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Edited Transcript of OCLS earnings conference call or presentation 5-Jun-17 8:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 Sonoma Pharmaceuticals Inc Earnings Call

PETALUMA Jun 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Sonoma Pharmaceuticals Inc earnings conference call or presentation Monday, June 5, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan McFadden

Sonoma Pharmaceuticals, Inc. - VP of Public and IR

* James Schutz

Sonoma Pharmaceuticals, Inc. - CEO, President and Director

* Robert E. Miller

Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary

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Conference Call Participants

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* Andrew J. Summers

Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst

* Laura Shelmire Engel

Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst

* Mi Zhou

Maxim Group LLC, Research Division - SVP

* Robert Robbins

Robbins Capital, LLC

* Sherry Grisewood

Dawson James Securities, Inc., Research Division - Managing Partner, Life Science Research

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Sonoma Fiscal Fourth Quarter 2017 Conference Call. My name is Carmen, and I will be your coordinator for today's call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

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Dan McFadden, Sonoma Pharmaceuticals, Inc. - VP of Public and IR [2]

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Thank you, Carmen. And good afternoon, and thank you, everybody, for joining us today. With me on the call are our CEO, Jim Schutz; and our CFO, COO, Bob Miller. We will open the call with Jim's update on our business strategy moving forward, followed by Bob's review of our financial results for the fourth quarter and fiscal year 2017. This afternoon, Sonoma issued a press release detailing fiscal fourth quarter 2017 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is at sonomapharma.com, or you can call Investor Relations at (425) 753-2105, and we'll be happy to assist you.

Before we begin, I remind listeners that this conference call contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words such as expect, to expand, would and anticipate, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risk inherent in the development and commercialization of potential products; the risk that potential clinical studies or trials will not proceed as anticipated or may not be successful or sufficient to meet regulatory standards or receive the regulatory clearance or approvals, 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. 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?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [3]

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Thank you, Dan. For my portion of today's call, I'll spend the next 5 minutes with a quick look back at our fiscal year ending March 31, 2017. A brief look ahead to several upcoming milestones in the next 12 months. Bob will cover our financials, and then we'll open the call for Q&A.

Looking back over the last 12 months, we had a solid fiscal year ending March 31, 2017. Several highlights: our cash position was $17.5 million, up $10 million from the same period last year; product revenue for the year was up 44% compared to last year. In October 2016, we sold Latin America assets for $19.5 million in cash, and a guaranteed minimum royalty of $2.5 million over the next 10 years. We received 3 new FDA approvals or clearances. We're awfully proud of our R&D team, they are on a roll. We recently launched our new SebuDerm product for the treatment of seborrheic dermatitis. And our intellectual property portfolio now totals 63 issued patents and 33 patent applications pending.

Specific to our dermatology business, prescriptions filled at the pharmacy counter were up 86% versus last year. Our dermatology net revenue was up 87% for the year. And we launched 4 new products, and now have 8 products in our sales bag.

Speaking of our sales force, 3 years ago, we were a good R&D-focused company and yet we out-licensed everything to partners for their sales teams to sell our great products. It's become a great point of pride that as of March 31, we have 30 sales reps, 2 district managers and 3 senior leaders, all facing our customers. One interesting data point with respect to our sales team, we do not hire rookies. Our sales team averages 10.3 years experience, specifically to dermatology. We have deep relationships with our customer dermatologists and hope to continue this hiring trend as we grow.

So all in all, we had a solid year ending March 31, 2017, and we think we're just getting started.

