Sonoma Pharmaceuticals's (SNOA) CEO Jim Schutz On Q3 2017 Results - Earnings Call Transcript

| About: Sonoma Pharmaceuticals, (SNOA)

Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA)

Q3 2017 Earnings Conference Call

February 9, 2017 16:30 ET

Executives

Dan McFadden - VP, Public & IR

Jim Schutz - CEO

Bob Miller - CFO & COO

Analysts

Jason Kolbert – Maxim

Chris Irons - QTR Research

Shane Martin - Stonegate Capital Partners

Andy Summers - Janus Capital

Presentation

Operator

Good afternoon, and welcome to the Sonoma Fiscal Third Quarter 2017 Conference Call. My name is Brian and I will be your coordinator for today's call. At this time all participants are in a listen-only mode. At the end of the call, we will be holding a question-and-answer session with the company's management. As a reminder, this conference call is being recorded for replay purposes.

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

Dan McFadden

Thank you, Brian. Good afternoon and thank you for joining us today. With me on the call are our CEO, Jim Schutz; and our CFO and COO, Bob Miller. We will open the call with Jim's update on our business strategy moving forward followed by Bob Miller's review of our financial results for the third quarter.

This afternoon, Sonoma issued a press release detailing fiscal third quarter 2017 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is www.sonomapharma.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 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 approvals, or receive the regulatory clearance or approvals. Also 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. Sonoma disclaims any obligation to update these forward-looking statements.

So with that, I will now turn the call over to Jim Schutz, our CEO.

Jim Schutz

Thank you, Dan. For today's call, I'll cover just a few topics during the next six minutes and then Bob will jump into the numbers for the quarter in detail. And then finally, we'll open the call for Q&A.

For my portion of the call, I'd like to share just a few thoughts on why we are here at Sonoma, why we exist as a company. And then switching gears spend just a few minutes on an upcoming significant milestone for our growing company. So first, why are we here is a company? What gets us out of bed early in the morning? You may remember that with our recent name and ticker change we also started pounding the drum about our purpose, a relentless passion for healing and that is truly our reason for being; to develop, market, and sell world-class healthcare products that demonstratively improve patient outcomes.

A great case and point in highlighting this passion for healing. A 79-year old grandmother of four living an hour or so west to New York City, in Essex County, New Jersey, took a nasty spill between Thanksgiving and the December holidays. No broken bones, thank goodness, but she suffered a large gash on the bridge of her nose. Ideally for patients suffering a wound that require stitches, most physicians recommend that the womb not remain open for longer than 6 to 8 hours after the injury occurs. But in this case the 79-year old did not go see her general practitioner or head to the emergency room but rather waited to see her dermatologist about a week after her fall.

By the time her dermatologist saw her the patient presented with significance scabbing; the dermatologist told us after the fact that she would have preferred to have seeing the patient earlier as the wound should have been stitched, "too late for stitches, significant scabbing and a likely scar that might never disappear," the physician wrote a prescription for our Celacyn, scar management product based upon our sales reps ground work. Our sales reps use marketing literature highlighting that Celacyn can be used at the beginning on stitches, glue or staples without concern of systemic absorption. Many of the competitive products in scar management space are nothing more than silicone; and as you may know, you cannot use silicone gel or sheets; in fact it's contra-indicated to use silicone until the wound is completely sealed.

So your sales rep had been enlightening this physician for months filling to physician sample closet, showing iPad based marketing literature, highlighting the safety science and clinical studies for our Celacyn scar management gel. And the physician had never written a prescription for it, until now.

So armed with the prescription for Celacyn, the grandmother patient filled a prescription in her local drug store and then presented herself back to the dermatologist office three weeks later. The physician described the former wound as beautiful, pink, and healing in a fashion that would likely not scar. The physician further said and we will very much like this, that Celacyn helped erase the lag time between injury and first appointment. The physician of course was going to do everything possible as a good dermatologist would do to make this patient beautiful again and our problem was as the physicians said highly impactful.

So having earned the trust of this physician that Sonoma's dermatology products can and will make a difference for her patients, this dermatologists is now sampling just about every product in our sales bag, all showing positive signs of progress in treating a variety of dermatology conditions. At least in this instance, Sonoma helped our passion to heal, shine brightly, and made our physician customer look even smarter. So this example and others like it over and over is how we can make Sonoma a great company and fulfill our passion to heal.

From a financial perspective what we need to do next to make Sonoma even stronger is to execute on our plan to breakeven. Sonoma's foundation in dermatology is solid, we now have 700 plus heavy prescription writer [ph] in the country which we define is physicians writing 10 or more prescriptions per month. We have a growing sales force that will be 30 plus strong by the end of March. With eight products in the bag we have a solid pipeline of new products coming from our own R&D and from licensing and we have a growth rate of 19% quarter-over-quarter for the last four quarters of prescription stilled at the pharmacy counter.

And thanks to Bob, in our recent Latin American news we are fully funded with cash to sufficient - excuse me, we are fully funded with cash sufficient to run operations without diluting shareholders. So what's next; breakeven company-wide.

