Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Specialty pharmaceutical company developing and commercializing products for chronic skin conditions, eye care, tissue care and animal health, alongside laboratory testing services. This report covers the three months ended June 30, 2019, the first quarter of fiscal 2020; comparable figures are for the three months ended June 30, 2018. Financial statement amounts below are in millions unless otherwise noted.
The company effected a 1-for-9 reverse stock split on June 19, 2019. Share and per-share figures were retroactively adjusted.
Key financial metrics
| Metric | Q1 FY2020 | Comparable period |
|---|---|---|
| Total revenue | $4.711 | $4.369 |
| Gross profit / margin | $2.367 / 50% | $1.731 / 40% |
| Operating loss | $(1.730) | $(3.552) |
| Net income (loss) | $0.715 | $(3.458) |
| Basic and diluted earnings (loss) per share | $0.54 | $(4.99) |
| Cash provided by (used in) operating activities | $0.738 | $(3.060) |
- Revenue comprised $4.385 million product sales and $0.326 million service revenue. Human skin-care product revenue was $3.962 million; animal skin-care revenue was $0.423 million.
- Cash and cash equivalents were $4.284 million at June 30, 2019, up from $3.689 million at March 31, 2019. Working capital was $9.699 million, compared with $8.905 million at March 31.
- Debt included $0.211 million of current long-term debt and no reported long-term portion. Operating lease liabilities were $1.371 million ($0.438 million current and $0.933 million non-current); the new lease standard also resulted in a $1.316 million right-of-use asset at quarter-end.
- Total assets were $16.918 million; total liabilities were $5.414 million; accumulated deficit was $168.582 million. The company reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue rose 8% ($0.342 million). U.S. product revenue increased 26% to $2.487 million and Europe/rest-of-world product revenue increased 19% to $1.244 million; Latin American product revenue fell 39% to $0.654 million, primarily reflecting lower Invekra sales.
- Gross margin improved to 50% from 40%, attributed by management to a higher proportion of dermatology revenue and U.S. cost savings. Service gross margin rose to 56% from 22%.
- Research and development expense decreased 3% to $0.338 million. Selling, general and administrative expense fell 24% to $3.759 million, primarily due to cost reductions, including lower headcount.
- Net income included a $2.472 million gain from the Petagon asset sale. Excluding that gain, the company still reported an operating loss of $1.730 million; the filing does not provide a non-GAAP adjusted net income measure.
- Cash from operations improved from a $3.060 million use to $0.738 million provided. Investing used $0.012 million and financing used $0.136 million in the quarter.
Outlook, commentary, risks and unusual items
- Going concern: Management expects continued losses and says additional capital will be needed to fund product development, market penetration and ongoing operations. It gives no assurance financing will be available on acceptable terms; failure to raise capital could require further cost reductions and delay commercialization. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Petagon transaction: On May 20, 2019, the company sold specified animal-health rights and assets for Asian and European markets for $2.700 million. It recognized $2.472 million as a gain; $0.228 million attributable to production equipment remained deferred pending delivery. The company agreed to supply Petagon for five years at agreed transfer prices and reported $0.155 million of related product revenue in the quarter.
- Invekra and geographic exposure: Latin America revenue was about 14% of total revenue in the quarter. Sonoma expects sales to Invekra to decline substantially as Invekra establishes its own manufacturing capacity; Sonoma’s supply obligation is described as continuing during a transition period, at the latest through October 27, 2020.
- Pricing and demand: Dermatology rebates were $1.061 million for the quarter and management says rebates significantly affect profitability. Seasonality, reimbursement levels, pricing pressure and changes in healthcare laws may also affect sales.
- Other items: Adoption of lease accounting on April 1, 2019 added lease assets and liabilities and a $0.059 million cumulative-effect adjustment to accumulated deficit, with no material operating-results impact. Potential severance obligations for key executives were $0.454 million if triggered. Management reported disclosure controls were effective and no material change in internal control; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Cash runway and the timing, availability, terms and potential dilution of additional financing, given the explicit going-concern uncertainty.
- Underlying operating performance and cash generation apart from the one-time Petagon gain, including whether cost reductions and improved margins are sustainable.
- Petagon equipment delivery, transition supply economics and the extent to which the asset sale affects recurring animal-health revenue.
- Invekra’s manufacturing transition and its expected effect on Latin American sales, alongside the concentration of revenue in key customers and partners.
- Rebate levels, reimbursement and pricing trends, and potential dilution from outstanding equity awards and warrants.