Switching gears, our next 12 months should continue to show strong growth. Bob and I'd like to highlight several upcoming milestones. One of our bright Wall Street gurus, who covered dermatology for years and years, said something interesting to us recently. He said it's all about prescriptions, prescriptions, prescriptions. As prescriptions grow, your stock price will rise. Have a bad prescription month and your stock price will fall. Bob and I think he's right. Monthly prescription data available via Bloomberg is a great metric to measure our performance going forward. We're expecting up to 7 dermatology approvals in Brazil this upcoming fiscal year, as you'll no doubt remember, Brazil has become the world's third-biggest maker, excuse me, third-biggest market for beauty products after the U.S. and Japan. And in plastic surgery and dermatology procedures, Brazil's now the world's second-biggest market after the U.S. We're planning a late summer, early fall launch for our recently FDA-approved Loyon product for skin descaling, which is a fancy way to say, removing scales and plaque on various dermatosises. You may remember, we in-licensed Loyon from a German pharma company. Then our own regulatory team took their German clinicals and recently received an FDA approval in March. Stay tuned for more news on this interesting product.

Speaking of new products and FDA approvals, our innovation plan should really start bearing fruit this year. Our new Chief Strategy and Marketing Officer, Marc Umscheid, the ex-Clorox guy, has really pulled together a great innovation plan with the team. In the next 12 months, we should have a great and we think perhaps even our best lineup of new FDA-approved derm and skincare products. For competitive reasons, we won't go into much detail now, but suffice it to say, we should have a very busy FDA schedule in the next 12 months. In addition, our profit center businesses, which we define as our International Division, Animal Health and Acute Care, are all breakeven now and throwing off cash, so we can grow U.S. derm faster. We expect continued wins from our profit center businesses, building on some recent good news with MannaPro, PetSmart, and a recent hospital formulary GPO, HealthTrust Group.

And finally with our growing sales force. New products from our own R&D and from our licensing efforts, we marched towards EBITDA breakeven with, as Bob likes to point out, more than sufficient cash to get us to EBITDA breakeven. So I spent a few minutes looking back at our fiscal year ending March 31, 2017, a few minutes looking ahead for the next 12 months. And Bob, if you will, cover our financials. Bob?

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [4]

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Thank you, Jim. I'll first discuss the financial results of our fourth quarter in fiscal year ended March 31, 2017. Secondly, a review of the financial results of our derm strategy. And finally, talk about our path to EBITDA breakeven, driven by the 30 derm sales reps and their 5 senior managers. 13 of which of them recently hired.

Moving now to a review of our financial results for the fourth quarter in the fiscal year 2017, and covering only the highlights with details in today's earnings press release.

Total revenue was $4 million for the quarter ended March 31, 2017, compared to $2.6 million in the same period last year. Total product revenue of $3.8 million was up 60% over the same period last year, with strong growth in U.S. dermatology, animal healthcare markets and in products sold to the new owner of our Latin America assets at reduced and previously agreed-to prices. More specifically, during the fourth quarter, U.S. product revenue increased $451,000, up 32% to $1.8 million, mostly related to the increase in the dermatology product revenue and higher sales to the new animal health care partner, partially offset by flat acute care sales. Total international product revenue was up $979,000 or 100% with increases in Mexico and Asia, partially offset by decreases in Europe and the Middle East.

Revenue from products sold to Invekra is temporary, as we mentioned before, until Invekra sets up their own manufacturing facility. We expect that revenue related to Invekra will be about $250,000 to $350,000 per quarter until they assume their own manufacturing. And we estimate that it will take about 6 to 12 months until Invekra manufacturers at their facility.

The gross margins 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 noncash expenses for the March quarter were $4.5 million, up $361,000 or 9% compared to the same period last year. The increase in cash operating expenses was due to the higher sales, marketing and administrative expenses in the United States related mostly to the increased number of our direct dermatology sales force.

