Sonoma Pharmaceuticals(SNOA) - 2024 Q4 - Annual Report

Part I Item 1. Business Sonoma Pharmaceuticals is a global healthcare company specializing in stabilized hypochlorous acid (HOCl) products for wound care, eye care, dermatology, and animal health, focusing on revenue growth and cost management through direct sales and partnerships in 55 countries - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications[16] - Business strategy involves growing revenues through new customers and distributors, introducing new products, and expanding regulatory approvals, while maintaining cost controls[17] - Sonoma sells its products directly and through partners in 55 countries across various channels, including dermatology, wound care, eye care, oral care, podiatry, and animal health[16][20] - Recent business developments include expanding product lines like MicrocynAH® and Microcyn® Negative Pressure Wound Therapy, launching new consumer products like Lumacyn Clarifying Mist, and establishing a Scientific Advisory Board[22] - As of June 17, 2024, the company employed 9 full-time employees in the U.S., one in the Netherlands, and 162 in Mexico[52] Business Channels and Products Sonoma's business is structured across key channels including Dermatology, Wound Care, Eye Care, Oral/Nasal Care, Podiatry, Animal Health, and Surface Disinfectants, leveraging its core HOCl technology through direct sales and partnerships - Dermatology products target redness, irritation, scars, and eczema, with partners like EMC Pharma for prescription products in the U.S. and various distributors internationally[21][23][30] - Wound care products are used for acute and chronic wounds, sold directly to healthcare practitioners in the U.S. and through distributors in Europe, the Middle East, and Asia[31][32] - Eye care products, such as Acuicyn™ and Ocucyn®, are sold through partners like EMC Pharma in the U.S. and Brill International in Europe[39][40][41] - Animal health products (MicrocynAH®) are distributed in the U.S. and Canada by Compana Pet Brands and in Asia and Europe by Petagon[47][48] - Surface disinfectant Nanocyn® is sold through partner MicroSafe and has received EPA approval for use in the U.S. against pathogens like COVID-19, MRSA, and Norovirus[49][51] Research and Development, Manufacturing, and Regulatory R&D expenses significantly increased in FY2024, with all products manufactured at its ISO 13485 certified facility in Mexico, holding 21 FDA 510(k) clearances and a CE certificate for broad market access Research and Development Expense | Fiscal Year | R&D Expense (USD) | | :--- | :--- | | 2024 | $1,871,000 | | 2023 | $207,000 | - All products are manufactured at the company's facility in Zapopan, Mexico, which is certified under U.S. cGMP, ISO 13485, and approved by the Mexican Ministry of Health[72] - The company has obtained 21 U.S. FDA 510(k) clearances for its products as medical devices[75] - Internationally, Sonoma has a CE certificate covering 39 products in 54 countries, along with various other approvals in regions like Brazil, China, and the Middle East[76] Customers, IP, and Competition Sonoma relies on a few key customers, protects its technology through IP, and competes in crowded markets against larger companies, with its stable HOCl-based formulations providing a competitive edge Significant Customer Revenue Concentration (FY2024) | Customer | % of Net Revenues | | :--- | :--- | | Customer A | 17% | | Customer B | 15% | | Customer C | 14% | - The company's success depends on protecting its proprietary technology through patents, trademarks, and trade secrets[82] - Competes with large healthcare companies that have advantages in name recognition, distribution, and financial resources[89][91] - The company believes its HOCl-based solutions are among the most stable available, providing a key competitive advantage[88] Government Regulation Sonoma operates in a highly regulated environment, with products primarily regulated as medical devices requiring FDA 510(k) clearance and CE marking, subject to various U.S. healthcare laws and foreign regulations, including potential reclassification of wound care products - Products are subject to extensive regulation by the FDA and foreign authorities, covering research, manufacturing, marketing, and sales[89] - In the U.S., products are regulated as medical devices, typically requiring 510(k) pre-market notification to demonstrate substantial equivalence to a legally marketed device[90][92] - A proposed FDA rule may reclassify certain wound dressings containing hypochlorous acid into Class II devices, which would require new 510(k) applications and compliance with special controls[95] - The company is subject to U.S. healthcare laws including the Physician Payments Sunshine Act, Anti-Kickback Statute, False Claims Act, and HIPAA[99][101][103][105] - In the European Union, products must comply with the Medical Devices Regulation and