Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Sonoma is a specialty pharmaceutical company developing and commercializing products for chronic skin conditions, with product sales in human and animal healthcare and laboratory testing and technical services. This fiscal second-quarter report covers the three and six months ended September 30, 2019; the comparable periods ended September 30, 2018. Financial amounts below are in U.S. dollars.
Financial performance and condition
- Quarter revenue: $4.968 million, up 1% year over year. Product revenue was $4.712 million; service revenue was $256,000.
- Quarter profitability: Gross profit was $2.294 million, or 46% of revenue, versus $2.427 million, or 49%, a year earlier. Operating loss was $1.202 million and net loss was $1.203 million, compared with net loss of $2.820 million. Basic and diluted loss per share was $0.91.
- Six-month revenue and profit: Revenue was $9.679 million, up 4%. Gross profit was $4.661 million, or 48% of revenue, versus $4.158 million, or 45%. Operating loss was $2.932 million; net loss was $488,000, compared with $6.278 million a year earlier. Six-month loss per share was $0.37.
- Cash flow: Six-month operating cash used was $160,000, compared with $6.607 million used in the prior-year period. Investing cash used was $69,000 and financing cash used was $241,000. Cash declined $457,000 from March 31 to $3.232 million.
- Liquidity and obligations: Working capital was $8.624 million, down from $8.905 million at March 31. Current assets were $13.310 million and current liabilities $4.686 million. Current long-term debt was $106,000, with no noncurrent long-term debt reported. Operating lease liabilities totaled $1.227 million.
- Balance sheet: Total assets were $16.145 million, total liabilities $5.874 million, and stockholders’ equity $10.271 million at September 30. Accumulated deficit was $169.785 million.
Material changes versus prior comparable periods
- Quarter product revenue increased 2%, but total gross margin fell to 46% from 49%, primarily due to higher rebates and product mix. U.S. product revenue declined 9%; Europe and the rest of the world increased 30%.
- For the six months, product revenue rose 4%, led by Europe and the rest of the world (+25%) and the United States (+7%); Latin America declined 23%. Management attributed the operating-loss improvement largely to lower operating expenses, including reduced headcount.
- Quarter selling, general and administrative expense fell 31% to $3.226 million; six-month expense fell 27% to $6.985 million. Research and development expense also declined in both periods.
- The six-month net loss included a $2.472 million gain on the May 2019 Petagon asset sale. The $2.7 million sale covered specified animal-health rights and assets for Asian and European markets; $228,000 allocated to production equipment remained deferred pending delivery.
- Effective April 1, 2019, the company adopted the new lease standard, recording operating right-of-use assets and liabilities; management reported no material impact on results of operations.
Outlook, risks and unusual items
- Management expects continued losses and says additional capital will be needed to fund development, market penetration and ongoing operations. It cannot assure that financing will be available on acceptable terms. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management expects Latin American revenue to fall substantially after Invekra establishes its own manufacturing facility. Invekra-related sales were approximately 18% of total revenue for the quarter and 16% for the six months; the reduced-price supply transition is expected to continue until, at the latest, October 27, 2020.
- Rebates pressure profitability: dermatology rebates were $1.742 million for the six months. Management says rebates support customer affordability but have significantly affected the bottom line.
- Other disclosed risks include seasonality, reimbursement and pricing changes, customer concentration, international-market exposure, product and regulatory risks, and wildfire-related power outages that could disrupt the Petaluma facility. The company’s existing insurance may not cover all outage-related costs.
- After quarter-end, Amy Trombly became interim CEO under a three-month agreement, and John Dal Poggetto became CFO under an agreement providing a $230,000 annual salary and a proposed $100,000 equity signing award. Director Frederick Sandford resigned in October.
Most important facts for investors to verify
- Whether the company can secure additional capital and the timing of any resulting funding or cost reductions, given the stated going-concern doubt and $3.232 million cash balance.
- How much of the six-month improvement in net loss reflects recurring operations versus the one-time Petagon gain.
- The sustainability of revenue and gross margins amid rebates, U.S. quarter declines, and expected reduction in Invekra-related Latin American sales.
- Cash collection and working-capital trends, including the increase in accounts receivable and accounts payable during the six-month period.
- Potential dilution: the filing lists approximately 630,000 potentially issuable shares from restricted stock units, options, warrants and common stock units at September 30, 2019; verify current balances and warrant terms.