Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2021. The company develops and sells stabilized hypochlorous acid (HOCl) healthcare products, directly and through partners in 54 countries. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Revenue | $2.902 million | $4.936 million | $10.330 million | $16.472 million |
| Gross profit / margin | $1.203 million / 41% | $1.995 million / 40% | $3.897 million / 38% | $6.753 million / 41% |
| Operating expenses | $2.161 million | $2.133 million | $6.724 million | $7.388 million |
| Operating loss | $958,000 | $138,000 | $2.827 million | $635,000 |
| Net loss | $944,000 | $650,000 | $2.142 million | $290,000 |
Quarterly and nine-month net losses per share were $0.31 and $0.85, respectively, versus $0.32 and $0.15 in the prior-year periods. Prior-year nine-month results included $893,000 of income from discontinued operations, including a gain on the Micromed sale; the 2021 periods had no discontinued-operations income.
For the nine months, operating cash outflow was $2.853 million, investing cash outflow was $38,000, and financing cash inflow was $7.174 million. Financing primarily reflected $7.554 million of net ATM equity proceeds. Cash increased by $4.309 million to $8.529 million.
Balance sheet and liquidity
At December 31, 2021, cash was $8.529 million, working capital was $13.824 million, total assets were $19.347 million, and total liabilities were $8.178 million. These compare with cash of $4.220 million, working capital of $8.905 million, assets of $14.987 million, and liabilities of $9.624 million at March 31, 2021.
The balance sheet showed $587,000 of current PPP debt and no long-term debt. The original $1.310 million PPP loan was partly forgiven: $723,000 of forgiveness was approved in September 2021 and recognized as other income. Withholding tax payable was $3.751 million. The company states these Mexico-related amounts are not due until 2027 and management believes assets are sufficient to cover the potential tax obligation.
Material changes and management commentary
- Revenue fell 41% in the quarter and 37% for the nine months. Human Care revenue declined to $2.015 million for the quarter and $7.201 million year to date, from $3.534 million and $13.628 million, respectively.
- Management attributed lower U.S. revenue primarily to transferring prescription dermatology sales to EMC Pharma. The company now sells to EMC at lower prices but says the reduced sales-force and overhead costs made the U.S. prescription business smaller but profitable. Wound-care revenue was described as essentially flat.
- Latin American revenue declined as Invekra sales fell after a reduced-price supply arrangement ended; management said the contract’s end reduced reported revenue but had a neutral overall bottom-line impact because of low contract margins.
- Nine-month gross margin declined to 38% from 41%, attributed primarily to the lower transfer price under the EMC arrangement. Quarterly gross margin improved to 41% from 40%, which management linked to Invekra pricing changes.
- R&D expense fell to $121,000 for nine months from $425,000, following closure of the Seattle facility and relocation of R&D to Mexico. Nine-month SG&A declined 5%, but SG&A rose to 74% of quarterly revenue from 43% as revenue fell.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management expects revenue to fluctuate, losses may continue in the foreseeable future, and additional capital may be needed. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management cites possible equity, debt, or collaboration financing but gives no assurance financing will be available on acceptable terms.
- The company reported that disclosure controls and procedures were not effective at December 31, 2021, citing material weaknesses involving spreadsheet controls, separation of preparation and review, revenue analysis, and review of tax consequences of intercompany transactions. Remediation measures were underway and still being tested.
- Management was monitoring inflation, shipping, supply-chain, and labor costs. It said the impact had been minimal to date but could affect sales, costs, or pricing. COVID-19 effects remain uncertain.
- One customer represented 22% of quarterly revenue; two customers represented 36% of nine-month revenue. Two customers each exceeded 10% of accounts receivable at December 31, 2021.
- Three key executives had employment agreements with potential aggregate severance of $775,000 if triggered. The company also disclosed ordinary-course legal matters it considered currently insignificant, while noting litigation could be materially adverse.
- January 2022 subsequent events included new distribution and licensing agreements and annual option grants. The option-vesting descriptions conflict: the subsequent-events note says annual vesting over three anniversaries, while the later Item 5 disclosure says vesting at six, 18, and 30 months.
Most important facts for investors to verify
- Whether revenue declines, particularly in Latin America and U.S. Human Care, stabilize and whether new distribution relationships produce sales.
- Cash burn, the timing and terms of any additional financing, and management’s basis for the going-concern assessment.
- The amount, treatment, and timing of the Mexico withholding-tax and related intercompany obligations due in 2027.
- Progress in remediating the disclosed material weaknesses and whether controls are operating effectively.
- The option-grant vesting schedule, given the inconsistent descriptions in the filing.