Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2022 (the third quarter of the company’s fiscal year ending March 31, 2023). Unaudited results; amounts below are in U.S. dollars, generally in thousands unless stated otherwise. Sonoma develops and sells stabilized hypochlorous acid (HOCl) products for human and animal healthcare and other applications, directly and through partners in 55 countries.
Key financial results
| Metric | Three months ended Dec. 31, 2022 | Prior-year quarter | Nine months ended Dec. 31, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $2,944 | $2,902 | $10,258 | $10,330 |
| Gross profit / margin | $831 / 28% | $1,203 / 41% | $3,613 / 35% | $3,897 / 38% |
| Operating expenses | $2,665 | $2,161 | $7,036 | $6,724 |
| Operating loss | $(1,834) | $(958) | $(3,423) | $(2,827) |
| Net loss | $(1,939) | $(944) | $(3,843) | $(2,142) |
| Net loss per share, basic and diluted | $(0.62) | $(0.31) | $(1.24) | $(0.85) |
- Cash and cash equivalents were $2.634 million at December 31, 2022, down from $7.396 million at March 31, 2022. Working capital was $7.298 million, versus $10.611 million at March 31, 2022.
- For the nine months, operating cash use was $3.711 million, investing cash use was $176,000, and financing cash use was $883,000. Cash declined by $4.762 million. Operating cash use included a $1.204 million decline in deferred revenue.
- Reported debt was $15,000 long-term at December 31, 2022; no current debt or short-term debt was reported. The insurance-premium financing note and PPP loan were fully paid by period-end.
- Total liabilities were $8.369 million, including $4.097 million of withholding tax payable. Stockholders’ equity was $5.559 million.
Material changes and operating developments
- Quarterly revenue increased 1% year over year, while nine-month revenue decreased 1%. For nine months, U.S. revenue fell 33% to $2.603 million, partly reflecting the transition of prescription dermatology sales to EMC Pharma, lower animal-health OTC sales, and retail-market softness. Europe revenue rose 29% to $3.117 million.
- Human Care revenue was $7.050 million for nine months, down from $7.201 million; Animal Care revenue was $1.957 million, down from $2.755 million. Service and royalty revenue increased to $1.251 million from $374,000, including a $750,000 machinery sale management characterized as a likely one-time event.
- Gross margin contracted, particularly in the quarter, with management citing lower manufacturing levels and higher material and transportation costs. Nine-month SG&A increased 6% to $7.030 million, reflecting the Woodstock, Georgia office closure and relocation to Boulder, Colorado. The December quarter included $350,000 of expense from settling a long-term contract; management expects this to be a one-time item.
- Other income was lower than in the prior year, primarily because the prior-year period included $723,000 of PPP loan forgiveness. Nine-month R&D expense was $6,000, compared with $121,000.
Liquidity, outlook, risks and other notable items
- Management states that the company may need additional capital and that financing may not be available on commercially acceptable terms, if at all. If capital cannot be raised, cost reductions could delay commercialization. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- No quantified revenue, earnings, or cash-flow guidance is provided. Management expects revenue to fluctuate and losses may continue in the foreseeable future.
- The company disclosed material weaknesses in disclosure controls, including inadequate spreadsheet controls, insufficient separation of preparation and review, and inadequate revenue analysis. Controls were concluded to be ineffective as of December 31, 2022; remediation and testing were still in progress at filing.
- Management identified exposure to euro and Mexican peso exchange-rate changes, inflation, shipping and supply-chain costs, labor availability, consumer demand, and reimbursement and pricing pressure. It also described a substantial Mexico tax liability, intercompany debt, unpaid technical assistance charges, and accrued interest, with amounts not due until 2027; management believes balance-sheet assets are sufficient to cover the tax obligation.
- After quarter-end, the company sold 1,535,718 shares under its December 2022 ATM agreement from January 4 through February 2, 2023, receiving $2.533 million net proceeds. The filing reports 4,649,247 common shares outstanding as of February 10, 2023, versus 3,109,652 at December 31, 2022. This financing adds liquidity but substantially increases the share count.
- Customer concentration was meaningful: three customers each represented 10% or more of nine-month revenue. The filing reports no material change to the risk factors in the prior Form 10-K and describes ordinary-course legal matters as currently insignificant.
Important facts for investors to verify
- Whether the post-quarter ATM proceeds and any other financing provide adequate cash runway, given continuing operating cash use and the going-concern uncertainty.
- Whether gross margins recover as manufacturing levels and input and transportation costs change, and whether revenue declines in the United States persist.
- Progress and effectiveness of the control-remediation plan, including testing of revenue recognition and financial-reporting controls.
- Details and potential cash impact of the Mexico withholding-tax and intercompany obligations due in 2027, including the assumptions supporting management’s assessment.
- The repeatability of service and royalty revenue and the impact of one-time items, including the machinery sale and contract-settlement expense, on underlying performance.