Bob created this great metric for simple guided minded guys like me that we can measure weekly, monthly, quarterly and here is his metric. For the quarter ending September 30, each of our legacy 17 sales reps averaged 800 plus prescriptions filled at the pharmacy counter during the quarter. Now looking forward to achieve breakeven company-wide, each of the original and the additional 13 new sales reps need to generate a 1,000 prescriptions, on average billed to the pharmacy counter each quarter. For our legacy reps from 800 to 1,000 prescriptions filled each quarter. For our new wraps from zero to a 1,000 prescriptions filled each quarter.

Our entire team is focused on this achievable realistic and measurable metric. Our compensation strategy going forward will focus on this metric. And for those of you without access to IMS data via Bloomberg or some other portal to track our quarterly prescription, we'll keep you posted on our progress.

So I shared a thought or two of about our purpose as a company, our relentless passion for healing and shared our next big goal for Sonoma and the metrics we will use to achieve breakeven. So Bob with that I'll hand the microphone to you.

Bob Miller

Thank you, Jim. I'll first discuss a review of the financial results of our ground strategy. Secondly, our overall financial results for our third quarter ending December 31, 2016. And finally talk about the financial impact on Sonoma of the sale of our Latin American assets to Invekra, to subsequent hiring of 13 new sales people and our drive to commercial EBITDA breakeven.

What have been the financial results of our dermatology focus starting in October 2014 through our third quarter ending December 31, 2016? As a preface to discussing these dermatology results starting from zero, direct sales revenue in late 2014, we have built a strong dermatology foundation over the last two plus years, upon which to continue to grow in the future. There are several ways to measure our success in the dermatology market. One is through the sales of our products to our wholesalers, which are recognized as revenue when shipped to them. This is a common way of recognizing revenue.

Our total U.S. product revenue was $646,000 for the December quarter 2014, $1 million for the December quarter 2015 and $1.7 million in the December quarter 2016, up 65% over the same quarter last year. This method of recognition tends to be driven by the load ins to the wholesalers. More specifically, our U.S. dermatology net product revenue was $1.3 million for the quarter ending December 31, 2016, compared to $676,000 in the same period last year, an increase of $577,000 or 85%.

While we recognize our derm revenue when we shipped to our wholesalers, a second method to objectively gauge the Sonoma dermatology performance is the number of prescriptions filled for patients via the pharmacies, multiplied times the price paid to us by the wholesalers. This is traditionally called 'demand dollars.' This information is available to the public for a fee via several well-known databases. According to the Symphony, one of the database's monthly data, the total prescriptions filled by patients via the pharmacy times the price paid to the wholesalers for all of our derm products was $2.4 million for the December 2016 quarter, up $1.8 million from $631,000 for the same period last year. This represents an average quarter-over-quarter growth of 41% for the last four quarters. The growth for the December 2016 quarter over the September quarter was 15%. The December quarters have historically grown at slower quarter-over-quarter growth rates than the other quarters due to seasonality and the higher number of holidays.

One way to augment this revenue growth trend is via the introduction of new products. In fact in late March 2016, we sold and loaded in Ceramax, a skin repair product for atopic dermatitis to the wholesalers. In September 2016, whether we loaded in SebDerm to the wholesalers and in the December quarter, we loaded in a combination pack of Alevicyn and Celacyn. Our target is to launch at least one new derm product per quarter.

Moving now to our review of our financial results for the third quarter fiscal year 2017 ended December 31, 2016 and covering only the highlights with the details in today's earnings press release. Total revenue was $3.4 million for the quarter ending December 31, 2016, compared to $2.5 million in the same period last year. Total product revenues of $3.2 million were up 43% over the same period last year with strong growth in U.S. dermatology, animal healthcare markets and in products sold to our new owner of the Latin America assets at a reduced price. Products sold to the new owner is temporary until they set up their manufacturing facility.

More specifically during the third quarter, U.S. product revenue increased $661,000 or 65% to $1.7 million, mostly related to an increase in dermatology revenue and higher sales to our new animal healthcare partner. Total international product revenue was up $301,000 or 25% with increases in Mexico and Asia, partially offset by decreases in Europe and the Middle East. The gross margin have been significantly impacted by the historical separation of the discontinued operations and the very low margins of the Mexico sales to Invekra at a reduced price.

Operating expenses minus non-cash expenses for the December quarter were $4.3 million, up $241,000 or 6%, compared to the same period last year. The increase in cash operating expenses were due to the higher sales marketing and administrate of expenses in the United States related mostly to the cost of our direct derm sales force.

On the balance sheet, our cash position at the end of December was $20.5 million, compared to $3.1 million on September 30, 2016 and our debt was almost zero. Due to the sales of our Latin America assets, we added $18 million to our cash position on October 28, 2016 with another $1.5 million placed in escrow recorded on our balance sheet as restricted cash and expected to be released before the end of March this year upon delivery and testing of the manufacturing equipment.

