Dan McFadden - VP, Public and Investor Relations Jim Schutz - CEO Bob Miller - CFO and COO.

Gabrielle Zhou - Maxim Group Laura Engel - Stonegate Capital.

Good day, ladies and gentlemen and welcome to the Oculus Innovative Sciences Fiscal First Quarter 2017 Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference Mr. Dan McFadden. Sir you may begin..

Thanks Sabrina and good afternoon and thanks to everybody for joining us. With me on the call today are CEO, Jim Schutz; and our CFO, Bob Miller. We will open the call with Bob’s review of our financial results for the quarter followed by Jim’s update on our business strategy moving forward.

This afternoon, Oculus issued a press release detailing fiscal first quarter 2017 financial results and recent corporate developments. A copy of the release can be downloaded from our website, which is oculusis.com, that’s oculusis.com, or you can call Investor Relations at 425-753-2105 and we will be happy to assist you.

Before we begin, I remind listeners that this conference call contains forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by use of words 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 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 Bob Miller, our CFO..

Thank you, Dan.

I will first discuss our key strategies to achieve strong revenue growth for fiscal year 2017; second, a review of the financial results of our derm strategy and our overall financial results for the first quarter ended June 30, 2016 and lastly, will provide some revenue guidance for the second fiscal quarter ending September 30, 2016.

First, what are our key strategies to continuous strong product revenue growth for fiscal year 2017? Our strategies for growth for the rest of this fiscal year, which have been the same and consistent since the beginning of 2015 are the following. The number one strategy is to focus on growing revenue in the U.S.

dermatology market with our direct sales force and a robust product portfolio with both Microcyn and non-Microcyn products. The U.S. derm segment provides us with the largest potential growth and will lead us to overall breakeven.

Our number two strategy is to continue strong unit growth in our international business with new product launches and stronger partners. The international segment was 61% of our product revenue for this June quarter and generates cash to help fund the US derm growth. This strategy is really simple.

Bottom line we’re selling into the derm market only with an expanding direct sales force and with an expanding product portfolio.

What have been the financial results of our dermatology focus starting in October 2014 through our first quarter ending June 30, 2016? As a preface to discussing these dermatology results, starting from zero direct sales revenue in late 2014, we have built a strong dermatology foundation over the past year and half, upon which to continue to grow in the future.

Jim will cover this in very detail in his discussion. There are several ways to measure our success in the derm market. One is the sales of our products which are recognized when we ship to the wholesale distributors. This is a common way of recognizing revenue and is reflected in the following reported revenue.

Our total US product revenue was $356,000 for the September quarter 2014, $615,000 for the March quarter 2015, $787,000 for the June quarter, $1.2 million for the September quarter, and $1.4 million for the March and June 2016 quarters. This method of recognition tends to be driven by product load-ins to the wholesalers which can be lumpy.

More specifically, our U.S. dermatology net product revenue was $686,000 for the quarter ending June 30, 2016 compared to $319,000 in the same period last year, an increase of $367,000 or 115%.

In the dermatology business, the gross revenue is calculated by multiplying the units sold to the wholesalers times the price sold to the wholesalers, often called WAC, wholesaler acquisition cost.

Our primary wholesalers are McKesson, Cardinal and AmerisourceBergen that show the product and inventory in distribution centers and field [ph] requested by the pharmacy. At that time wholesalers ship the product to the pharmacy and it is dispensed to the patient and [indiscernible].

The deductions from gross revenue to net revenue include a wholesaler fee of 10% to 12%, a return reserve of 5% to 7% and a rebate amount of 25% to 30% of gross revenue.

A rebate program is offered by all companies offering similar products and provide significant reductions to those patients who do not have any medical insurance or have high deductibles for the product. As you can see from these percentages, the reductions from gross revenue to net revenue are significant.

While we recognize our derm revenue when we ship the product to the wholesalers, a second method to objectively gauge the Oculus dermatology performance is the number of prescriptions sold to the patients via the pharmacies multiplied times the price paid to us by the wholesalers. This is sometimes called demand dollars.

This information is available to the public for a fee via several well known databases.

According to the Symphony monthly data, the total prescriptions sold to patients via pharmacies times the average price paid by the wholesaler for all of our derm products to give you a sense of our quarter-over-quarter derm growth, was $151,000 for the March 2015 quarter, $227,000 for the June 2015 quarter, $331,000 for the September quarter, $631,000 for December, $1 million for the March 2016 quarter and $1.7 million for the June quarter just ended.

