Sonoma Pharmaceuticals, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; comparative period ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in thousands. Sonoma develops and sells stabilized hypochlorous acid products across human and animal healthcare and other markets, directly and through partners in 54 countries.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $3.983 million | $3.684 million |
| Gross profit / margin | $1.446 million / 36% | $1.453 million / 39% |
| Operating expenses | $2.301 million | $2.357 million |
| Operating loss | $855,000 | $904,000 |
| Net loss | $887,000; $0.29 per share | $1.098 million; $0.52 per share |
| Operating cash flow | $(1.533) million | $(1.223) million |
- Revenue rose 8%. Gross profit was nearly flat as cost of revenue increased 14% to $2.537 million; gross margin declined about 3 percentage points.
- Cash and cash equivalents were $5.586 million at June 30, down from $7.396 million at March 31, 2022. Working capital was $9.963 million, versus $10.611 million at March 31.
- Cash used in investing activities was $23,000 and cash used in financing activities was $387,000. Financing outflows included $120,000 in PPP loan payments and $230,000 in short-term debt payments. The PPP loan was paid in full. Balance-sheet short- and long-term debt totaled approximately $474,000.
- Total liabilities were $9.199 million, including $3.933 million of withholding tax payable. The company says related Mexico tax, intercompany debt, technical assistance charges and interest are not due until 2027.
Changes and operating drivers
- U.S. revenue fell 45% to $871,000, primarily reflecting the divestiture of prescription dermatology products to EMC Pharma; management said this also eliminated related expenses, including a direct sales force.
- Latin American revenue increased 85% to $1.048 million, primarily due to a $750,000 machinery sale that management expects to be a one-time event. Europe and rest-of-world revenue increased 35% to $2.064 million, mainly from distributor orders; those orders can be uneven between quarters.
- Revenue mix shifted: human care revenue declined to $2.168 million from $2.715 million, while service and royalty revenue rose to $1.028 million from $157,000. Animal care revenue was $787,000 versus $812,000.
- Management attributed lower gross margin primarily to product and customer mix and increased shipping costs. R&D expense fell to $6,000 from $84,000, mainly due to reduced clinical-trial expense; SG&A was essentially flat at $2.295 million.
Outlook, risks and notable items
- No quantified revenue or earnings guidance is provided. Management expects revenue to fluctuate, anticipates possible losses, and says additional capital may be needed to fund product development, market penetration and ongoing operations.
- The company states that uncertainty about access to new financing raises substantial doubt about its ability to continue as a going concern. It may need to reduce costs if it cannot obtain capital; such actions could delay commercialization.
- Management cited foreign-exchange exposure, inflation, shipping and supply-chain costs, possible labor constraints, recession risk, dependence on distributors, regulatory and commercialization risks, and customer concentration. Two customers represented 15% and 26% of quarterly revenue; two customers represented 25% and 18% of net receivables at June 30.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2022. The filing identifies material weaknesses involving spreadsheet controls, separation of preparation and review, and revenue analysis, and says remediation testing was not complete. The company says prior control issues contributed to a restatement of June 2020 quarterly results and corrections to fiscal 2021 results.
- After quarter-end, the company announced consolidation of U.S. corporate functions in Boulder and closure of its Woodstock office by December 31, 2022; CFO Jerry Dvonch resigned in connection with the move. The filing describes $100,000 severance, subject to a release, and up to six months of COBRA reimbursement. The company also disclosed executive agreement amendments and bonus awards effective July 22.
- Also after quarter-end, the company reported the launch of MicrocynVS veterinary products and said Nanocyn received U.S. EPA approval and was added to EPA Lists N and Q during 2022.
Key facts for investors to verify
- Whether operating cash burn and the $5.586 million cash balance provide sufficient runway, and what financing options are realistically available.
- Whether revenue growth is repeatable without the one-time $750,000 machinery sale, and whether distributor ordering patterns and customer concentration create material volatility.
- Whether gross margin can recover from the mix and shipping-cost pressures.
- Progress and evidence of effective remediation of internal-control weaknesses, particularly during the finance-team relocation and CFO transition.
- Potential exposure and timing of the Mexico withholding-tax and intercompany obligations described as due in 2027.