Sonoma Pharmaceuticals(SNOA) - 2025 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Unaudited Financial Statements These unaudited statements detail the company's financial position and performance, noting increased cash from financing activities and a persistent net loss Condensed Consolidated Balance Sheets The balance sheets show total assets decreased to $13.7 million, while cash increased to $5.2 million, and stockholders' equity declined to $4.9 million due to an accumulated deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 (Unaudited) | Mar 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,236 | $3,128 | | Total current assets | $12,380 | $12,548 | | Total assets | $13,668 | $14,740 | | Total current liabilities | $3,703 | $3,719 | | Total liabilities | $8,798 | $8,603 | | Total stockholders' equity | $4,870 | $6,137 | Condensed Consolidated Statements of Comprehensive Loss Revenues increased for both three and nine-month periods, reaching $10.5 million for nine months, while net loss narrowed to $2.7 million for the nine-month period, improving loss per share Performance Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2024 | Three Months Ended Dec 31, 2023 | Nine Months Ended Dec 31, 2024 | Nine Months Ended Dec 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,564 | $3,138 | $10,534 | $9,296 | | Gross Profit | $1,270 | $1,460 | $3,937 | $3,654 | | Loss from operations | $(1,031) | $(844) | $(3,054) | $(3,292) | | Net loss | $(928) | $(866) | $(2,681) | $(3,768) | | Net loss per share | $(0.63) | $(1.59) | $(2.40) | $(10.74) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $7,000, with financing activities providing $2.8 million, resulting in a $2.1 million net increase in cash to $5.2 million Cash Flow Summary for Nine Months Ended Dec 31 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7 | $(2,550) | | Net cash used in investing activities | $(33) | $(20) | | Net cash provided by financing activities | $2,788 | $1,054 | | Net increase (decrease) in cash | $2,108 | $(1,414) | | Cash and cash equivalents, end of period | $5,236 | $2,406 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased to $4.9 million due to net loss and foreign currency translation loss, partially offset by $3.1 million from common stock sales - Total stockholders' equity declined from $6,137,000 on March 31, 2024, to $4,870,000 on December 31, 2024[16] - The company raised approximately $3.1 million (net) from the sale of common stock through its At-the-Market (ATM) facility during the nine months ended December 31, 2024[16] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, a reverse stock split, going concern doubts due to losses, disaggregated revenue by product and geography, and significant customer concentration risk - Effective August 29, 2024, the company executed a 1-for-20 reverse stock split of its common stock[19] - The company's history of losses and financial condition indicate substantial doubt about its ability to continue as a going concern within one year[22] Revenue by Source - Nine Months Ended Dec 31 (in thousands) | Revenue Source | 2024 | 2023 | | :--- | :--- | :--- | | Human Care | $8,886 | $7,286 | | Animal Care | $1,176 | $1,688 | | Service and Royalty | $472 | $322 | | Total | $10,534 | $9,296 | Revenue by Geography - Nine Months Ended Dec 31 (in thousands) | Region | 2024 | 2023 | | :--- | :--- | :--- | | United States | $1,930 | $2,214 | | Europe | $3,943 | $3,488 | | Asia | $1,832 | $1,730 | | Latin America | $2,174 | $1,165 | | Rest of the World | $655 | $699 | | Total | $10,534 | $9,296 | - For the nine months ended December 31, 2024, three customers (B and C, and another not named for the full period) accounted for 21%, 19%, and a percentage over 10% of net revenue, respectively[59] - Subsequent to the quarter end, on January 2, 2025, the company granted a total of 49,500 stock options and 45,000 restricted stock units to directors, employees, and management[60] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's global HOCl product business, highlighting a 13% revenue increase driven by international growth, slight gross margin compression, and ongoing liquidity challenges raising going concern doubts Our Business The company specializes in stabilized hypochlorous acid (HOCl) products globally, expanding its wound care line and securing a new distribution agreement with Medline Industries - The company's core business is developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of healthcare applications, sold in 55 countries[65] - In August 2024, the company entered into a five-year distribution agreement with Medline Industries, LP, to market and distribute its wound care products in the United States, later expanded to include Canada and OTC products[81] - The company manufactures all its goods in Mexico, with approximately 82% of revenue for the nine months ended Dec 31, 2024, derived from sales outside the U.S.