Good afternoon, and welcome to the Sonoma Fiscal Second Quarter 2018 Conference Call. My name is Skylar, and I’ll be your coordinator for today’s call. At this time, all participants are in a listen-only mode. At the end of the call, we will be holding a question-and-answer session with company management. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mr. Dan McFadden. Please proceed, sir.

Thank you, Skylar. Good afternoon, and thank you for joining us today. With me on the call are our CEO, Jim Schutz; our Chief Marketing Strategy Officer, Marc Umscheid; our CFO, COO, Bob Miller. We will open the call with Jim’s update on our business strategy moving forward, then Marc will talk a bit about some of our digital branding strategies that are in place now and that will be followed by Bob Miller’s review of our financial results for the fiscal second quarter. This afternoon, Sonoma issued a press release detailing second quarter 2018 financial results and recent corporate developments. A copy of this can be – release can be downloaded from our website, which is at sonomapharma.com, or you can call Investor Relations at (425) 753-2105, and we’ll be happy to assist you. As well, there is available a visual presentation at our Events page, if you go to the download sonomapharma.com/events.cfm. Before we begin, I’ll 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, anticipate, among others. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, including risks 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; as well as the company’s future capital needs and its ability to obtain additional funding; and other risks detailed from time to time in the company’s filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q and the annual report on Form 10-K. Identified product applications and/or uses are intended to highlight potential applications for the investment community and does not infer that the company is marketing for these indications. The company does not provide any assurances that such applications will receive regulatory approvals. Sonoma disclaims any obligation to update these forward looking statements. I will now turn the call over to Jim Schutz, our CEO.

Thank you, Dan, and good afternoon, everyone. We had a solid and busy quarter, and we have lots to cover on today’s call. I want to make sure we have time to address everyone’s questions during Q&A. So let’s get started with three key points. First, our results for the quarter and full year outlook are solid. Revenue growth, prescriptions filled and cash management, were all strong this quarter. The pipeline is moving forward and our team is very focused on execution. Second, we are facing some managed care and rebate challenges just like every biopharma company in our space. Those challenges are manageable, and we will deal with them head-on. We know how to be creative at all things rebates, especially in managing costs, all the while maintaining the right level of investment to drive future growth. Third, this business will be profitable, generate significant cash flow and will deploy that cash – that future cash to create value for our shareholders. With that, let’s turn to our performance in the quarter. As Dan said for those of you with access to the supplemental PowerPoint, on Slide 4, we had a solid quarter. Company-wide revenue was up 55% versus the same period last year and up 13% versus the quarter ending June 30. Our U.S. dermatology revenue was up 53% versus last year and up 35% since the June quarter. A big thank you to our now 35-person sales team, nice quarter. Prescriptions filled continue to grow with 19,660 units filled at the pharmacy counter for the September quarter, up nicely from 17,180 for the June quarter. As expected, our EBITDA loss is shrinking and cash at the end of September was healthy at $10 million. Turning to Slide 5. With three quarters of the year behind us, we’re…

Good afternoon. I’m pleased to join you today to provide a snapshot of Sonoma’s emerging, brand-building and business-development efforts. But first, let me explain my role at Sonoma and why I’m excited to be here. After 17 years at the Clorox Company, I joined Sonoma because Sonoma’s leadership and I saw an opportunity to build on Sonoma’s strong product solutions and dermatology sales capabilities with increased brand-building and business-development efforts. Through these efforts, we believe we can further define Sonoma’s strategic choices and continue to drive strong growth. We will build on our internal mission of having a relentless passion for healing by adding increased focus on our relevance in the marketplace and by further clarifying our value proposition to the customers and patients who benefit from our products. Overall, I’m thrilled by what I’ve seen since joining the Sonoma team and recognize a significant opportunity to add to the great work already being done here. With that said, let me share two recent examples. On the brand-building front, I draw your attention to alevicyn.com. It’s a micro site launched two weeks ago that adds support to the success of our best-in-class dermatology sales efforts. This site provides a specific brand promise on our most strategic product line to our most strategic customers, dermatologists who treat atopic dermatitis patients. This digital effort provides two growth opportunities; first, it efficiently complements our current dermatology sales force with the core message for dermatologists who already prescribe Alevicyn solutions and maybe looking for more information. Second, it will help stretch our reach beyond our sales rep coverage to drive interactions with dermatologists no matter where they practice or when they want to engage. In developing this site and its associated outreach programs, we have learned and will continue to learn about the importance of our products to our customers and patients. We will also gain insight into how to further satisfy their needs with new innovation ideas. Lastly, this site provides a digital platform to be replicated across all of our current and future strategic initiatives. For example, look for our new Loyon micro-site to launch in a few weeks with outreach to support our new product launch. On the business development front, as Jim said earlier, we recently received clearance in seven specific dermatology solutions for the Brazil market. We’ve been working diligently to monetize these new clearances and plan to share new news regarding our partnering efforts in the near future. Importantly, as a result of our due diligence into the Brazil market, we’re building the model to be used as a template to develop a significant international dermatology business to complement our U.S. business. In summary, by adding brand-building and business-development capabilities to Sonoma, we plan to further leverage our strong U.S. dermatology product and sales expertise, both domestically and abroad. With that, I’ll turn it over to Bob to walk through the financials.