affix a CE marking to be sold[109] Item 1A. Risk Factors The company faces significant risks including ongoing net losses, going concern doubts, dependence on key customers and distributors, international operational and tax risks, extensive regulatory hurdles, market competition, and potential Nasdaq delisting - The company has a history of net losses, with a net loss of $4.8 million in FY2024, and an accumulated deficit of $194.3 million These conditions raise substantial doubt about its ability to continue as a going concern[119] - Dependence on third-party distributors and a few key customers is a major risk In FY2024, three customers accounted for 17%, 15%, and 14% of net revenues, respectively[121][127] - Significant international operations (76% of revenue in FY2024) expose the company to political, economic, and currency risks A substantial intercompany debt of its Mexican subsidiary poses a significant tax liability risk[124][128] - The company faces extensive regulatory risks, including potential delays or failure to obtain FDA clearances for new products and the risk of non-compliance with ongoing regulations, which could lead to recalls or market withdrawal[132][137] - The company is not in compliance with Nasdaq's minimum bid price requirement of $1.00 per share and has until September 16, 2024, to regain compliance, facing a risk of delisting[188] Item 1B. Unresolved Staff Comments There are no unresolved staff comments - Not Applicable[190] Item 1C. Cybersecurity Cybersecurity risks are managed through internal and external assessments, employee policies, and Board oversight, with no material incidents reported to date - Cybersecurity risk management involves management assessments, an outside consultant, and secure third-party software[191] - The Board of Directors, as a whole, oversees cybersecurity risks, with management providing regular updates[193] - The company is not currently aware of any cybersecurity threats that have materially affected or are likely to materially affect its business, operations, or financial condition[192] Item 2. Properties The company leases its principal executive office in Colorado and manufacturing facilities in Mexico, which are deemed adequate for the next 12 months Leased Properties | Location | Purpose | Monthly Rent | | :--- | :--- | :--- | | Boulder, CO | Principal executive office | USD 3,573 | | Zapopan, Mexico | Office, manufacturing | MXN 209,811 | | Zapopan, Mexico | Warehouse | MXN 213,625 | Item 3. Legal Proceedings The company may be involved in ordinary course legal matters, but management considers them insignificant and not materially adverse - The company may be involved in ordinary course legal matters, but management currently considers them insignificant[195] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[196] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "SNOA", has approximately 291 holders, and has never paid or intends to pay cash dividends - Common stock is traded on The Nasdaq Capital Market under the symbol "SNOA"[198] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[200] Item 6. Selected Financial Data As a smaller reporting company, Sonoma Pharmaceuticals is not required to provide selected financial data - The company is a smaller reporting company and is not required to provide selected financial data[203] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenue decreased 4% to $12.7 million, gross margin improved to 37%, R&D surged 804% to $1.9 million, resulting in a $4.8 million net loss and $2.4 million net cash used in operations, raising substantial doubt about going concern Results of Operations FY2024 total revenue decreased 4% to $12.7 million, with Europe growing 18% offset by U.S. and Latin America declines, while gross profit increased to $4.7 million (37% margin), R&D surged 804%, leading to a $4.8 million net loss Revenue by Geographic Region (in thousands) | Region | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | United States | $3,058 | $3,428 | (11%) | | Europe | $4,781 | $4,051 | 18% | | Asia | $2,298 | $2,451 | (6%) | | Latin America | $1,726 | $2,383 | (28%) | | Rest of the World | $872 | $959 | (9%) | | Total | $12,735 | $13,272 | (4%) | Key Operating Metrics (in thousands) | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Gross Profit | $4,745 | $4,477 | 6% | | Gross Margin | 37% | 34% | N/A | | R&D Expense | $1,871 | $207 | 804% | | SG&A Expense | $7,575 | $8,840 | (14%) | | Net Loss | $(4,835) | $(5,151) | (6%) | Liquidity and Capital Resources As of March 31, 2024, cash was $3.1 million and working capital $8.8 million, with net cash used in operations at $2.4 million, but ongoing losses and negative cash flows raise substantial doubt about going concern, requiring future capital Cash and Working Capital (in thousands) | Metric | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,128 | $3,820 | | Working capital | $8,829 | $10,081 | Summary