[97] Results of Operations Total revenue increased 13% to $10.5 million for the nine months, driven by Latin America and Europe, despite a slight gross margin compression and U.S. revenue decline, narrowing the net loss Revenue Change by Geography (Three Months Ended Dec 31, 2024 vs 2023) | Region | $ Change (in thousands) | % Change | | :--- | :--- | :--- | | United States | $(254) | (29%) | | Europe | $40 | 3% | | Asia | $57 | 11% | | Latin America | $461 | 125% | | Rest of the World | $122 | 75% | | Total | $426 | 14% | - For the three months ended Dec 31, 2024, gross profit margin decreased to 36% from 47% in the prior year, due to changes in the utilization of manufacturing resources compared to the prior period[108] Revenue Change by Geography (Nine Months Ended Dec 31, 2024 vs 2023) | Region | $ Change (in thousands) | % Change | | :--- | :--- | :--- | | United States | $(284) | (13%) | | Europe | $455 | 13% | | Asia | $102 | 6% | | Latin America | $1,009 | 87% | | Rest of the World | $(44) | (6%) | | Total | $1,238 | 13% | - For the nine months ended Dec 31, 2024, gross profit margin was 37%, compared to 39% in the prior year period[120] Liquidity and Capital Resources Liquidity improved with cash increasing to $5.2 million due to $3.1 million from stock sales, yet substantial doubt about going concern remains due to accumulated deficit and historical losses - The company reported an accumulated deficit of $197.0 million as of December 31, 2024[128] - Management has concluded that there is substantial doubt about the company's ability to continue as a going concern due to its history of losses and uncertainty about securing additional capital[129] - During the nine months ended December 31, 2024, the company raised $3,079,000 in net proceeds from the sale of common stock[131] Material Trends and Uncertainties Key uncertainties include significant customer concentration, foreign currency risks, a substantial Mexican tax liability due in 2027, and the potential impact of global economic conditions and tariffs - The company relies on certain key customers for a significant portion of its revenues[138] - The company is exposed to risk from foreign currency devaluation, especially the Mexican Peso and the Euro against the US dollar[139] - A substantial tax liability related to its Mexico operations, including intercompany debt and interest, is due in 2027[140] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[144] Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in internal control over financial reporting, specifically a lack of separation of duties, with remediation efforts underway - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of December 31, 2024[147] - Management identified a material weakness in internal control over financial reporting due to a lack of separation of duties in the preparation and review of reported numbers[149] - Remediation measures include hiring a new CFO and Controller in 2023, separating preparation and review duties, and enhancing internal controls training[150] PART II - OTHER INFORMATION Legal Proceedings The company may be involved in ordinary course legal matters, but management currently deems them insignificant - While the company may be involved in ordinary course legal matters, management believes such matters are currently insignificant[155] Risk Factors New risk factors include potential tariffs on Mexican imports and the critical need to transition European products to the new Medical Device Regulation (MDR) by December 2028 - A key risk is the potential for new or increased tariffs on goods imported into the U.S. from Mexico, which could adversely affect the business as all products are manufactured there[157] - The company faces a significant risk related to transitioning its European products to the new Medical Device Regulation (MDR); failure to meet the requirements by the December 31, 2028 deadline could result in products being withdrawn from the EU market[160][161][164] - While four products have successfully transitioned to the new MDR, several others, including eye care and acne products, are still under review or require additional studies for transition[162][163] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered securities were issued during the quarter ended December 31, 2024 - No unregistered securities were issued during the quarter ended December 31, 2024[165] Other Information No director or officer adopted or terminated any Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated any Rule 10b5-1 trading arrangement during the quarter[168] Exhibits This section indexes all exhibits filed with or incorporated by reference into the Form 10-Q, including corporate governance documents, material contracts, and certifications - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[175] - Exhibits include various material agreements, such as the Equity Distribution Agreement with Maxim Group LLC and the Distribution Agreement with Medline Industries, LP[175]