Over the next 10-plus minutes, I will discuss one, the financial results for the quarter ended September 30, 2017 compared to the same period last year and last quarter. Secondly, our three-year financial track record in dermatology. And thirdly, our path to profitability. Moving now to the quarter. I will cover the high-level results for the key financial metrics for the quarter ended September 30, 2017, which includes the revenue, cash operating expense, EBITDA, cash usage and the cash position. More details of these results are discussed in the press release and the upcoming 10-Q. Even though we’ll mention the results for the overall company, we’ll focus on the results and growth of the dermatology prescription business since this is a business, which will be driving us to profitability. As Jim mentioned earlier, we have distributed a PowerPoint slide in PDF form as a supplement to the earnings call. Looking on Slide 9, there is a table showing the results of the key metrics for the September quarter 2017 compared not only to the September quarter last year, but also the June 30, 2017 quarter. Some of these key metrics are the following; total product net revenue for the September quarter was $4.1 million, up $1.6 million or 61% from the same period last year and up 15% compared to the June quarter. This growth was driven mostly by strong increases in the revenue in Latin America and U.S. dermatology. U.S. product net revenue was $2.3 million, up $571,000 or 34% from the same period last year and up 22% over the June quarter, with increases in dermatology and acute care, partially offset by decline in animal health care. The derm net revenue was $1.6 million, up $561,000 or 53% from the same period last year and up $425,000 or…

[Operator Instructions] Our first question comes from Jason Kolbert with Maxim Group. Your line is now open.

Hi, guys. This is Susan Lee. Hello?

We’re here.

Hi, this is Susan Lee calling on behalf of Jason Kolbert. Thanks for taking my call guys. Can you guys give me an update on Sonoma’s progress with your partners in China? And what’s the strategy to penetrate the larger derm market in China? And how do you see that business vertical impacting the top line over the next several years?

Yes. Thanks. Great question. As you know, we have regulatory approvals for various liquid products in China, and we remain very enthusiastic about getting through the SFDA or Chinese regulatory authorities for our various gel formulations. We know we’ve been approached by several interesting partners in China and Susan, even with your help, with your contacts, we’d love some help there. To answer to your second question is, we’re pending regulatory approval on our gel products, and we look forward to partnering those products out in China.

Sounds good. That’d it for me.

Thank you.

Thanks.

Thank you.

Our next question comes from Eric Pansick [ph]. Your line is now open.

Hi. This is Eric. Thanks for taking my question. Just a couple of quickies. Still a decline in animal health care even with the PetSmart deal. And then a question on – and I think that Bob you addressed this, the amplitude of the expenses, is that as expected? Obviously, expect expenses increasing with the hiring of all the sales reps in marketing. Is that increase – the amplitude of that increase as expected? Or is it higher or lower with the sales gain?

Yes. The expenses were as expected. They were up from last year, but they are actually down like almost – they’re $400,000, $500,000 down from the June quarter. And a lot of that has to do with our audit cost, which get recorded in the June quarter, which tend to be $300-plus thousand. And so therefore June quarter is higher normally than the rest of the quarters, but we would expect to see over the next year that the cash operating expenses, let me emphasize cash operating expenses taking out the stock comp charge and that type of thing, should range anywhere from 3 – $4.3 million to about $4.6 million. Obviously, not in the June quarter though. In terms of the animal health care – did that answer your question on the expenses?