This represents an average quarter-over-quarter growth of 65% for the last four quarters. Please keep in mind, as mentioned above, wholesaler fees, rebate fees, and return reserves are deducted from gross revenue or gross demand dollars to derive a net revenue – net demand growth.

In addition, the gross revenue, just to summarize, is derived from unit shipped to the wholesalers versus demand dollars which is derived from units dispensed to the patients from the pharmacy. One way to keep this growth trend going is via the introduction of new products.

In fact, as mentioned earlier, in late March 2016 we sold and loaded in Ceramax, a skin repair product for atopic dermatitis to the wholesalers. During the following June quarter, the one that just ended, there were 1084 Ceramax prescriptions filled with a WAC price of $214. This is our best and quickest product launch in our history.

Our target is to launch at least one new derm product per quarter. Jim will talk more about our pipeline of new products in just a few moments. To give you a sense of the impact of the growth of dermatology sales on Oculus, the product revenue in the U.S.

as a percentage of the total product revenue has grown from 27% in the 2015 June quarter, last year, to 39% in the 2016 June quarter.

The bottom line is that for the last four quarters, the execution of our strategy to focus and grow the dermatology business where the direct sales force has been effective, meaningful and have shown a significant tangible impact on our overall financial results.

Moving now to a review of our financial results for the first quarter of fiscal year 2017 ended June 30, 2016, covering only the highlights with details in today's earnings press release. Total revenue was $3.8 million for the June quarter when compared to $3.7 million in the same period in 2015.

Product revenues were up 20% over the same period last year with strong growth in the U.S. dermatology and animal health sales, partly offset by a decrease in revenue from Latin America, with a 19% decline in peso with a strong sales quarter last year.

The revenue for the same quarter last year in Mexico included the stocking of our new partner’s expansive distribution network. Licensing fees and royalty fees were down $372,000. More specifically during the first quarter, U.S.

product revenue increased $586,000, up 74% to $1.4 million, mostly related to the increase in dermatology product revenue and higher sales through our new animal healthcare partner.

On the other hand, total international product revenue was about flat with last year with strong growth in Europe and the rest of world offset by decreases in sales in Latin America due to the 19% decline in peso and the strong quarter last year that I just mentioned.

Operating expenses minus non-cash expenses for the June quarter were $4.1 million, up $431,000 compared to the same period last year. The increase in cash operating expenses was due to higher sales and marketing expenses in the United States relating to the cost of our direct dermatology sales force.

On the balance sheet, our cash position at the end of March was $5 million and our long term debt was zero. How do we do compare to our guidance for the quarter ended June 30, 2016? The following was provided to you on the last earnings call.

“For the June quarter we expect total revenues to be in the $4 million range with US revenue growth of 50% plus led by growth in the dermatology segment”. As we already mentioned, the total revenue for the June quarter was $3.8 million on the low side of the $4 million dollar range and the U.S. product revenue was up 74% within the 50% plus guidance.

What is our guidance for the September quarter? For the September quarter we expect the total revenue to be in the range of $4 million with 50% plus growth in the U.S. revenue, partly offset again by the lower revenue in Mexico mostly related to the decline of peso.

As mentioned on previous calls, we continue to believe that Oculus remains a strong investment candidate for the value investor who is also looking for strong revenue growth.

We have a market cap of about $20 million, if one deducts the $5 million of cash from the market cap and the ratio of adjusted market cap of $15 million compared with fiscal year end 2016 product revenue, that ratio was about one to one.

Product revenue grew at 31% for the fiscal year 2016 and 20% for the June quarter that we just announced compared to the same period last year. The multiple of market cap to revenue for the typical derm companies tends to range between 3x to 6x.

Thus a potential investor can benefit not only from the strong derm product growth, but also from a potential expansion of the multiple. With that, I will turn it over to Jim..

Thank you, Bob. For my portion of today's call we'll spend just a few minutes on two areas before opening the call for Q&A. First, our progress in our growing U.S. dermatology business, and second, our pipeline of dermatology products which we believe will continue our U.S. derm growth sales ramp. So first, our progress in our growing U.S.

dermatology business. As Bob said our U.S. derm sales were up 115% versus the same period last year largely driven by our growing sales team. As Bob said we now have 20 plus experienced field salespeople, plus three highly trained senior managers. Each of the senior managers have 20 plus years of sales and marketing specific dermatology experience.

