UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission file number: 001-33216

SONOMA PHARMACEUTICALS, INC.

(Name of registrant as specified in its charter)

Delaware	68-0423298
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer identification No.)

645 Molly Lane, Suite 150 Woodstock, GA	30189
(Address of principal executive offices	(Zip Code)

(800) 759-9305

(Registrant’s telephone number, including area code)

N/A

(Former name or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value	SNOA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated Filer ☐	Accelerated Filer ☐
Non-accelerated Filer ☒	Smaller reporting company ☒
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of November 12, 2021, was 3,097,674.

SONOMA PHARMACEUTICALS, INC.

Index

	Page
PART I - FINANCIAL INFORMATION	3
Item 1. Unaudited Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Statements of Cash Flows	5
Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	26

PART II - OTHER INFORMATION	28
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3. Defaults Upon Senior Securities	28
Item 4. Mine Safety Disclosures (Not applicable.)	28
Item 5. Other Information	29
Item 6. Exhibits	29

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)


	September 30, 2021			March 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	8,392		$	4,220
Accounts receivable, net		3,416			2,806
Inventories, net		2,482			2,530
Prepaid expenses and other current assets		3,519			3,218
Current portion of deferred consideration, net of discount		212			209
Total current assets		18,021			12,983
Property and equipment, net		337			360
Operating lease, right of use assets		700			769
Deferred consideration, net of discount, less current portion		694			763
Other assets		76			112
Total assets	$	19,828		$	14,987

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,876		$	1,769
Accrued expenses and other current liabilities		987			1,154
Deferred revenue		100			267
Deferred revenue Invekra		53			52
Current portion of debt – PPP		587			–
Current portion of long-term debt		199			596
Operating lease liabilities		276			240
Total current liabilities		4,078			4,078
Long-term deferred revenue Invekra		205			229
Long-term debt, less current portion – PPP		–			1,310
Withholding tax payable		3,661			3,478
Operating lease liabilities, less current portion		424			529
Total liabilities	$	8,368		$	9,624
Commitments and Contingencies (Note 6)		–			–
Stockholders’ Equity:
Series C Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at September 30, 2021 and March 31, 2021, 0 shares issued and outstanding at September 30, 2021 and March 31, 2021		–			–
Common stock, $0.0001 par value; 24,000,000 shares authorized September 30, 2021 and March 31, 2021, 3,004,741 and 2,092,909 shares issued and outstanding at September 30, 2021 and March 31, 2021, respectively (Note 9)		3			2
Additional paid-in capital		196,438			189,217
Accumulated deficit		(180,475	)		(179,277	)
Accumulated other comprehensive loss		(4,506	)		(4,579	)
Total stockholders’ equity		11,460			5,363
Total liabilities and stockholders’ equity	$	19,828		$	14,987

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Six Months Ended September 30,
	2021			2020			2021			2020
Revenues	$	3,744		$	5,769		$	7,428		$	11,536
Cost of revenues		2,503			3,267			4,734			6,779
Gross profit		1,241			2,502			2,694			4,757
Operating expenses
Research and development		10			(85	)		95			391
Selling, general and administrative		2,195			2,418			4,468			4,862
Total operating expenses		2,205			2,333			4,563			5,253
Income (loss) from operations		(964	)		169			(1,869	)		(496	)
Interest (expense) income, net		(4	)		4			(5	)		4
Other (expense) income, net		723			(77	)		531			(197	)
Gain on sale of assets		150			55			150			132
Income (loss) from continuing operations		(95	)		151			(1,193	)		(557	)
Income tax expense		(5	)		–			(5	)		–
Income (loss) from discontinued operations (Note 4)		–			(31	)		–			917
Net income (loss)	$	(100	)	$	120		$	(1,198	)	$	360
Net income (loss) per share: basic
Continuing operations	$	(0.04	)	$	0.08		$	(0.54	)	$	(0.29	)
Discontinued operations		–			(0.02	)		–			0.48
Total Basic Net income (loss) per share	$	(0.04	)	$	0.06		$	(0.54	)	$	0.19
Net income (loss) per share: diluted
Continuing operations	$	(0.04	)	$	0.07		$	(0.54	)	$	(0.26	)
Discontinued operations		–			(0.01	)		–			0.43
Total diluted net income (loss) per share	$	(0.04	)	$	0.06		$	(0.54	)	$	0.17
Weighted-average number of shares used in per common share calculations: basic		2,344			2,008			2,219			1,924
Weighted-average number of shares used in per common share calculations: diluted		2,344			2,159			2,219			2,118
Other comprehensive income (loss)
Net income (loss)	$	(100	)	$	120		$	(1,198	)	$	360
Foreign currency translation adjustments		(234	)		188			73			355
Comprehensive income (loss)	$	(334	)	$	308		$	(1,125	)	$	715