On the balance sheet, and Jim mentioned this earlier, our cash position at the end of March was $17.5 million compared to $7.5 million last year, with minimal debt, weathered in the financial results of our dermatology efforts starting in October 2014 through the fourth quarter ending March 31, 2017. As a preference to discussing these dermatology results, starting from 0 direct sales in late 2014, we have built a strong dermatology foundation over the past 2-plus years, upon which continue to grow in the future. There are several ways to measure our success in the derm market. One is through the sales of our products to our wholesale distributors, which are recognized as revenue when shipped to them, this is a common way of recognizing revenue. Our total U.S. product revenue was $613,000 for the March quarter in 2015, $1.4 million in the March quarter of 2016, and $1.8 million in the March quarter, 2017, up 32% over the same quarter last year. More specifically, our U.S. dermatology net product revenue was $1.2 million for the quarter ending March 31, 2017, compared to $769,000 in the same period last year, increase of $400,000 or 52%. While we recognize our derm revenue when we ship to our wholesalers, a second method to objectively gauge the Sonoma dermatology performance is a 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, and is also widely shown via Bloomberg. It is shown on a weekly basis or monthly basis for all of our products, and if you have an interest in following Sonoma more closely as an investor, we recommend that this is relevant information to follow.

According to the Symphony monthly data, the total prescriptions filled by patients via the pharmacy times the price paid by the wholesalers for all of our derm products was $2.5 million for the March quarter -- 2017 quarter, up $1.5 million or 150% from $1 million for the same period last year. The average quarter-over-quarter growth for the last 4 quarters for demand dollars was 28%. The growth in demand dollars for the March quarter over the December quarter was 7%. The number of prescriptions filled for the December and March quarters were both in the 13,000 unit range flat with the September quarter. This seasonality occurred last year slightly modified for product lines last year in the March quarter. The December and March quarters have historically grown at slower quarter-over-quarter growth than the other quarters due to seasonality, the high number of holidays and derm conferences in the December and March quarters. And with the start of the year in January, most managed care programs with initial deductibles tend to cause a delay in filling up prescriptions and cause higher rebates more specifically related to the March quarter. After this seasonality in December and March of last year, we recovered nicely with strong quarter-over-quarter growth, since prescriptions filled in the June and September quarters. Regardless of these seasonality factors, our prescriptions filled and demand dollars have grown dramatically since we started selling products with our direct sales force from 0 to over 13,000 prescriptions a quarter and from 0 to over $2.5 million in demand dollars for the March 2017 quarter. There have been 3 primary factors, which have generated this strong growth. First in order of importance has been the quality, effectiveness, leadership and the number of our direct sales force. We started with 10 salespeople in late 2014 and added 7 more in October 2015 to April 2016 time frame. Most of our 17 sales reps had quick sales ramps in the first 6 to 9 months reaching breakeven, and then positive returns in their respective territories. After that, the sales tend to grow at a more normal pace. The second factor for the high growth has been the launch and growth of 8 products and product line extensions, which Jim mentioned earlier. The last and third reason has been our price increases. Since we have relatively large product sizes, our price per gram of product is currently well below that of our competitive products. For example, Topicort, a solid branded mid-potency topical steroid, sells for about $4.50 a gram; a comparable generic sells for $2.67 per gram; and Alevicyn gel sells for $1.11 per gram.

What is our plan to achieve commercial EBITDA breakeven? Our current primary financial objective. Our plan to achieve EBITDA breakeven includes the same 3 factors, which I just mentioned, and is very simple in concept, including hiring enough experienced and effective dermatology sales reps to achieve breakeven; two, launch and grow new and current products; and three, increase prices based on a pricing strategy of periodic plan and smaller changes but remaining below the price per gram of our competitive products. I will discuss each of these factors in greater detail.

Number one, and the most important is to hire additional experienced and effective sales reps. How many should we hire? How soon? And how much do they need to sell on average? We think the number of sales reps we need to achieve EBITDA breakeven is a total of 32 to 35 reps. Since September 30, 2016, we had 17 sales reps, we have already added and trained 13 reps, mostly in the latter half of recent March quarter, a 75% increase in the sales force. The others will be hired if needed in the next 6 to 9 months. We think that an aggressive hiring program like this one is the quickest path to EBITDA's breakeven. In addition, to achieve breakeven with 32 sales reps, sales reps need to sell 1,000 prescriptions per quarter on average or in total sell 32,000 prescriptions per quarter. The "on average" is key, since there are fairly wide variations in the size and potential between different territories. As a result, our territories have different targets. At 32,000 prescriptions filled, the sales reps contribute enough income to cover the derm and corporate overhead.

