Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2018; the company’s fiscal year ends March 31. Amounts below are in U.S. dollars.
Business context and financial performance
Sonoma is a specialty pharmaceutical company focused on therapies for chronic skin conditions, with product sales in human and animal health care and laboratory testing and other service revenue.
| Metric | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $5.28 million | $14.59 million |
| Gross profit / margin | $2.85 million / 54% | $7.01 million / 48% |
| Operating loss | $2.35 million | $8.55 million |
| Net loss | $2.30 million | $8.58 million |
| Basic and diluted loss per share | $0.26 | $1.20 |
| Operating cash flow | Not separately provided | $(8.97) million |
Quarterly product revenue was $5.05 million and service revenue was $235,000. Cash and cash equivalents were $6.50 million at December 31, 2018, versus $10.07 million at March 31, 2018. Working capital was $11.25 million, down from $12.99 million. Reported long-term debt was $22,000, with $182,000 of current capital lease obligations and no long-term capital lease balance.
Changes versus prior comparable periods
- Quarterly revenue increased 9% year over year; nine-month revenue increased 12%. Nine-month product revenue rose 11%, led by Latin America growth of 43%; U.S. product revenue rose 5%.
- Quarterly gross margin improved to 54% from 49%; nine-month gross margin improved to 48% from 46%. Management attributed the quarterly product-margin improvement primarily to lower rebate costs.
- Quarterly net loss narrowed by $889,000 to $2.30 million; the nine-month net loss narrowed by $989,000 to $8.58 million. Higher revenue and gross profit and lower stock compensation contributed, partly offset by executive severance.
- Nine-month operating cash use was $8.97 million, compared with $9.39 million in the prior-year period. Receivables increased $1.63 million and inventory increased $514,000 during the period.
Liquidity, outlook, risks and unusual items
- Going concern: Management expects continuing losses and says additional capital is needed to fund development, commercialization and operations. It states that financing may not be available on acceptable terms and that these conditions raise substantial doubt about the company’s ability to continue as a going concern. The filing also identifies a risk that available cash may not support operations for the next six to twelve months.
- Financing and dilution: A November 2018 public offering generated $4.74 million in net proceeds, including common and convertible preferred stock units and warrants. The company also raised $957,000 net through at-the-market sales during the nine-month period. Common shares outstanding increased from 6.17 million at March 31 to 11.97 million at December 31; outstanding options, warrants and preferred securities could create further dilution.
- Revenue risks: Invekra accounted for approximately 14% of total revenue in the quarter and 17% for the nine months. The company expects Latin American revenue to decline substantially after Invekra establishes its own manufacturing lines; reduced-price supply is expected to continue through a transition period ending no later than October 27, 2020. Dermatology rebates were $1.25 million for the quarter and $4.57 million for the nine months, weighing on profitability.
- Other risks and contingencies: On January 4, 2019, Nasdaq notified the company that its share price had been below the $1.00 minimum bid for 30 consecutive business days, allowing until July 3, 2019 to regain compliance. The company recorded a $270,000 liability related to an October 2018 sale of 113,000 unregistered shares and disclosed potential securities-law claims or penalties. A lawsuit against Collidion and related parties was settled in September 2018, with no finding of wrongdoing.
- Management change: The former CEO/president and CFO/secretary resigned in December 2018. Frederick Sandford was appointed CEO and interim CFO. The quarter included $475,000 of severance expense related to the resignations. Management concluded disclosure controls were effective as of December 31, 2018.
- Outlook: The filing provides no quantified revenue or earnings guidance. Management expects continuing losses and identifies seasonal sales fluctuations, pricing and reimbursement pressure, and potential reductions in Invekra-related sales as material uncertainties.
Important facts for investors to verify
- Cash runway and near-term financing plans, given $8.97 million of operating cash use over nine months and management’s going-concern warning.
- Whether revenue growth and gross-margin gains can persist, particularly as rebates remain substantial.
- Invekra’s manufacturing transition timeline and the resulting impact on Latin American revenue.
- Potential dilution from outstanding warrants, options and convertible preferred stock, and remaining authorized-share capacity.
- Progress toward Nasdaq’s $1.00 minimum bid-price requirement and any exposure related to the unregistered share sale.