Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and period: Specialty pharmaceutical company selling therapies for chronic skin conditions, including human and animal skin-care products, and laboratory and technical services. The filing covers the three months ended June 30, 2018, the first quarter of the company’s fiscal year ending March 31, 2019; comparative results are for the three months ended June 30, 2017. Figures below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended June 30, 2018 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $4.369 million | $3.835 million; up 14% |
| Gross profit and margin | $1.731 million; 40% | $1.762 million; 46% |
| Operating loss | $3.552 million | $3.383 million |
| Net loss | $3.458 million; $0.55 per share | $3.508 million; $0.82 per share |
| Operating cash flow | $(3.060) million | $(4.634) million |
| Cash and cash equivalents | $7.685 million at June 30 | $10.066 million at March 31, 2018 |
| Working capital | $10.511 million at June 30 | $12.993 million at March 31, 2018 |
| Debt and lease obligations | $0.223 million long-term debt and $0.255 million capital leases, including current portions |
Performance and material changes
- Product revenue rose 14% to $4.095 million; service revenue rose 18% to $274,000. U.S. product revenue increased 6%, Latin America increased 90%, and Europe and the rest of the world declined 11%.
- Management attributed lower gross margin primarily to a greater mix of lower-margin Latin American sales and higher dermatology rebates. Dermatology rebates were $1.902 million for the quarter.
- Research and development expense declined to $350,000 from $382,000, primarily due to lower study spending. Selling, general and administrative expense increased 4% to $4.933 million, reflecting higher U.S. legal and marketing costs.
- Net loss improved slightly, by $50,000, chiefly because other income improved by $219,000, primarily from foreign-exchange fluctuations; operating loss increased by $169,000.
- Cash decreased by $2.381 million during the quarter. Financing activities provided $794,000, including $916,000 of net proceeds from common-stock sales, partly offset by debt and lease principal payments.
Outlook, risks, and other notable items
- Management expects continued losses and says additional capital will be needed to fund development, market expansion, and ongoing operations. It states that uncertainty over obtaining financing raises substantial doubt about the company’s ability to continue as a going concern; financial statements contain no adjustments for a possible failure to continue.
- Invekra-related Latin American product revenue was $1.079 million, approximately 25% of quarterly revenue. Sonoma expects Latin American revenue to fall substantially once Invekra establishes its own manufacturing lines; the supply arrangement may continue through October 27, 2020.
- Management cites reimbursement and pricing pressure, patient rebates, seasonality, regulatory and product-development uncertainty, international-business exposure, and the ability to raise capital among significant risks. No specific financial guidance is provided.
- The company is pursuing litigation against Collidion, Inc. and former employees, officers, and directors over alleged misappropriation of confidential information and breach of fiduciary duties; damages have not been determined, and no countersuit had been filed.
- After quarter-end, the company issued 17,741 shares to a service provider and granted the CEO and CFO 67,733 stock options each. It also sold 6,695 shares through its at-the-market program from July 1 through August 6, for $15,500 in net proceeds.
Important facts for investors to verify
- Available liquidity, cash-burn trends, and the timing and terms of any required financing.
- Progress of Invekra’s manufacturing buildout and the resulting effect on Latin American sales and margins.
- Whether revenue growth can be sustained while gross margins are pressured by product mix and rebates.
- Customer concentration: one customer represented 25% and another 14% of quarterly net revenue.
- Developments and potential financial impact of the Collidion litigation and other contingencies.