The second key factor in achieving breakeven is the launch and growth of new and current products. We will be launching, as Jim mentioned earlier, a unique Loyon product effective in reducing the scaling on dermatosis in the fall of 2017, and several line extensions for Ceramax in the December and March quarters. We have a robust current portfolio of 8 products and the line extensions for treatment of atopic and seborrheic dermatitis, scar management, surgical procedures and oral anti-infective for severe acne and a state-of-the-art skin barrier and repair product. The sales force is now divided into 2 (inaudible) categories. The first group is the 17 sales reps, which have been with Sonoma for 1 to 2.5 years, have demonstrated a quick 6 to 9 months sales ramp to achieve positive returns in their territory, the quickest was 3 months. Generally after that, as I mentioned earlier, after that quick surge, the growth will be at a more normal pace. In the September 2016 quarter, these 17 sales reps sold on average 814 prescriptions for that quarter, not too far from the 1,000-unit breakeven target level. The second group of reps are those who have been recently hired and trained, mostly in the latter half of March 2017 quarter. Similar to the tenured reps, while starting at 0, they're newbies to us, but still experienced reps, should also demonstrate a quick 6 to 9 month-strong sales ramp, which means that we should exhibit strong overall prescription quarter-over-quarter growth in the September, June and December quarters probably in that order. The December quarter, as I mentioned earlier, will be dampened by the seasonality impact which I -- by the seasonality impact. Like other sales groups, after the 6 to 9-month spurt, the growth will continue in a slower more normal rate. To verify some of these comments, the prescriptions filled, for those of you who have not been looking at them, for the last 8 weeks shown on Bloomberg had demonstrated a nice upward trend. The key metric to watch as we drive to EBITDA breakeven is the ratio of average prescriptions filled per sales rep per quarter. In the first 9 months, with 10 salespeople, that ratio grew from 0 to 716 prescriptions filled per quarter per sales rep. Then as we added 7 new salespeople, this ratio dipped down to 481 and then bounced back to 814 as I mentioned in the September quarter, as new sales reps at that time exhibit their strong 6 to 9 months sales ramp. With the addition of 13 new salespeople, mostly in March quarter of 2017, the average dips down again in March and probably the June quarter, but resume increasing as new reps progress up their strong 6 to 9-month sales ramp. During this time, our overall prescriptions filled, as I mentioned, should grow quickly. As mentioned earlier, our breakeven level occurs when our sales reps achieve the average 1,000 prescriptions per rep per quarter assuming 32 sales reps.

What is the possible time of achieving the EBITDA breakeven? Let me make it clear that we are not indicating breakeven in a specific quarter in the future. What we are saying is, one, our prescriptions for the March quarter were about 13,000 and have been growing at an average quarter-over-quarter growth rate for the last 4 quarters at 13%. And two, if, and I want to emphasize the word, "if", our prescriptions filled grow at a quarter-over-quarter growth rate average of 13% to 20%, starting from the March quarter, then we should achieve the breakeven in the range of the June to December 2018 time frame.

Let me now make some general comments about the plan to achieve EBITDA breakeven. We believe, and we've mentioned this before, this quick expansion is the fastest way to achieve that breakeven, and we expect to use about $10 million of our $17.5 million of nondilutive cash to achieve this breakeven. Therefore, we do not expect to complete any dilutive funding in the near future, except those owners of the trading warrants, who choose to exercise their positions in the stock, as the stock price goes up. The gross margins will improve as we increase the U.S. dermatology revenue, which has 80% to 85% gross margins and at the breakeven level, we should have a blended gross margin in the range of a low 70% level.

