SEC Form 10-Q filed by Sonoma Pharmaceuticals Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
OR
For the transition period from ____________ to ______________
Commission file number:
(Name of registrant as specified in its charter)
| (State or other jurisdiction of Incorporation or Organization) | (I.R.S. Employer identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(
(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 |
| The |
Indicate by check mark whether the registrant (1) has 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.
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).
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 ☐ |
| 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 August 8, 2024 was .
SONOMA PHARMACEUTICALS, INC.
Index
| 2 |
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, 2024 | March 31, 2024 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Current portion of deferred consideration, net of discount | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease, right of use assets | ||||||||
| Deferred tax asset | ||||||||
| Deferred consideration, net of discount, less current portion | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenue, current portion | ||||||||
| Short-term debt | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Total current liabilities | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Withholding tax payable | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 5) | ||||||||
| Stockholders’ Equity: | ||||||||
| Convertible preferred stock, $ par value; shares authorized at June 30, 2024 and March 31, 2024, respectively, shares issued and outstanding at June 30, 2024 and March 31, 2024, respectively | ||||||||
| Common stock, $ par value; shares authorized at June 30, 2024 and March 31, 2024, respectively, and shares issued and outstanding at June 30, 2024 and March 31, 2024, respectively (Note 7) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Selling, general and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Loss from operations before income taxes | ( | ) | ( | ) | ||||
| Income tax (expense) benefit | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share: basic and diluted | $ | ) | $ | ) | ||||
| Weighted-average shares outstanding: basic and diluted | ||||||||
| Other comprehensive loss: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustments | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income tax expense | ||||||||
| Operating lease right-of-use asset | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventories, net | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Deferred consideration, net of discount | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Withholding tax payable | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds (costs) from issuance of common stock, net of offering expenses | ( | ) | ||||||
| Proceeds from exercise of employee stock options | ||||||||
| Principal payments on short-term debt | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate on cash and cash equivalents | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months ended June 30, 2024 and 2023
(In thousands, except share amounts)
(Unaudited)
| Common Stock ($0.0001 par Value) | Additional Paid in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Proceeds from At-the-Market sale of common stock, net of offering expenses | ||||||||||||||||||||||||
| Proceeds from exercise of employee stock options | ||||||||||||||||||||||||
| Employee stock-based compensation expenses | ||||||||||||||||||||||||
| Foreign currency translation adjustment | – | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock ($0.0001 par Value) | Additional Paid in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Cost in connection with ATM | – | ( | ) | ( | ) | |||||||||||||||||||
| Employee stock-based compensation expenses | ||||||||||||||||||||||||
| Foreign currency translation adjustment | – | |||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Rounded to nearest thousand unless specified)
(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 moved its principal office from Petaluma, California to Woodstock, Georgia in June 2020 and to Boulder, Colorado in October 2022. 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, eye, oral and nasal care, dermatological conditions, podiatry, animal health care, and as a non-toxic disinfectant. The Company’s products are clinically proven to reduce itch, pain, scarring, and irritation safely and without damaging healthy tissue. In-vitro and clinical studies of HOCl show it to safely manage skin abrasions, lacerations, minor irritations, cuts, and intact skin. The Company sells its products either directly or via partners in 55 countries worldwide.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (the “SEC”) in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2024, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 17, 2024.
| Note 2. | Liquidity and Financial Condition |
The Company reported a net loss of $
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. This uncertainty along with the Company’s history of losses indicates that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying condensed consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.
| 7 |
| Note 3. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP 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 condensed 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 valuation allowance relating to the Company’s deferred tax assets, valuation of equity and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
The Company computes basic net loss per share by dividing net loss 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.
The following table provides the net loss for each period along with the computation of basic and diluted net loss per share:
| For the Three Months Ended June 30, | ||||||||
| (In thousands, except per share data) | 2024 | 2023 | ||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted-average number of common shares outstanding: basic and diluted | ||||||||
| Net loss per share: basic and diluted | $ | ) | $ | ) | ||||
The computation of basic and diluted loss per share for the three months ended June 30, 2024 and 2023 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.
| June 30, | ||||||||
| (In thousands) | 2024 | 2023 | ||||||
| Common stock to be issued upon vesting of restricted stock units | ||||||||
| Common stock to be issued upon exercise of options | ||||||||
| Common stock to be issued upon exercise of warrants | ||||||||
| Common stock to be issued upon exercise of common stock units (1) | ||||||||
| (1) |
| 8 |
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”), Topic 606 Revenue from Contracts with Customers (“Topic 606”). Revenue is recognized when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company derives the majority of its revenue through sales of its products directly to end users and to distributors. The Company also sells products to a customer base, including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company has also entered into agreements to license its technology and products.
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled.
For all of the Company’s sales to non-consignment distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e. when its performance obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could occur when the customer receives the product based on the terms of the agreement with the customer. For product sales to its value-added resellers, non-stocking distributors and end-user customers, the Company grants return privileges to its customers, and because the Company has a long history with its customers, the Company is able to estimate the amount of product that will be returned.
The Company has entered into consignment arrangements, in which goods are left in the possession of another party to sell. As products are sold from the customer to third parties, the Company recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending on whether a patient is covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the Company’s rebate program.
Sales to stocking distributors are made under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods and services in the technical support contract with Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and as separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.