Yes. That’s fine.

On the animal health care, last year, we had the load-ins for a lot of the animal health care products, which made it a larger sales number, if you will, which is one of the reasons it’s down, plus I would also say, at this point, at least, on quarter-to-quarter basis, it tends to be a little lumpy at this point. Jim may want to add something to that so.

No. Eric, we have our animal health care really on the line in the form of Dan, so any further animal health questions, fire away.

I’ll just supplement Bob’s comment there. PetSmart is moving along very nicely. In fact, I took my golden doodle in there to be trimmed yesterday and went to the SKUs of our products and the shelf was empty. They were missing the ophthalmic gel, eye and ear wash and then they all sold out. So PetSmart is very, very pleased with the performance to date. And as Bob had mentioned, last year’s number that was a lot of the initial stocking orders. But it’s moving nicely in that particular chain and looks like it will continue.

Great, great. I appreciate that color. And if I can just sneak one last one in, along the same line, so the dermatology line, which is obviously the path to profitability, in – how do I formulate this question that it makes sense? The – in, call it, QSR stats, Starbucks, as an example, they use a metric called same-store sales. And what that says is, that each store is getting more business, more customers, or is your business – I’m sorry, is your income increasing because you’re opening more stores. So as we get these new reps, just wondering if you have a feeling on at some point where there wasn’t a rep before, it’s low hanging fruit to approach a dermatologist office and show him our great products and they say, well, let me give them a try. At some point, are we anywhere near saturation or something where we – in our geographic regions that we’re going to be emphasizing in the growth rate you mentioned at 17%. Are we getting to more stores? Or are we expecting the dermatologists to write more prescriptions at each store to accomplish that 17%?

Yes, I think the answer would be a combination of both. We are – obviously, we’re putting some, some of the sales reps. Actually, we put into some of the – like we’ve added one around the New York area, so we cut down where there are an awful lot of dermatologists and LA. We’ve added sales reps into those territories and then they get a smaller territory. But those markets are so large we can do that. And we tend to get both – we then tend – at that point, we’ll add new dermatologists. They can focus on, but the effort would be actually growing the current dermatologist group. In the areas where we’re putting in new locations, then we’re obviously going to opening up from the beginning new dermatologists and as well as increasing the size of those dermatologists. What we found in those areas, it’s helpful to – and we’ve done some of that. We have a guy that flies there and spends a couple of days trying to prep the market. And we found that, that’s really helpful in growing the markets in that way. So the answer to your question is that we’re doing both. We’d like to focus on those dermatologists that write a lot of prescriptions and that’s our primary focus. And we tick out – pick out the top 100 or 200 of those people and that’s – those are the ones we focus on the most. Jim, anything else?

No, good answer.

Well, thank you very much.

Thank you, Eric.

Our next question comes from Keith Zdrowak with National Securities. Your line is now open.

I have two quick questions. One, with everything that happened with Ruthigen a few years ago, did we ever get back the technology from Ruthigen? And if so, is there ever any plan to do anything with it? Whether you guys develop it or license it out or sell it? And the second question is, I read on a website something talking about that you guys had developed or developing some sort of eye medication. And just wondering if you have any sort of comment on anything of what I read about that?

Great to hear your voice, Keith. I’ll answer your Ruthigen question first. First part of that was, the question posed was, did we get the technology back after Ruthigen was sold to Pulmatrix, and the answer is, yes, we got all intellectual property, machinery back in art. The second question was the Ruthigen license was for a pre and post-surgical rents as an antimicrobial. And the question, I think, Keith, was, do we here at Sonoma ever intend to pursue that same indication as a pharmaceutical and the answer is, it’s an expensive and time-consuming opportunity. We’d love to partner it, but we’re not going to pursue it directly. Your third question regarding the blepharitis product is dead on accurate. We do have a product Acuicyn, A-C-U-I-C-Y-N, that we sell reasonably well in the blepharitis space which, as you know, Keith, is really dermatitis around the eyelid.

Okay. And any comment as far as just how excited you are about that. I mean, I – and obviously, it’s not quite the whole dermatology sector that you are in. But just wondering, how – what is the potential of them? And how profitable is that business?