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended September 30,
	2021			2020
Cash flows from operating activities
Net income (loss)	$	(1,198	)	$	360
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		100			107
Forgiveness of PPP loan		(723	)		–
Stock-based compensation		114			223
Gain on sale of assets		–			(770	)
Changes in operating assets and liabilities:
Accounts receivable		(595	)		(705	)
Inventories		60			(1,386	)
Deferred consideration		76			65
Prepaid expenses and other current assets		(283	)		(273	)
Operating lease right-of-use assets		76			330
Accounts payable		99			706
Accrued expenses and other current liabilities		(169	)		(860	)
Withholding tax payable		184			–
Operating lease liabilities		(74	)		(343	)
Deferred revenue		(194	)		(102	)
Net cash used in operating activities		(2,527	)		(2,648	)

Cash flows from investing activities:
Purchases of property and equipment		(74	)		(97	)
Deposits		36			(38	)
Proceeds from sale of assets		–			610
Net cash (used in) provided by investing activities		(38	)		475

Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs		6,892			–
Proceeds from exercise of common stock options and purchase warrants		216			1,919
Proceeds from PPP loan		–			1,310
Principal payments on long-term debt		(397	)		(432	)
Net cash provided by financing activities		6,711			2,797
Effect of exchange rate on cash and cash equivalents		26			5
Net increase in cash and cash equivalents		4,172			629
Cash and cash equivalents, beginning of period		4,220			3,691
Cash and cash equivalents, end of period	$	8,392		$	4,320

Supplemental disclosure of cash flow information:
Cash paid for interest	$	8		$	4

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)


	Series C Convertible Preferred Stock ($0.0001 par Value)				Common Stock ($0.0001 par Value)				Additional Paid in			Accumulated			Accumulated Other Comprehensive
	Shares		Amount		Shares		Amount		Capital			Deficit			Loss			Total
Balance March 31, 2021		–	$	–		2,092,909	$	2	$	189,217		$	(179,277	)	$	(4,579	)	$	5,363
Transaction costs related to ATM agreement offering		–		–		–		–		(10	)		–			–			(10	)
Employee stock-based compensation expenses		–		–		–		–		56			–			–			56
Stock based compensation related to issuance of restricted common stock		–		–		–		–		3			–			–			3
Foreign currency translation adjustment		–		–		–		–		–			–			307			307
Net loss		–		–		–		–		–			(1,098	)		–			(1,098	)
Balance, June 30, 2021		–	$	–		2,092,909	$	2	$	189,266		$	(180,375	)	$	(4,272	)	$	4,621
Issuance of common stock in connection with ATM, net of transaction costs		–		–		855,500		1		6,901			–			–			6,902
Issuance of common stock due to options exercises		–		–		44,042		–		193			–			–			193
Issuance of common stock due to warrants exercises		–		–		12,290		–		23			–			–			23
Employee stock-based compensation expense		–		–		–		–		52			–			–			52
Stock based compensation related to issuance of restricted common stock		–		–		–		–		3			–			–			3
Foreign currency translation adjustment		–		–		–		–		–			–			(234	)		(234	)
Net loss		–		–		–		–		–			(100	)		–			(100	)
Balance, September 30, 2021		–	$	–		3,004,741	$	3	$	196,438		$	(180,475	)	$	(4,506	)	$	11,460

