Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2021 (fiscal second quarter of fiscal 2022). Unaudited consolidated financial statements; amounts below are in U.S. dollars unless stated otherwise.
Business context
Sonoma develops and sells stabilized hypochlorous acid (HOCl) products for human and animal health, wound care, eye, oral and nasal care, dermatology, and disinfection. It sells directly and through partners in 54 countries. The reported business excludes Micromed, sold in June 2020 and presented as discontinued operations.
Financial results
| Metric | Three months ended September 30, 2021 | Six months ended September 30, 2021 |
|---|---|---|
| Revenue | $3.744 million | $7.428 million |
| Gross profit / gross margin | $1.241 million / 33% | $2.694 million / 36% |
| Operating expenses | $2.205 million | $4.563 million |
| Operating loss | $964,000 | $1.869 million |
| Net loss | $100,000 | $1.198 million |
| Basic and diluted loss per share | $0.04 | $0.54 |
- Revenue declined 35% for the quarter and 36% for the six-month period versus 2020. Latin American sales fell 74% and 75%, respectively, primarily reflecting lower Invekra orders after its reduced-price manufacturing arrangement ended in October 2020.
- Quarterly and six-month gross margins fell to 33% and 36%, from 43% and 41%. Management attributed the decline primarily to the EMC Pharma arrangement and lower transfer prices for U.S. prescription products.
- Six-month operating cash flow was negative $2.527 million, compared with negative $2.648 million in 2020. Investing cash flow was negative $38,000; financing cash flow was positive $6.711 million, mainly from stock issuance.
- Cash was $8.392 million at September 30, 2021, versus $4.220 million at March 31, 2021. Working capital was $13.943 million, up from $8.905 million. Total liabilities were $8.368 million, down from $9.624 million.
- Debt included $587,000 of current PPP debt and $199,000 of current long-term debt; no noncurrent PPP debt remained on the balance sheet. The company recognized $723,000 of PPP loan forgiveness as other income.
Material changes and notable items
- Under a five-year U.S. agreement, EMC Pharma manages, markets and distributes certain prescription dermatology and eye-care products. Sonoma expects lower revenue from those products but also lower sales-force, servicing and rebate costs; management expects cost reductions to exceed the revenue decline and improve overall performance.
- Sonoma raised $6.902 million net through its at-the-market offering during the quarter, issuing 855,500 shares. After quarter-end, it raised an additional $678,000 net from 94,600 shares. Common shares outstanding increased from 2,092,909 at March 31 to 3,004,741 at September 30.
- Other income included the $723,000 PPP forgiveness benefit. The company also recorded a $150,000 gain on sale of assets in the quarter and six-month period. These items supported reported results and are not operating revenue.
- Six-month 2020 results included $917,000 of income from discontinued operations, including a $795,000 gain on the Micromed disposal; there was no discontinued-operations income in 2021.
- Invekra remained a significant customer: it represented about 14% of quarterly revenue and 15% of six-month revenue in 2021. Two customers together represented 38% of quarterly revenue and 38% of six-month revenue.
Outlook, risks and controls
- No specific revenue or earnings guidance was provided. Management expects revenue to fluctuate, says losses may continue, and expects it may need additional capital to fund commercialization and operations.
- Management states that uncertainty over access to future financing raises substantial doubt about the company’s ability to continue as a going concern. It cautions that financing may not be available on acceptable terms; cost reductions, if needed, could delay commercialization.
- The company disclosed a substantial Mexico tax liability, intercompany debt, unpaid technical-assistance charges and accrued interest, with amounts not due until 2027. It is consulting tax professionals on options to limit exposure.
- Risks include COVID-19 effects, higher shipping and labor costs, customer and geographic concentration, reimbursement and pricing pressures, regulatory and commercialization uncertainties, and dependence on additional financing.
- Management concluded disclosure controls and procedures were not effective at period-end because of material weaknesses involving spreadsheet controls, segregation of preparation and review, revenue analysis, and tax review of intercompany transactions. Remediation and testing were ongoing; management said the weaknesses were not yet considered remediated.
- The filing reports no material off-balance-sheet arrangements. Ordinary-course legal matters were described as currently insignificant, although the company notes litigation could adversely affect results.
Most important facts for investors to verify
- Whether the EMC Pharma transition ultimately delivers the expected operating-cost savings and offsets lower product revenue and gross margins.
- Cash burn, financing needs, and the company’s ability to continue as a going concern without further equity issuance or other financing.
- Progress in remediating and testing the disclosed material weaknesses in financial reporting controls.
- Changes in Invekra and other customer concentration, order levels, and geographic revenue mix.
- The status and potential amount of Mexico tax, intercompany debt and related charges, despite their stated 2027 due date.
- The extent to which reported earnings depend on nonrecurring items such as PPP forgiveness and asset-sale gains.