Russ Huffington - Kelton & Associates.

Good day ladies and gentlemen and thank you for standing by. Welcome to the Oculus Innovative Sciences, fiscal second quarter 2014 conference call. My name is Heuie and I will be your conference coordinator for today's conference. At this time all participants are in a listen-only mode. (Operator Instructions).

As a reminder, this conference call is being recorded for replaying purposes. I will now like to turn the call over to Mr. Dan McFadden. Please proceed, sir..

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

This afternoon Oculus issued a press release detailing fiscal second quarter 2014 financial results and recent corporate developments. The copy of the release can be downloaded from our website, which is at www.oculusis.com, and that's O-C-U-L-U-S-I-S dot 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 does contain forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words such as expect, to expand, would and anticipate among others.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risk inherent in the development and commercialization of potential products; the risk that potential clinical studies or trials will not proceed as anticipated or may not be successful or sufficient to meet regulatory standards or receive the regulatory clearance or approvals; the company's future capital needs and its ability to obtain additional funding; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission included in the Quarterly Report on Form 10-Q and the Annual Report on Form 10-K.

Identified product applications and/or uses are intended to highlight potential applications for the investment community and does not infer that the company is marketing for these indications. The company does not provide any assurances that such applications will receive regulatory approvals.

Oculus disclaims any obligation to update these forward-looking statements. So with that, I will now turn the call over to Jim Schutz, our CEO. Jim..

Thank you Dan and thank you all for joining us today. Our agenda for today’s call; first, our CFO, Bob Miller will jump right into the numbers describing our quarterly results, as well as guidance for the upcoming quarter. Following Bob I'll spend just a few minutes on an update on our activity during this past quarter.

A look ahead as we plan for life after separation from our drug spinout Ruthigen and then we’ll open up the call for questions from investors and we’ll end the call after even shareholder has a chance to ask questions. Bob..

Thank you, Jim. First, I will indicate how we did in our guidance for the second quarter ending September; secondly, provide the guidance for the third quarter ending December; and lastly we'll summarize our financial results for the second quarter.

How did we do on our financial guidance for the quarter ending September 30? We provided guidance for the total revenue of greater than $3.6 million and achieved $4.1 million. We provided guidance of the $3.8 million range for cash operating expenses and spent $3.7 million.

We were lower than the $1.2 million negative EBITDAS range with a $0.9 million negative due to higher than expected revenue and lower than expected operating expenses.

What is our guidance for the quarter ending December 31? We expect total revenue to be in the range of $3.4 million, cash operating expenses from the $3 million range and EBITDAS to be in the range of $800,000 negative.

Given when the IOP is completed, Ruthigen will be paying Oculus for equipment within 90 days and clinical milestone payments after at least a year totaling $8 million. In addition the direct IPO related cost such as legal costs will be repaid to Oculus by Ruthigen at the time of the closing of the IPO, currently totaling about $750,000.

In our last earnings calls we provided revenue rate growth guidance for our three business groups for the full fiscal year 2014.

What is our revised guidance for fiscal year 2014? Since our product revenue is down for the second quarter and year-to-date, we are revising our product revenue growth guidance for the fiscal year 2014 to be between plus 5% and minus 5% In addition we are revising our guidance for the three business groups, the forecasted product revenue growth for the full fiscal year as one, minus 5% to 0% for Innovacyn and animal healthcare and over the counter human products; two, negative 25% for dermatology wound care businesses due to the discontinuous of Union Springs and Onset, partially offset by the growth of Quinnova; and three, 0% to 5% for the international businesses including Mexico.

While we expect to see flat revenue growth in the quarter ending December as compared to the same period last year, we expect to see positive quarterly year-over-year revenue growth in the quarter ending March 31 and for the full fiscal year 2014.

What are some of the key factors, which can positively affect this growth? One, More Pharma will be launching new products in the oral and general markets and expanding into additional Latin American countries this fiscal year, and into certain dermatology markets next fiscal year.

Revenue for Mexico represented 40% of the total product revenue for the year-to-date. Number two, we are happy to formally announce that Innovacyn has arranged for Walgreens to carry Vetericyn over the counter human care products for significant consignment sales which are currently in most of the stores.

Jim will talk a little more about this later on. Recognition of the sales will not occur until the product is sold out of the stores and Innovacyn is paid for the product. None of these human, over the counter wound care sales are soon to include in our revenue growth guidance.

Revenue from Innovacyn represented 24% of our product revenue in the year-to-date. Number three, U.S. dermatology partner, Quinnova, will be launching two new products in the middle of 2014 calendar year, one of which is the scar product. The FDA has asked us some additional questions on the scar approval, which delayed its clearance.