What is the impact of the sale of the Latin American assets on our primary objective of achieving commercial EBITDA breakeven? Due to the recent sale of the Latin America business and the rapid hiring of derm sales reps we are in a period of transition for the March and June quarters, we will not provide quarterly guidance for those quarters. However, we will make the following comments about the financial impact on Sonoma on the sale of our Latin American assets, the hiring of new sales reps and our drive to commercial EBITDA breakeven.

The strong cash position of $20.5 million enables us to quickly expand our dermatology sales force from 17 at the end of September to about 30 by the end of March. We believe that this quick expansion is the fastest way to achieve break even and we expect to use $6 million to $8 million of our $20.5 million of non-diluted cash to achieve this breakeven.

What are the key assumptions of our sales rep driven revenue growth? Our history is that it generally takes the sales rep six to nine months to breakeven, even on the quickest breakeven time was three months. Also during the first six to nine months, the sales reps have the fastest growth and thereafter the growth tends to be slower. Thus, we have two general groups of sales reps - one, we have 17 reps at the end of September which are gone, up the initial sales rep and on average above breakeven, but have a slower growth rate. I will refer to these as the mature for the legacy sales group.

In the second group, we have 13 new sales reps which are just starting, which will have a high growth sales rep stage for the next six to nine months. Looking at the high growth sales reps, we can use our early history to provide us with a benchmark for the future. In the early stages, our expansion in dermatology with 10 sales reps, a 30% turnover and a starter product portfolio of three or four products. The average monthly sales rep grew from 35 prescriptions per month per rep in November of 2014 to 250 prescriptions per month per rep in July 2015 - nine months later.

We believe that we can achieve a comparable rep per sales rep or better as we add 13 reps in the near future and they have a product portfolio of eight products. Looking at the mature sales reps, 17 reps as of September 30, had an average and as Jim mentioned earlier, average of about 810 prescriptions filled in the September quarter generated a positive return and will continue to grow but in lesser quarter over quarter growth rate than the new sales reps.

The gross margins will improve as we increase the U.S. dermatology revenue, which have 80% to 85% gross margins and at a breakeven level, we should have a blended gross margin in the range of the mid 70%. Looking now at the big picture in order for us to achieve EBITDA breakeven, we estimate that our total net revenue needs to be in the range of $5.5 million to $6 million per quarter and if the prescriptions filled need to be in the range of 30,000 to 35,000 per quarter.

Fairly, our prescriptions for the December quarter were about 13,000 and have been growing at an average quarter-over-quarter growth rate for the last four quarters of 19%. If our prescriptions fill continue to grow at a quarter-over-quarter average growth rate of 15% to 20%, then we should be able to reach the breakeven range, which would be in the range of March to June 2018 time frame.

As mentioned on previous calls we continue to believe the Sonoma remains an even stronger investment candidate for the value investor, who is also looking for strong revenue growth especially with the cash position of $20.5 million even after a 30% growth in our stock price over the last three weeks.

With respect to valuation, I like to end with three points - one, our cash position of $20.5 million is close to our market cap of around $28 million or stated differently; our cash value per share of $4.85 in book value, up $5.42 as closed to a recent stock price. Number two, our revenue growth was strong in the recent past at 43% for the last nine months ending December 31, 2016, compared to the same period last year. More specifically in dermatology as we've mentioned earlier, average quarter-over-quarter growth rate demand dollars for the last four quarters has been 41%.

In future, investors should expect to see continued strong dermatology revenue growth as the additional 13 sales reps follow and already demonstrated sales rep. Number three, our valuation should continue to increase as we get closer to breakeven. Also at that time of breakeven, our net revenue should be in the $22 million to $25 million range while derm companies tend to tout a revenue multiple of 3x to 5x. Thus, a potential investor can benefit not only from the strong derm product growth and reaching breakeven, but also from the potential expansion of the multiple without having to worry about stock dilution.

With that I'll turn it over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question will come from the line. I've Jason Kolbert with Maxim. Please proceed.

Jason Kolbert

Hi, guys. Congratulations on a very strong quarter. I'd just like to understand the income that you're showing as a result of the spin out. Has that been completely accounted for in this quarter or is there still residual income that will be recognized from that and then we'll talk a little bit about kind of the prescription trends and the sales growth trend in the U.S. versus international if you can. Thank you.

Bob Miller

Sure. Beginning from the sale in Latin America has been shown mostly in this quarter. That if you look at the income from our discontinued operations our P&L, it's about $15.5 million. It's very complex. When you take a business and call it a discontinued business and have to revise the historical financials, it's quite an extensive job and especially when you have to calculate the tax liabilities at the same time. But the short answer to your question is, yes, it should be contained in this quarter. There will be implications obviously as we go forward because we're continuing to recognize revenue for a product that we're actually selling the Invekra and that will discontinue as we've mentioned as they continue to manufacture. And of course when we compare to history, that has changed as well because we've had to revise our historical numbers over the last two years.