Accounts Receivable
Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns are based on analysis of contractual terms and historical trends.
| 9 |
The Company’s policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers
include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis
of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on
government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. The Company did not deem it necessary to record
an allowance for doubtful accounts for probable credit losses at June 30, 2024 and March 31, 2024. Additionally, at June 30, 2024 and
March 31, 2024, the Company has allowances of $
Inventories
Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.
Due to changing market conditions, estimated future
requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand
and records a provision to write down excess and obsolete inventory to its estimated net realizable value. At June 30, 2024 and March
31, 2024, the Company recorded provisions to reduce the carrying amounts of inventories to their net realizable value in the amounts of
$
Recent Accounting Standards
Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption.
| Note 4. | Condensed Consolidated Balance Sheet |
Inventories, net
Inventories, net consist of the following:
| June 30, | March 31, | |||||||
| 2024 | 2024 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventories, gross | ||||||||
| Less: allowance for obsolete and excess inventory | ( | ) | ( | ) | ||||
| Total inventories, net | $ | $ | ||||||
| 10 |
Leases
The Company’s operating leases are comprised primarily of facility leases. Balance sheet information related to the Company’s leases is presented below:
| June 30, | March 31, | |||||||
| 2024 | 2024 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease liabilities – current | ||||||||
| Operating lease liabilities – non-current | ||||||||
Other information related to leases is presented below:
| Three Months Ended June 30, 2024 | ||||
| Operating lease cost | $ | |||
| Other information: | ||||
| Operating cash flows from operating leases | ( |
) | ||
| Weighted-average remaining lease term – operating leases (in months) | ||||
| Weighted-average discount rate – operating leases | ||||
As of June 30, 2024, the annual minimum lease payments of our operating lease liabilities were as follows:
| For Years Ending March 31, | ||||
| 2025 (excluding the three months ended June 30, 2024) | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total future minimum lease payments, undiscounted | ||||
| Less: imputed interest | ( | ) | ||
| Present value of future minimum lease payments | $ | |||
| Note 5. | Commitments and Contingencies |
Legal Matters
The Company may be involved in legal matters arising in the ordinary course of business including matters involving proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which the Company is or could become involved in litigation may have a material adverse effect on its business and financial condition of comprehensive loss.
Employment Matters
The Company has employment agreements in place with two of its key executives. These executive employment agreements provide, among other things, for the payment of up to eighteen months of severance compensation for terminations under certain circumstances.
| 11 |
As of June 30, 2024, with respect to these agreements,
aggregated annual salaries was $
| Note 6. | Debt |
Financing of Insurance Premiums
On February 6, 2024, the Company entered into
a note agreement for $
| Note 7. | Stockholders’ Equity |
Authorized Capital
The Company is authorized to issue up to shares of common stock with a par value of $ per share and shares of convertible preferred stock with a par value of $ per share.
Sale of Common Stock
In connection with the Equity Distribution Agreement
that the Company entered into on December 15, 2023 with Maxim Group LLC (“Maxim”), as amended, from May 13, 2024 to May 22,
2024 the Company sold shares of its common stock for gross proceeds of $
| Note 8. | Stock-Based Compensation |
For the three months ended June 30, 2024 and 2023, the Company incurred $ and $ of stock-based compensation expense, respectively. All stock-based compensation incurred is included in selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.
At June 30, 2024, there was unrecognized compensation costs of $ related to stock options which is expected to be recognized over a weighted-average amortization period of years.
Stock options award activity is as follows:
| Number of Shares | Weighted- Average Exercise Price | |||||||
| Outstanding at April 1, 2024 | $ | |||||||
| Options exercised | ( | ) | ||||||
| Outstanding at June 30, 2024 | $ | |||||||
| Exercisable at June 30, 2024 | $ | |||||||
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock, or $ per share at June 30, 2024.
| 12 |
Restricted stock award activity is as follows:
Number of Shares | Weighted Average Award Date Fair Value per Share | |||||||
| Unvested restricted stock awards outstanding at April 1, 2024 | $ | |||||||
| Restricted stock awards granted | ||||||||
| Restricted stock awards vested | ( | ) | ||||||
| Unvested restricted stock awards outstanding at June 30, 2024 | $ | |||||||
The Company did not capitalize any cost associated with stock-based compensation.
The Company issues new shares of common stock upon exercise of stock options or release of restricted stock awards.
| Note 9. | Income Taxes |
At the end of each interim reporting period, the Company determines the income tax provision by using an estimate of the annual effective tax rate, adjusted for discrete items occurring in the quarter.
Our effective tax rate for the three months ended
June 30, 2024 was (
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of June 30, 2024, the Company continues to maintain a valuation allowance in the U.S.
| Note 10. | Revenue Disaggregation |
The Company generates product revenues from products which are sold into the human and animal healthcare markets, and the Company generates service revenues from laboratory testing services which are provided to medical device manufacturers.