We targeted growing our sales team to approximately 35 to 40 reps in the U.S. over the next two years. We're currently selling seven unique and effective prescription dermatology products in several of those key products.

Our Alevicyn line and new Ceramax brand that Bob mentioned are all focused on the mitigation and treatment of atopic dermatitis or commonly known as eczema. The combination of Alevicyn and Ceramax have terrific supporting clinical evidence. You may remember Alevicyn has terrific anti-inflammatory and anti-itch properties.

And Ceramax has robust clinicals showing skin repair. We believe it's a great combination. For those of you who do not subscribe to IMS or Symphony data, our Ceramax ramp is particularly attractive in the last 90 days both in units and pricing and is on its way to becoming our fastest growing and we predict best selling product.

Our best seller by unit is our Celacyn for scar management. Over the last four quarters, Celacyn has grown in demand dollars 50% quarter over quarter. Our sales teams is especially enthusiastic about introducing Celacyn for scar management once we start detailing the static dermatology space soon.

Our systemic acne product Mondoxyne continues to impress and perform well and it's in our top three products. We're working with a strong growing base of over 550 U.S. dermatology prescribers, meaning that more than 550 physicians are writing more than 10 prescriptions each month just for our products.

Starting from zero in late 2014 and till the end of June 2016 we've filled more than 44,000 prescriptions at the pharmacy counter to our dermatology patients. The prescriptions filled for the June quarter were approximately 11,700 which is our best quarter yet.

And just for comparison purposes, we filled 8600 prescriptions in the quarter ending 31 March 2016. And that's an increase of 37% in just 90 days.

So we think we have a tiger by the tail with our new focus on US dermatology and want to continue to feed our growing sales force with more innovative products both from our own R&D and from our in-license business [ph].

What are our new products in our dermatology pipeline? Ceramax, our skin barrier repair product licensed from a well known European formulator launched in April, and as we said now multiple times, is on its way to becoming our fastest growing and we predict, our best selling product.

SebDerm, a new product for seborrheic dermatitis and from our own R&D received FDA approval in late 2015 and is in the final stages of a Phase 4 type clinical study, or as stated alternatively, a marketing clinical study post approval designed to gather information on SebDerm’s efficacy in various populations.

We anticipate the product to launch in September 2016. Lasercyn, a new product also from our own R&A indicated for post-laser procedures chemical peels and dermabrasions received FDA approval in April 2015 and we’re planning to launch to be a static dermatology space -- actually we're just manufacturing as we speak. So stay tuned for the launch date.

You'll no doubt remember that Lasercyn will be our first foray into the static side of our growing dermatology focus. LOYON, a new product that we license from a German pharma company, will soon be in the FDA queue with an indication for skin descaling.

We anticipate an FDA approval in late 2016, perhaps early 2017 and are targeting a launch thereafter we’re anticipating in early 2017.

RBO 68126 is another product from our own R&A specifically designed for post Mohs procedures, we filed with the FDA recently and a product launch is planned depending upon FDA timing for the spring of 2017 and finally, TSO216 and TSO316 both licensed from a European formulator both for atopic dermatitis both planned for FDA approval and product launches in later 2017.

So we have a robust product pipeline for the next two years for our growing sales force and we'll keep you posted on our clinical trial results, FDA approvals and product launch timeline. So one final thought, before we open the call for Q&A, our overall strategy of focusing our efforts on US dermatology as Bob said is simple straight forward.

Our tactical drivers are also straight forward. We will grow via four tactical steps. One, we will grow by selling more of our current seven products. Two, we will grow by adding new products from the pipeline we just talked about.

Three, we will grow by adding additional sales people in new territories calling on new doctors, and four, we will grow by gentle price increases for our current and future products. So Bob covered our numbers and gave guidance for the quarter ending September 30. I spent a few minutes on our progress in our growing U.S.

terminology business, and then a few minutes on our pipeline of dermatology products which we believe will continue our derm growth sales ramp. So with that, Sabrina, if you would please open the call for Q&A. .

[Operator Instructions] And our first question comes from the line of Jason Kolbert with Maxim Group..