Jason Kolbert

Okay.

Bob Miller

On your question on - whatever is your question on the - your second question?

Jason Kolbert

Yes. I was going to ask you to walk me through kind of the - the revenue number. Approximately $3.3 million in the current quarter. What's the split look like between international and U.S., and help me understand the outlook. I realize you're not going to give guidance, but for example on the U.S. sale, how much of that sales represents new scripts versus say, refills?

Bob Miller

Yes. If you're looking at the U.S. component, about $1.3 million of that, $1.7 is dermatology and we don't look at in terms of new at this point unless you had something on that.

Jim Schutz

You mean [indiscernible] versus refill.

Bob Miller

Yes. The new TX tends to be a lower percentage and I don't have that right on the tip of my tongue at this point in time. Then the general refills.

Jason Kolbert

So can you talk a little bit as these new sales reps come up to speed, what kind of requirements do you have for them in terms of your calculations on a revenue per rep? What do you think a fully seasoned rep can produce, say a year from now?

Bob Miller

Yes. It's a fairly wide range from one territory to another. We have reps that I believe are probably over and we if we did it off the benchmark of what Jim was talking about where we have an average of 800 perceptions filled per quarter per rep, that ranges anywhere from almost 1,400, 1,300 down to 600. We think that the potential - we should be able to get to the 1,000 reps per quarter on average. As the reps that are out there continue to refine their business, they've got to grow their prescriptions about 25% and the new reps obviously have to start from scratch and have to grow the business fairly rapidly.

Jim Schutz

And Jason, to your point, some of the territories put a lot of meat on the bone. New York, California, Florida, Texas, we also then have to figure out how to cover Kansas City and Oklahoma City in the like. Two different call points, two different patient populations and the like. So tough to give a one-size-fits-all answer there, but we're studying IMS data to make sure that we put our reps in the maximally beneficial territories. We can see who the heavy prescription writers are for our products and for competitive products the IMS dated to put those reps right in those territories.

Jason Kolbert

Okay, well congratulations on a great transaction in terms of Latin America and we look forward to watching the U.S. sales build and grow traction now as you execute the company fundamental. Thank you.

Jim Schutz

Okay. Thank you, Jason.

Bob Miller

Thank you, Jason.

Operator

Thank you. Our next question will come from the line of Shane Martin, Stonegate Capital Partners. Please proceed.

Shane Martin

Hey, guys. Congratulations on a good quarter in the transaction. I'm actually calling in for [indiscernible] this afternoon. But the appointment of Marc, the new Chief Strategy and Marketing Officer. Do you guys see any sort of approach with the direct sales force or timing change at all? Any sort of new initiatives or anything with his appointment yet?

Jim Schutz

Good question. He's just getting his feet wet. We're really excited to have him and I'll tell you the number of investors like yourself, saying that have asked us why a guy like Marc would join our small but growing company is really flattering. So we expect great things from him. Yes, we've seen a small but meaningful impact. We are going to spend a lot of time with him in our sales force in early March at the American Academy of Dermatology meeting in Orlando. But I hope I have answered your question. I'm not sure I got it other than yes, he just started in January. He's got his feet wet and we expect great things from him.

Shane Martin

Yes. I was just I was just wondering. I mean are there any changes in thoughts on pricing, or size of the team or anything like that that you guys are aware of just yet? I know it's early.

Jim Schutz

First and foremost, we know he's doing a deep dive on brands' competitive pricing and the like. We could really use some help in cross pollinating our various brands across our areas. Competitive pricing is a constantly moving target trying to pay attention to what Valeant, GlaxoSmithKline, Galderma and Allergan are doing in our space requires enormous amount of homework. We know he's really diving in on pricing and branding initially but then eventually will help us on the sales force side.

Shane Martin

Okay. And is there any sort to update on the Invekra transition and kind of continuing to manufacture for them? Do you guys know how long you're going to be continuing to do that?

Jim Schutz

Contractually we're obligated for two years from the date of the transaction which was October of 2016. Is that correct, Bob?

Bob Miller

Yes.

Jim Schutz

So we're planning to manufacture for them for the full two years. We are spending more time with them, we're headed back down there in mid of February and then again in March. Our engineers and bright R&D people are heading down there. So we'll keep you posted on that, but for now we're planning on manufacturing. If they're up to speed earlier, then so be it.

Shane Martin

Okay, and then any sort of additional progress for you guys in reestablishing some of your presence in the animal healthcare market?

Jim Schutz

We actually have an animal health guru on the phone with us. Dan, you want that one?

Dan McFadden

Sorry, I was on mute. The animal health as you're probably aware, we've licensed a lot of our U.S. activity to a company called Manna Pro to St. Louis. Really well-respected company in the feed and seed category initially and now they've moved into pet specialty, so we have licensed both large animal farm and ranch as well as pet specialty to those folks. They're doing a fantastic job. At the same time, we're now using our internal resources to focus on the U.S. and Canadian ethical markets, so we're going after the veterinarians now. So we're pretty optimistic, good opportunities out there, we've got some major change on board now caring the product and more to be reported on that soon. So excited. We're certainly getting traction.