The following table presents the Company’s disaggregated revenues by source:
| Three Months Ended June 30, | ||||||||
| Product | 2024 | 2023 | ||||||
| Human Care | $ | $ | ||||||
| Animal Care | ||||||||
| Total Product | ||||||||
| Service and Royalty | ||||||||
| Total | $ | $ | ||||||
| 13 |
The following table shows the Company’s revenues by geographic region:
| Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Asia | ||||||||
| Latin America | ||||||||
| Rest of the World | ||||||||
| Total | $ | $ | ||||||
| Note 11. | Significant Customer Concentrations |
The following table shows major customers revenues as a percentage of net revenue:
| For the Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Customer A | *% | |||||||
| Customer B | ||||||||
| Customer C | ||||||||
The following table shows major customers accounts receivable balances as a percentage of net accounts receivables:
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Customer A | ||||||||
| Customer B | *% | |||||||
| Customer C | ||||||||
| Customer D | ||||||||
| * |
| Note 12. | Subsequent Events |
Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued. The Company does not have subsequent events to report.
| 14 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q as of June 30, 2024 and our audited consolidated financial statements for the year ended March 31, 2024 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 17, 2024.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “anticipate,” “suggest,” “estimate,” “plan,” “aim,” “seek,” “project,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “likely,” “proposal,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the risks described in our Annual Report on Form 10-K including: our ability to become profitable; our dependence on third-party distributors; certain tax impacts of inter-company loans between us and our Mexican subsidiary; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; the progress and timing of clinical trials and physician studies; our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability to compete with other companies that are developing or selling products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products; the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market and generate attractive margins; the ability to attain specified revenue goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug Administration, or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture sufficient amounts of our products for commercialization activities; our ability to protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability to continue to expand our intellectual property portfolio; the risk we may need to indemnify our distributors or other third parties; risks attendant with conducting a significant portion of our business outside the United States; our ability to comply with complex federal and state fraud and abuse laws, including state and federal anti-kickback laws; risks associated with changes to health care laws; our ability to attract and retain qualified directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our ability to expand to and commercialize products in markets outside the wound care market; our ability to protect our information technology and infrastructure; and the impact of any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
Our Business
We are a global healthcare leader for developing and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, eye care, oral care, dermatological conditions, podiatry, animal health care and non-toxic disinfectants. Our products are clinically proven to reduce itch, pain, scarring, and irritation safely and without damaging healthy tissue. In-vitro and clinical studies of HOCl show it to safely manage skin abrasions, lacerations, minor irritations, cuts, and intact skin. We sell our products either directly or via partners in 55 countries worldwide.
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Business Channels
Our core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. We have been in business for over 20 years, and in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms.
We sell our products into many markets both in the U.S. and internationally. In international markets, we ship a variety of products to 55 countries. Our core strategy is to work with partners both in the United States and around the world to market and distribute our products. In some cases, we market and sell our own products.
Dermatology
We have developed unique, differentiated, prescription-strength and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our products are primarily targeted at the treatment of redness and irritation, the management of scars and symptoms of eczema/atopic dermatitis. We are strategically focused on introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to new product families.
In the United States, we partner with EMC Pharma, LLC to sell our prescription dermatology products. Pursuant to our March 2021 agreement with EMC Pharma, we manufacture products for EMC Pharma and EMC Pharma has the right to market, sell and distribute them to patients and customers for an initial term of five years, subject to meeting minimum purchase and other requirements.
In September 2021, we launched a new over-the-counter product, Regenacyn® Advanced Scar Gel, which is clinically proven to improve the overall appearance of scars while reducing pain, itch and redness. On the same day, we launched Regenacyn Plus, a prescription-strength scar gel which is available as an office dispense product through physician offices.
In October 2022, we launched two new over-the-counter dermatology products in the United States, Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel for the alleviation of red bumps, rashes, shallow skin fissures, peeling, and symptoms of eczema/atopic dermatitis, and Rejuvacyn® Advanced Skin Repair Cooling Mist for management of minor skin irritations following cosmetic procedures as well as daily skin health and hydration.
In June 2022, the Natural Products Association certified Rejuvacyn Advanced as a Natural Personal Care Product. Reliefacyn Advanced received the National Eczema Association Seal of AcceptanceTM in 2023.
In January 2023, we launched a line of office dispense products exclusively for skin care professionals, including two new prescription strength dermatology products, Reliefacyn Plus Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Rejuvacyn Plus Skin Repair Cooling Mist. These products, along with Regenacyn Plus Scar Gel, are marketed and sold directly to dermatology practices and medical spas.
In January 2024, we launched LumacynTM Clarifying Mist, a direct-to-consumer skin care product in the United States. Lumacyn is an all-natural daily toner to soothe skin, reduce redness and irritation, and manage blemishes by reducing infection.
Our consumer products are available through Amazon.com, our online store and third-party distributors.
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We sell dermatology products in Europe and Asia through distributors. In these international markets, we have a network of partners, ranging from country specific distributors to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners to create products they can market in their home country. Some products we develop and manufacture are custom label while others use branding we have already developed. We have created or co-developed a wide range of products for international markets using our core HOCl technology.
First Aid and Wound Care
Our HOCl-based wound care products are intended for the treatment of acute and chronic wounds as well as first- and second-degree burns, and as an intraoperative irrigation treatment. They work by first removing foreign material and debris from the skin surface and moistening the skin, thereby improving wound healing. Secondly, our HOCl products assist in the wound healing process by removing microorganisms. HOCl is an important constituent of our innate immune system, formed and released by the macrophages during phagocytosis. Highly organized cell structures such as human tissue can tolerate the action of our wound care solution while single-celled microorganisms cannot, making our products advantageous to other wound-irrigation and antiseptic solutions. Due to its unique chemistry, our wound treatment solution is also much more stable than similar products on the market and therefore maintains much higher levels of hypochlorous acid over its shelf life.
