Sonoma Pharmaceuticals(US:SNOA)2023-11-13 21:01PART I - FINANCIAL INFORMATION Unaudited Financial Statements The company reported a net loss of $2.9 million for the six months ended September 30, 2023, with total assets decreasing and significant going concern doubt Condensed Consolidated Balance Sheets Total assets decreased to $13.6 million as of September 30, 2023, driven by a drop in cash, while total stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2023 (Unaudited) | March 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,137 | $3,820 | | Total current assets | $11,516 | $13,798 | | Total assets | $13,635 | $16,231 | | Liabilities & Equity | | | | Total current liabilities | $3,239 | $3,717 | | Total liabilities | $7,960 | $8,254 | | Total stockholders' equity | $5,675 | $7,977 | Condensed Consolidated Statements of Comprehensive Loss Revenues decreased to $6.2 million for the six months ended September 30, 2023, leading to a widened net loss of $2.9 million Statement of Comprehensive Loss Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $2,731 | $3,331 | $6,158 | $7,314 | | Gross Profit | $990 | $1,536 | $2,194 | $3,182 | | Loss from Operations | $(1,208) | $(731) | $(2,448) | $(1,586) | | Net Loss | $(1,484) | $(1,017) | $(2,902) | $(1,904) | | Net Loss Per Share | $(0.29) | $(0.33) | $(0.57) | $(0.61) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved to $1.4 million for the six months ended September 30, 2023, with cash and cash equivalents ending at $2.1 million Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,446) | $(3,363) | | Net cash used in investing activities | $(19) | $(210) | | Net cash used in financing activities | $(264) | $(565) | | Net decrease in cash and cash equivalents | $(1,683) | $(4,045) | | Cash and cash equivalents, end of period | $2,137 | $3,351 | Notes to Condensed Consolidated Financial Statements Notes highlight substantial doubt about going concern due to recurring losses and low cash, with revenue concentrated and a recent $1.4 million stock offering - The company's recurring net losses ($2.9M for the six months ended Sep 30, 2023), accumulated deficit ($192.4M), and low cash balance ($2.1M) raise substantial doubt about its ability to continue as a going concern1819 Revenue Disaggregation by Source (in thousands) | Revenue Source | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Human Care | $4,825 | $4,615 | | Animal Care | $1,067 | $1,523 | | Service and Royalty | $266 | $1,176 | | Total | $6,158 | $7,314 | Revenue Disaggregation by Geography (in thousands) | Geographic Region | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | United States | $1,396 | $1,842 | | Europe | $2,271 | $2,012 | | Asia | $1,208 | $1,438 | | Latin America | $747 | $1,444 | | Rest of the World | $536 | $578 | | Total | $6,158 | $7,314 | - For the six months ended September 30, 2023, three customers (C, B, and A) represented 17%, 12%, and 14% of net revenue, respectively62 - In October 2023, the company sold 8,500,000 shares of common stock at $0.20 per share, generating gross proceeds of $1.7 million and estimated net proceeds of $1.414 million6566 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 16% revenue decline due to lower sales and a one-time event, a reduced gross profit margin, cost containment efforts, and ongoing liquidity concerns with substantial doubt about going concern Our Business Sonoma Pharmaceuticals develops stabilized hypochlorous acid (HOCl) products for diverse applications, employing a global distribution strategy alongside direct sales and launching new products - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications71 - The core strategy is to work with partners for marketing and distribution, but the company also sells its own products directly. Key markets include dermatology, wound care, eye care, oral/nasal care, podiatry, animal health, and surface disinfectants73 - Recent product launches include Pediacyn™ for pediatric care (April 2023) and Podiacyn™ for foot care (April 2023), both sold direct-to-consumer in the U.S. The company is also developing an intraoperative pulse lavage irrigation treatment, anticipating a U.S. commercial launch in 2024808896 Results of Continuing Operations Total revenue decreased by 16% to $6.2 million for the six months ended September 30, 2023, driven by declines in U.S. and Latin American sales, while R&D expenses increased and SG&A decreased Revenue by Geographic Region (in thousands) | Region | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $1,396 | $1,842 | $(446) | (24%) | | Europe | $2,271 | $2,012 | $259 | 13% | | Asia | $1,208 | $1,438 | $(230) | (16%) | | Latin America | $747 | $1,444 | $(697) | (48%) | | Rest of the World | $536 | $578 | $(42) | (7%) | | Total | $6,158 | $7,314 | $(1,156) | (16%) | - The decrease in U.S. revenue was primarily due to a decline in over-the-counter animal health care sales. The decrease in Latin America was mainly due to a one-time $750,000 service revenue from selling machinery in the prior period104107 Operating Expense Changes (in thousands) | Expense Category | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Research and Development | $861 | $406 | 112% | | Selling, General and Administrative | $3,781 | $4,362 | (13)% | Liquidity and Capital Resources The company's liquidity is precarious with $2.1 million cash and a $192.4 million accumulated deficit, raising substantial doubt about its going concern ability despite a recent $1.4 million stock offering - As of September 30, 2023, the company had cash and cash equivalents of $2.1 million and an accumulated deficit of $192.4 million116 - Net cash used in operating activities for the six months ended September 30, 2023, was $1.4 million, an improvement from $3.4 million in the prior-year period, primarily due to favorable changes in accounts receivable and inventory119120 - Management states that recurring losses and the need for additional capital raise substantial doubt about the company's ability to continue as a going concern124 - Subsequent to the quarter end, on October 30, 2023, the company raised estimated net proceeds of $1.414 million through a common stock offering118 Material Trends and Uncertainties The company identifies key risks including customer concentration, foreign currency fluctuations, a Mexican tax liability, and broader macroeconomic uncertainties like inflation and recession - The company faces risks from customer concentration, foreign currency fluctuations (Euro and Mexican Peso), and a substantial tax liability in Mexico125126127 - Economic uncertainties, including inflation, shipping costs, supply chain issues, and the prospect of a recession, are being closely monitored as they may impact financial results128129 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company has elected not to provide market risk disclosures - As a smaller reporting company, the registrant is not required to provide the information for this item132 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2023, due to material weaknesses, despite ongoing remediation efforts - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of September 30, 2023134 - Material weaknesses identified include inadequate spreadsheet controls, a lack of separation of duties in financial reporting, and errors related to income tax withholding accruals136 - Remediation measures include hiring an interim CFO and a Controller, separating preparation and review of financial reports, and implementing additional controls. However, these controls have not yet been tested over a sufficient period to confirm their effectiveness137139 PART II - OTHER INFORMATION Legal Proceedings Management believes any legal proceedings in the ordinary course of business are currently insignificant - While the company may be involved in ordinary course legal matters, management currently considers them to be insignificant141 Risk Factors A key risk is non-compliance with Nasdaq's minimum bid price requirement, potentially leading to delisting if not resolved by March 20, 2024 - On September 22, 2023, the company received a notice from Nasdaq for failing to maintain a minimum bid price of $1.00 per share143 - The company has a 180-day period, until March 20, 2024, to regain compliance. Failure to do so could result in the delisting of its common stock from Nasdaq143144 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered securities were issued during the quarter ended September 30, 2023 - No unregistered securities were issued during the quarter ended September 30, 2023145 Exhibits This section provides an index of all exhibits filed with the Form 10-Q, including corporate governance documents and certifications