Sonoma Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (fiscal Q2 and first half of fiscal 2018). Unless noted otherwise, financial figures below are in millions of dollars.
Business context
Sonoma is a specialty pharmaceutical company focused on therapies for chronic skin conditions, including prescription dermatology products and Microcyn-branded products. It also provides laboratory testing and technical services. The company is transitioning its Latin American operations to Invekra following an asset sale completed in October 2016; it continues to supply Invekra during a manufacturing transition.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $4.325 in 2017; $2.798 in 2016, up 55% | $8.160 in 2017; $5.436 in 2016, up 50% |
| Product revenue | $4.144; $2.574 in 2016, up 61% | $7.747; $4.985 in 2016, up 55% |
| Service revenue | $0.181; $0.224 in 2016 | $0.413; $0.451 in 2016 |
| Gross profit / margin | $1.848 / 43%; $1.036 / 37% in 2016 | $3.610 / 44%; $2.017 / 37% in 2016 |
| Operating expenses | $4.705; $4.022 in 2016 | $9.850; $8.512 in 2016 |
| Loss from operations | $(2.857); $(2.986) in 2016 | $(6.240); $(6.495) in 2016 |
| Net loss | $(2.870); $(1.949) in 2016 | $(6.378); $(4.517) in 2016 |
| Net loss per share, basic and diluted | $(0.67); $(0.46) in 2016 | $(1.48); $(1.08) in 2016 |
Reported gross-margin improvement is not directly comparable: prior-year Latin American business results were reclassified to discontinued operations. Management attributed revenue growth to stronger U.S. and international product sales; U.S. product revenue rose 34% in both comparative periods. The company said dermatology products may support higher margins as their share of sales grows. SG&A increased 19% for the quarter and 17% for the six-month period, primarily due to expansion of the dermatology sales force.
Cash, liquidity and obligations
- Cash and cash equivalents were $9.983 at September 30, 2017, down from $17.461 at March 31, 2017. Working capital was $13.992, versus $19.355 at fiscal year-end.
- Six-month operating cash use was $7.233, compared with $4.001 in the prior-year period. Investing cash use was $0.176; financing cash use was $0.092. The net decrease in cash was $7.478.
- Current liabilities were $3.207. Reported long-term debt totaled approximately $0.088, and capital lease obligations totaled approximately $0.358, including current portions.
- Management expected available cash to fund working capital, sales and marketing, and R&D for at least 12 months from the November 14, 2017 filing date, while cautioning that further capital may be needed. It expects losses to continue for the foreseeable future.
Material changes, outlook and risks
- Invekra-related product sales were $0.754 for the quarter and $1.323 for the six months. The company expects Latin American revenue to decline significantly as Invekra establishes its own manufacturing capacity. The supply arrangement has a potential $2.0 one-time penalty for a six-month consecutive supply failure; management said it did not expect the penalty.
- The filing describes a royalty arrangement with Invekra, but gives differing terms in different sections: the notes refer to 3% on certain product sales, while MD&A states 2.5% on Latin American net revenue excluding Mexico and a $0.25 annual minimum for ten years. Payments are in Mexican pesos.
- Revenue concentration is material: for the six months, four customers accounted for 20%, 16%, 12% and 12% of net revenue. At September 30, three customers represented 47%, 19% and 17% of net accounts receivable.
- Other risks include ongoing losses and possible financing needs, execution of the Invekra transition, product development and regulatory outcomes, competition, international-market exposure and foreign-exchange fluctuations. Management reported no material change to the risk factors in its prior Form 10-K. Ordinary-course legal matters were described as currently insignificant, though litigation could have a material adverse effect.
- No specific revenue or earnings guidance was provided. Management cited growth in U.S. and international sales and continued investment in its sales force and product development. Disclosure controls were concluded effective as of September 30, 2017.
Important facts for investors to verify
- Reconcile the Invekra royalty terms, including the percentage, covered territories and products, minimum payment, and payment schedule.
- Assess the cash-burn trajectory and assumptions behind management’s stated 12-month liquidity runway, including potential financing needs.
- Track the timing of Invekra’s manufacturing transition, related supply revenue, and the possibility of the contractual supply penalty.
- Evaluate customer concentration and collection exposure, particularly the largest customer’s share of accounts receivable.
- Compare margins and revenue growth on a consistent basis given the Latin American discontinued-operations reclassification.