In the United States, we sell our wound care products directly to hospitals, physicians, nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements. In Europe, the Middle East and Asia, we sell our wound care products through a diverse network of distributors.
To respond to market demand for our HOCl technology-based products, we launched our first direct to consumer over-the-counter product in the United States in February 2021. Microcyn® OTC Wound and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including sunburns and other skin irritations. Microcyn OTC is available without prescription through Amazon.com, our online store and third-party distributors.
In March 2021, we received approval to market and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation in France, Germany and Portugal. The approval applies to our products MucoClyns™ for human hygiene to be marketed and commercialized by us, MicrocynAH® for animal heath marketed and commercialized through our partner, Petagon Limited, and MicroSafe for disinfectant use to be marketed and commercialized through our partner, MicroSafe Group DMCC.
In June 2022, the Natural Products Association certified Microcyn OTC as a Natural Personal Care Product in the United States.
In June 2023, we announced a new application of our HOCl technology for intraoperative pulse lavage irrigation treatment, which can replace commonly used IV bags in a variety of surgical procedures. The intraoperative pulse lavage container is designed to be used in combination with a pulse lavage irrigation device, or flush gun, for abdominal, laparoscopic, orthopedic, and periprosthetic procedures. It is in trial use by hospitals in Europe and launched in the U.S. in November 2023.
In April 2024, we announced expansion of our Microcyn Negative Pressure Wound Therapy Solution products line, now available in 250mL, 450mL and 990mL sizes to meet the diverse needs of healthcare professionals and patients.
In July 2024, we announced an expansion of our distributor base in Europe through a new partnership with Smart Healthcare Company (SHC) s.r.o. for the distribution of Microdacyn60® wound care products into Ukraine.
Eye Care
Our prescription product Acuicyn™ is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes and helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to provide near instant relief, and gentle enough to use as often as needed. In the United States, our partner EMC Pharma sells Acuicyn through its distribution network.
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In international markets we rely on distribution partners to sell our eye products. In May 2020, we entered into an expanded license and distribution agreement with our existing partner, Brill International S.L., for our Microdacyn60® Eye Care HOCl-based product. Under the license and distribution agreement, Brill has the right to market and distribute our eye care product under the private label Ocudox™ in Italy, Germany, Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return, Brill paid us a one-time fee, and the agreed upon supply prices. In parts of Asia, Dyamed Biotech markets our eye product under the private label Ocucyn.
In September 2021, we launched Ocucyn® Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com, through our online store, and through third party distributors. Ocucyn Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective solution for good eyelid and eyelash hygiene.
Oral, Dental and Nasal Care
We sell a variety of oral, dental, and nasal products around the world.
In international markets, our product Microdacyn60 Oral Care treats mouth and throat infections and thrush. Microdacyn60 assists in reducing inflammation and pain, provides soothing cough relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications and is ready for use with no mixing or dilution.
Our international nasal care product Sinudox™ based on our HOCl technology is an electrolyzed solution intended for nasal irrigation. Sinudox clears and cleans stuffy, runny noses and blocked or inflamed sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is currently sold through Amazon in Europe. In other parts of the world, we partner with distributors to sell Sinudox.
Podiatry
Our HOCl-based wound care products are also indicated for the treatment of diabetic foot ulcers. In the United States, we sell our wound care products directly to podiatrists as well as hospitals, nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements. In Europe, we sell our wound care products for podiatric use through a diverse network of distributors.
In April 2023, we launched PodiacynTM Advanced Everyday Foot Care direct to consumers for over-the-counter use in the United States, intended for management of foot odors, infections, and irritations, as well as daily foot health and hygiene. Podiacyn is available through Amazon.com, our online store and third-party distributors.
Animal Health Care
MicrocynAH® is an HOCl-based topical product that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment of a variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms and wounds to the outer ear.
For our animal health products sold in the U.S. and Canada, we partner with Compana Pet Brands. Compana distributes non-prescription products to national pet-store retail chains and farm animal specialty stores, such as PetSmart, Tractor Supply, Cabela’s, PetExpress, Bass Pro Shops, and Menards. In August 2022, we announced the launch of a MicrocynVS® line of products exclusively for veterinarians for the management of wound, skin, ear and eye afflictions in all animal species.
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For the Asian and European markets, in May 2019 we partnered with Petagon an international importer and distributor of quality pet food and products for an initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. In August 2020, Petagon received a license from the People’s Republic of China for the import of veterinary drug products manufactured by us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.
Surface Disinfectants
Our HOCl technology has been formulated as a disinfectant and sanitizer solution for our partner MicroSafe and is sold in numerous countries. It is designed to be used to spray in aerosol format in areas and environments likely to serve as a breeding ground for the spread of infectious disease, which could result in epidemics or pandemics. The medical-grade surface disinfectant solution is used in hospitals worldwide to protect doctors and patients. In May 2020, Nanocyn® Disinfectant & Sanitizer received approval to be entered into the Australian Register of Therapeutic Goods, or ARTG for use against the coronavirus SARS-CoV-2, or COVID-19, and was also authorized in Canada for use against COVID-19. Nanocyn has also met the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one of the very few eco-certified, all-natural disinfectant solutions in Australia.
