Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019; filed February 14, 2020. Amounts below are U.S. dollars unless stated otherwise.
Business context
Sonoma is a specialty pharmaceutical company selling human and animal skin-care, wound-care and eye-hygiene products, as well as laboratory testing and technical services. Its products are sold in the U.S. and internationally.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2019 |
|---|---|---|
| Revenue | $4.678 million, down 11% | $14.357 million, down 2% |
| Gross profit / margin | $2.158 million / 46%, versus 54% | $6.819 million / 47%, versus 48% |
| Operating loss | $0.982 million | $3.914 million |
| Net loss | $1.084 million, versus $2.298 million | $1.572 million, versus $8.576 million |
| Net loss per share | $0.72 | $1.14 |
Nine-month operating expenses fell to $10.733 million from $15.559 million, mainly reflecting cost reductions and lower headcount. The nine-month net loss also benefited from a $2.472 million gain on the Petagon asset sale.
For the nine-month period, operating cash use was $1.000 million, investing cash use was $0.036 million, and financing provided $1.029 million. Cash was $3.727 million at December 31, 2019, compared with $3.689 million at March 31, 2019.
At December 31, current assets were $13.858 million and current liabilities $4.158 million; working capital was $9.700 million. Total assets were $16.496 million and total liabilities $5.287 million. No long-term debt or current debt was reported at quarter-end. Operating lease liabilities totaled approximately $1.098 million.
Material changes and business developments
- Quarterly product revenue declined 13%; U.S. product revenue fell 31%, partly reflecting the prior-year Epicyn launch and weaker insurance reimbursement. Europe and the rest of the world grew 17% for the quarter.
- Nine-month product revenue outside the U.S. was mixed: Europe and the rest of the world grew 22%, while Latin America declined 14%. U.S. animal-health revenue increased 36% to $1.753 million.
- Product gross margin weakened, which management attributed to product mix and reduced insurance reimbursement. Rebates on dermatology products totaled $2.294 million for the nine months.
- The November 2019 stock offering sold 446,577 shares at $3.50 per share, generating $1.376 million net. Common shares outstanding increased to 1,777,483 from 1,316,335 at March 31, 2019.
- The May 2019 Petagon sale of certain Asian and European animal-health rights and assets generated $2.7 million; $2.472 million was recognized as a gain, with the equipment-related portion deferred pending delivery.
Outlook, risks and contingencies
- Going concern: Management expects continued losses and says additional capital will be needed. It states financing availability is uncertain and that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management expects 2020 to focus on strategies and products it believes can support sustainable growth and profitability, while acknowledging revenue may fluctuate over the next six to twelve months as it changes or exits less profitable activities. No numerical guidance was provided.
- In January 2020, Sonoma engaged Maxim Group to assess options for its U.S. dermatology business, including a possible joint venture or sale. Management cited reimbursement challenges, rebate pressure and the direct sales force’s overhead costs.
- The Invekra arrangement was expected to end in fall 2020. Management anticipates ending the low-margin supply relationship could improve margins, but may reduce near-term revenue. International business excluding Invekra grew 22% in the nine-month period.
- Key risks include reliance on additional financing, reimbursement and rebate pressures, customer concentration, international-market exposure, product and regulatory execution, and ordinary-course legal matters. Two customers represented 21% and 15% of quarterly revenue; one represented 10% of receivables at December 31.
- The filing reports effective disclosure controls as of December 31, 2019 and no material changes to internal control over financial reporting during the quarter. A new CEO employment agreement runs through December 31, 2020, subject to extensions.
Important facts for investors to verify
- Cash runway, expected financing needs and any subsequent capital-raising plans, given the disclosed substantial doubt about continuing as a going concern.
- Whether the U.S. dermatology business is retained, sold or partnered, and the resulting effects on revenue, costs and margins.
- The timing and financial impact of the Invekra agreement’s expected expiration, including any transition in international sales.
- Underlying earnings and margins excluding the one-time Petagon gain, alongside trends in rebates, product mix and insurance reimbursement.
- Customer concentration, receivable collectability and the dilution implications of equity financing and outstanding equity awards.