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Oculus Innovative Sciences, Inc. (NASDAQ:OCLS)

Q1 2015 Earnings Conference Call

August 7, 2014 4:30 p.m. ET

Executives

Dan McFadden - VP of IR

Bob Miller - CFO/COO

Jim Schutz - CEO

Analysts

Dan Trang - Stonegate Securities

Operator

Good afternoon, and welcome to the Oculus Innovative Sciences Fiscal First Quarter 2015 Conference Call. My name is Janine, and I'll be your coordinator for today's conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Dan McFadden

Thank you, Janine. Good afternoon, and thank you everybody for joining us today. With me on the call today are our CEO, Jimmy Schutz; and our CFO/COO, Bob Miller. We'll open the call with Bob Miller's review of our financial results for the quarter, followed by Jim's update on current activities as well as our business strategy moving forward.

This afternoon Oculus issued a press release detailing fiscal first quarter 2015 financial results and recent corporate developments. A copy of the release can be downloaded from our Web site which is www.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, 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, 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'll now turn the call over to Bob Miller, our CFO/COO. Bob?

Bob Miller

Thank you, Dan. I'll first discuss how we did on our guidance for the first quarter ending June 30, 2014. Secondly, we'll summarize our financial results for the first quarter, and lastly, we'll just some of the general revenue growth guidelines and new product initiatives for some of our business segments.

How did we do on our financial guidance for the quarter ending June 30th this year? We provided guidance for total revenue in the range of 3.1 million, and achieved 3.4 million. We provided guidance of in the $2.9 million range for cash operating expenses, and spent 3 million. We provided guidance within the range of 1.2 million negative EBITDAS, and had 1 million negative.

Moving now to a summary of the results of our first quarter ended June 30th, instead of repeating the financial results as I've often done in the past, which are already provided in the press release, I'll only cover the highlights of the financials and also talk about the initiatives we're working on to reignite our revenue growth.

Product revenues were up 1% compared to the same period last year with increases in Europe, Mexico, Middle East, India and Singapore offset by declines in U.S. and China. The flat revenue growth for the quarter compared to last year is comprised of very different growth characteristics with the various products and territory segments of our business.

One, very high growth, 50% plus in Europe and rest of the world with new products approved and introduced and new country-specific distributor partners. Two, 9% unit growth in Mexico with More Pharma, our partner in Latin America, partially offset by 4% devaluation in the Peso versus the Dollar.

Three, 25% decline in animal healthcare due to the impact of increased competition, lower prices and the transition of the business to another partner. Four, 10% revenue growth from our current dermatology partner offset by the discontinuance of a separate derm partner last year. And finally, high growth in the U.S. wound care which has been sold directly by our direct sales force.

Gross margins were down to 58% from 68% due to the decline in higher margin sales in the U.S. versus lower margin sales outside the U.S.

Operating expenses minus non-cash expenses for the first quarter were $3 million, up 46,000 compared to the same period last year. A slight increase in the cash operating expenses was a result of higher sales marketing and administrative expenses in the U.S., Mexico, Europe; partly offset by lower expenses to Ruthigen.

On the balance sheet, our cash position at the end of June was $5 million, and our total debt was $64,000; in effect, no debt.

We're not happy about our 1% revenue growth for the quarter regardless of the reasons. Our major initiative for fiscal year 2015 is to restore our revenue growth rate by launching multiple new products in U.S., Europe and Mexico.

What are some of the key product launches, which can positively affect this growth? One, More Pharma launched new products in the oral/dental at the end of June, and will be launching into the scar markets after they complete a supporting clinical study as well as expanding into additional Latin America countries.

Revenue from Mexico represents 43% of the total product revenue for the quarter. On average, over the next several quarters we expect Mexico product unit growth to be in the range of 8% to 15% compared to the same period this last year.

Number two, on the U.S. dermatology market, we'll be launching two new products in late 2014 this year, what I’d like to see is a scar management deal. In the U.S. wound care markets, we transferred the wound care sales earlier this year from our acute care partner Eloquest to our 15% sales force, which has been re-launching the wound care products, including an innovative three ounce HydroGel spray and (indiscernible) with two ounce spray solution with a focus on the wound care centers and the hospitals.