Shane Martin

Okay, great. And last question, guys, just a quick update on some of your cash on hand. I know obviously some of that pushing towards the breakeven point. Are you guys still on the sidelines fully or are you guys looking towards any sort of new acquisitions? Can you guys give me any update on that?

Bob Miller

I think our primary focus with our $20.5 million is to get us to breakeven and use our $6 million to $8 million to get there. We do not really have any plans to make any quick acquisitions and use that cash up. We feel really comfortable with a strong cash position at this point.

Jim Schutz

Well and plus, Shane, Bob and I are old greater guys. We love the license and then if we fall in love with it, date and then we'll marry, then we'll acquire. We've had a good start licensing and we'd like to continue that. But stay tuned.

Shane Martin

Okay, great. Thanks, guys, I appreciate.

Jim Schutz

Okay. Thank you, Shane.

Bob Miller

Yes. Thanks, Shane.

Operator

Thank you. Our next question will come from the line of Chris Irons of QTR Research. Please proceed.

Chris Irons - QTR Research

Hi, guys. Nice job moving in the right direction and luckily two guys before me took two of my questions. So you're off the hook there. Just two quick things. The first is the SG&A just looks a little high. Can you just give me a little color on that and maybe a bit of outlook on SG&A going forward? Maybe what some of the growth in SG&A is attributable to that's just on-boarding the new sales staff is my assumption.

Bob Miller

Absolutely. All of our increase in the SG&A and especially if you look at the SG&A excluding the non-cash items especially stock compensation charges, that's an increase, I believe it was 6% thereabouts, which we didn't think was up about 14%, but then if you take it down the operating losses minus the - if you take out the stock comp charge and some of the other non-cash charges, it's a 6% increase for the quarter, which we think is reasonable. Most of that is attributable to the increase in the U.S. and in the dermatology business. Is it auto-whack [ph] to you and on a percentage of revenue or was it - how does it auto-whack [ph]?

Chris Irons - QTR Research

Yes, just in general. Just give it a brief look. It just look a little bit high to me. It's tough to do with the percentage of revenue because you guys are at a spot now where you're at the very beginning of hopefully growing something that's going to move a little bit larger. I don't know if that's necessarily the best way to look at it. I think I looked at a quick quarter-over-quarter comparison perhaps.

Bob Miller

That's why if you take a look, take out the non-cash expenses, I think a truer representation, there have been a couple of things. One is we actually at the end of the year shifted from all of our salespeople to as a way from a contract sales organization where we had some of our salespeople and we will actually take some of our sales expenses down as a result of that and on the other side adding 13 salespeople will obviously take it up in a while until we get the benefit from those salespeople in terms of growth and revenue and generation of cash.

Chris Irons - QTR Research

Right, until you see some leverage there. I understand.

Bob Miller

I would expect to see it continue to go up as we increase the salespeople and then the revenue should go up to cover it and generate contribution margin.

Chris Irons - QTR Research

Okay. And then if you don't mind, just one more quick question, which is actually kind of two questions as it happens in some calls.

Bob Miller

It's okay.

Chris Irons - QTR Research

I think you may have mentioned during the call. Unfortunately I was in between offices, so I was listening and I may have just flipped at one point and missed it, but the first question is do you have a you have a rough date, or maybe a quarter, or maybe first half, second half of the year that you guys are targeting for cash flow positives? And then just moving forward from that, for people that are a little bit unfamiliar with the turnaround with the story. Can you just expound a little bit on the vision maybe looking out a few years in terms of - I know you started to talk a little bit about 'let's kind of get our ducks in a row before we move to acquisitions' and things of that nature and I know it's very tempting to take on debt right now. But the impression that I get is that you are looking to grow very much organically and keep the balance sheet in good shape. Can you just guide me over the next maybe 24-36 months in terms of when you look to achieve that cash flow positive or cash flow neutral milestone and then kind of the direction from a bird's eye perspective from there.

Bob Miller

Let me first of all answer the debt question. We've had over the years venture debt and everything else. At this point, we don't think it's appropriate until we get started generating, in fact generating cash.

Chris Irons - QTR Research

Fantastic.

Bob Miller

So we don't plan to move forward with that even though it's something - especially with the significant amount of cash that we have versus the amount of funds that we actually think we need to get to breakeven. I am trying to answer the timing of the breakeven and let me, before I do that, say that our EBITDA breakeven is really close because we don't have big CapEx, working capital is not overwhelming component. We're probably between EBITDAs and really cash flow, it's maybe a quarter away.

Chris Irons - QTR Research

Oh, wow. Okay.