Revenue from dermatology and wound care in the U.S. represented 17% of our total product revenue on a year-to-day basis. Number four, in the Middle East; we expect to receive some significant public bids, which will positively impact our sales during the rest of the year and next fiscal year.

Five, in Europe, we expect to receive additional CE marked approvals in the quarter ending March, allowing us to market for the first time a variety of prescriptions SKUs for the Microcyn solution, the HydroGel and a wide rage of oral and dental applications, including a mount rinse.

These clearances will broaden our product line in wound care and enable us to enter the oral and general markets and thus increase our sales in Europe for both the next quarter and the next fiscal year. International revenue excluding Mexico represented 14% of our total product revenue for the year-to-date.

And lastly in addition, we expect to receive additional payments for our proprietary manufacturing machines and for the clinical milestone from Ruthigen and the repayment of direct IPO costs, when and if the IPO is completed. These milestone payments total $5 million and are not assumed in our product revenue guidance.

Moving now to the results of our second fiscal quarter ending September 30, product revenues were down 10% compared to the same period last year, with decreases in Mexico China and India, partially offset by increases in Europe, Middle East and Singapore. The decline in the quarterly revenue growth compared to last year was a result of two factors.

One, the impact of the closing of More Pharma transaction, which occurred in August 2012. It resulted in significantly higher revenue in September quarter last year to the sales, not only to the existing trade customers at higher market prices, but also to More Pharma at that time.

Second the partnerships in the United States with Union Springs and Onset Pharmaceuticals was discontinued by the end of the year, of last year.

Product revenue in the United States was equal to the same period last year, with higher sales in dermatology wound care and animal health care, offset by declines related to the discontinuance of the two partnerships I mentioned just a coupe of minutes ago.

Oculus recorded revenue in the amounts of $1.3 million and $1.2 million for the quarter ended September 30, 2013, versus 2012 respectively from Innovacyn, with a 5% increase over the same quarter last year.

Revenue in Mexico decreased $510,000 or 27% as compared with the same period last year, as a result of the More Pharma transaction completed in August of 2012 as I explained previously.

The higher unit volume growth of 21% and the recognition of $378,000 related to the amortization of up-front fees paid by More Pharma was more than offset by a 52% reduction in the overall sales price per unit.

Also due to the transfer of the sales function in Mexico to More Pharma, related operating expenses in Mexico were $678,000 lower than that in the same period last year.

Revenue in Mexico and the "Rest of World" increased $99,000 as compared with the same period last year with increases in Europe, Middle East and Singapore, partially offset by decreases in China and India.

Our gross product profitability was 69% of product revenues, down from 74% during the same period last year, due to the declines in margins in Mexico related to the More Pharma transaction, partially offset by higher gross margins in the U.S. and Europe.

Operating expenses minus non-cash expenses during the second quarter were $3.7 million, up $177,000 when compared to $3.5 million for the same period last year, due to higher Ruthigen expenses of $994,000, partially offset by lower selling expenses in Mexico of $678,000.

EBITDAS for the quarter ending September 30 was negative $882,000, including $994,000 of expenses related to Ruthigen compared to negative $213,000 for the same period last year, due to lower product revenue in gross margins.

As a lead-in to Jim, since January of this year, Oculus has spent a significant amount of time and money working on documents and activities relating to the Ruthigen IPO. We believe that the IPO will have a significant positive impact on the value of Oculus, as we will be major shareholders in Ruthigen, plus unlocking the value of this opportunity.

An additional cash benefit to Oculus as a result of the Ruthigen IPO was $8 million of capital purchases and milestone payments. With that final comment I will turn it over to Jim..

Thank you, Bob. I'd like to spend just a few minutes on three topics before we open the call for questions-and-answers. First a brief update on Ruthigen, our drug subsidiary and their IPO process; second, a few thoughts on life at Oculus after the Ruthigen separation; and then finally a short update on operations and sales and marketing.

The most frequent question we’ve been getting over the past few weeks is regarding the Ruthigen IPO. As many of you are aware, our drug subsidiary Ruthigen filed its S-1 or prospectus to go public earlier this year and has been in correspondence with the SEC regarding this process.

Their intent is to list on the NASDAQ under the ticker symbol RTGN, more specifically prohibited by SEC regulations regarding gun jumping from addressing the timing, pricing and the many other questions uncertain that you have.

We will suggest for those of you who have questions that we haven’t of cannot answer, please turn to the various Ruthigen filings at SEC.gov website. Apologies in advance, Bob and I will be sticking to this exact same response if any questions regarding the Ruthigen process popup in our question-and-answer series.