of Cash Flows (in thousands) | Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,398) | $(6,152) | | Net cash used in investing activities | $(2) | $(258) | | Net cash provided by financing activities | $1,676 | $2,489 | - Management states that the company's history of losses and need for additional capital raise substantial doubt about its ability to continue as a going concern[230] Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sonoma Pharmaceuticals is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[239] Item 8. Consolidated Financial Statements and Supplementary Data This section presents the consolidated financial statements for FY2024 and FY2023, including the auditor's report highlighting going concern doubt, along with balance sheets, statements of comprehensive loss, changes in equity, cash flows, and accompanying notes Report of Independent Registered Public Accounting Firm The independent auditor's report confirms fair presentation of financial statements but expresses substantial doubt about the company's ability to continue as a going concern due to significant losses and negative operating cash flows - The auditor's report explicitly states that the company's significant losses, negative operating cash flows, and need to raise additional funds raise substantial doubt about its ability to continue as a going concern[244] Consolidated Financial Statements The consolidated financial statements show total assets of $14.7 million and liabilities of $8.6 million as of March 31, 2024, with a $4.8 million net loss on $12.7 million revenue for the year, and an accumulated deficit of $194.3 million Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $12,548 | $13,798 | | Total Assets | $14,740 | $16,231 | | Total Current Liabilities | $3,719 | $3,717 | | Total Liabilities | $8,603 | $8,254 | | Total Stockholders' Equity | $6,137 | $7,977 | Consolidated Statement of Comprehensive Loss (in thousands) | Account | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Revenues | $12,735 | $13,272 | | Gross Profit | $4,745 | $4,477 | | Loss from Operations | $(4,701) | $(4,570) | | Net Loss | $(4,835) | $(5,151) | Revenue Disaggregation (in thousands) | Source | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Human Care | $10,110 | $9,426 | | Animal Care | $2,203 | $2,500 | | Service/Royalty | $422 | $1,346 | | Total | $12,735 | $13,272 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[366] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2024, due to material weaknesses in internal control over financial reporting, with remediation efforts underway but not yet fully effective - Management concluded that disclosure controls and procedures were not effective as of March 31, 2024[368] - Material weaknesses in internal control over financial reporting were identified, including inadequate spreadsheet controls, lack of separation of duties, and inadequate revenue reporting analysis[370] - Remediation measures are underway, such as hiring new financial leadership, separating duties, and improving controls, but the weaknesses are not yet considered fully remediated[371][372] Item 9B. Other Information On June 14, 2024, the Board amended bylaws to reduce the stockholder meeting quorum to one-third, and the Compensation Committee approved 53,586 Restricted Stock Units for three key executives - On June 14, 2024, the company amended its bylaws to reduce the quorum for stockholder meetings from a majority to one-third of outstanding stock[374] - On June 14, 2024, equity awards of 53,586 Restricted Stock Units were granted to CEO Amy Trombly, CFO Jerome Dvonch, and COO Bruce Thornton[375] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement, with the company maintaining a Code of Business Conduct and procedures for director nominations - Required information is incorporated by reference from the 2024 Annual Meeting Proxy Statement[379] - The company has a Code of Business Conduct available on its website and has established procedures for stockholders to nominate directors[381][383] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[384] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[385] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[386] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[387] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, referencing financial statements under Item 8, noting omitted schedules, and providing an index of all exhibits including corporate governance and material contracts - This section contains an index of all exhibits filed with the Form 10-K, including corporate governance documents, material agreements, and Sarbanes-Oxley certifications[392][393] - Financial statements are referenced under Item 8, and financial statement schedules are omitted as they are not applicable or the information is included elsewhere[390][391] Item 16. Form 10-K Summary There is no Form 10-K summary provided - None[399]