U.S. Markets closed

Edited Transcript of OCLS earnings conference call or presentation 8-Aug-18 8:30pm GMT

Q1 2019 Sonoma Pharmaceuticals Inc Earnings Call

PETALUMA Aug 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Sonoma Pharmaceuticals Inc earnings conference call or presentation Wednesday, August 8, 2018 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James Schutz

Sonoma Pharmaceuticals, Inc. - CEO, President & Director

* Marc Umscheid

Sonoma Pharmaceuticals, Inc. - COO

* Robert E. Miller

Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary

================================================================================

Conference Call Participants

================================================================================

* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst

* Laura Shelmire Engel

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

* Scott A. Billeadeau

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Sonoma Fiscal First Quarter 2019 Conference Call. My name is Chris, and I will be your coordinator for today's call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now turn the call over to Mr. Jim Schutz. Please proceed, sir.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, and thank you all for joining us today. With me on the call are Bob Miller, Sonoma's Chief Financial Officer; and our Chief Operating Officer, Marc Umscheid. Marc will join us during the Q&A portion. Before we start, let me remind you that today's discussion contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause our actual results to differ materially from those discussed on today's call, including risks inherent in the development and commercialization of potential products; our ability to become profitable; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; our expectations related to the use of our cash reserves; our future capital needs and our ability to obtain additional funding; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, including our annual and quarterly reports.

These forward-looking statements are identified by the words -- excuse me, by the use of words such as expect, to expand, would and anticipate amongst others. Identified product applications and/or uses are intended to highlight potential applications for the investment community and do not infer that the company is marketing for these indications. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Sonoma disclaims any obligation to update these statements except as required by law.

Switching gears. For today's call, I'll cover 3 areas: first, a review the key financials from our quarter ending June 30, 2018; second, I'll cover just a few highlights from the quarter; and then finally, a brief look ahead at our upcoming milestones and product launches in the next 6 months. Bob will then follow with a thorough discussion of our financial results for the quarter, and then we'll open the call up for Q&A.

We filed our press release and supplemental PowerPoint earlier today and we had a bounce back quarter ending June 30, 2018, from our March numbers. For those of you in front of your computer, you can see that on Slide 4 of the PowerPoint, total revenue was $4.4 million, up from 14% -- excuse me, up 14% versus the same period last year and rebounding from the quarter ending March 31, up 20%. Revenue for dermatology was $1.2 million, up 1% versus the same period last year, and up 55% versus the March quarter. International revenue was $2.1 million, which was up 22% versus the same period last year, and up 11% versus the March quarter, and cash on hand as of June 30, was $7.7 million.

The number one question we've been receiving from shareholders after our previous earnings call was whether our March numbers were a hiccup. You may remember, Bob said that we expect our June, September and December quarters to bounce back from the hiccup in March. Based upon the numbers in today's press release and reflected on Slide 4 of the PowerPoint, we are pleased to report that in fact, March was a hiccup.

For investors hoping for guidance for the September quarter, we'll answer as follows. Although we continue our policy of not providing specific guidance for current or upcoming quarters, we will say this: after a robust July sales month, all trends are positive for a strong September quarter.

In response to our March numbers or our March hiccup, we crafted a three-pronged plan to reduce the impact on our revenue of the ever-changing insurance coverage landscape. First, we've been working with an insurance coverage expert to make financial and clinical trial arguments, detailing the cost and clinical benefits of our products. As an example of a financial argument to an insurance carrier, let's look at 3 products all indicated for the treatment or management of atopic dermatitis or eczema. Clobetasol, the first product, a high-potent topical steroid that went generic in the mid-1990s and is indicated for atopic dermatitis or eczema. Clobetasol is $335 a tube, even as a generic, and the average price per gram of Clobetasol is somewhere between $8 and $8.50 per gram, depending on where you pick up your prescriptions.