Bob Miller

It's a lot easier to target EBITDAs because everybody can see or EBITDA because everybody can see that number. But what we've been saying is that we need to get to 30,000 to 35,000 prescriptions per quarter to get to breakeven is a really simple rule. Now there are lots of other assumptions that go into that, but we're trying to simplify it. We're currently about a little over 13,000 for the December quarter in terms of prescriptions filled and we have been growing as we've mentioned, a number of times, at about 19% quarter-over-quarter, but as our numbers get bigger, it's going to be more difficult to achieve that kind of a growth rate. But what we have been saying is that if we continue to grow somewhere between the 15% quarter-over-quarter and 20% quarter-over-quarter, it's just mathematically. We're not actually giving guidance, if you will.

Chris Irons - QTR Research

Sure.

Bob Miller

Mathematically, that would land us with over the 30,000 prescriptions in the March-June 2018 time frame. We're really continue making it contingent upon an assumption of growth. Prescriptions now, we're at this stage where for me to say it's going to be X quarter for sure, I think it's not very appropriate for me to do at this point, versus tell you if we achieve a certain growth rate when will we get to that breakeven point. That's really what we're doing.

Jim Schutz

And Chris, I think I can answer your last question. Yes, we look forward to our organic growth and yes we have some products that we've in-licensed. So the pipeline for the next four or five quarters is actually very, very solid. Bringing guy running R&D for us in Seattle is really cranking out some new and interesting products and we in-licensed a great interesting product out of Germany. It's on the market in Germany, has solid clinicals and we're translating all those clinicals in the FDA queue as we speak in the hopes of getting an FDA approval or clearance sometime early 2017. To your question about M&A, thanks to Bob's cash and his growing sales force. We are all of a sudden becoming smarter or better-looking what would the analogy be, Bob? We're starting to get peaks in all sorts of interesting other technologies that are out there I think in large part because of our growing sales force in this space and with our new-found cash, we're becoming more popular.

Bob Miller

And the fact that we now will have a much larger sales force. We have an awful lot of people who are developing products that don't have a sales force in dermatology.

Chris Irons - QTR Research

Sure.

Bob Miller

And you mentioned there we are now on the radar and very attractive for those groups of people to license and sell a product for.

Chris Irons - QTR Research

Sure. And with a lot of pharmaceutical companies, there has been some growth in extremely quickly through M&A and blowing themselves up here and I'm not going to mention names. Part of the appeal is that you guys are being very meticulous about the balance sheet and you're looking to do it kind of one step at a time and very slowly and I'd hope that you guys continue to kind of be prudent with capital going forward and just continue to do work. So, thank you, guys, for taking the questions.

Bob Miller

Hey, thank you, Chris. Great question.

Jim Schutz

Yes. Thank you.

Operator

Thank you. Our next question will come for the line of Andy Summers with Janus Capital. Please proceed.

Andy Summers

Hey, guys. Good afternoon.

Jim Schutz

Hi, Andy.

Andy Summers

Hi. I was hoping if you could add some color around the U.S. business. You did $1.7 million in the quarter. You said $1.3 million of that was dermatology. What is the difference? What's the other $400,000? Is that all animal health or what else is in there?

Bob Miller

We have a sort of wound care business that we've had for a while that we're selling that's not growing at this point that we've had for a while and wound care in the hospital sales and the other part is the animal healthcare. So it's a combination of the two that makes up the $400,000.

Jim Schutz

And our goal there, Andy, as we may have should previously on this call is we want that wound care business and animal healthcare business to be breakeven in throwing off cash so that we can throw it back into U.S. dermatology, which is where we see our best in highest growth potential. So we're not throwing cash in, to Bob's point, into wound care animal health. We want them to sort of cash back at U.S. term.

Bob Miller

Yes, good point.

Andy Summers

And when do you suppose those to be cash contributors?

Bob Miller

They actually are at this point and it's a lot easier to get to cash positive like when you have a partner that's spending the sales and marketing dollar and we have built up a business that's got us a relatively small support group in the wound care side that is positive at this point as well.

Andy Summers

Okay, great. And then in the European business, down there at the last couple quarters but you've shown growth the last few years. What is the go-to market strategy in the X U.S. regions and do you expect that segment to grow over time?

Bob Miller

Yes. As you pointed out, it has been growing over time. We've got the hypochlorus acid and most of us at wound care, we've got - actually we have 25 CE mark approvals at this point - a lot of which aren't being utilized which makes it a pretty good opportunity for business development, again to generate cash. We also have a lot of derm approvals that relate to the CE marks, too, to expand actually our derm business internationally. But we will see it grow. We've got a strong position in the Middle East actually, in Europe and Singapore, and starting to grow a lot more in China at this point. We actually have a pretty good animal healthcare sales over in Europe as well especially around the Singapore-China area.

Jim Schutz

And my next favorite business development deal that we've got our new guy working on is we're expecting some Brazilian dermatology approvals in the first half of 2017, more than one which we're really excited about and as you may know, Brazil is now the second largest dermatology market in the world behind the U.S. Good things coming internationally, to your point Bob. Everything international was breakeven and throwing cash back so that we can grow U.S. term faster. Correct?