Through our partner MicroSafe, we sell hard surface disinfectant products into Europe, the Middle East and Australia.
In July 2021, we granted MicroSafe the non-exclusive right to sell and distribute Nanocyn in the United States provided that MicroSafe secure U.S. EPA approval. In April of 2022, MicroSafe secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold in the United States as a surface disinfectant, and it was subsequently added to the EPA’s list N for use against COVID-19. In June 2022, the EPA added Nanocyn to List Q as a disinfectant for Emerging Viral Pathogens, including Ebola virus, Mpox, and SARS-CoV-2, and in March 2023 the EPA added Nanocyn to Lists G and H, for use against Methicillin Resistant Staphylococcus Aureus (MRSA), Salmonella, Norovirus, Poliovirus, and as a fungicide. Nanocyn also received the Green Seal® Certification after surpassing a series of rigorous standards that measure environmental health, sustainability and product performance. Nanocyn is currently sold by MicroSafe in Europe, the Middle East and Australia.
Additional Information
Investors and others should note that we announce material financial information using our company website (www.sonomapharma.com), our investor relations website (ir.sonomapharma.com), SEC filings, press releases, public conference calls and webcasts. The information on, or accessible through, our websites is not incorporated by reference in this Quarterly Report on Form 10-Q.
Results of Operations
Comparison of the Three Months Ended June 30, 2024 and 2023
Revenue
The following table shows our consolidated total revenue and revenue by geographic region for the three months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | ||||||||||||||||
| (In thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||||
| United States | $ | 642 | $ | 806 | $ | (164 | ) | (20% | ) | |||||||
| Europe | 1,288 | 1,070 | 218 | 20% | ||||||||||||
| Asia | 477 | 862 | (385 | ) | (45% | ) | ||||||||||
| Latin America | 880 | 487 | 393 | 81% | ||||||||||||
| Rest of the World | 104 | 202 | (98 | ) | (49% | ) | ||||||||||
| Total | $ | 3,391 | $ | 3,427 | $ | (36 | ) | (1% | ) | |||||||
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The decrease in United States revenue of $164,000 for the three months ended June 30, 2024, was primarily the result of fluctuations in timing of orders of over-the-counter animal health care products.
The increase in Europe revenue for the three months ended June 30, 2024 of $218,000 was the result of a general increase in demand for our products.
The decrease in Asia revenue of $385,000 for the three months ended June 30, 2024 was primarily due to timing of orders. Revenues from our international distributors tend to fluctuate from period to period due to customer placement of larger but less frequent orders to benefit from quantity discounts and reduced shipping costs.
The increase in Latin America revenue for the three months ended June 30, 2024 of $393,000 was primarily due to timing of customer orders for overflow manufacturing.
The decrease in Rest of World revenue for the three months ended June 30, 2024 of $98,000 was primarily due to timing of customer orders.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics for the three months ended June 30, 2024 and 2023 are as follows:
| Three Months Ended June 30, | ||||||||||||||||
| (In thousands, except for percentages) | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Cost of Revenues | $ | 2,085 | $ | 2,223 | $ | (138 | ) | (6% | ) | |||||||
| Cost of Revenue as a % of Revenues | 61% | 65% | ||||||||||||||
| Gross Profit | $ | 1,306 | $ | 1,204 | $ | 102 | 8% | |||||||||
| Gross Profit as a % of Revenues | 39% | 35% | ||||||||||||||
The increase in gross profit of $102,000 for the three months ended June 30, 2024, as compared to the prior period, was primarily due to overall product mix, and higher costs of materials and transportation in the prior period.
Research and Development Expense
The research and development expense metrics for the three months ended June 30, 2024 and 2023 are as follows:
| Three Months Ended June 30, | ||||||||||||||||
| (In thousands, except for percentages) | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Research and Development Expense | $ | 470 | $ | 325 | $ | 145 | 45% | |||||||||
| Research and Development Expense as a % of Revenues | 14% | 9% | ||||||||||||||
Increases in research and development expenses for the three months ended June 30, 2024 of $145,000 was primarily due to increased product development and expanded regulatory efforts in the U.S. and Europe to support new product releases.
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Selling, General and Administrative Expense
The selling, general and administrative expense metrics for the three months ended June 30, 2024 and 2023 are as follows:
| Three Months Ended June 30, | ||||||||||||||||
| (In thousands, except for percentages) | 2024 | 2023 | Change | % Change | ||||||||||||
| Selling, General and Administrative Expense | $ | 2,009 | $ | 2,119 | $ | (110 | ) | (5% | ) | |||||||
| Selling, General and Administrative Expense as a % of Revenues | 59% | 62% | ||||||||||||||
The decline in selling, general and administrative expenses for the three months ended June 30, 2024 of $110,000 was the result of ongoing efforts to contain expenses across all parts of the company.
Other Income (Expense), net
Other income (expense), net for the three months ended June 30, 2024 was $176,000 compared to other income (expense), net of $(211,000) for the three months ended June 30, 2023. The change in other income (expense), net primarily relates to exchange rate fluctuations.
Income Tax (Expense) Benefit
Income tax (expense) benefit for the three months ended June 30, 2024 and 2023 was $(146,000) and $33,000, respectively. The expense for the current year is primarily related to the use of our deferred tax asset in Mexico and, to a lesser extent, our deferred tax asset in Netherlands. The benefit for the prior year was related to our Mexico deferred tax asset.