For comparison's sake, our Alevicyn Gel, also indicated for the management of atopic dermatitis or eczema, costs $1.50 per gram. The third product for comparison's sake was launched by a larger pharma company and was launched in 2016 as a new, nonsteroidal product for eczema, atopic dermatitis, without a generic alternative, and that costs somewhere between $10 and $13 per gram. At the risk of repetition and because I want to hammer this point, our Alevicyn Gel costs $1.50 per gram. Our financial argument to the insurance carriers is compelling. We have a new, nonsteroidal product indicated for the management of atopic dermatitis or eczema at a fraction of the cost.

A second step we took to reduce the impact on our revenue from the ever-changing insurance coverage landscape is an exciting new program we touched on last call. We are working with a mail-order prescription delivery program. The new program works like this: after a patient leaves the doctor's office with a prescription, our new mail order pharmacy contacts that patient by telephone within 60 minutes or no longer than 24 hours after the doctor's visit to capture insurance information. The patient speaks with the pharmacy call center to obtain insurance information and a shipping address. The patient then will receive our product in typically 2 days, but sometimes up to 4 days or how about if I say, no longer than 4 days, delivered to the patient's doorstep much like Amazon would do if they were making the delivery.

Our dermatologist customers love this program because the doctor's office and staff get to avoid fighting with the pharmacists at Rite Aid, CVS and Walmart and because our prescriptions get filled as the doctor wrote them or prescribed them. One doctor customer humorously tells us that his written prescriptions had become a wish list at the retail pharmacy counter, meaning that the retail pharmacist has been filling prescriptions with what the pharmacist wishes, not what the doctor prescribed. Our efforts in the second step working with a mail order prescription delivery program is already bearing fruit. About 50% of the prescriptions filled in the quarter ending June 30, were filled via these home delivery services, substitution at the retail pharmacy counter is dropping, our insurance coverage is going up, patients seem to like the new program and our doctor customers are responding very positively to this new program.

The third and final step we've taken to reduce the impact on our revenue because of the ever-changing insurance landscape is that we've been fine-tuning our sales rep plan to better targeting doctors -- excuse me, to target doctors and patients with good insurance.

Switching gears on Page 5 of the supplemental PowerPoint, you can see several of our upcoming milestones and product launches. Our new Brazilian partner is launching 2 of our products for acne and scar management in the next 90 days. In the U.S., we are preparing for product launches for an exciting new antimicrobial facial cleanser as part of an acne regimen. Stay tuned for upcoming supportive clinical trial data on this new product. And we're launching our Ceramax lotion. If you tried our Ceramax cream, you'll love our new lotion. Our cream and lotion formulations both have unique composition and benefits. But generally speaking, our new lotion is more viscous, has a higher water percentage, is lightweight, nongreasy and easily absorbs into the skin. We've been testing samples of Ceramax lotion and the efficacy, safety and pricing should be a hit.

Finally, we're forecasting that given the feedback from our doctor customers regarding our new Amazon-like home delivery service, is that by the end of 2018, 60% of our prescriptions will flow through this direct patient delivery program.

One final thought before handing the microphone to Bob. As I mentioned before, the number one question we get from shareholders is whether March 2018 was in fact a hiccup, and the answer is yes. March was a hiccup, June bounced back nicely, and September looks strong. The second most common question we get from shareholders is regarding our cash position, specifically, does Sonoma need more cash? And our answer is as follows: we are always looking for new buy-and-hold institutional investors, and we will fund raise if we believe it is necessary to sustain our growth. We believe sustained revenue growth is key to our success. We're focused on achieving critical mass, building brand awareness for our great products and ultimately creating loyalty with customers and patients. Higher revenue generates cash to cover expenses and steers us towards profitability. However, we will not sacrifice our growth by cutting expenses to the bone at this crucial time. Although we had a challenging quarter ending March 31, we saw our business rebound in May and June and now in July, and we adjusted our business model to reflect those challenging changes in healthcare insurance plans. As a result, we are reviewing our cash burn rate and are actively cutting cost but without impacting our top line growth. Our primary goal is to grow at a healthy pace.

