Oculus Innovative Sciences Beats Analyst Expectations, Even More than at First Blush
Published Thursday, November 12, 2015 by Fred Zucker
When it comes to earnings, there is plenty of information that is black and white, but there are also a bevy of adjustments and circumstances that need to be fully understood to get a more accurate interpretation of performance.  Lawsuits, as in the case of financial data provider Markit (NASDAQ: MRKT) in the latest quarter, can tap into profits.  Markit reported on Tuesday a profit in the latest quarter of $6.5 million, or 4 cents per share.  However, excluding $45.5 million in charges to settle an antitrust lawsuit and other one-time charges, earnings were 37 cents per share, in line with analyst expectations.  One-off charges also hurt oil and gas producer Apache Corp. (NYSE: APA), while foreign exchange adjustments and non-tax gains played a role revenue and profits at Trinity Biotech plc (NASDAQ: TRIB), leaving investors a drove of information to digest.

In the same vein, Oculus Innovative Sciences (NASDAQ: OCLS) posted earnings last Thursday, earnings that beat analyst expectations, although they were clouded by a loss due to derivatives related to warrants.  Further, the company provided the type of year-over-year quarterly growth guidance that Wall Street should take notice of.

The Headline Numbers

The consensus expectations were for Oculus to report revenue of $3.69 million and a net loss of 11 cents per share during the company’s fiscal second quarter, ended September 30, 2015.  Oculus exceeded revenue expectations by almost 10 percent, notching total revenue of $4.05 million.  In the year prior quarter, total revenue was $3.26 million, representing a year-over-year gain of 24.2 percent.  In the fiscal first quarter, total revenue was $3.68 million

Net loss for the quarter totaled $1.76 million, or 11 cents per share, in line with expectations.  In the year prior quarter, net loss was $718,000, or 8 cents per share.    In the year earlier quarter, Oculus recorded a non-cash gain resulting from a change in the fair value of derivative liabilities reducing its loss that period by $841,000 and its loss per share by 10 cents.   In the recent quarter Oculus only recorded a $65,000 non-cash gain related to its derivative liabilities which had a negligible impact on earnings per share.  The calculations for these non-cash gains were driven by the spread between the exercise prices of outstanding warrants, the stock price and the remaining term of the warrants, all measured at the end of each quarter.

In layman’s terms, these gains represent an “accounting” loss, not an actual “cash” loss.  Going forward the non-cash transactions should have a limited impact on Oculus’ results as the number of outstanding warrants subject to derivative liability treatment has been substantially reduced due to the expiration of warrants in Q2.

The Underlying (and More Important) Numbers

Product revenue, especially in the United States, is the horse that is pulling the Oculus cart.  It’s important to note that Oculus completely revamped its business model in the United States, cutting ties with its old partners and bringing sales in-house, which will have a positive impact on the top and bottom lines going forward.  It was only last October that the company hired its first 13 members of its U.S. dermatology sales force.  Four more were added last month and Oculus hopes to expand the dermatology team to as many as 24 in the next year.

In the quarter ended last September 30, 2014,, U.S. product revenue was only $356,000.  That has grown quarter-over-quarter to $621,000, $787,000 and then to $1.2 million in the latest quarter for year-over-year growth of 233 percent.  The increase is largely because of increased demand for Oculus’ dermatology products, of which there are now six on the market, two of which were only recently launched.  Sales of these derm products, the key driver for shareholder value, rose from only $99,000 in Q2 fiscal 2015 to $733,000 in Q2 fiscal 2015, putting it on track for $3 million in sales on an annualized basis.

In Latin America, Oculus is benefiting from the buyout of its prior distributor by the much larger firm Laboratorios Sanfer.  Sales in this region grew by 8 percent to $1.3 million, in spite of a 26 percent unfavorable currency exchange due to weakness in the peso and strength of the U.S. dollar.

Elsewhere in the world, sales were ahead by 72 percent to $952,000 on the back of increases in Asia and Middle East and new sales partners in India and New Zealand.  A decline in Europe, at the hands of a 19 percent decline in the euro despite rising sales on a local currency basis, mitigated the overall advance.

Earnings are holding in negative territory, but that’s largely due to increased sales and marketing expenses.  It’s well known that expenses related to a sales force always escalate at first and will eventually reach a tipping point and become cash-flow positive.  With the majority of the team now a year into it and new sales reps penetrating key markets, such as Dallas, it’s foreseeable that the breakeven point is not far off on the horizon.

These sales reps are making big strides in an initial goal to grow from the current level of about 250 dermatologists buying Oculus products annually to 3,000 – 5,000 dermatologists.  This is evidenced by prescriptions for Oculus Alevicyn and Celacyn derm products expanding from (numbers approximate) 1,300 to 4,400 to 7,000 to 8,600 in the past four quarters.

The Future Numbers

Above is, of course, looking only at the products on the market today by Oculus.  The company is debt-free with $8 million in cash and trailing-twelve-month sales around $15 million that look to be hitting their stride.  Those are solid cornerstones – and nearly unheard of – for a company with a market valuation of less than $20 million.

Growth is being demonstrated across the globe, including the key segments of the U.S. and Latin America.  Going forward, Oculus says it wants to bring one, or even two, new products to market each quarter.  The company has several new products for which it is seeking marketing approval from the U.S. Food and Drug Administration, including a new skin repair product (a good companion for the current Alevicyn hydrogel) for treatment of atopic dermatitis (or eczema as it is often called), and another for seborrheic dermatitis, a common skin condition of the scalp that causes scaly patches, redness and stubborn dandruff.  Oculus is hoping for FDA approval for the products in March 2016 and by the summer of 2016, respectively.  The pipeline is strong and has now expanded outside of the company’s grass roots of hypochlorous acid-based products, products that can easily be added to the sales team’s arsenal to continue to drive sales in the future.

All-in-all, a quick look at the headline figures from the latest quarter of Oculus should turn heads to a degree as the overlooked company again topped analyst estimates.  However, a closer look at the numbers and better understanding of how the derivative loss factored in to the recent quarter paints an even clearer picture about the opportunity at hand.

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