Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Business and period: Sonoma develops and sells stabilized hypochlorous acid (HOCl) healthcare products, including wound-care, dermatology, eye-care, animal-health and disinfectant products. It sells directly and through partners in 55 countries. This fiscal second-quarter report covers the three and six months ended September 30, 2023; financial amounts below are in thousands of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2023 | Three months ended Sept. 30, 2022 | Six months ended Sept. 30, 2023 | Six months ended Sept. 30, 2022 |
|---|---|---|---|---|
| Revenue | $2,731 | $3,331 | $6,158 | $7,314 |
| Gross profit / margin | $990 / 36% | $1,536 / 46% | $2,194 / 36% | $3,182 / 44% |
| Operating expenses | $2,198 | $2,267 | $4,642 | $4,768 |
| Operating loss | $(1,208) | $(731) | $(2,448) | $(1,586) |
| Net loss | $(1,484) | $(1,017) | $(2,902) | $(1,904) |
| Basic and diluted loss per share | $(0.29) | $(0.33) | $(0.57) | $(0.61) |
- Six-month operating cash use was $1,446, versus $3,363 in the prior-year period. Investing cash use was $19 and financing cash use was $264. Cash declined by $1,683 to $2,137 from March 31, 2023.
- At September 30, cash was $2,137, working capital was $8,277, and total assets were $13,635. Current liabilities were $3,239.
- Short-term debt was $172 at September 30, down from $431 at March 31; the filing also reports $4,473 of withholding tax payable. It does not present a separate total-debt figure.
Changes and operating drivers
- Revenue declined 18% in the quarter and 16% for the six months. U.S. revenue fell mainly because of lower over-the-counter animal-health sales. European revenue increased; Asian and other international sales were affected largely by order timing.
- Six-month Latin American revenue fell 48%, mainly because the prior-year period included $750 of one-time machinery-sale service revenue. Management expects that event to be nonrecurring.
- Quarterly and six-month gross margins fell to 36%, from 46% and 44%, respectively. Management attributed the six-month gross-profit decline mainly to the prior-year machinery-sale revenue; the quarterly decline was primarily associated with lower revenue.
- Research and development expense rose to $536 for the quarter and $861 for six months, reflecting increased product-development and regulatory efforts. Selling, general and administrative expense decreased to $1,662 and $3,781, respectively, as the company sought to contain costs.
- Revenue mix shifted: six-month human-care revenue increased to $4,825 from $4,615, while animal-care revenue decreased to $1,067 from $1,523 and service-and-royalty revenue decreased to $266 from $1,176.
Outlook, risks and notable items
- Going concern: Management expects revenue to fluctuate and losses to continue in the foreseeable future, and says additional capital may be needed. It states that financing may not be available on acceptable terms and that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Subsequent financing: On October 30, 2023, the company completed an offering of 8.5 million shares at $0.20 per share, generating $1.7 million gross and estimated net proceeds of $1.414 million. The cover reports 13,679,333 shares outstanding on November 9, compared with 5,179,333 at September 30.
- Nasdaq listing: The company received notice that it did not meet the $1 minimum bid-price requirement. It had until March 20, 2024 to regain compliance; delisting could impair liquidity and access to capital.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective as of September 30. Remediation measures were underway, but controls had not been tested for a sufficient period to establish that the material weaknesses were remediated.
- Tax and currency exposure: Management disclosed substantial Mexico tax, intercompany-debt, unpaid technical-assistance and accrued-interest amounts due in 2027, and stated it believes balance-sheet assets are sufficient to cover the tax obligation. Foreign-exchange movements, particularly involving the euro and Mexican peso, have affected results.
- Concentration and contingencies: Customer C accounted for 21% of quarterly revenue and 17% for six months. Ordinary-course legal matters were described as currently insignificant, but the filing notes they could adversely affect the business. Potential severance for two key executives was approximately $1.3 million if triggered.
- The filing provides no specific numerical revenue or earnings guidance. Prior-year comparative figures were reclassified between cost of revenues and research and development for presentation consistency, with no effect on total operating costs or earnings.
Important facts for investors to verify
- Whether the post-quarter equity proceeds and available cash are sufficient to fund operations, given the going-concern warning and continuing losses.
- Progress toward Nasdaq’s minimum-bid-price compliance deadline and the potential effect of the subsequent share issuance on existing shareholders.
- Whether sales and gross margins recover, including the durability of European demand and the impact of customer order timing and concentration.
- Whether internal-control remediation is completed and tested effectively, and how the Mexico-related withholding-tax and intercompany obligations develop.