And with Bob, I'll hand the microphone to you.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [3]

--------------------------------------------------------------------------------

Thank you, Jim. Over the next 10 minutes, I will discuss the financial results for the June quarter and the progress of action plans executed or being executed to deal with the issues we encountered in the March quarter. Looking first at the financials, I will cover the high-level results for the key financial metrics, including the revenue, cash operating expenses, EBITDA and the cash position. More details of these results are discussed in the press release and the upcoming 10-Q, which will be released shortly. In addition, we have a supplemental PowerPoint presentation, which Jim mentioned, which displays these key metrics on Slide 6 compared to the same period last year, June 2017 quarter, and compared to the last quarter ended March 31, 2018.

As Jim briefly mentioned, the total net revenue for the June quarter was $4.4 million compared to $3.8 million for the same period last year, up 14% and up 20% over the recent March 2018 quarter, with increases in both the U.S. and the Latin America revenues.

Covering international first, as shown on Page 6. International revenue, up $2.1 million, is up 22% compared to the same period last year and up 11% compared to the March 2018 quarter. The revenue was primarily up due to very strong increase in Latin America sales sold by our partner in Latin America, and smaller increases in China, Korea, Australia, New Zealand and India. These increases were partially offset by decreases in the Middle East and Singapore. As a result of our strong overseas distribution networks, Sonoma continues to be the worldwide leader in the manufacture and sale of HOCl products. We make and sell over 300,000 units of HOCl product every month, and over 3.6 million units a year. Our number of units sold are more than 10x larger than the total number of units sold by all of our HOCl competitors. Our HOCl technology enables Sonoma to sell unique, effective and safe products for the use in dermatology and advanced skin care on humans and animals.

U.S. product net revenue was $2 million, up 6% from the same period last year and up 45% from the March 2018 quarter, driven by higher sales in dermatology and animal health care, partially offset by a decrease in acute care products compared to last year.

The dermatology gross revenue based on shipments to customers, not prescriptions filled, was $3.6 million for the quarter ending June 30, 2018, up 13% compared to the same period last year and up 34% compared to the recent March quarter. The graphs of our gross revenue in total and by product line over the last 3 years are shown on Pages 7 and 8 in the supplemental PowerPoint presentation.

The reset of the healthcare plans in January this year and the growth of the high deductible plans continue to impact the factory units sold and the rebate cost in the month of April, while the months of May and June were stronger. The dermatology net revenue of $1.2 million was up 1% from the same period last year and up 55% compared to the recent March 2018 quarter. Even though the gross revenue was up compared to the same period last year, the net revenue was about the same due to the higher rebate cost as a percentage of the gross revenue of 4 percentage points. On the other hand, the rebate costs as a percentage of gross revenue were much lower compared to the March 2018 quarter by 5 percentage points. This is shown on Page 6 of our PowerPoint presentation by looking at the change in the net revenue as a percentage of gross revenue, right below the U.S. dermatology net revenue line.

As Jim pointed out earlier, we implemented a mail order program to help preclude or reduce the impact of factories, which caused the March quarter to be down in our dermatology business. As you may recall, last quarter, we identified the following potential benefits of a more pervasive mail order program. One, mail order pharmacies maintain a limited inventory of our products, which we control and which we can keep at a minimal level. Thus far, we have seen low inventories at the mail order pharmacies, which prevents large inventory swings like what happened to us in the March quarter with the current wholesalers. Number two, this delivery method enables us to better control the rebate cost by making a small profit compared to losing money on prescription filled for uninsured patients by the wholesalers and retail pharmacies. Number 3, the mail order delivery will significantly process -- will deliver -- significantly reduce the number of substitutions from and abandonment in our products, which currently occur at the normal retail pharmacy. In general, this method will tend to make the gap between the gross and net revenues smaller and more predictable. To incentivize doctors and patients to utilize this method, we reduced the co-pays which the patients have to pay. This program was implemented at the end of May and thus, it was introduced our doctor customer base for only a month before the end of the June quarter, would have been our results thus far with this program.

