worst storms and the reduced pricing the reduced volume that we saw.

Bob Miller

And I can answer Bob the more pharma question for those who aren’t paying us close attention as Bob does, More Pharma, our Latin American partner. More Pharma’s revenue is off bit for this quarter but to your question surprise or anticipated our international team and I were just in Mexico City More Pharma and a big issue for them in the quarter ending March 31st, was the sale of Casa Saba, which is one of the larger healthcare distributors south of the border, that was a surprise to More Pharma, it was even a bigger surprise to us being a step removed from that relationship. And we believe that caused More Pharma and therefore our sales to at least on a short-term be negative to impact.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Renold Smith from Marigold (ph).

Unidentified Analyst

It really has. I’ve a few questions because that’s the really -- jump in here before. On Kinetic Concepts and that they’re announcing through that study that Microcyn was one of only two products for advanced wound care that passed muster. When is that going to kick-in in a big way?

Jim Schutz

Well, great question. For those of you who don’t know what Ron is talking about KCI is a very large Texas based wound care company with one of the biggest products in wound care negative pressure wound therapy NPWT and they just sponsored a study for Microcyn was one of two products as Ron mentioned approved for use of one of their next generation product. So, right now Ron both in Europe and in the U.S. their relationship has never been stronger with KCI, we get telephone calls on a weekly-daily basis through some advertising that Dan, who started today’s calls off, has put together. I attended wound care conferences both in Europe and in the U.S. this spring and was very pleased to see the working together with KCI and the reaction from our customers.

Unidentified Analyst

Is this in terms of numbers, in terms of increasing Oculus’s revenues, is this anything that could happen in a big way in the next six months was this long-long term?

Bob Miller

So we’ve been seeing very -- actually very strong growth in our U.S. wound care business since we’ve taken it over in January from Eloquest and we continue to see and we have a 15 person sales force that’s aggressively working with KCI in supplying product and working within hospitals. We’re finding that we’re getting introduced and getting requests for bids from a number of hospital organizations and we expect to see continued strong growth in the wound care business.

Unidentified Analyst

Does your relationship with KCI preclude you from also going after business with Smith & Nephew?

Jim Schutz

No.

Unidentified Analyst

So everybody -- so the $6 billion plus wound care market you get the working with all of the three majors or more, is that correct?

Jim Schutz

Yeah, we like to consider it Swiss like position that we’ll work with them all.

Unidentified Analyst

Now on the 15, the 15 salesmen that the program and nucleus that you initiated, does that lead to the possibility of putting different units in different parts of the country and would it be breakeven to start out with and then moving forward in other words is there any reason why you haven’t move fast further than the 15 original sales people?

Jim Schutz

Well, I think it’s we like to see the growth occur and then we’ll add more sales people if that’s what you mean. We do plan to add some more sales people on that arena and continue to grow it. The other thing that we’ve seen we are not planning and nor do we need to run the expanse different locations to manufacture the product. We’ve got more than sufficient capacity to cover the entire United States out of our manufacturing facility in Petaluma at this point. So we don’t need to incur that. The other thing I would say is that we were in a one of the larger wound care conferences couple of months ago and Microcyn or the hypochlorous acid product where we do have some competitors is becoming an extremely popular technology at this point and is getting a lot of visibility and people are seeing the real benefits of HOCL and we expect that to continue to be result in pull through for the growth of the revenue.

Unidentified Analyst

As far as you were in Mexico recently, this new product for infections for the throat, are they noticing any specific reaction from the doctors and positive reaction, what is the -- is there any picture going forward of what that could look like?

Jim Schutz

Stay tuned. As we’ve mentioned in the press release and we’ll be consistent on this call the product is being rolled out as we speak throughout pharmacies throughout Mexico and we’re very pleased to see those numbers. And next time we speak Ron for the quarter ending June 30th and the August time frame we’ll give you a clear update.

Unidentified Analyst

Now as far as Europe is concerned could you give us any kind of time line of when that product might be approved or the scar product would that be about the same time and this is this in the near future?

Unidentified Company Representative

The additional approvals that I talked about in terms of dermatology which include atopic dermatitis and scar should be coming in the next couple of within the next quarter. They should be sooner rather than later. It’s difficult to forecast approvals, regulatory approval sometimes, but we have some, a lot of strong approvals that we’re seeing in the derm areas I mentioned. We need to build up a distribution network like we’ve done in the wound care side for derm, which we’re planning to do that will take time. And we would actually be doing the same type of build up with local distributors for the dermal areas as well. And we would have a good strong dental, we actually have a dental approval, oral approval in Europe, at this point we’ll be adding coins (ph) to that approval over the next several months.

Unidentified analyst

Now you say you have an oral approval would that include the product that Mexico has.

Jim Schutz

Ah, yes.

Unidentified analyst

You have that right now?

Jim Schutz

Yes, we have that right now, now we’re beginning some additional claims in the oral over the rest of the year. So we’re adding to the claims, but we have an oral approval, we can sell an oral product, as well as dental products into Mexico and into Europe right now.

Unidentified analyst

As far as the, is it Innovation, the animal health, that company.

Jim Schutz

It’s now Innovacyn.

Unidentified analyst

Innovacyn, they introduced a product called Articyn, will they be continuing to use your product as, you know for Articyn and for Puricyn and what they’ve been doing or are they planning to substitute somebody else’s products for that.

Jim Schutz

Good question and good memory on the word Articyn, Articyn is the product… go ahead.

Bob Miller

Articyn, I’m sorry I interrupted you but that’s for people who have tattoos and things like that.

Jim Schutz

Exactly, exactly. So as Bob mentioned we’re in discussion on a transition agreement, and Ron I’m sorry to be a broken record but stay tuned, we’ll give you a lot more update in the August timeframe as the transition agreement takes full form.

Unidentified analyst

Now this is a question that’s been on the back of my mind on Ruthigen for some time and I don’t know if you can talk about it or not but Ruthigen has arrived to use your technology for seven different areas. What about other areas in the world outside of the seven areas, what would that look like.

Jim Schutz

The license agreement with Ruthigen allows them to use our intellectual property for certain target indications in the US, in Europe, Japan and as I sit here Bob I forgot, is Canada on their or not. Canada shouldn’t be an afterthought but for the moment I can’t remember, Ron. But the rest of the world is ours.

Jim Schutz

They have the licensing for a surgical lens product. And that’s the primary application for the Ruthigen and they’ll be going through the clinical trials for a surgical lens in the abdominal area. Now they do not have -- that’s their primary application. They don’t really have a broad set of other applications.

Operator

Thank you, (Operator Instructions), and I have no further questions at this time.

Jim Schutz

Thank you all for joining us today. We look forward to speaking to you in August.

Operator

Thank you, ladies and gentlemen thank you for your participation in today’s conference, this does conclude the program and you may now disconnect. Everyone have a good day.

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