Switching topics, we are exited to look ahead as to what the future holds for us at Oculus after Ruthigen separates. As you can read in this afternoon press release, our numbers for the past quarter show that on a pro-forma basis we would have been EBITDAS positive; earnings before interest, taxes, depreciation, amortization and stock comp charges.

We would have been EBITDAS positive when excluding the Ruthigen related expenses for the quarter. Trying to speak in Harry Truman’s plain English and I’ve been reading a great book about Harry Truman, so my apologies.

Trying to speak in plain English, as soon as we separate from Ruthigen and achieve approximately $4 million in quarterly sales, we’ll be EBITDAS positive. But we aren’t stopping there. After we achieve that goal we will work on our operating profitability and then positive cash flow.

I saw an old quote in the last couple of weeks from Fred Adler that I haven’t seen in a while and it goes something like this “Happiness is positive cash flow.” Bob said he attended a meeting in New York 20-plus years ago and they were handing out t-shirts with that same slogan. Good business concepts never seem to change.

We are pushing hard for that happiness and that positive cash flow. Finally, a short update on operations and same store marketing. On the operational side you will remember we manufacture our great products at three locations, here, where Bob and I are in Northern California.

In Southern California at our partner Innovacyn’s facility and also in Guadalajara Mexico that manufactures for the rest of the world. We have a terrific team, both north and south of the border focusing on quality, regulatory and production. Our product gross margins as Bob mentioned for the company for this quarter was 69%.

We are moving our European product manufacturing this quarter to our Mexican facility with an expected increase of 30% or so in our European gross margins, all without missing a beat in the eyes of our European customers.

Our collective team is a doing a good job controlling expenses and we think we can continue to improve those margins as our revenue growth increase.

On the sales and marketing front, as Bob said we’ll be launching a handful of new products in the hospital setting, dermatology and oral care markets in Europe this spring in 2014 that our distributors and partners have been eagerly awaiting. Please stay turned for more information here and we’ll share the news via press release later. In the U.S.

as Bob mentioned, our partner Innovacyn is making solid strides on their two Puracyn over the counter products in Walgreens. You can find the first on first-aid-shelf and the second, a foot wash in the diabetes section.

We would encourage our shareholders to visit Walgreens, buy a bottle or two and you’re probably not in the big Warren Buffett fan, but as Warren Buffett has said, as a shareholder you make money on both sides of that transaction.

For example, if you own X on stock and it looks like you just bought a big slug, buy X on gas, you are helping increase revenue and correspondingly the stock price. The same holds true with Puracyn.

Buy a bottle or two, giving a gift to family and friends during this upcoming holidays, you will have two things an outstanding product in your home and its now available over the counter for the first time, and second, you will help improve our revenue numbers.

Our hospital product sales and marketing team were launching a new marketing campaign beginning in January. In healthcare there are two busy times of the year for academic and scientific conferences, spring and fall and we attended quite a few of the fall conferences this year in the acute care space, dermatology.

We are going to tell and we are going to repeat again in the spring. We are convinced that we if we can get our great products in the hands of healthcare professionals and if we can get them to use them in their clinical setting, then we’ll earn customers for life. Our customers love our products.

Our challenge is we need to put our products into the hands of more customers. So before opening up the call to question-and-answers we’ve covered the Ruthigen IPO process, provided a quick update on life after separation from a financial perspective, from Ruthigen, and finally an overview of operations in sales and marketing.

Thank you for taking time to listen to us today, and operator, please open the phone lines for question-and-answers..

Yes, sir. (Operator Instructions). And it looks like our first question will come from Jack Wallace with Sidoti & Company. Please go ahead, your line is now open..

Good afternoon Jim, Bob. Thanks for taking my questions..

Sure Jack..

First one for U.S. Rx, sales is flat and I know we had the distributor transaction, but at this point we are a couple of quarters in. Are you maybe a little disappointed about the growth coming from the one distributor and are you going to see any help from a direct sales force maybe hitting some call points that they are not currently hitting..

I think right now our current sales force revenue is somewhat dominated by the Innovacyn revenue, if you just look at the percentage of sales, and so a lot of our increase or decrease has been, as I mentioned affected by the Innovacyn and then the discontinuance of two partnerships that we had last year.

So we did have growth, both in the women healthcare products, which is our product that’s being solid by our current sales force and that was pretty good and we also had growth in Innovacyn, but we had also a discontinuance of two partners, one in the springs and one on-set that basically offset the growth of those other two.

That’s a partial answer to your question at this point.

Did you have a related question to that?.

