Sonoma Pharmaceuticals, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended March 31, 2022, compared with the year ended March 31, 2021. Although the request metadata says “2021 Q4,” this filing reports FY2022; it does not provide a standalone fourth-quarter summary.
Business context
Sonoma develops and manufactures stabilized hypochlorous acid (HOCl) products for human and animal health and surface disinfection, selling directly and through partners in 54 countries. Management said its focus after restructuring was revenue growth while controlling costs, expanding distribution, launching products and seeking additional regulatory clearances.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $12.628 million | $18.629 million |
| Gross profit / gross margin | $3.993 million / 32% | $6.559 million / 35% |
| Operating loss | $5.887 million | $3.449 million |
| Loss from continuing operations | $5.086 million | $4.615 million |
| Net loss | $5.086 million | $3.950 million |
| Operating cash flow | $(4.248) million | $(3.378) million |
| Cash at year-end | $7.396 million | $4.220 million |
| Working capital at year-end | $10.611 million | $8.905 million |
Revenue fell 32%. U.S. revenue declined 30% to $3.807 million, Latin American revenue declined 65% to $2.095 million, and Europe and rest-of-world revenue declined 7% to $6.726 million. Human-care product revenue was $9.010 million, down from $15.317 million; animal-care revenue was $3.169 million, approximately flat. International markets generated about 70% of revenue.
Cost of revenue was $8.635 million, or 68% of revenue, versus $12.070 million, or 65%, in FY2021. Management attributed the lower gross margin to product mix and higher distributor sales. SG&A rose 3% to $9.755 million, while R&D fell 77% to $125,000. FY2022 included $723,000 of PPP loan forgiveness and a $332,000 income-tax benefit; FY2021 included $665,000 of income from discontinued operations, including a $770,000 pretax disposal gain.
Financing activities provided $7.396 million, primarily from $7.554 million of net ATM stock-sale proceeds, partly offset by debt payments. The company issued 950,100 ATM shares during the year; common shares outstanding increased from 2,092,909 to 3,100,937. At March 31, 2022, current liabilities included $688,000 of short-term debt and $120,000 of current PPP debt. The balance sheet also reported $3.838 million of withholding tax payable. Total liabilities were $10.148 million.
Material changes and developments
- The transition of Invekra to its own manufacturing reduced Latin American revenue; Sonoma said remaining overflow orders were at lower volumes. FY2022 revenue related to Invekra was $2.095 million, compared with $5.876 million in FY2021.
- In the U.S., Sonoma moved prescription dermatology and eye-care products from a direct-sales approach to a distributor model. Management said this reduced operating costs but also lowered reported revenue and contributed to margin pressure.
- Wound-care revenue in the U.S. increased 19%, while disinfectant sales in the Middle East declined as pandemic-driven demand receded.
- Products and partnerships highlighted included the September 2021 launches of Regenacyn scar gels and Ocucyn eyelid cleanser, the March 2022 launch of Microdox urinary/bladder rinse, and a January 2022 agreement with Anlicare to pursue oral and dental clearances in China and Macau.
- After year-end, Nanocyn received U.S. EPA approval through partner MicroSafe and was subsequently added to EPA lists for COVID-19 and emerging viral pathogens. The filing states the regulatory process was managed and financed by MicroSafe.
Outlook, risks and unusual items
The filing gives no quantified revenue, earnings or cash-flow guidance. Management identified priorities for the new fiscal year as finding U.S. and international distribution partners, developing products and expanding U.S. over-the-counter sales. It did not anticipate material capital expenditures for FY2023.
- Going concern: The auditor’s report and management disclosure state that recurring losses and the need for additional funding raise substantial doubt about the company’s ability to continue as a going concern. Management said it may seek equity, debt or collaboration funding, but gave no assurance financing would be available on acceptable terms.
- Customer and revenue concentration: Three customers represented 21%, 17% and 10% of FY2022 net revenue. Loss of a major customer or failure to replace Invekra-related revenue could materially affect results.
- Mexico tax and intercompany balances: The company disclosed approximately $11.2 million of intercompany loan principal, $7.3 million of technical-assistance payments and $18.3 million of accrued interest owed by its Mexican subsidiary, with loans maturing in 2027. It also discussed potential Mexican tax and withholding consequences and limitations on related tax deductions and credits. Management said tax professionals were reviewing options.
- Other operating risks: International exposure, foreign-exchange movements, regulatory approvals, reliance on distributors, reimbursement and pricing pressure, manufacturing and supply-chain constraints, inflation, shipping costs and labor availability may affect performance. Management said the recent impact of shipping, supply-chain and labor pressures had been limited, but warned of potential effects.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2022 because of material weaknesses, including spreadsheet controls, segregation of duties and revenue-reporting analysis. Remediation was underway but had not been tested for a sufficient period to be considered complete.
- Audit: The FY2022 auditor issued an unqualified opinion and reported no critical audit matters. The audit report nevertheless highlighted the going-concern uncertainty.
Important facts for investors to verify
- Whether the company can fund operations and reduce its operating cash burn without further dilutive financing.
- Whether new U.S. and international sales can offset the decline in Invekra-related and pandemic-driven revenue, and whether margins improve under distributor arrangements.
- The status, timing and financial consequences of the Mexican intercompany balances, withholding-tax exposure and related tax treatment.
- Whether major customers maintain purchases and whether customer and receivables concentrations change.
- Whether management’s remediation of internal-control weaknesses is completed and independently validated.
- The commercial contribution, regulatory status and partner commitments associated with newer products and Nanocyn’s U.S. approvals.