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

	Series C Convertible Preferred Stock ($0.0001 par Value)					Common Stock ($0.0001 par Value)				Additional Paid in		Accumulated			Accumulated Other Comprehensive
	Shares			Amount		Shares		Amount		Capital		Deficit			Loss			Total
Balance March 31, 2020		1.55		$	–		1,777,483	$	2	$	186,559	$	(172,246	)	$	(5,610	)	$	8,705
Stock based compensation related to common stock restricted stock grants		–			–		3,086		–		18		–			–			18
Stock based compensation, net of forfeitures		–			–		–		–		45		–						45
Issuance of common stock due to warrant exercises		–			–		169,167		–		1,490		–			–			1,490
Conversion of Series C convertible preferred stock into common stock		(1.55	)		–		17,222		–		–		–			–			–
Foreign currency translation adjustment		–			–		–		–		–		–			167			167
Net income		–			–		–		–		–		240			–			240
Balance, June 30, 2020		–		$	–		1,966,958	$	2	$	188,112	$	(172,006	)	$	(5,443	)	$	10,665
Stock based compensation, net of forfeitures		–			–		–		–		160		–			–			160
Issuance of common stock due to options exercises		–			–		74,451		–		429		–			–			429
Foreign currency translation adjustment		–			–		–		–		–		–			188			188
Net income		–			–		–		–		–		120			–			120
Balance, September 30, 2020		–		$	–		2,041,409	$	2	$	188,701	$	(171,886	)	$	(5,255	)	$	11,562

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.

Organization and Recent Developments

Organization

Sonoma Pharmaceuticals, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware in December 2006. The Company’s principal office was moved to Woodstock, Georgia from Petaluma, California in June 2020. The Company is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”) products for a wide range of applications, including wound care, animal health care, eye care, oral care, nasal care, dermatological conditions and disinfectants. The Company’s products reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. The Company’s stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells in the area treated assisting the body in its natural healing process. The Company sells its products either directly or via partners in 54 countries worldwide.

Impact of Coronavirus

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. In an effort to mitigate the continued spread of the virus, federal, state and local governments, as well as certain private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings and quarantining of people who may have been exposed to the virus. As a result of these restrictions, together with a general fear of the impact on the global economy and financial markets, there is significant uncertainty surrounding the potential impact on the Company. As events are rapidly changing, the Company is unable to accurately predict the impact that the coronavirus will have on its business due to uncertainties including, but not limited to, the duration of quarantines and other travel restrictions within the U.S. and other affected countries, the ultimate geographical spread of the virus, the severity of the disease, the duration of the outbreak and the public’s response to the outbreak.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2021 and for the six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2021, the condensed consolidated statements of comprehensive income (loss) for the three months ended September 30, 2021 and 2020, the cash flows for the three months ended September 30, 2021 and 2020 and the condensed consolidated statement of stockholders’ equity for the six months ended September 30, 2021 and 2020 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results for the six months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending March 31, 2022 or for any future interim period. The condensed consolidated balance sheet at March 31, 2021 has been derived from audited consolidated financial statements. These unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2021, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on July 14, 2021.

Note 2.

Liquidity and Financial Condition

The Company reported a net loss of $100,000 and $1,198,000 for the three and six months ended September 30, 2021. At September 30, 2021 and March 31, 2021, the Company’s accumulated deficit amounted to $180,475,000 and $179,277,000, respectively. The Company had working capital of $13,943,000 and $8,905,000 as of September 30, 2021, and March 31, 2021, respectively.