Yes, so the last year, I know we lost the two distributors there. Last year was a, the shining start in terms of growth rate, with 117% on the year. It seems as though that Quinnova was going to have maybe a couple more products coming potentially sooner.

And I know we had a little bit of delay there with the scar product, but again, it seems like it was high flying segment there and now we’re two quarters in down the 35% on the year.

Are you maybe getting a little bit worried there or is it just a matter of its not quite apples-to-apples and maybe I’m reading too much into the – maybe not reading enough into the loss of the two distributors..

Yes, I think your, since we are basically flat on a quarter-to-quarter basis, the two distributors on a relative basis do make a big different. Quinnova did actually show some growth and so did the woman’s healthcare product.

So we would expect that to grow, but a lot of it, and we did see a 5% growth in the Innovacyn, but on the year-to-date basis it was tend to be dominated by the size of the Innovacyn business in terms of the growth..

Okay thanks, that’s helpful and then in terms of the outlook in Mexico, if I remember correctly here, it had a little bit potential higher on the growth end for the international segment, 23% unit growth. I know its come down a little bit from previous quarters, which you said were not likely to be the go forward at the 40% and 50% range.

What is the outlook like in Mexico? Has anything changed there and are you moving a little bit of cost before some of the new products come online..

Well, we are being a little cautious. We still see strong growth down there. What really happened this year compared to last year is when we closed the deal last year with More Pharma. We had a huge – if you looked at it historically you could see that it was really a very, very large quarter and we are happy to it last year.

Now this year we are not so happy, that it occurred last year.

But we sold a lot of products prior to the closing of the More Pharma deal at a full market price, because we sold it into trade customers and then we sold a significant, and sold a lot of it into the hospital call points, which More Pharma generally was not calling on and then we also sold quite a bit to More Pharma.

So because of that, it somewhat masked the growth of the More Pharma products. They are still – they’ve been growing at 50% plus up until this quarter on a unit basis. We would expect to continue to see them growth. Now we are going to have a launch in the oral products in the first quarter of this coming year, the quarter ending March.

So we still see them as a strong unit growth area..

And are we potentially going to see the scar product come out in Mexico before, in the states. I know we had the delay there and I guess they’ll also transaction into that and maybe getting a little bit more color on the timetable and the process that’s been going on with the scar product in the States..

A great question. Lets handle the Mexico question first and then the U.S. We are excited about this scare opportunity. You may remember, I was patient one and I’d be glad to show you my [Jack Lemmon] face at your convenience. But it is, it will be a tight race between the Mexico and the U.S. to see who gets the approval or clearance first.

Mexico you may remember filed with the Mexican Ministry of Health at the end of 2012, beginning of 2013 with U.S. chronicles and so they could be just to punch Jack, but some inter company competition is healthy. So on the U.S. side, please stay tuned.

Well, based upon the last correspondents that we do want to go into too much detail on, we got fingers crossed for that next clearance or approval in the U.S. shortly..

But we will probably see the launch for Quinnova is scheduled for the middle of calendar year 2014 and the launch for Mexico is probably going to be a little bit before that. So in terms of – we would expect obviously both approvals to be before that..

Got you. Thank you and then last one, I know you guys know this is coming. Book value $1.5 million, NASDAQ listing requirements getting questioned here a little bit.

What’s the next step here?.

Yes, thanks for brining it up. You are right, we are about $1 million off on that. We actually had a discussion with the NASDAQ over the last couple of days and mentioned that to them and there are two alternatives for correcting that and we are aware of both of those.

One of which and the one that we think is going to happen first is the IPO, that’s our primary alternative. The IPO from Ruthigen will make a significant impact on our net worth and take us out as a concern for the range, well about the $2.5 million level. So we think that’s the first alternative that’s most likely to happen.

If for some reason backup plan is delayed, we have a couple of meeting ourselves to fix that. The NASDAQ is well aware of those alternatives and will give us some grace period on that..

Got you. Thank you, that’s helpful and you beat on guidance this quarter across the board, your adjusted EPS one item can beat our estimate, as well as top line there. I know that you had a couple if go forward questions here. It seems like there’s quite a bit of good things to come based on what your saying in the script here.

It seems like with the slightly lower guidance range, you might be setting yourselves a little bit of a low hurdle, but maybe your just being conservative..

No. We’re trying to be conservative, we are saying things that we don’t have in the forecast like the over the counter Puracyn product and also any milestone payments related to Ruthigen, but at the same time we adjusted, we try to keep fairly narrow ranges on the forecast that we can, and on the guidance that we can..

Got you. Thanks for taking my questions..

Thanks Jack..

Thank you sir. Our next question will come from Chuck Lipson with CSL Associates. Please go ahead your line is open..