The primary mail order pharmacy filled over 900 prescriptions for the month of June, which represents 20% of our factory units sold for prescriptions during June. Thus far, we are happy with the high-quality of the customer service and the quick uptake of the program in its first full month of implementation. For the month of July, our primary mail order pharmacy filled over 1,500 prescriptions, which represents 28% of the factory units sold for prescriptions in July. While this appears to be an effective program, we will continue to remain in great relationships with the wholesale distributors and the retail pharmacies. Many doctors and patients prefer to use this very convenient but more expensive distribution network to obtain their prescription products.

Now returning to a discussion of the financials for the June quarter. The cash operating expenses for the quarter ended June 30 were $4.9 million, up $209,000 or 4% from the same period last year and down 5% from the March quarter 2018. The increase in cash operating expenses compared to last year were due to higher legal and marketing cost in the U.S. The loss from operations minus noncash expenses EBITDA for the June quarter was $3.1 million, up $249,000 from the same period last year, primarily due to lower gross margins and higher operating cash expenses. The cash position on June 30 was $7.7 million compared to $10.1 million on March 31, 2018.

We look forward to the following for the rest of the fiscal year 2019. Number one, growth in the sales rep productivity with increases in the average coverage or prescriptions with good insurance or we call them good scripts per rep per quarter. This is a primary focus of our sales reps. They receive no commission for the "bad scripts." This is designed to produce growth and profitable net revenue and will be aided by 2 strong product launches in the U.S. dermatology market, which Jim talked about. Number two, continued growth in our specialty mail order programs, which Jim and I talked about. Number three, moderate price increases since our price per gram is lower than the competitive products. Number four, our cash operating expenses are expected to remain relatively flat. And lastly, number five, the profitable revenue growth should result in a reduction in our EBITDA.

I will now pass the call back to the operator for question and answers.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Bruce Jackson with Benchmark.

--------------------------------------------------------------------------------

Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [2]

--------------------------------------------------------------------------------

One of the -- in addition to the mail order effort that you've got underway, you also last quarter talked about engaging some consultants to look at the reimbursement rates for the product. So I was wondering if you had made any progress on that front during the quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, good question, Bruce. Yes, I briefly mentioned it. I gave an example in my prepared remarks, the financial arguments that we'll be making to the Blue Cross Blue Shield, Anthems of the world. But we have a really good consultant, we're arming that consultant with the information he's asking for and we'll keep you posted on the results.

--------------------------------------------------------------------------------

Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [4]

--------------------------------------------------------------------------------

And then a quick question on Invekra. How long do you see that agreement continuing right now? It seems to be a little bit stronger than you originally anticipated.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

If memory serves, Bob, contractually, we've extended for an additional 2 years that expires late fall 2020, I believe, correct?

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [6]

--------------------------------------------------------------------------------

Something like that, yes.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Yes, and they're a terrific partner for us. We love to see their growth and our international guru is really pressing Invekra to expand into other Latin America countries, Central and South America other than Brazil.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [8]

--------------------------------------------------------------------------------

So (inaudible) we think that they asked to extend it because the making of the product is a lot more difficult than they, I think, envisioned initially. And so -- and that's -- we're fine with that because it does give us additional revenue and additional profits.

--------------------------------------------------------------------------------

Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [9]

--------------------------------------------------------------------------------

Okay. Then last question for me with the new Brazil agreement with U Skin. When do you anticipate the first orders to start flowing for that?

--------------------------------------------------------------------------------

Marc Umscheid, Sonoma Pharmaceuticals, Inc. - COO [10]

--------------------------------------------------------------------------------

Yes, this is Marc, thanks for the question. We've already started. We've already received 2 significant orders and we're in the process of shipping the first out now. We expect those products to hit market in Brazil within the next 60 to 90 days.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from Laura Engel with Stonegate Capital Partners.

--------------------------------------------------------------------------------

Laura Shelmire Engel, Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst [12]

--------------------------------------------------------------------------------

Just circling back to the Invekra, if that deal is going to continue, can you just comment a little bit on the effect on margins? And then I guess, over this upcoming the remainder -- remaining 3 quarters, maybe what this is -- as far as margin levels, kind of the new normal, or if we should expect to see additional changes with the change in your business a little bit?