So it comes back to our primary overall strategy of the company. Our focus is on the dermatology prescription business. It is not on the eye care business. Now we do sell the product. It generates cash for us. It’s not going to be something that we’re focused on. It’s simply to help us generate some cash, to help us grow the derm business. And that’s a primary purpose of that market.

I guess – I mean, I guess, one question would be comparing that to the animal health division. What do you guys – how do you compare it to that? Are you more excited about animal health as far as what that can do for you or the eye medication?

Well, I have a good short answer to that one, Keith. The product margins in the blepharitis space are much more attractive than our profit margin – product margins in the animal health space.

Okay. All right, thank you very much.

Thank you, Keith.

[Operator Instructions] Our next question comes from Raymond Myers with Benchmark. Your line is now open.

Thank you taking the questions. Let me ask you first about Loyon product that you just started marketing this week. Can you describe the sales potential of that product and both long term and maybe within the first 12 months? What kind of revenue can we anticipate?

Yes, good question, Ray. As you know, we in-licensed this from a German pharmaceutical company that markets and sells Loyon in Germany and in the U.K. We do not have any U.S. data because we own U.S. rights. We got it through the FDA and we just launched it. I will say in the United States, there are two other products used by dermatologists for descaling, both of them old, questionable whether they’re even on label for it, but it’s salicylic acid and urea. We really like having a new product something with very, very solid clinicals from our European colleagues to march into this new opportunity. As far as sales potential at the risk of reputation, there is not an analog in the U.S. that we can point you to, but we assured on this call previously that our European partners sell about USD 10 million or EUR 10 million, Bob, I forgotten, but it’s about the same FX now on an annual basis in Germany and in UK.

That sounds great. Jim, in – on August call, you mentioned that Sonoma had a pending FDA filing, but you wouldn’t elaborate for competitive reasons. So two-pronged question. First, can you tell us anything more about that now? And can you tell us anything about the timing and how that’s progressing?

Thanks for paying so much attention. I was teased mercilessly after that earnings call for not sharing that information, but I’m going to do it again. We’re sitting on an interesting opportunity with the FDA approval we got that you referenced and an additional that’s coming up that, Ray, we will be sharing more information upon this next approval, but at the risk of annoying and harassing our terrific shareholders, we’re going to remain quite for competitive reasons on the FDA approval in hand.

Okay. Very good. That sounds encouraging. You’ll need to hear about that. You recently got regulatory approvals in Brazil and you said on this call, stay tuned for potential marketing partners. Can you tease us a bit more with what the opportunity in Brazil might be? I understand it’s quite a large market for dermatology.

Yes. This is Marc. I can answer that one. So on – in our partnership discussions, very preliminarily, we believe, it’s at least $1.5 billion U.S. market in the space we’re looking at. And that’s a compound annual growth rate space of around 10% over the past five years. So that’s kind of the size of the opportunity. We have four products, seven indications. Our current expectation is to launch at least two of those products out the gate. And we’re looking at partnership deals as we speak. So obviously, with those type of arrangements, we’re not at liberty to disclose until they’re actually signed and delivered.

Okay. That sounds encouraging. We – you touched on the rebates. It doesn’t sound like the rebate issues were any more of a challenge in Q3 than Q2. But I’m also not sure what progress that you made in addressing the rebates in Q3. Do we expect the rebate issue to improve? Or is your effort simply to prevent it from getting worse?

Yes. We’ve got two initiatives that we don’t want to spend a lot of time on for competitive reasons. But there are mechanisms that will enable us to control the rebate costs and the return cost as well, much more than we have currently, involves different ways of distributing the product, let me put it that way. So we’re not quite there yet, but the next quarterly call, we should be able to indicate what we’ve done at that point.

Very good. And then my last question is around sales force. You’ve added quite a lot of sales people six months or nine months ago, and I wanted to get a sense of how you measure the sales productivity? And whether those sales people are living up to your expectations along those metrics?

Yes. They – we do look carefully at the number of scripts written for each of the sales reps. And on a total basis, the average number of prescriptions per month or per quarter, per sales person and that’s really important. And for the quarter that we just ended, we saw the uptick in that ratio. And I think we shared with you the December 16 number with – when we had 17 sales people of 773. And – but we’re on the uptake at this point, and we expect to see it continue on the uptake as we grow the revenue with the same number of in effect 33 to 32 sales reps.