Looking now at the big picture in order for us to achieve EBITDA breakeven, we estimate that our total net revenue should be in the $6 million to $6.5 million per quarter range, and that the prescriptions filled as we've mentioned a couple of times, should be in the 32,000 to 35,000 range.

Now a last general comment on our journey to breakeven is that we will update you on our progress on each quarterly earnings call. And if needed, we'll adjust our assumptions and the impact of those changes. As mentioned on previous calls, we continue to believe that Sonoma remains a strong investment candidate for the value investor even with the recent increase in the stock price, who is looking for strong growth in revenue and a strong cash position.

With respect to valuation, I would like to end with 3 points. One, our cash position of $17.5 million is a high percentage of our market cap of about $32 million, I think, today. Number two, our product revenue growth was strong at 48% for the last 12 months ending March compared to the same period last year. In the future, investors should expect to see continued strong revenue -- dermatology revenue growth, as the additional 13 new sales reps follow and already demonstrated sales ramp. And three, we have laid out a clear plan to break even. As we get closer to the breakeven point, our market cap and stock price should, in theory, increase. Also at the time of breakeven, our net revenue should be in the annualized $23 million to $25 million range, and 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from the line of Laura Engel with Stonegate Capital.

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Laura Shelmire Engel, Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst [2]

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So I wanted to ask just -- obviously a lot of information and a lot of exciting things going on. With the products in the pipeline there, it looks like the launch of the Loyon -- is that how you say Loyon, skin descaler -- that's the next kind of big one. Could you tell us, I've been looking and have read through the releases just a little bit more about the market opportunity and kind of what some of the other current options are, which I couldn't find many as far as what's out there to be replaced.

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [3]

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Great question. So your pronunciation is dead-bang right. Loyon. It's a skin descaler for various dermatosises. If you can picture a product that descales the egg-shell like psoriasis covering to that ugly disease or the itchy scaly skin associated with dermatosises. There's not a great product selection for dermatologists currently in the United States, which is why we're excited about this product. At the risk of repetition, we in-licensed this from a German pharma company. We got it through the FDA using their clinicals and our sales team is really excited about selling the product.

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Laura Shelmire Engel, Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst [4]

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Okay, great. And then, as far as -- it looks like so that'll be fall. Do you think it's possible we could see one more this calendar year? And then can you summarize again you said what the expectation was for going forward? The metric as far as other additional launches?

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [5]

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Yes. So we did say fall -- late summer, early fall for Loyon. I think I shared with you, Laura, not to be coy, but we've got a really active FDA schedule coming with some really interesting products and approvals. So I'm not going to be more detailed on that timeline. But to answer her good short question, are we anticipating any additional product launches between now and December?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [6]

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Well, I think the Ceramax. Looking at the very end of our fiscal year, there should be some Ceramax line extensions that should come pretty close to -- near the end of the fiscal year.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [7]

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Fiscal, not calendar.

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Operator [8]

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(Operator Instructions) And our next question is from the line of Sherry Grisewood with Dawson James Securities.

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Sherry Grisewood, Dawson James Securities, Inc., Research Division - Managing Partner, Life Science Research [9]

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Actually, I have 2 short questions. I wanted to understand whether that $834,000 of revenue to Invekra is more of a onetime thing? Or is that going to be a quarterly supply number? What's the repeatability of that revenue?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [10]

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Yes. The -- well, first of all, good question. First of all, the total $834,000 is a little bit higher than what we would be considered normal. We would consider the normal range between $250,000 and $350,000. And that is price paid to us at a very reduced price to the now-owner Invekra of our Latin America assets for manufacturing the product. Once they start their own -- and they're in the process of setting up their own manufacturing, but we think it's going to take them anywhere from 6 to 12 months to do that at this point. So we would expect that, that $250,000 to $350,000 a quarter would exist as long as we are manufacturing. So that would be 6 to 12 months. Does that answer your question?

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Sherry Grisewood, Dawson James Securities, Inc., Research Division - Managing Partner, Life Science Research [11]

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But the $834,000 was a bit of an outlier?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [12]

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Yes, it was an outlier. Exactly. There were some prices that were agreed to ahead of time prior to the deal that were a little bit higher priced.

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Sherry Grisewood, Dawson James Securities, Inc., Research Division - Managing Partner, Life Science Research [13]

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Okay.

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [14]

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And they rolled and flushed through the system at this point.

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Sherry Grisewood, Dawson James Securities, Inc., Research Division - Managing Partner, Life Science Research [15]

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Okay, great. My second question sort of wanted to follow up a little bit on the person ahead of me's question. And that is, at this point, considering the range of products that you're developing for the prescription derm market, what is the profile or what will be the profile of products that you might be looking to either in-license or acquire, or launch next year? And is there a change in the mix of that profile of products compared to which you have now?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [16]

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Good question. That seemed like that had multiple parts, Sherry. So why don't we break it. The ideal target product, we're not looking to jump into Phase II clinicals. We'd like something that's much closer to commercial. Our sales team has a -- especially the lead guy has a really good nose for new products. He takes many of our ideas to key opinion-leader doctors all around the country, and vets them giving us terrific feedback. What else can I say on the target products. We have our great line currently of topicals. We have 1 systemic that may give you a hint of where we'd like to go in the future. And then the second half of that question Bob, why don't you ask -- she was talking about the mix.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [17]

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Well, I think we are -- one of our strategies from day 1 has been to diversify into different technologies other than just the Microcyn technology. We've done a pretty good job of that. We think with our severe acne Mondoxyne product and our Ceramax product. And now we're adding the Loyon product. So -- and what's really interesting is when we have a national sales force that we have now, we get an awful lot of people coming knocking on our door, and asking us if we have an interest in the product, so -- in their products which sell, which gives us a lot of leverage in looking at new products and potentially adding new products to our line. And so that's a real positive. In terms of our Microcyn products, we think there is some opportunities there just because a lot of the -- there is a lot of recognition now coming around it a lot of like atopic dermatitis is detected to staph aureus. And so that's a really interesting opportunity for us for the Microcyn technology products.

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Operator [18]

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And our next question comes from the line of -- from Andy Summers with Janus.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [19]

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Couple of questions. So first what can you say about how well this product, Loyon, has performed in the markets where it's currently sold today? Like for example, how big is it in a country like Germany?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [20]

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Yes. At the risk of repetition, we in-licensed it from a German pharma company. It's only available in Germany, we'll be the first to introduce it in the U.S. To give you a comparable -- they have a very big sales force and they sell by their estimation about USD 10 million per year in the European market for a similar product. Now mind you, Andy, they have a broader indication than we do here in the States. We're happy with the first step of the indication but we'd eventually like to go back to the FDA and broaden ours also. So it's a good interesting product that sells well there. Our indication is a little bit more narrow here in the States, and we'd like to broaden it with the FDA.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [21]

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Okay. What are you missing in your label versus what they have in their label?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [22]

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They have a full-blown psoriasis -- descaling of psoriasis. We'd very much like to get that in the States.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [23]

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What do you have to do to get that?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [24]

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Go back to the FDA. We've not given the timeline to go back to the FDA audit other than to say that we got great clinicals coming from this German pharma company since they got through the European equivalent of the FDA, and they built up a nice data packet of clinicals. So we're parsing through those clinicals to figure out how to get back in front of the FDA with new data.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [25]

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I see, okay. Okay, and then, you mentioned earlier...

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [26]

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It would be a 510(k) kind of application at this point. So it wouldn't take forever...