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [13]

--------------------------------------------------------------------------------

Yes. See, you're right. The Latin America margins, especially the Invekra ones are in the mid- to high-teens and we would expect them to stay there during this extension. In terms of our overall mark -- and of course, the longer they stayed in that margin, they'll have a tendency to influence margin to a lower level. But as our derm business grows, which has 75%, 80 percent-plus margins, as that grows as a percentage of the overall business, which we expect it to do, then we should see an improvement in the margins. And I think in the past, we've said that they should be up in the high 60% to low 70% levels.

--------------------------------------------------------------------------------

Laura Shelmire Engel, Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay, great. And then on the mail order program, I guess longer term, would you see that as a -- what potential as a percentage of your business and then maybe touch on any associated cost with that program, now that you've kind of explained how it works.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [15]

--------------------------------------------------------------------------------

So I'll handle the first, Laura. Bob, you handle the cost?

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [16]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [17]

--------------------------------------------------------------------------------

Laura, we're forecasting that the home delivery channel should be about 60% of our U.S. prescriptions by the end of calendar 2018. Our physician customers really like this channel so we'd like to give our customers more of what they want. After that, ask us again after that earnings call and we'll give you our latest thinking from there. But Bob, why you don't you answer the cost question versus say, the AmerisourceBergen, Cardinal, McKesson product?

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [18]

--------------------------------------------------------------------------------

Yes, yes. So it's a very complex -- the answer is a very complex one and I'll try to make it simple. What it's going to do with the impact is it will tend to reduce the -- because it's a consignment sale in terms of the bad scripts, the scripts that our cash payer don't have much insurance or good insurance, it will reduce the gross revenue over time as that becomes a higher percentage, and it will then also should increase the net revenue. In other words, the difference between the gross and the net is going to get much narrower. And the reason for that is that we will sell the products that are cash pay for a low price rather than recognize any rebate on them. And therefore, it will eliminate the fairly significant rebate cost relating to cash pay. Does that give you an answer, or is that...

--------------------------------------------------------------------------------

Laura Shelmire Engel, Stonegate Capital Markets, Inc., Research Division - Senior Research Analyst [19]

--------------------------------------------------------------------------------

It gives me a good idea. So I appreciate that and congrats on the quarter, I will get back in the queue.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hey Laura, one last thought on the fees. Bob likes to hammer home to us and so I'll hammer it home, that the fees we pay the wholesalers, AmerisourceBergen, Cardinal and McKesson to feed every retail pharmacy in the country are expensive to a small company like us. The fees that we pay the home delivery service, Bob, you answer that question.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [21]

--------------------------------------------------------------------------------

Yes, generally, what we pay is in the 12% range for the wholesalers; and for the mail orders, it's in effect, an 8% number. But when you get back to the rebates, we actually -- through the wholesaler system, we're actually rebating, and the pharmacies, the retail pharmacies actually get a profit out of it. So that we would -- this mail order eliminates the profit that the retailers get, which means it's actually a lower price to the consumer or to the insurance company.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And our next question comes from Eric [Panzic] private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [23]