That’s great. One point of clarification. You have 30 sales people and five managers. Is that an increase of net five versus last quarter? What was the change in total?

Yes. No, we had it – let’s say, December 2016, we have 17 sales people. And I believe, it was four managers at that point. We added another manager. And then we added another 13 sales people. I think it’s a sequence.

Okay. Thank you for clarifying. Look forward to seeing more results.

Thank you for the questions. Good questions.

Yes. Thank you, Ray.

Our next question comes from Scott Billeadeau with Walrus Partners. Your line is now open.

Hello. Hi, guys. Thanks for taking my question. Some of them have been answered. Just one more question on the sales force, the 13 new. Do you have a sense for – is there a reasonably normal curve? And how many people are still at the beginning of that curve? How many are "mature" in terms of what your expectations are? Certainly, as you lay out 30 to 32 and 1 million a piece, how many are at 1 million or tracking above? Any info you could give us would be great.

Okay. So when you – look if you go back to this – we started out with 17 sales rep, and they were – and this is the December quarter, and this is symphony data, 773. So obviously, what we need to do – they are obviously up the curve. They would be growing much slower on a quarter-over-quarter basis, but all they have to do is get to 1,000. Now they will probably get to greater than 1,000 on average, that group. Then you’ve got the 13 sales people, some of which we hired – been hired in March – quite a few of them in the quarter ending March and some of them in the quarter ending June. They are clearly going up the ramp and generally the ramp to profitability is six months to nine months that they will generally be profitable. Almost all of the older ones were actually almost profitable in the December time frame. But then I’ll continue after that point to maybe 12 months that they continue up fairly quickly, this is – I’m talking about an average ramp and then they’ll slip down at – after making up to the 12 months. But – so you can do the math yourself, I think, figuring out the group in March and the group in June where they might stand so.

And in terms of incremental spending you kind of laid out the September quarter next year or going out. I mean, is the idea is – you’re pretty good on sales guys, now you may have to swap one out if one is not working, but to a certain extent. So for the foreseeable future, you’ll be running with 30 to 32 plus 5. Is that the game plan?

Yes, yes. So we need to get to the 32,000 to 34,000 a quarter, 1,000, so somewhere between the 32 and the 34, currently, we have 30. So at some point, we’d rather see that those 13 – those first 13 go up the ramp and start getting – putting ourself in a better cash or revenue position and cash position before we add the two to four so. And yes, we don’t – we – our operating expenses should not go up that much, we’ve made the big investment already with the 13 sales people.

Yes. Okay. And then last question. Just getting back to the unnamed FDA approval. Can you share with us whether that is going – is it something that will be executed by this sales force or not? I guess, is – if you can give us that answer.

That one I can answer. And the answer is, yes.

Okay, good. All right. Thanks guys.

Thanks.

Thanks, Scott. Hope you’re doing well.

Yes. Thanks.

At this time, I’m showing no further questions. I’d like to turn the call back over to Jim Schutz, CEO, for closing remarks.

Thank you all for joining today’s call and for your continued support. We feel Sonoma is in the best shape we’ve ever been in for several reasons. We’ve effectively executed a turnaround strategy in a very attractive dermatology market, with a strong, experienced and effective sales system, a robust and unique product pipeline. Over the last three years, we demonstrated a strong track record quarter-over-quarter growth in the prescription dermatology business. We believe this three-year track record demonstrates our ability to continue to achieve high, consistent, quarter-over-quarter growth in the future. As Bob said multiple times, our next step is driving to commercial EBITDA probability, which we believe will increase shareholder value. Our commercial EBITDA profitability plan is relatively simple and is really an extension of this three-year track record we keep talking about. First, we’re going to see revenue growth from the efforts of our 30 sales reps; second, we’re launching new products and continued growth of current products; and third is gentle price increases consistent with other comparable products. We think the foundation and all the building blocks are in place to achieve this EBITDA profitability. We look forward to sharing our progress as we build this company to becoming a pure-play, multi-technology dermatology company and achieving our purpose of relentless passion for healing. With that, thank you very much operator. We’re going to sign off.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day.