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [27]

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Okay.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [28]

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And now we also have a predicate device too, which is our own product for atopic dermatitis.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [29]

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Okay, great. And then you mentioned earlier, that you expect to have 7 product approvals in Brazil in fiscal year '18. Could you just give us some color around your go-to-market strategy in Brazil? Are you planning to do it alone? Or do you need a partner? Or just how exactly do you expect that to play out?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [30]

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We're definitely going to partner in Brazil. We have zero intentions of building a sales force in Brazil ourselves. We really do have a laser focus on building U.S. derm and keeping that beholden. Go-to-market strategy is through a partner. The claims are interesting. The portfolio is interesting. And we're fishing and chopping now, Andy.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [31]

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So you'd expect to sign a partnership before these approvals start to come in?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [32]

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Probably after, if -- and this is based upon my experience -- if I were in their shoes, why not wait to see what the final labels and indications are before you signed anything.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [33]

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Okay. And you'll just -- do you partner all 7 of these with the same company? Or you'll find multiple partners? Or how will that work?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [34]

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Yes, stay tuned. We've had strong interests on a handful of them. So we may do exactly that, but we'll keep you posted.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [35]

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Okay, great. And then last question from me. You've sort of hinted at your pipeline throughout this call. But just to be very specific, do you guys have any NCEs in your pipeline? Or is everything just sort of reformulations?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [36]

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That's a good question. So NCE is a new chemical entity. We have just read a really interesting document from 1 of our regulatory folks on an NCE opportunity. But to be fair Andy, NCEs and NDAs are expensive and time-consuming, and we do have interesting opportunities in our pipeline, but we'd rather get to breakeven first. And Bob, you're really strong on that point. Will you hammer that point because I think you do it well.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [37]

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Yes. Well, we think it's something that we would like to look at the lower cost like an orphan drug type of alternatives. But we want to get to breakeven first. And that's the key for us at this point in time. We may do small types of things that would lead to the orphan drug kind of alternatives. The other thing that -- in terms of the question you just asked about the potential partnerships, we don't really include any potential partnerships in our path to breakeven. And to the extent that we have a partnership like in Brazil for the derm area, that would actually improve our ability to get to breakeven sooner.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [38]

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With some upfront cash payments? Or do you not expect any upfronts?

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [39]

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Well, we may get some upfronts. But looking more at the breakeven, more of a continuous flow of revenue and cash that they would generate.

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [40]

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And Bob is a really big fan of profit-sharing mechanism. So that even if we had to give up on some upfront cash, that we would make more on long run. And I tend to agree with him.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [41]

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Okay. And if I could just squeeze in one last one. So for most companies, EBITDA breakeven does not equal cash flow breakeven. But I think in your case, correct me if I'm wrong, because you're not going to be a taxpayer for so long and you don't have debt that requires interest payments. Your EBITDA and cash flow breakeven timeline should be roughly the same. Is that a fair statement?

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [42]

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Close. And because we don't have a really big working capital requirement, or CapEx requirement, it's pretty close. It'll probably lag about a quarter.

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Andrew J. Summers, Janus Capital Management LLC - Portfolio Manager and Equity Research Analyst [43]

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Okay. Perfect.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [44]

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So that's -- but not very far. The lag isn't very much.

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Operator [45]

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And our next question is from the line of Jason Kolbert with Maxim Group.

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Mi Zhou, Maxim Group LLC, Research Division - SVP [46]

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It's Gabrielle Zhou for Jason. I just have a question on the derm script. Can you discuss more in detail the increase in derm script in the quarter and the year. And how many scripts are there per quarter? And what's the rate of growth?

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [47]

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Okay. So our rate of growth in prescriptions for the last 4 quarters, and that's ending in March, was about 13% quarter-over-quarter, on average for the last 4 quarters. It's been, because of the seasonality as I mentioned before, it's been -- it's actually declined just because it's been more flat for the last 2 quarters, anyway. Prior to that, it was something like a 20 -- it was up in the 20%, 19%, 20% level prior to that. We think that that's just because of the hiring of an increase in our salespeople by 75%, our sales reps. And we also, you know there is a pretty expected 6 to 9-month fairly quick ramp for those 17 salespeople that we think there should be -- the growth should be higher than 13% quarter-over-quarter going over the next 2 or 3 quarters. Does that answer your question?