--------------------------------------------------------------------------------

Just 2 of them, but just a point of order, I see that the gross profit is down 2% quarter-over-quarter this year versus last year, and the SG&A was up 4% and that somewhere in there, swirling numbers includes 30 sales reps. So I also noticed when you talked about what happened in March and the bounce back, if you add the last 2 quarters this fiscal year and you compare them to last fiscal year, the sales are only up 2%. So I don't call it impressive with 30 reps on board. I do like -- it seems that you have a sense of the numbers. I do like what I heard, I think, from Bob just now, that you're going to be squeezing the reps a little bit more for a little bit more efficiency. I do like the price resistant stock, you clearly have some opportunity there, so that sounds good. But getting to my question, share price is down 50% in the last quarter. Haven't heard of any roadshows. I see on your Investor page that your last presentation is dated February. You don't get many questions from firms. Certainly, you get some from regionals not from majors, so I think the share volume kind of tells -- to tell you a disinterest. You and -- or Jim and Bob, you pulled down $1.2 million last year, $600,000 each in FY '18. So I guess my questions are 2. Do you believe that your biggest duty is to stakeholders, which includes shareholders? So that's question 1. And if so, have you determined concrete steps outside of operating results to support your stock price? If so, what are they? Again, you remember last quarter, I mentioned that the share prices decreased and you have to go to funding, that we get diluted at a smaller price. The person that comes in is probably going to want both an option, so to speak, plus preferred shares, meaning dividends. And that hole is hard to climb out of, so I really want to focus on what you are doing outside of operations to support the stock price.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [24]

--------------------------------------------------------------------------------

Okay, so let me respond. On the first, the last -- during the summer for MicroCap group that we're in, there aren't that many conferences. We have a whole -- the last conference we went to was in the early part of June, LD Micro. We, I think, are scheduled to go to 3 conferences or 4 in September and 2 or 3 in October at this point. So we're generally pretty active and go to most of the MicroCap conferences, and we think that's really important for communication to current shareholders and new shareholders. So that's -- we're pretty active in that arena. We think that's an important thing. We try to issue press releases that are meaningful press releases to everybody. And we'll have some relating to some of our new studies that Jim talked about in the facial cleanser area. There's a large one coming out this weekend. It's being talked about in the Derm Conference that we will actually press release either this coming week or next week. And so we're reasonably active in that investor conference arena. Jim, you have anything?

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [25]

--------------------------------------------------------------------------------

No. And Eric, we'll obviously update the PowerPoint the next time we do a conference. My only other note was, Eric commented on our pay. It is public. Bob and I both make the same thing. We both took pay cuts when we took over the company. We both make $250,000 a year. I'm not sure where you're getting your other numbers, but I don't want to quibble with that. You can see in our proxy just recently filed, exactly what we get paid, but we also like to buy stock in the open market, we'd like to align ourselves with our shareholders and make money on the stock, not on the cash. But thank you for the great questions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jim's compensation is probably at the 25th percentile of other CEOs at the same sized companies.

--------------------------------------------------------------------------------

Unidentified Participant, [27]

--------------------------------------------------------------------------------

Yes, it came out of the proxy but I like what you say. If there were an announcement you bought stock in the open market, that would be helpful, I'm not suggesting you do so. And as far as press releases are concerned, you obviously issue stuff that's meaningful, I get it, but you could, if you so choose -- chose to release one, once a month saying, here's where our scripts are this month compared to last year. So there are other things you can do, but I appreciate your response.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [28]

--------------------------------------------------------------------------------

It's a great point. We have debated issuing more press releases, but I will tell you my strong opinion, Eric, is that we announce something when it's material, when it's important to our shareholders and no fluff, no gray press releases, now wiggly-wiggly press releases. Sorry for the poor analogy there, but it is a conversation. We see lots of other companies that issue fluffy press releases. That's not the kind of company I want to run. When we issue something, it's meaningful and important.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [29]

--------------------------------------------------------------------------------

Now let me also say that the shareholders and the stock price is very important to us. It's one of our jobs as a management team to do the utmost we can to increase the value of the company over time. And we think that's extremely important, we think the communication is important, but at the same time, the execution is extremely important, too.

--------------------------------------------------------------------------------

Unidentified Participant, [30]

--------------------------------------------------------------------------------

Yes, I get you. Just -- we just know just by the numbers, you need to go back to the trough, and I just hate to see that you're going back to the trough at such a low stock price and what do you call it, a position of strength. But thank you again very much for your responses.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And our next question comes from Walter [Shinker] with [Mass] Partners.