Bob Miller

Yes. Now we were going to do some restructuring down in Mexico. It is because we've got to right-size that operation. It's because once Invekra takes over, then we'll right-size that manufacturing operation and it will be breakeven. You can see continued growth, but it's not going to be anything like the dermatology growth that we're going to be seeing in the United States. It's going to be more of a consistent 10% to 15% growth.

Andy Summers

Okay and maybe you could just help us understand how you're going to go to market in a country like Brazil? Do you have a partner? How does that work?

Jim Schutz

We're shopping. We're shopping, but we will not go direct. We will partner it out.

Bob Miller

Almost all of our international activities are with partners.

Andy Summers

So is there a possibility that you get some upfront cash in that field or not?

Jim Schutz

Well, Bob has got a nice track record recently, so Bob, no pressure, but Andy and I would like to see a lot of cash out of Brazil. Yes, we're working on it. We'll keep you posted. It will be very nice, Andy, to have the Brazilian approvals, the regulatory approvals in hand, which I think increases our leverage to maximize that opportunity versus saying, 'Hey, at some point in the future we expect to get approval' so we're purposely shopping but we'd like to hold on to those rights until we reduce that regulatory risk and then maximize our opportunity.

Andy Summers

Okay, great. And then just a little bit help on the gross margin as we go forward here. What is the sort of time frame to get to that 75% level that you mentioned earlier in the call?

Bob Miller

It would be about the same time we get to breakeven.

Andy Summers

Part of that is the assumption for breakeven? Okay.

Bob Miller

Yes. That's an assumption for breakeven. We have a mix. First of all in our gross margins as we reported, when we had to separate the business between continuing and discontinue. We had to take out the variable cost. We really couldn't split up the fixed cost so that was the assumption. So that's one of the reasons that the cogs historically are much slower than what they've been in reality. In the current ones, in this particular quarter we're impacted by the very narrow margins when we sell to this partner that we just sold the business to, those margins are cost plus just a little bit, so the margins are very slim and that has a negative impact on the overall gross margins. But as I mentioned the derm margins are in the 80% to 85% level and as we will just be a balance and we will tend to be more like a 35%-65%, 65% U.S., 35% outside the U.S. on a little bit longer term perspective especially when the sales to this Invekra disappears.

Andy Summers

So what would the gross profit margin have been in the quarter if you would have stripped out those fixed cost?

Bob Miller

Well, I don't have a quick answer for you at this point but we generally been at the - for this quarter less of an impact than the last quarter.

:

Okay.

Bob Miller

Just because it was done in October, so really had two-thirds of a quarter.

Jim Schutz

And will that answer be in the Q, I thought I saw it.

Bob Miller

Probably. Now what's in the queue, there will be data that shows out - shows the expenses that went to both the continued and discontinued businesses. So you could look at that but it has less of an impact on this quarter versus last quarter.

:

Okay. So your gross margins are going to expand by 2,500 basis points in the next - call it 12 to 18 months. Is that a fair statement?

Bob Miller

Yes, from the 50 [indiscernible] up to the mid-70s, yes.

:

Okay.

Bob Miller

But most of our growth is in margins that are at the 80% to 85% area.

:

Okay, excellent. Okay, and then last question for me - or actually two more questions. First one is, what was cash flow from operations in the quarter?

Bob Miller

Cash flow from operations in the quarter was about negative $2 million.

:

Negative $2 million, okay.

Bob Miller

You could actually - we ended the $2 million to $2.5 million; $2 million to $2.4 million, $3 million or something in that range. Actually if you look at the EBITDA and the earnings, it was $2.5 million.

:

Okay. And then last question for me, looking through your financial filings from last year, you guys have a - where you had an NOL that was the $140 million adding upto your federal state and international NOLs. Did those international NOLs go away with the Latin America sale?

Bob Miller

Yes, we used up most of that it with this transaction in Mexico.

Jim Schutz

But we used up most of the international.

Bob Miller

Yes, and international NOLs have been mostly - the Mexico international NOLs have been mostly used up. Now some of those disappear overtime so we don't - and I think it was probably around $6 million to $7 million that we used up in Mexico which was most of it.

:

Okay. So of the remaining $130 million which is U.S. based federal and state NOLs, do you expect to use most of those overtime?

Bob Miller

I would like to but that's quite a forecast. And you know, it appears that we're not going to need to pay taxes for a while.

:

Yes, that's the point I was driving at.

Bob Miller

For how long - good question.

:

Yes, it's amazing if the company of your size have the cash hoard that you have and the NOL asset and the balance sheet you have and no real offsetting liabilities that they are very attractive attributes.

Bob Miller

Thank you.

:

Okay, thanks guys. Great quarter, look forward to catching up soon.

Operator

Thank you. [Operator Instructions] It looks like we have a follow-up question from the line of Jason Kolbert with Maxim. Please proceed.