On June 24, 2020, the Company closed on an asset purchase agreement for the sale of its Micromed Laboratories division and testing facility, including all Micromed’s assets, such as testing equipment, certain office furniture and customer list, with Infinity Labs SD Inc. for an aggregate purchase price of $850,000. On the closing date, the Company received $610,000 in cash from this sale, which was adjusted for working capital, a credit of $100,000 for future testing services from Infinity over the next two years in lieu of cash, and $60,000 held in escrow for one year, subject to adjustment for certain indemnity claims or purchase price adjustments. Since July 2021, the escrow was received. The Company also retained its accounts receivables outstanding on the date of closing in the amount of approximately $81,000 and an insignificant amount of liabilities. As part of the transaction, Infinity also assumed the Petaluma lease for the office and lab space. The Company retained the warehouse space to store inventory and assets until September 30, 2020.

On May 1, 2020, the Company received loan proceeds in the amount of $1,310,000 under the Paycheck Protection Program (“PPP”), from Coastal States Bank in Atlanta, Georgia. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, “CARES Act”, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight or 24 weeks as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains payroll levels. The amount of loan forgiveness will be reduced if the Company terminated employees or reduced salaries during the applicable period.

The unsecured loan, which is in the form of a note dated April 29, 2020, matures on April 29, 2022, and bears interest at a rate of 1% per annum, payable monthly commencing on May 1, 2021. The note may be prepaid at any time prior to maturity with no prepayment penalties. The Company has used a portion of the loan amount for eligible purposes, such as payroll expenses. On September 3, 2021, the Company received approval for forgiveness in the amount of $723,000.

On May 29, June 1 and 2, 2020, the Company received proceeds of $1,799,000 from the exercise of November 2018 common stock purchase warrants by several investors.

On July 30, 2021, the Company entered into an At The Market Offering Agreement with HC Wainwright & Co., LLC under which the Company may issue and sell shares of its common stock from time to time through HC Wainwright acting as sales agent. The Company will pay HC Wainwright a commission of 3% of the gross proceeds from the sale of any shares of common stock under the Agreement. During the quarter ended September 30, 2021, the Company sold 855,500 shares of common stock for gross proceeds of $7,202,000 and net proceeds of $6,902,000 after deducting commissions and other offering expenses.

Since September 30, 2021, the Company sold 94,600 shares of common stock for gross proceeds of $700,000 and net proceeds of $678,000 after deducting commissions and other offering expenses.

Management believes that the Company has access to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations, or other means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms, if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively impacted. If the Company is unable to secure additional capital, it may be required to take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.

Note 3.

Summary of Significant Accounting Policies

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, fair value allocation of assets sold to Invekra, Petagon, Microsafe and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.

Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

Computation of earnings per share
	Three Months Ended September 30,						Six Months Ended September 30,
(In thousands, except per share data)	2021			2020			2021			2020
Numerator:
Income (loss) from continuing operations	$	(100	)	$	151		$	(1,198	)	$	(557	)
Income (loss) from discontinued operations		–			(31	)		–			917
Net income (loss)	$	(100	)	$	120		$	(1,198	)	$	360

Denominator:
Weighted-average number of common shares outstanding: basic		2,344			2,008			2,219			1,924
Dilutive effect of stock options		–			149			–			192
Dilutive effect of restricted stock		–			2			–			2
Weighted-average number of common shares outstanding: diluted		2,344			2,159			2,219			2,118

Income (loss) per share from continuing operations	$	(0.04	)	$	0.08		$	(0.54	)	$	(0.29	)
Income (loss) per share from discontinued operations		–			(0.02	)		–			0.48
Net income (loss) per share: basic	$	(0.04	)	$	0.06		$	(0.54	)	$	0.19

Income (loss) per share from continuing operations	$	(0.04	)	$	0.07		$	(0.54	)	$	(0.26	)
Income (loss) per share from discontinued operations		–			(0.01	)		–			0.43
Net income (loss) per share: diluted	$	(0.04	)	$	0.06		$	(0.54	)	$	0.17

The computation of basic loss per share for the three and six months ended September 30, 2021, and 2020 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

Three Months Ended September 30,

Six Months Ended September 30,

(In thousands)

2021

2020

2021

2020

Stock options

207

Restricted stock

–

Warrants

106

SEC Form 10-Q filed by Sonoma Pharmaceuticals, Inc.