Hi good afternoon guys. This is Gabrielle Zhou on behalf of Jason Kolbert. Thanks for taking my question. So while the increase in the first quarter revenue grew 20% which is offset by the Latin America decrease due to the foreign exchange rate.

How do you see the growth versus exchange rate in foreign markets affecting the revenue over the next six to twelve months?.

We think that -- obviously we can't forecast what the peso is going to do. But if it stays where it is that will have a negative impact on our revenue. However since we are fairly squared we actually manufacture in Mexico and lot of our expenses in Mexico.

Mexico, even though the revenue is down, it still generates cash because those were fairly squared. Going forward we would expect this especially in the next quarter to have that same kind of impact where – there’s going to be a negative impact on the revenue, but they will not be a negative impact on the cash.

Does that answer your question?.

Yes. Okay, thanks. I have a follow up question.

So can you walk us through the projected timeline for new product launches this year into the following year? Thanks and sorry -- and also what that means for top line revenue?.

SebDerm for seborrheic dermatitis, Lasercyn for the static market. After that we're soon to be in the FDA queue for LOYON, a descaling product that we anticipate in early 2017 we would launch and that of course is subject to FDA timeline. A little bit later in 2017, perhaps late spring, we'd be launching a new product for post-Mohs procedures.

And then we've got two additional really interesting European products that we've got planned for later in 2017. So apologies for the repetition but we think we have a pretty low risk healthy pipeline coming.

In the second half of that question, what do we believe those launches will do to top line revenue on that, I think, you want that one?.

Yes, first of all you’ve got to distinguish between the gross revenue and just get a little bit of that earlier and down to net revenue, there are a number of deducts relating going from gross to net in the dermatology business that are fairly significant rebate so that we would -- in terms of the growth, as Jim mentioned, and we mentioned before that we've had -- in the last four quarters been growing at a demand dollar growth rate of about 65% quarter over quarter.

Obviously as our numbers get larger, we're not going to be able to maintain that kind of a pace but we would expect to see really good strong revenue growth in dermatology on the top line, maybe not at the 60% because of the product launches, help that -- enable that us to achieve that kind of growth rate but a very strong continued growth rate over the next year because of the product launches.

.

[Operator Instructions] And our next question comes from Laura Engel with Stonegate Capital. .

Good afternoon and I appreciate the information. Good quarter, good information. Always love the specifics. I wanted to get back to one thing I had in my notes.

From last call we talked about the -- and you mentioned this time the non-core markets churned off cash and I wanted to see if you’d just give us an update on with your current cash balance, the cash machine turned off and then your goal for the breakeven, where you see that falling over the next remaining quarters of this fiscal year?.

Well, I think we said this in the past, our quarterly burn rate tends to be in the 1.5 to 2 million range per quarter and we would expect that to decline, that cash need to decline over time as we get closer to breakeven. Our breakeven quarterly revenue number is about $6.5 million and we see us growing to that.

We don't give a specific deadline but you guys can figure out what kind of growth rate that it takes to get there and you can see us how we’re growing in our derm business. Of course our international business tends to be growing at a much slower rate than the derm business. .

And then can you give us a feel for part of the -- I guess approach that's been mentioned in the past is gentle price increases and you had mentioned – seen some of those in this fiscal year.

What are your thoughts on that having just finished this quarter?.

Yeah, our gentle price increases mentioned, we took our Microcyn products up – last we took them up to $120 per unit and that was about $99 before that, and that's been -- that was several months ago that we took them up. We would say that the gentle price increases would probably be in the 10% to 20% range.

Now what’s also really happening is interesting is that we got out with the Microcyn products priced at the $122 level and we have Ceramax priced at the 2014 level. We have Mondoxyne that's priced at anywhere from $480 to $600. So what's happening is that our average price per script is going up.

So it's not just the price increases but because of the mix and especially the growth of the Ceramax business which has been very strong is that every price has gone up, goes up – has been going up almost every quarter. End of Q&A.

[Operator Instructions] At this time I'm showing no further questions. I would like to turn the call back over to Mr Jim Schutz for closing remarks. .

Thanks very much. Thanks everybody for joining us. We look forward to talking to you if not before – we look forward to talking to you in November for the earnings call for the quarter ending September 30. Thanks very much. .

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program. You may all disconnect. Have a great day..