Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Business and period: Sonoma develops and sells stabilized hypochlorous acid (HOCl) products for human and animal health, including wound care, dermatology, eye care and disinfectants. Its products are sold directly and through partners in 55 countries. This unaudited report covers the quarter and six months ended September 30, 2022 (the second quarter and first half of fiscal 2023); comparisons are with the corresponding 2021 periods. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Sept. 30, 2022 | Three months ended Sept. 30, 2021 | Six months ended Sept. 30, 2022 | Six months ended Sept. 30, 2021 |
|---|---|---|---|---|
| Revenue | $3.331 | $3.744 | $7.314 | $7.428 |
| Gross profit / margin | $1.336 / 40% | $1.241 / 33% | $2.782 / 38% | $2.694 / 36% |
| Operating expenses | $2.067 | $2.205 | $4.368 | $4.563 |
| Operating loss | $(0.731) | $(0.964) | $(1.586) | $(1.869) |
| Net loss | $(1.017) | $(0.100) | $(1.904) | $(1.198) |
| Basic and diluted loss per share | $(0.33) | $(0.04) | $(0.61) | $(0.54) |
Revenue fell 11% in the quarter and 2% for the six-month period. For the quarter, U.S. revenue declined 28%, partly reflecting the divestiture of prescription dermatology products and lower over-the-counter animal-health sales; Europe grew 27%. First-half U.S. revenue fell 37%, while Europe, Asia and Latin America increased. Management attributed international quarterly fluctuations in part to irregular distributor ordering. First-half Latin America revenue included a $750,000 machinery sale that management expects to be nonrecurring.
Quarterly gross margin rose to 40%, primarily from higher unit volumes at the Mexico manufacturing facility, partly offset by product mix and European shipping costs. First-half gross margin improved to 38%; management attributed the increase primarily to the one-time machinery sale. SG&A declined 6% in the quarter and 2% year to date amid expense-containment efforts. R&D expense was minimal: zero in the quarter and $6,000 for six months.
Cash, liquidity and obligations
- Cash and cash equivalents were $3.351 million at September 30, 2022, down from $7.396 million at March 31, 2022. Working capital was $8.866 million, versus $10.611 million at March 31.
- For the first six months, operating cash use was $3.363 million, investing cash use was $0.210 million and financing cash use was $0.565 million; cash declined by $4.045 million. Operating cash use included a $1.149 million reduction in deferred revenue.
- Reported debt was $244,000 at period-end: $229,000 short-term and $15,000 long-term. The PPP loan was fully settled; $120,000 of PPP principal was paid during the six months. A separate $4.013 million withholding-tax payable was reported, with related Mexico amounts described as not due until 2027.
- The company reported a $186.267 million accumulated deficit. Management stated that its recurring losses and capital needs raise substantial doubt about its ability to continue as a going concern. Additional financing may not be available on acceptable terms; without it, cost reductions could delay commercialization. The financial statements include no adjustments for a possible inability to continue as a going concern.
Outlook, risks and other notable matters
- No specific revenue, earnings or cash-flow guidance is provided. Management expects revenue to fluctuate, losses may continue, and additional capital may be needed.
- Management cited foreign-exchange exposure, potential effects from inflation, shipping and supply-chain costs, labor availability, consumer demand and a possible U.S. recession. The filing says the company had experienced higher shipping costs, with overall effects so far described as minimal.
- The filing identifies significant Mexico tax and intercompany obligations, including unpaid technical-assistance charges and accrued interest; management said the amounts are not due until 2027 and that it believes balance-sheet assets are sufficient to cover the tax obligation. Tax professionals are reviewing options.
- Other income was $(189,000) for the quarter and $(256,000) for six months, compared with income of $723,000 and $531,000 in 2021, respectively. The prior-year comparison benefited primarily from $723,000 of PPP loan forgiveness; exchange-rate movements also affected other income or expense.
- Customer concentration is notable: three customers represented 20%, 13% and 12% of quarterly revenue. At September 30, two customers represented 35% and 20% of net receivables.
- Disclosure controls and procedures were deemed ineffective at September 30, 2022. Management cited material weaknesses, including inadequate spreadsheet controls, insufficient separation of preparation and review, and revenue-reporting analysis deficiencies. Remediation testing was ongoing. The company was consolidating operations in Boulder, Colorado; its CFO was leaving in November and a replacement had been hired.
- The filing reports no subsequent events through issuance and no material changes to the risk factors in the prior Form 10-K. It notes the company was evaluating the Inflation Reduction Act’s potential effects.
Most important facts for investors to verify
- Cash runway, expected operating cash burn and the timing and terms of any financing; assess the stated going-concern uncertainty.
- Whether internal-control remediation is completed and tested, particularly controls over revenue recognition and financial reporting.
- How much of revenue and margin depends on the nonrecurring $750,000 machinery sale, and whether recurring sales and gross margins improve.
- Collection and ongoing concentration risks for major customers, plus distributor ordering patterns and product demand by region.
- The amount, timing and potential cash impact of Mexico withholding-tax and intercompany obligations, including the reported $4.013 million payable.