As you can expect most of my questions would probably relate to Ruthigen if I could ask them, but a couple of other things.

Here on the retail to Walgreens, could you give some idea if there are other retailers that your looking for or how your planning to market this and what kind of revenues might come out of Walgreens?.

Yes, good question. Why don’t I handle the first chuck and Rob you handle the second. Our good friends in Southern California Chuck at Innovacyn, our partners there are private, so we always like to honor their wishes of keeping their information confidential until they want us to share. They’ve asked us to focus of Walgreens and that’s it.

We would expect that showing success there that they may move into other brick and mortar in addition to online sales, but we’re excited to see their progress and a lot of effort on their part to get the first foot in the door with Walgreens in two spots..

Are they exclusive in retail?.

Again for competitive reasons they’ve asked us not to share that. You know, stay tuned. We see good things coming here, especially given the safety profile of the product. You don’t see the long warnings from the FDA as you do with so many other products.

So, it’s a perfect over the counter product line and we hope to continue to feed our partners there in additional over the counter products. I know you asked a second half of that question and the second half was any expected dollar amount forecasted in our numbers from over the counter sales I believe Chuck..

Right..

This is a – we know how much has been shipped out to Walgreens at this point, but our partners have asked us not to share that and we want to do what they’ve asked us on this particular thing. Exactly how much of that would be in terms of revenues, we don’t really know and that’s why we’re really not putting out any forecast at this point..

Some more question on that, roughly the same as say south of the border?.

Pardon me..

Are gross margins the same as say south of the border, is that the question?.

Yes..

I mean the gross margins in this particular product of the over the counter, that’s your question?.

Yes..

Our gross margins are pretty similar to what they are over the counter in both the Vetericyn and Puracyn..

Okay, even though you’re going through this distribution..

Yes, now the costs from an Ruthigen side are pretty significant and they are making an investment in this product in Walgreens, so that’s pretty significant. But if you just look at it from our gross margins, it would be very similar to the Vetericyn..

Okay, and then I know we had high hopes for the scar product being approved in the quarter that just finished and there is some delay. Were the questions, anything daunting or were they something that you feel you can overcome..

Good question. We estimated, the scar approval or clearance to come in the fall and then we tightened that to October and November. Without tipping the cards too much, we’re still pushing for November. So I hope that answers the question on the debt, the questions from the FDA..

Well that sounds like maybe good news is not too far away on that..

Yes, we’ve got our fingers crossed there and its a great product as you know in a large market with no therapeutic indications or drugs that dermatologists can write a script for. So we’re excited and our dermatology partner in Philadelphia is excited..

Okay. So then once the approval is received we’re giving ourselves what, about five or six months before we actually see the product in the derm’s offices..

Yes, I think Bob, you suggested they’d be launching in mid-2014. Having met Bob, you know he’s very conservative, so we like to hit our timing. So assume we’re going to hit that timing..

Okay great. Well hopefully this Ruthigen IPO will get off and we can become a profitable company..

Thank you Chuck..

Thank you sir. (Operator Instructions). Our next phone question will come from Russ Huffington with Kelton & Associates. Please go ahead. Your line is open..

Good evening gentlemen..

Hi Russ, its been a long time..

Yes sir. Just wanted to say a couple of things. James, not that you if you have it exactly right if everybody would take this opportunity and since they got that great Vetericyn product, go in to Walgreens and buy some for Christmas and tell all your friends, number one, that would help everything out dramatically.

The second thing and I know you can’t talk much about Ruthigen, but the expense is just kind of breath taking. I saw in that first line and its like you said, it was about $750,000 for attorney fees.

Even down here in Austin its that $750 an hour count for 1000 hours, that’s just breath taking, but I just wanted to share my opinion and I know you’ll are doing your best. I know your pushing forward and I hope the next conference call we’d have this all under our belt..

Thank you Russ, we agree. Going back to your Vetericyn comment, Bob likes to talk about – I’ve forgotten the name of the movie, but a grandfather walks around the home with a Windex bottle and so yeah, squirts everybody and everything and we would encourage our customers and shareholders to do the same thing..

I totally agree and I think it’s a great product and I hope everybody does that. You all have a great holiday season..

Thank you Russ..

Thank you..

Thank you. Bye-bye..

Thank you sir. (Operator Instructions). Presenters, it looks like we have no additional questioners on the phone queue. I’d like to turn the program back over to Mr. Schutz for any additional or closing remarks..

Thank you for joining us today and we were just talking about the holiday. So have a good thanksgiving until we speak to you again, thanks again..

Thank you gentlemen and thank you ladies and gentlemen. Again, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect..