Sonoma Pharmaceuticals, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018, compared with FY2017. The request metadata says “2017 Q4,” but this filing reports FY2018 annual results; it is not a standalone quarterly report.
Business context
Sonoma is a specialty pharmaceutical company selling hypochlorous-acid (HOCl)-based and other products for dermatology, wound care, eye care and animal health, plus laboratory testing services. It operates in the U.S. and internationally. The company reported growth in U.S. dermatology, launched Loyon, expanded its sales team, and received additional FDA 510(k) clearances. In 2016 it sold certain Latin American assets to Invekra but continued supplying products during a transition period.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $16.658 million | $12.825 million |
| Gross profit / margin | $7.310 million / 44% | $5.668 million / 44% |
| Operating expenses | $21.499 million | $18.642 million |
| Operating loss | $14.189 million | $12.974 million |
| Continuing-operations loss | $14.328 million | $8.669 million |
| Net income (loss) | $(14.328) million | $9.274 million |
| Cash from operating activities | $(12.439) million | $(8.167) million |
| Cash and cash equivalents at year-end | $10.066 million | $17.461 million |
| Working capital | $12.993 million | $19.355 million |
- Revenue rose 30%; product revenue increased 31% to $15.663 million and service revenue rose 15% to $995,000.
- U.S. product revenue grew 27% to $8.372 million; Latin American product revenue related to Invekra rose to $3.007 million; Europe and rest-of-world product revenue increased 5% to $4.284 million.
- Dermatology net revenue increased 40% to $5.803 million, and prescriptions filled rose 40% to 73,667. Product gross margin declined to 45% from 46%, which management attributed mainly to product mix; total gross margin remained 44%.
- SG&A increased 17% to $19.924 million, primarily reflecting $1.989 million of higher sales expenses and increased stock compensation. R&D was essentially unchanged at $1.575 million.
- Cash declined $7.395 million during the year. Financing provided $5.240 million, principally from common-stock sales; investing used $201,000. Interest-bearing debt and capital-lease obligations totaled approximately $559,000 at year-end. Contractual debt, capital-lease and operating-lease payments totaled $1.277 million.
Changes, outlook and key risks
- The prior-year net income included $17.943 million of after-tax discontinued-operations income, including a $19.679 million pretax gain on the Latin American asset sale. FY2018 had no discontinued-operations income. The company therefore moved from net income to a net loss despite revenue growth. FY2017 continuing-operations results also included a $4.268 million tax benefit.
- Management expects continued losses and says additional capital may be needed. The auditor’s report includes a going-concern explanatory paragraph: substantial doubt exists about the company’s ability to continue as a going concern. Management said financing may be pursued through equity, debt or collaborations, but availability and terms are uncertain; cost cuts could delay commercialization.
- No quantified revenue, earnings or cash-flow guidance was provided. Management described plans to grow U.S. dermatology, develop and commercialize products, and expand sales and international activity.
- In FY2018, Sonoma raised $4.5 million net in a registered offering and $968,000 net through an at-the-market program. From April 1 through June 11, 2018, it raised a further $916,000 net through the ATM, with 245,132 shares sold.
- Invekra-related revenue depends on a supply transition that may end by October 2020 as Invekra establishes manufacturing. Sonoma received $312,500 in royalties during FY2018; the stated $2.5 million variable consideration is payable over ten years in Mexican currency and is subject to currency fluctuation. A $2 million supply-failure penalty is disclosed, though the company said it did not expect to incur it.
- Other notable risks include dependence on a small number of customers (four customers represented 66% of FY2018 revenue), concentration of receivables (two customers represented 54%), rebate and reimbursement pressure, seasonality, foreign-exchange exposure, regulatory and manufacturing compliance, competition, and potential need for additional capital. Patient rebates were $1.669 million in the fourth fiscal quarter.
- The company is pursuing litigation against Collidion and former personnel over alleged trade-secret misappropriation and breach of fiduciary duties; damages remain undetermined. The filing reports no countersuit as of its filing date.
Most important facts to verify
- Whether subsequent financing and cash generation are sufficient to address the disclosed going-concern uncertainty.
- Whether dermatology growth and prescription increases can continue while containing SG&A, rebates and customer concentration risk.
- Timing of Invekra’s manufacturing transition and the resulting effect on supply revenue, royalties and future Latin American sales.
- Whether additional funding, regulatory clearances and commercial execution support the company’s stated growth plans.
- Potential dilution from equity issuance and outstanding options and warrants; shares outstanding were 6.172 million at March 31, 2018 and 6.421 million at June 21, 2018.