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

At the beginning of the call, you went through 3 different products, the relative pricing for a similar type of application. You used a per gram valuation. I don't know if the efficacy per gram is the same, but the disparity is so large. And while the point you were trying to make, I think, is that you provide a dramatically better value. Sitting here thinking about the business, my own thought was, which crazy person set the pricing on this. Why didn't you price it at $2.50 a gram, make more money and still be 1/4 of the other guy or 1/3 of the other guy, depending on how you look at it. And so the world is not breaking down your door because you're much cheaper and I don't think you're going to be that successful, just from personal experience, in convincing insurance companies to prohibit the use of other approved drugs necessarily. So why is not a attractive strategy -- I think that's a double negative, why isn't the strategy to at least where you have very large pricing disparities, push pricing -- I know you do raise prices -- reasonably aggressively since being the dramatically low price person is I assume, it's helping you get in some doors but doesn't seemed to be -- we're still a $4 million a quarter, growing at mid-teen percent business.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [33]

--------------------------------------------------------------------------------

Good questions. When sitting across from an insurance carrier like Blue Cross Blue Shield, first conversations tend to be with someone like Bob, our CFO: financially driven, spreadsheet focused, and we need to be fully armed with price per gram analysis, which is the example that I gave you. Down the road, exactly to your point, we will have efficacy conversations, clinical trial information and the like. But first conversations and the one I wanted to highlight was price per gram. We certainly have examined increasing our product prices. We don't want to be greedy. We want to increase prices gently on a regular basis. You raised a great point, could we do something draconian and really raise the prices? We certainly explored it. We've done price sensitivity analysis and we believe that our (inaudible) with the insurance carriers, with our patients and our physicians support doing gentle price increases rather than a knee jerk. I don't know if that gives you a satisfactory answer, Walter. You're right, we are less expensive and we like being less expensive. If your argument is we may be leaving too much on the table, then we'll continue to gently increase prices over time.

--------------------------------------------------------------------------------

Unidentified Analyst, [34]

--------------------------------------------------------------------------------

Okay, and then just -- and the point's been made and I don't have a solution, but the value of the company with the $2 stock and that's within if you get an uptick tomorrow, which I assume you'll get and I understand we burn cash, is well under 1x sales. I'm just wondering, and my experience as you know, is very extensive in MicroCap companies. Unfortunately, I think we're falling into the penalty box of you've got a $12 million market cap, $13 million market cap, the value gets sufficiently low, it's not attractive to people to build a position. I normally lecture everybody just run the business and it's going to take care of itself. However, in today's market, increasingly, I am seeing pretty decent to good companies, once they fall sufficiently out-of-favor, becoming very difficult to come back, especially if the nature of the business is we're going to show good, steady growth but there's nothing breakthrough dramatic in what we do. And therefore, less as a question but more as a statement, it really is important and I normally don't say this for you people, meaning the 2 of you, to make an intensified effort to reverse the negative psychology and get the stock back up some, not because I need it in the short term but because once you fall into these holes and may have to raise money, it is a catch-22 that makes it very difficult. So I'm sure you know that. I know it better than you do because I'm in a lot of these companies, but I reinforce the comment made by others that you can't just run the business. I know you don't, we've met bunches of times, you're very responsive, but we're falling into a hole here which is very difficult to climb out of.

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [35]

--------------------------------------------------------------------------------

Well, thank you for the comment. We agree with you. We're going to do everything we can to get out of this hole, so to speak. And we think our -- we've got a couple product launches, one in particular that we think is particularly exciting, that's the facial rinse and it's going to be used in the acne regimen. And hopefully, we'll see some renewed interest and renewed growth relating to that as well as our other products.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

And our next question comes from Scott Billeadeau with Walrus Partners.

--------------------------------------------------------------------------------

Scott A. Billeadeau, [37]

--------------------------------------------------------------------------------

So most of my questions have been answered. Just a quick thing, with the current sales force, is there -- do these guys see through to -- at all or have any visibility in terms of as they bring on a new client or a new -- what the ultimate rebates are going to be for them? I mean just trying to compensate them for what you guys actually get as opposed to kind of the gross revenue number doesn't really mean much anymore. Just any thoughts? Have you been able to come up with a plan or some way to incent them for what -- for net revenues as opposed to gross revenues? Or is that just something you've got to handle behind the scenes?