Net Loss
The following table provides the net loss for each period along with the computation of basic and diluted net loss per share:
| Three Months Ended June 30, | ||||||||
| (In thousands, except per share data) | 2024 | 2023 | ||||||
| Net loss | $ | (1,143 | ) | $ | (1,418 | ) | ||
| Weighted-average shares outstanding: basic and diluted | 17,029 | 4,936 | ||||||
| Net loss per share: basic and diluted | $ | (0.07 | ) | $ | (0.29 | ) | ||
Liquidity and Capital Resources
We reported a net loss of $1,143,000 and $1,418,000 for the three months ended June 30, 2024 and June 30, 2023, respectively. At June 30, 2024 and March 31, 2024, our accumulated deficit amounted to $195,492,000 and $194,349,000, respectively. At June 30, 2024 and March 31, 2024, we had cash and cash equivalents of $2,589,000 and $3,128,000, respectively. At June 30, 2024 and March 31, 2024, we had working capital of $8,176,000 and $8,829,000, respectively.
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Sources of Liquidity
Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various loans and the sale of certain assets to customers.
Since July 1, 2023, substantially all of our operations have been financed through cash on hand and the following transactions:
| · | Proceeds of $1,446,000, net of offering expenses, from the sale of common stock on October 26, 2023. | |
| · | Proceeds of $343,000, net of offering expenses, from the sale of common stock on January 11, 2024. | |
| · | Proceeds of $748,000, net of offering expenses, from the sale of common stock in May of 2024. |
Cash Flows
The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the three months ended June 30, 2024 and 2023 as well balances of cash and cash equivalents and working capital:
| Three Months ended June 30, | ||||||||
| (In thousands) | 2024 | 2023 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (912 | ) | $ | (215 | ) | ||
| Investing activities | (5 | ) | (17 | ) | ||||
| Financing activities | 636 | (135 | ) | |||||
| Effect of exchange rates on cash | (258 | ) | 91 | |||||
| Net change in cash and cash equivalents | (539 | ) | (276 | ) | ||||
| Cash and cash equivalents, beginning of the period | 3,128 | 3,820 | ||||||
| Cash and cash equivalents, end of the period | $ | 2,589 | $ | 3,544 | ||||
| Working capital (1), end of period | $ | 8,176 | $ | 9,546 | ||||
| (1) | Defined as current assets minus current liabilities. |
Net cash used by operating activities during the three months ended June 30, 2024 was $912,000, primarily due to a net loss of $1,143,000 offset by stock related compensation expense of $107,000.
Net cash used by operating activities during the three months ended June 30, 2023 was $215,000, primarily due to a net loss of $1,418,000 offset by stock related compensation expense of $177,000, decrease in accounts receivable of $191,000, decrease in inventory of $230,000 and a combined increase in accounts payable and accrued liabilities of $394,000.
Net cash used in investing activities was $5,000 for three months ended June 30, 2024, primarily related to the purchase of equipment.
Net cash used in investing activities was $17,000 for three months ended June 30, 2023, primarily related to the purchase of equipment.
Net cash provided by financing activities was $636,000 for the three months ended June 30, 2024, primarily due to the sale of common stock of $748,000 offset by $119,000 of principal payments on a short-term loan related to financing of insurance premiums.
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Net cash used in financing activities was $135,000 for the three months ended June 30, 2023, primarily related to principal payments on a short-term loan related to financing of insurance premiums.
Material Trends and Uncertainties
We rely on certain key customers for a significant portion of our revenues. In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular rate over any subsequent period.
We are exposed to risk from foreign currency devaluation for both the Mexico Peso and the Euro versus the US dollar. Risk related to foreign currency valuation tends to be unpredictable and can be affected by various factors outside of our control.
We face a substantial Mexico tax liability, intercompany debt, unpaid technical assistance charges and accrued interest. These amounts are due in 2027. At this time, management believes there are sufficient assets on the balance sheet to more than cover any tax obligation without interrupting our operations or business. We have engaged tax professionals to review all options to limit our exposure to these amounts and to proceed in a manner that is most advantageous to us.
The effects of the recent pandemic continue to impact economies worldwide, and we are closely watching inflation, increased volatility within financial markets, shipping costs, supply chain issues and labor costs. Any impact to our business operations, customer demand and supply chain due to increased shipping costs may ultimately impact sales. We continue to evaluate our end-to-end supply chain and assess opportunities to refine the impact on sales. Currently, most of our customers pay for shipping expenses, including increased shipping costs, if any. We have not yet faced labor shortages however it is possible we may have difficulties retaining and finding qualified employees in a tight labor market in the future. Furthermore, overall inflation tendencies may put pressure on our product pricing and/or costs.
We also closely monitor overall economic conditions and consumer sentiment and the prospect of a recession in the United States which may impact our financial results.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 condensed 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 valuation allowance relating to our deferred tax assets, valuation of equity and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, we evaluate and adjust estimates accordingly.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of our most recent fiscal quarter. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2024 due to the fact that material weaknesses in our internal controls over financial reporting exist at period end.
Notwithstanding our ineffective disclosure controls and procedures, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted accounting principles.