Number three, in Europe, we received additional CE Mark approvals, for one, mild to moderate acme; two, a wide range of oral/dental applications including a mouth rinse; and three, a variety of prescription SKUs for advanced wound care Microcyn Solution and HydroGel.

We launched the new EU advanced wound care products through our (indiscernible) wound care distributor network, and to 11 European companies. We'll be launching into the oral and dental markets in the dermatology markets to a separate network of distributors, which we'll be working on during the second half of our fiscal 2015.

In dermatology, in Europe, we expect to receive additional clearances shortly for Atopic Dermatitis, scar, and derm procedures providing us with a very strong dermatology portfolio.

International revenue, excluding Mexico represents 21% of our total product revenue for the quarter. We expect our international revenue, excluding Mexico developing 20% plus range over the next several quarters. As mentioned in the press release, the growth for this segment for the quarter was 65%.

In total, we have 10 new product launches in U.S., Europe and Mexico planned before March 31, 2013, which will serve to springboard a revenue growth with our focus on wound care and dermatology globally.

As most of you are aware, our wholly-owned subsidiary Ruthigen completed its IPO on March 26th of this year right before our fiscal year, the end of our fiscal year. What is the impact of Ruthigen IPO on our future cash and financing? One, Ruthigen potentially owes us $8 million of milestone payments related to the achievement of certain clinical milestones.

The first one is the 1.5 million upon enrollment of the last patient on phase one too, which is expected to occur by the end of June 2015. Number two, we own 2 million shares of Ruthigen which will have a market value of 10 million to 12 million since the IPO based on the Ruthigen stock price on the NASDAQ. Even though there are restrictions on our sale of these shares, we expect that at some time or in the next several years we will be able to sell in shares, we use the cash to grow our business, in other words, non-diluted financing.

Also, since any distribution of Ruthigen shares is a taxable event, to both the investor and Oculus, we do not think it’s economically prudent to distribute the shares.

What has been the impact of Ruthigen on our June financial statements? The primary factor this quarter is the impact on network, which significantly have increased to 13.4 million on June 30th this year, up from 2.6 million of June 30th last year.

With those final comments, I’ll turn it over to Jim.

Jim Schutz

Thank you, Bob. Now that Bob has given you the numbers in this, our first quarter since the Ruthigen IPO, I’d like to spend a few minutes on three areas before we open the call for Q&A. One, just a few comments on our quarter; two, an update on Vetericyn; and three, a brief look ahead at our European efforts.

As Bob said, we are not pleased with our 1% revenue growth over the same quarter the last year, and expecting continued reductions in animal health revenue short-term. It will pick a few quarters before we can turn the corner and return to that double-digit revenue growth that we have grown accustomed to over the past few years.

Having said that, I believe there is cause for optimism conservatively. We anticipate, as Bob said, a minimum of five new product launches in the U.S. in the spring of 2015 or by the spring in 2015, including our exciting new scar management product and another five new product launches in the same period in Europe, Latin America and rest of world, which includes our Atopic Dermatitis Gel and a new oral care solution. And while we are not at liberty to disclose the remaining products in the markets due to competitive reasons, some of these in my opinion have the potential to be game changers. As we prepare for these product launches we will keep our shareholders updated via press releases and on our investor blog at the Oculus Web site.

These new products were at the core of our corporate mantra that we established today, I took helm as the CEO in February of 2013, new products, new people and new territories. Speaking to new people, as we previously mentioned, our animal healthcare partner Innovacyn have decided to replace the A.T.I.B. in their Vetericyn animal products to a lower cost hypochlorous acid. We obviously feel this is shortsighted on their part, their customers having grown accustomed to our Microcyn-based products that have an (indiscernible) safety record and provide best-in-class clinical results.

We are excited not to be in active discussions with multiple animal healthcare companies that are eager to promote a new wound care product for animals both (indiscernible) that will allow them to brag that it continue to be the original Microcyn formulation. These animal healthcare marketing experts see great value in being able to tout the safety and efficacy record of our Microcyn, which has been successfully used conservatively on over 10 million humans and animals to-date worldwide.