Jason Kolbert

I just wanted to follow-up on one area; we were talking a little bit about SG&A and I was looking at your non-GAAP to GAAP reconciliation. So - you know, I understand where SG&A is versus the prior quarter. And I understand your answer is a little bit better taking the $4.7 million you reported and essentially backing out $1 million shows me that was just an incremental bump. What my question really is going forward with the divestiture of Latin America, how does SG&A change because I want to subtract kind of the cost of Latin America that are no longer going to be part of SG&A. So historically I'd expect the numbers to come down but I also want to factor in the fact that you are adding sales reps as you focus on building U.S. term sales; so can you give us some kind of just rough approximation of how you see SG&A evolving for the balance of this year and next? Thank you.

Bob Miller

Yes, the SG&A as I mentioned earlier, we're going to have a little bit of a decrease relating to the shift from a CSO for maybe 10 of our current salespeople. But then we're going to have 13 more people. And that's a pretty significant bump in the SG&A but we - the reason we are doing that is because we think that's the quickest way, especially when you're talking about six to nine months ramp in sales. That is without a doubt the quickest way to get to that breakeven, we think; and yes, it will pop up the SG&A for a while but we think it gets recovered pretty quickly and then starts generating cash.

So if you take the average sales person probably as a $1 on an annual basis and this is fully loaded. I think it's around $170,000 and you multiply that times and that includes samples and everything else. You know, that - multiply that 13 times 13 and then - but at the same time you're going to see that it's going get taken down as revenue and cash is generated from the sale of the product. Does that help you in terms of your model?

Jason Kolbert

Yes, that helps. Thank you very much.

Operator

Thank you. Our last question will come from [indiscernible]. Please proceed.

Unidentified Analyst

Hi, gentlemen, I hope you guys are staying out of the floods. And I hope all your people are - you're right and I think of it up there. The question; I was interested why - why are we uncomfortable talking about guidance in the next two quarters?

Jim Schutz

We've got dramatic changes that one, we just sold - something that represents one-third of our revenue, and we've got - that's one impact. We've got to allow for the transition to - of that sale where we're manufacturing a product for almost cost and providing it to a partner that we agreed to do for which we've got almost $20 million in cash. So we've got that obligation and we don't know exactly how long that's going to last; and then actually - you know, it means we're doing something without really getting a return on that other than the money we've already gotten. The second reason is we're loading a heck of lot of salespeople; you know, we want to see a little bit of that materialize if you will and take fold and exactly when we hire the people and where we hire them has a lot of different implications for us; things that were right in the middle of that process.

Unidentified Analyst

Where are you now? How many have you hired so far subsequent to September? September you had 17?

Jim Schutz

Yes and then we added a handful right before the quarter ending December 31. And as we said we're trying to hire 30 plus total by end of [indiscernible]. But I will tell you really good reps are available, we don't hire Xerox [ph] people, we like experienced dermatology sales reps and really good reps.

Unidentified Analyst

In our prior conversations you said with the variant and with the mess going on in the specialty pharmacy space, these reps are becoming more available.

Jim Schutz

Exactly. And they are hungry. We paid reasonable wages, uncapped commissions and Bob is very, very generous to them with stock options which they may not have got.

Unidentified Analyst

Don't tell me that.

Jim Schutz

Well, I will tell you that is a very, very good tool for a small company to attract.

Unidentified Analyst

I like that. I understand. But I would think based on your - you've been doing this since 2014 that you'd be pretty in-tune with scripts being written and be more comfortable talking about what you're expecting.

Bob Miller

Yes, now while we have our own forecast obviously, and - but we just think what the combination of the transition of the sales and the right sizing of Mexico operations, and which affect our expenses. And also the hiring of the new people, probably less so; we think it's prudent to wait. When we have our next call we may provide some guidance at that point.

Unidentified Analyst

Okay, I take that as a promise then.

Bob Miller

Okay.

Unidentified Analyst

Okay, thank you guys. All the other questions have been answered. Thanks for your time.

Operator

Thank you. There are no further questions in queue. So at this time I would now like to hand the conference over to Mr. Jim Schutz, Chief Executive Officer, for closing comments or remarks. Sir?

Jim Schutz

Thanks everyone for joining us for this call and for your continued support. We feel - Bob and I feel that Sonoma is in the best shape we've ever been for a couple of reasons. So we're executing on our turnaround strategy in a very attractive dermatology market with a growing experienced sales team, robust and unique products, and a nice pipeline.

Our next step is to drive to commercial breakeven which we think will positively impact stock prices. Our current cash of $20.5 million enables us to step on the gas pedal in growing the sales force with no dilution to shareholders. And three, our EBITDA's breakeven plan is rather straightforward; we're going to hire new sales reps, we have solid pipeline of new products, we're going to continue to grow the sales of our current products and Bob's going to gently increase prices consistent with other comparable products. So we think we have the foundation and building blocks to achieve breakeven again at the risk of repetition [ph] without dilution of shareholders.

So we look forward to sharing our progress as we build this company to becoming a pure play multi-technology dermatology company, and achieving our greater purpose of relentless fashion for healing. So thanks very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.

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