Evaluation of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was not effective as of June 30, 2024. We determined that there was a lack of separation of duties with preparation and review of the reported numbers, among other things. We believe we have taken steps to correct this, but the controls are currently being tested and have not been working for a sufficient period of time to remove this weakness.
Management’s Remediation Measures
Management, with oversight from the Audit Committee of our Board of Directors, is actively engaged in remediation efforts to address the material weaknesses identified in the management’s evaluation of internal controls and procedures. Management has taken a number of actions to remediate the material weaknesses described above, including the following:
| · | Improved monitoring and risk assessment activities to address these control deficiencies. | |
| · | Hired an experienced Chief Financial Officer and Controller in 2023. | |
| · | Separated the preparation of the financial reports from review of the financial reports. | |
| · | Developed and delivered further internal controls training to individuals associated with these control deficiencies and enhanced training provided to all personnel who have financial reporting or internal control responsibilities in these areas. The training includes a review of individual roles and responsibilities related to internal controls, proper oversight and reemphasizes the importance of completing the control procedures. |
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These improvements are targeted at strengthening our internal control over financial reporting and remediating the material weaknesses. We remain committed to an effective internal control environment, and management believes that these actions and the improvements management expects to achieve as a result will effectively remediate the material weaknesses. However, the material weaknesses in our internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing that these controls operate effectively. As of the date of filing this Quarterly Report on Form 10-Q, management is in the process of testing and evaluating these additional controls to determine whether they are operating effectively. We have hired appropriate accounting staff to establish effective internal controls and processes.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not finished testing our controls and sufficient time has not elapsed to make the determination these controls are operating effectively.
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PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings |
On occasion, we may be involved in legal matters arising in the ordinary course of our business including matters involving proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of comprehensive loss.
| Item 1A. | Risk Factors |
There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2024, as filed with the SEC June 17, 2024.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
We did not issue any unregistered securities during the quarter ended June 30, 2024 and through August 8, 2024.
| Item 3. | Default Upon Senior Securities |
We did not default upon any senior securities during the quarter ended June 30, 2024.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
During the quarter ended June 30, 2024, no director
or officer
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| Item 6. | Exhibits |
Exhibit Index
| Exhibit No. | Description |
| 3.1 | Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective January 30, 2006 (included as exhibit 3.1 of the Company’s Annual Report on Form 10-K filed June 20, 2007, and incorporated herein by reference). |
| 3.2 | Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective October 22, 2008 (included as exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 21, 2008, and incorporated herein by reference). |
| 3.4 | Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective March 29, 2013 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 22, 2013, and incorporated herein by reference). |
| 3.5 | Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective December 4, 2014 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 8, 2014, and incorporated herein by reference). |
| 3.6 | Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective October 22, 2015 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 27, 2015, and incorporated herein by reference). |
| 3.7 | Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective June 24, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 28, 2016, and incorporated herein by reference). |
| 3.8 | Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective December 6, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 7, 2016, and incorporated herein by reference). |
| 3.9 | Amended and Restated Bylaws, as amended, of Sonoma Pharmaceuticals, Inc., effective December 6, 2016 (included as exhibit 3.2 to the Company’s Current Report on Form 8-K filed December 7, 2016, and incorporated herein by reference). |
| 3.10 | Amendment No. 1 to Amended and Restated Bylaws, as amended, of Sonoma Pharmaceuticals, Inc., effective June 14, 2024 (included as exhibit 3.10 to the Company’s Annual Report on Form 10-K filed June 17, 2024, and incorporated herein by reference). |
| 3.11 | Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock, filed with the Delaware Secretary of State on April 24, 2012 (included as exhibit 4.2 to the Company’s Current Report on Form 8-K, filed April 25, 2012, and incorporated herein by reference). |
| 3.12 | Certificate of Designation of Series B Preferred Stock, effective October 18, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 21, 2016, and incorporated herein by references). |
| 3.13 | Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective June 19, 2019 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 19, 2019, and incorporated herein by reference). |
| 4.1 | Specimen Common Stock Certificate (included as exhibit 4.1 to the Company’s Annual Report on Form 10-K filed June 28, 2017, and incorporated herein by reference). |
| 4.2 | Section 382 Rights Agreement, dated as of October 18, 2016, between Oculus Innovative Sciences, Inc. and Computershare Inc., which includes the Form of Certificate of Designation of Series B Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (included as exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 21, 2016, and incorporated herein by reference). |
| 10.1 | Form of Indemnification Agreement between Oculus Innovative Sciences, Inc. and its officers and directors (included as exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference). |