They recognize that the quality and safety when it comes to the treatment of our four-legged friends outweigh the price. It’s our hope we will have something to announce relatively soon on this front. And, again, watch for press releases in our investor blog for updates.

And without opening our kimono too widely, it’s safe to say that it will be announcing the addition of some key industry experts to our team who will be taking our Microcyn technology in new directions both domestically and abroad. These new directions will involve some major opportunities that we believe can generate sustainable revenue growth.

Speaking to territories, our international sales team as Bob mentioned had a solid quarter with 50% plus growth in sales. And just a moment to focus on Europe, we are building a nice dermatology product line that includes the following; a spray product for the treatment of mild to moderate acme, a complimentary gel also for the treatment of mild to moderate acme. And both the spray and gel form are approved currently in Europe via the CE Mark process.

This fall, we also expect our European Atopic Dermatitis product approval and we also expect our scar management product approval shortly thereafter. And finally to our fifth product in our dermatology bag, our international teams is in the regulatory queue for a new product expected in the spring of 2015 for a product we are not yet ready to share, but we hope you to stay tuned. That’s a nice bag, a solid bag of products for our growing European dermatology opportunity.

One final thought, our international footprint continues to grow. We show our great products in 33 countries now and are targeting to sell in 41 by the end of the year. So Bob covered the numbers. We’ve provided a little bit of color on the quarter. We provided a quick update on Vetericyn, and we spend -- used a brief look ahead in our European dermatology product line and described our growing international footprint.

So with that, Janine, we’d ask you to open the call for question-and-answer.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Dan Trang with Stonegate Securities. Please go ahead.

Dan Trang - Stonegate Securities

Hi. Thanks for taking my question. Speaking of Innovacyn, how much growth can we expect from Innovacyn for the next year, for the rest of the year?

Jim Schutz

Innovacyn -- I'm sorry. It’s a little hard to hear you Dan. But the question was how much growth do we expect from Innovacyn for the rest of -- and we missed the timeframe. How much growth do we expect from Innovacyn during what timeframe?

Dan Trang - Stonegate Securities

For the rest of the year.

Jim Schutz

Oh, okay.

Bob Miller

They have not been growing at this point, so we would not expect -- it's a very seasonal business. And this happens to be their stronger season, but we have not seen them -- they have not been growing as you could tell historically over the last couple of months. And we would not expect them to grow. In fact, what we would be doing over the next year, we’ll probably see a transition to, in effect, a new partner.

Dan Trang - Stonegate Securities

Okay.

Bob Miller

When its event decline, and a new partner pick up.

Dan Trang - Stonegate Securities

Okay.

Bob Miller

What we would see, and it's really difficult during that transition to really identify that like we gave guidance for international or like we gave guidance for some of the other areas; it's very difficult for us to do that in animal healthcare.

Dan Trang - Stonegate Securities

Okay. And what are the feedbacks for some of the brick and mortar retailers that you've been able to pick your product in?

Bob Miller

Are you referring to the Walgreens?

Dan Trang - Stonegate Securities

Yes.

Bob Miller

Again, this has to do with our partners, and they even though they went out and they spent a fair amount of money, we don’t expect that to continue to grow at this time.

Dan Trang - Stonegate Securities

Okay, all right. Thank you.

Bob Miller

Now, we do see that there will be some growth -- potential growth in that arena from other partners that we're talking to at this point in the animal healthcare arena.

Dan Trang - Stonegate Securities

Okay, all right. Thank you.

Bob Miller

Thank you, Dan.

Operator

(Operator Instructions) And I'm showing no questions in the queue at this time. And I'd like to turn the conference back for any closing remarks.

Jim Schutz

Janine, thank you, and thanks to all who joined us today, and we look forward to speaking to you.

Operator

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

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Source: Oculus Innovative Sciences' (OCLS) CEO Jim Schutz on Q1 2015 Results - Earnings Call Transcript

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