Sonoma Pharmaceuticals, Inc. — Q3 FY2024 Form 10-Q
Business context and reporting period. The unaudited quarterly report covers the three and nine months ended December 31, 2023. Sonoma develops and sells stabilized hypochlorous acid products for human and animal healthcare and disinfectant applications, directly and through partners in 55 countries. Unless stated otherwise, financial figures below are in U.S. dollars and thousands.
Financial performance and position
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2023 | Nine months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Revenue | $3,138 | $2,944 | $9,296 | $10,258 |
| Gross profit / margin | $1,460 / 47% | $831 / 28% | $3,654 / 39% | $3,613 / 35% |
| Operating expenses | $2,304 | $2,665 | $6,946 | $7,036 |
| Operating loss | $(844) | $(1,834) | $(3,292) | $(3,423) |
| Net loss | $(866) | $(1,939) | $(3,768) | $(3,843) |
| Basic and diluted loss per share | $(0.08) | $(0.62) | $(0.54) | $(1.24) |
- For the quarter, revenue rose 7% year over year; for the nine months, it declined 9%. Q3 gross margin improved to 47% from 28%; nine-month gross margin improved to 39% from 35%.
- Q3 revenue growth reflected increases in the U.S. and Europe. Nine-month revenue fell mainly because the prior-year period included a one-time $750 service sale in Latin America; U.S., Asia and Latin America revenue also declined.
- Management attributed the Q3 gross-margin improvement to product mix, labor redeployment to R&D, and higher materials and transportation costs in the prior-year quarter. SG&A decreased 36% for the quarter and 22% for the nine months, which management attributed to cost-containment efforts. R&D rose to $601 for the quarter and $1,462 for the nine months, primarily for product development and regulatory work.
- At December 31, 2023, cash was $2,406, versus $3,820 at March 31, 2023. Working capital was $9,428, versus $10,081 at March 31. Total assets were $14,618 and total liabilities were $7,926.
- Net cash used in operating activities was $2,550 for the nine months, compared with $3,711 in the prior-year period. Investing cash use was $20; financing provided $1,054, primarily from the stock offering, partly offset by $387 of short-term debt repayments. Cash declined by $1,414 over the period.
- Reported short-term debt was $44 at December 31, 2023; the balance sheet lists no long-term debt. Withholding tax payable was $4,591. The company also had $341 of operating lease liabilities.
Material changes, outlook and risks
- Going concern: The company reported recurring losses, $2,406 of cash, and operating cash outflow. Management stated that substantial doubt exists about its ability to continue as a going concern. It may seek equity, debt or collaboration financing, but cannot assure financing will be available on acceptable terms. If it cannot raise capital, it may need further cost reductions, potentially delaying commercialization. The financial statements contain no adjustments for a possible inability to continue as a going concern.
- Equity financing and dilution: In an October 2023 offering, Sonoma sold 8.5 million shares at $0.20 per share, receiving $1,700 gross and $1,446 net. Shares issued and outstanding rose from 4,933,550 at March 31 to 13,684,333 at December 31. Under a December ATM agreement, the company subsequently sold 1,923,100 shares on January 11, 2024, for approximately $392 gross and $356 net. The filing reports 15,607,433 shares outstanding as of February 7, 2024.
- Nasdaq listing: Nasdaq notified the company on September 22, 2023 that it did not meet the $1 minimum bid-price requirement and set March 20, 2024 as the deadline to regain compliance. Delisting could adversely affect liquidity and access to capital.
- Tax exposure: The filing describes a substantial Mexico tax liability related to intercompany debt, unpaid technical-assistance charges and accrued interest, not due until 2027. Management believes balance-sheet assets are sufficient to cover the obligation without disrupting operations and says it is reviewing options with tax professionals. The balance sheet reports $4,591 of withholding tax payable.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023 due to material weaknesses, including inadequate spreadsheet controls, insufficient separation of preparation and review duties, and weaknesses in revenue analysis. Remediation actions are underway but have not operated long enough or been tested sufficiently to establish remediation.
- Other risks and developments: Revenue depends on a small number of customers and can fluctuate with distributor order timing. The company cites foreign-exchange exposure, inflation, shipping and supply-chain costs, and uncertainty in raising capital. A January 2024 license and distribution agreement with NovaBay covers Avenova-branded products in the EU for an initial two-year term. The filing provides no numerical revenue or earnings guidance.
Important facts for investors to verify
- Cash runway, operating cash burn, and whether additional financing or cost reductions will be needed to sustain operations.
- Nasdaq bid-price compliance status and any implications for listing, trading liquidity, or future financing.
- Potential dilution from the October offering, the January ATM sale, and any further equity issuance.
- Amount, timing and resolution of the Mexico tax and withholding-tax exposure, including the reported $4,591 payable.
- Progress and testing results for remediation of the material weaknesses in financial reporting controls.
- Whether revenue trends, customer concentration and distributor order timing support improved gross margins and commercialization prospects.