| 10.2 | Office Lease Agreement, dated May 18, 2006, between Oculus Technologies of Mexico, S.A. de C.V. and Antonio Sergio Arturo Fernandez Valenzuela (translated from Spanish) (included as exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference). |
| 10.3 | Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated from Dutch) (included as exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference). |
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| 10.4 | Form of Director Agreement (included as exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference). |
| 10.5 | Amendment to Office Lease Agreement, effective February 15, 2008, by and between Oculus Innovative Sciences Netherlands B.V. and Artikona Holding B.V. (translated from Dutch) (included as exhibit 10.44 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and incorporated herein by reference). |
| 10.6† | Exclusive Sales and Distribution Agreement, dated November 6, 2015, by and between Oculus Innovative Sciences, Inc. and Manna Pro Products, LLC (included as exhibit 10.1 to the Company’s 8-K filed March 23, 2016 and incorporated herein by reference). |
| 10.7† | Asset Purchase Agreement dated October 27, 2016, between Oculus Innovative Sciences, Inc. and Invekra, S.A.P.I de C.V. (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 31, 2016, and incorporated herein by reference). |
| 10.8† | Amendment Agreement to Acquisition Option dated October 27, 2016, by and between More Pharma Corporation S. de R.L. de C.V. and Oculus Technologies of Mexico, S.A. de C.V. (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 31, 2016, and incorporated herein by reference). |
| 10.9 | 2016 Equity Incentive Plan (included as exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2016, and incorporated herein by reference). |
| 10.10⸸+ | Asset Purchase Agreement dated May 14, 2019, between Sonoma Pharmaceuticals, Inc. and Petagon, Ltd. (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 22, 2019, and incorporated herein by reference). |
| 10.11⸸+ | Asset Purchase Agreement dated February 21, 2020, between Sonoma Pharmaceuticals, Inc. and MicroSafe Group, DMCC (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 27, 2020, and incorporated herein by reference.) |
| 10.12⸸+ | License, Distribution and Supply Agreement by and between Sonoma Pharmaceuticals, Inc. and Brill International, S.L. dated May 19, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 26, 2020, and incorporated herein by reference.) |
| 10.13⸸ | Licensing Agreement between Sonoma Pharmaceuticals, Inc. and MicroSafe Group, effective July 27, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 6, 2020, and incorporated herein by reference). |
| 10.14⸸ | Exclusive Supply and Distribution Agreement between the Company and EMC Pharma, LLC, dated March 26, 2021 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 31, 2021, and incorporated herein by reference). |
| 10.15 | 2021 Equity Incentive Plan (included as appendix on the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2021 and incorporated herein by reference). |
| 10.16+⸸ | Exclusive License and Distribution Agreement between the Company and Dyamed Biotech Pte Ltd., dated November 4, 2021 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 9, 2021, and incorporated herein by reference). |
| 10.17+⸸ | Exclusive License and Distribution Agreement between Sonoma Pharmaceuticals, Inc. and Anlicare International dated January 18, 2022 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 20, 2022, and incorporated herein by reference). |
| 10.18 | Sonoma Pharmaceuticals, Inc. Non-Employee Director Compensation Program and Stock Ownership Guidelines, revised by the Board of Directors on December 29, 2022 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 30, 2022, and incorporated herein by reference). |
| 10.19 | Amended and Restated Employment Agreement by and between the Company and Amy Trombly, dated June 16, 2023 (included as exhibit 10.38 to the Company’s Annual Report on Form 10-K filed June 21, 2023, and incorporated herein by reference). |
| 10.20 | Amended and Restated Employment Agreement by and between the Company and Bruce Thornton, dated June 16, 2023 (included as exhibit 10.39 to the Company’s Annual Report on Form 10-K filed June 21, 2023, and incorporated herein by reference). |
| 10.21 | First Amendment to the Lease between the Company and Westland Development Services, Inc., dated June 21, 2023 (included as exhibit 10.38 to the Company’s Quarterly Report on Form 10-Q filed November 13, 2023, and incorporated herein by reference). |
| 10.22 | Equity Distribution Agreement, by and between Sonoma Pharmaceuticals, Inc. and Maxim Group LLC, dated December 15, 2023 (included as exhibit 1.1 to the Company’s Current Report on Form 8-K filed December 15, 2023, and incorporated herein by reference). |
| 10.23 | Offer letter to Jerome Dvonch dated February 7, 2024 (included as exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed February 8, 2024, and incorporated herein by reference). |
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| 10.24 | Offer letter to John Dal Poggetto dated February 7, 2024 (included as exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed February 8, 2024 and incorporated herein by reference). |
| 10.25 | Amendment No. 1 to Equity Distribution Agreement, by and between Sonoma Pharmaceuticals, Inc. and Maxim Group LLC., dated March 8, 2024 (included as exhibit 1.1 to the Company’s Current Report on Form 8-K filed March 8, 2024, and incorporated herein by reference). |
| 14.1 | Code of Business Conduct (included as exhibit 14.1 to the Company’s Current Report on Form 8-K filed January 23, 2017, and incorporated herein by reference). |
| 21.1 | List of Subsidiaries (included as exhibit 21.1 to the Company’s Annual Report on Form 10-K June 28, 2017, and incorporated herein by reference). |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1* | Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted in inline XBRL, and included in exhibit 101). |
| * | Filed herewith. |
| † | Confidential treatment has been granted with respect to certain portions of this agreement. |
| ⸸ | Certain portions of the exhibit have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request. |
| + | The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. |
Copies of above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee, upon written request to: Chief Financial Officer, Sonoma Pharmaceuticals, Inc., 5445 Conestoga Court, Suite 150, Boulder, Colorado 80301.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 8, 2024 | By: | /s/ Amy Trombly | |
|
Amy Trombly President and Chief Executive Officer, (Principal Executive Officer) |
|||
| Date: August 8, 2024 | By: | /s/ Jerome Dvonch | |
| Jerome Dvonch | |||
| Chief Financial Officer | |||
|
(Principal Financial and Principal Accounting Officer) |
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