Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2018. Sonoma is a specialty pharmaceutical company focused on therapies for chronic skin conditions, with product and laboratory-service revenue in the U.S. and internationally. Financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $4.939 million | $9.308 million | $4.325 million; $8.160 million |
| Gross profit / margin | $2.427 million / 49% | $4.158 million / 45% | $1.848 million / 43%; $3.610 million / 44% |
| Operating loss | $2.652 million | $6.204 million | $2.857 million; $6.240 million |
| Net loss | $2.820 million | $6.278 million | $2.870 million; $6.378 million |
| Net loss per share, basic and diluted | $0.44 | $0.99 | $0.67; $1.48 |
| Operating cash used | Not separately stated | $6.607 million | $7.233 million |
- Quarterly revenue increased 14% year over year; six-month revenue increased 14%. Product revenue rose 12% and 13%, respectively, while service revenue rose 68% and 40%.
- For the six-month period, U.S. product sales increased 7% and Latin American sales increased 57%; Europe and the rest of the world declined 2%. Animal-health sales contributed to U.S. growth. Invekra-related product revenue was $1.828 million, or about 20% of total six-month revenue.
- Quarterly gross margin improved to 49%, principally because of lower rebate costs; six-month gross margin was 45%. SG&A increased 8% for the quarter and 6% for six months, primarily from higher U.S. legal and marketing expenses. R&D was $740,000 for six months, down from $750,000.
- Cash and cash equivalents were $4.048 million at September 30, down from $10.066 million at March 31. Working capital was $8.591 million, down from $12.993 million. The six-month cash decrease was $6.018 million, including $6.607 million used in operations; financing provided $675,000, including $957,000 in net stock-sale proceeds.
- At September 30, total debt was approximately $99,000 and capital-lease liabilities approximately $219,000. Total liabilities were $3.563 million; the company reported no default on senior securities.
Material changes and notable items
- Quarterly net loss narrowed by $50,000 and six-month net loss by $100,000 versus 2017, despite higher revenue. Shares used in the weighted-average EPS calculation increased substantially year over year, to 6.465 million for the quarter and 6.353 million for six months.
- Dermatology rebates were $1.415 million for the quarter and $3.317 million for six months, materially affecting revenue economics. Management said it was working with providers, payors and other parties to manage pricing and reduce rebate impact, but gave no assurance of success.
- The company expects to supply Invekra at reduced prices during a transition period ending no later than October 27, 2020, while Invekra develops manufacturing capability. Management expects Latin American revenue to decrease substantially once Invekra begins manufacturing.
- On October 4, 2018, after quarter-end, the company sold 113,000 shares for $270,000 gross proceeds, but concluded the sale exceeded applicable Form S-3 issuance limits and that the shares were unregistered. Successful rescission claims could require repayment with interest; regulatory investigation or penalties are also possible.
- Stockholders approved increasing authorized common shares from 12 million to 24 million. The company reported an S-1 offering pending and warned a maximum offering could use a majority of authorized shares, with potential dilution and reduced flexibility for future equity issuance.
- The company settled its lawsuit against Collidion and related former personnel during the quarter; the settlement was to the parties’ satisfaction, with no finding of wrongdoing against any party.
Outlook, risks and contingencies
- Management expects continued losses and says additional capital will be needed to fund product development, market penetration and ongoing operations. It cannot assure financing will be available on acceptable terms, or at all. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern; the financial statements include no adjustments for a possible failure to continue.
- The company disclosed that, at September 30, it might not have sufficient cash to continue operations for the next six to twelve months. If sales, expense management or financing do not improve, it may need to reduce or cease operations; equity financing would dilute shareholders and debt could impose restrictive covenants.
- Management cited seasonal sales fluctuations, reimbursement and pricing pressure, rebate costs, dependence on international markets and Invekra, regulatory and product-development uncertainties, competition, and the possibility of reduced access to capital. No specific revenue, earnings or cash-flow guidance was provided.
- Five key executives had employment agreements; potential severance payments totaled $1.417 million if applicable termination conditions are triggered. Management reported disclosure controls were effective at September 30 and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash runway, operating cash burn, and the timing and terms of any needed financing, including the pending offering.
- Whether the October 4 unregistered-share sale prompts rescission claims, regulatory action, penalties or other costs.
- How quickly Invekra transitions to its own manufacturing and the resulting effect on Latin American sales and gross margin.
- Whether rebate levels can be reduced without weakening product demand, and whether reported revenue growth converts into improved cash flow.
- Potential dilution from the offering, outstanding options and warrants, and the enlarged authorized share count.