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Mi Zhou, Maxim Group LLC, Research Division - SVP [48]

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Yes. I appreciate the insight.

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Operator [49]

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And our next question is from the line of Bob Robbins with Robbins Capital Management.

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Robert Robbins, Robbins Capital, LLC [50]

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My question has to do with Europe and the rest of the world. Your breakdown in the quarterly release toward the end shows that it's about 60% as big as the United States in revenues. And it's growing on a 3-month basis about a little less than half the U.S. rate. We know you're emphasizing the U.S. but it's only growing 10% in the 12-month full year revenues versus 51% growth in the U.S. Tell us more about what the strategy really is there? And at what point would Europe and the rest of the world perhaps be growing a lot faster? And which countries might lead that?

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [51]

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Well, great question, Bob. Why don't I -- let's split it, I'll take Europe, you take rest of the world.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [52]

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Okay.

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [53]

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I'll cover Europe. As you know, Bob, primarily our European revenue is from acute care sales. It's a solid business for us. We have terrific partners there. But we're just getting started in the dermatology business. Now, fair warning, European dermatology pricing is not as robust as U.S. dermatology pricing. But we remain really enthusiastic about moving into that space because it affords us higher product margin opportunities in European derm. Why don't you answer RoW.

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Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO, COO and Corporate Secretary [54]

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Okay, I think on RoW, we see a lot of potential. But as a small company, our strategy, in the big picture with the international business, is it's a business unit that should be generating cash. And it does, even after we've sold Mexico or Latin America for $20 million, and taking that out, it's still is pretty close to breakeven in generating cash at this point. There, we try to use partners, almost all of our international activities are through partners. We're not going to change that because what that enables us to do is generate cash. We don't have to spend all the money on sales and marketing, like our partners would do. And that's -- we're going to continue that model. So -- and we think that longer term that -- pointed out, higher growth in the U.S. we actually have higher gross margins, but at the same -- and we have really good operating profit margins in the rest of the world and in Europe simply because we don't have a high G&A component. So our purpose in (inaudible) is to really generate cash. And we think that that will grow but just not nearly as quickly as we think that, that ratio would probably be in the 80% to 60% range, 80% as we grow more in the later years in the derm business versus the international. Does that answer your question?

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Operator [55]

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(Operator Instructions) And I'm not showing any further questions, I would like to turn the call back to management for any final remarks.

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James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President and Director [56]

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Thank you, all for joining the call and for your continued support. We feel that Sonoma is in the best shape we've been for several reasons. One, we've effectively executed a turnaround strategy in a very attractive dermatology market, with a strong experienced and effective sales team, robust and unique portfolio, and a growing product pipeline. As Bob had said repeatedly, our next step is driving the commercial breakeven, which should increase our shareholder value. Two, our current cash position of $17.5 million enables us to step on the gas in our growing derm business, without dilution to shareholders and while using only part of our cash. Three, our commercial EBITDA's breakeven plan, which is simple includes, one, hiring new sales reps, which we now have 30; two, the launching of new products and continued growth of existing products; three, gentle price increases consistent with comparable products. We believe we have the foundation and all the building blocks to achieve breakeven without further dilution to shareholder. So we look forward to sharing our progress as we build to becoming a pure-play multitechnology dermatology company and achieving our purpose of relentless passion for healing. We hope you can turn in, in August for our earnings call for the quarter ending June 30, 2017. Operator, thanks very much.

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Operator [57]

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You're welcome. And ladies and gentlemen, this concludes our program for today. You may all disconnect. Have a wonderful day.