--------------------------------------------------------------------------------

Robert E. Miller, Sonoma Pharmaceuticals, Inc. - CFO & Corporate Secretary [38]

--------------------------------------------------------------------------------

No, you're absolutely right. We have and they have access to data on doctors that they're calling on, and their selection process is picking out the doctors that generally have patients that have good coverage. So they're going to be focusing on and as I mentioned, they don't get a commission if they get -- if a script is written that doesn't have insurance. So you can imagine they're highly motivated to do that. They have the data and the information in advance looking at the doctors to understand which doctors have good insured patients and which ones don't. And they can say they're able to make those choices and we're drilling that into them, and it's really important and that's what we call growth of our profitable net revenue that I was referring to before. Now the mail order houses also help us in this arena because we pay less for a script that's a bad script in the mail order side, and that's a benefit. So as I mentioned on the earlier question about the impact of that, what that will do is it might reduce the gross revenue. But as we all know, the real concern is what's going on with the net revenue. It will reduce the gross revenue, it will also reduce the rebate cost. And it also should eliminate some of the substitution process and abandonment process. So the net, it should take our net revenue on a straight comparison basis to the wholesale distribution network, should take the net revenue up.

--------------------------------------------------------------------------------

Scott A. Billeadeau, [39]

--------------------------------------------------------------------------------

Yes, okay. And then of the reps from a year ago, how many are still around? I mean, (inaudible) success and I'm trying to figure out if is it your classic bottom of the 5%, bottom 10%, you've got to work out or guys that are picking the easy sale that you don't get paid for, have you been able to migrate some of those other -- maybe give us a little thought on turnover of your reps.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Scott, voluntary turnover has been skinny. We seem to engender a lot of loyalty with our reps. We pay them well, uncapped commissions. Involuntary turnover, Bob likes to say, we don't have a ton of patience. We use data to make those decisions profitability by territory. We're constantly looking at new ways to share that data with our reps to move them up the food chain. But your first point was a great point. It's really challenging unless you're armed with an enormous amount of data to know that Dr. Miller in Northern California, to know before going into his office, what percentage of his patients are Medicare, Medicaid, no insurance, Affluent. That data is available out there. We really try to hammer that home and feed our reps with that information before going into an office.

--------------------------------------------------------------------------------

Scott A. Billeadeau, [41]

--------------------------------------------------------------------------------

Okay. Just, like I said, it's all about behavior modification. If you can -- commission, you can do quite a bit with the commission plan to modify behavior as long as they have the data. You can't tell them to do things they don't know.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [42]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Jim Schutz for any further remarks.

--------------------------------------------------------------------------------

James Schutz, Sonoma Pharmaceuticals, Inc. - CEO, President & Director [44]

--------------------------------------------------------------------------------

Hey, thank you all for joining today's call and for your continuing support. Just one final paragraph or 2. In the March 2018 quarter, we hit a speed bump on our dermatology product growth. We reacted quickly to implement programs to, one, improve our managed care coverage; two, diversify our distribution channels to better control our process; and three, we're adjusting our sales reps to focus on selling profitable prescriptions, as Bob said, to the right doctors, for the right patients. These actions and programs have already put our dermatology business in a stronger position to grow our profitable revenue. As a small company, we pride ourselves on being nimble and being able to quickly address challenges. And as mentioned before, we had a robust May, June, and now, July, and the trend is in our favor for a strong September quarter. As Bob said, we just completed a clinical study using our proprietary active ingredient, hypochlorous acid, for an antimicrobial facial cleanser product to be used as part of the acne regimen, with good results. We will be issuing a press release on these results in the next several weeks, so please stay tuned. And we anticipate launching that new product sometime in the fall of 2018. We look forward to sharing our progress as we build Sonoma to become a multi-technology dermatology company and achieving our purpose of relentless passion for healing. So thank you. Operator, that's all from us.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. And everyone, have a great day.