Sonoma Pharmaceuticals(SNOA) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Unaudited Financial Statements This section presents the company's unaudited financial statements, highlighting a reduced net loss for Q3 FY2024, a decrease in total assets to $14.6 million, and notes detailing liquidity and subsequent equity offerings Condensed Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $14.6 million from $16.2 million, primarily due to reduced cash and cash equivalents, while total liabilities and stockholders' equity also saw slight declines Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Dec 31, 2023 (Unaudited) | Mar 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,406 | $3,820 | | Total current assets | $12,502 | $13,798 | | Total assets | $14,618 | $16,231 | | Liabilities & Equity | | | | Total current liabilities | $3,074 | $3,717 | | Total liabilities | $7,926 | $8,254 | | Total stockholders' equity | $6,692 | $7,977 | Condensed Consolidated Statements of Comprehensive Loss For Q3 2023, revenues increased to $3.14 million and net loss significantly narrowed to $0.87 million, while nine-month revenues decreased to $9.30 million with a stable net loss Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,138 | $2,944 | $9,296 | $10,258 | | Gross Profit | $1,460 | $831 | $3,654 | $3,613 | | Loss from Operations | ($844) | ($1,834) | ($3,292) | ($3,423) | | Net Loss | ($866) | ($1,939) | ($3,768) | ($3,843) | | Net Loss Per Share | ($0.08) | ($0.62) | ($0.54) | ($1.24) | Condensed Consolidated Statements of Cash Flows For the nine months ended December 31, 2023, net cash used in operating activities improved to $2.55 million, while financing activities provided $1.05 million, resulting in a $1.41 million decrease in cash and equivalents Cash Flow Summary (Nine Months Ended Dec 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,550) | $(3,711) | | Net cash used in investing activities | $(20) | $(176) | | Net cash provided by (used in) financing activities | $1,054 | $(883) | | Net decrease in cash | $(1,414) | $(4,762) | | Cash and cash equivalents, end of period | $2,406 | $2,634 | Notes to Condensed Consolidated Financial Statements These notes detail the company's financial condition, raising substantial doubt about its going concern ability due to recurring losses, and highlight recent equity offerings, revenue disaggregation, and a new license agreement - The company's recurring net losses and cash usage raise substantial doubt about its ability to continue as a going concern[18][19] - In October 2023, the company sold 8,500,000 shares of common stock for net proceeds of $1,446,000[52] - Subsequent to quarter end, on January 5, 2024, the company entered a license and distribution agreement with NovaBay Pharmaceuticals, Inc. to sell Avenova-branded products in the European Union[68] Revenue Disaggregation (Nine Months Ended Dec 31, in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | By Revenue Source | | | | Human Care | $7,286 | $7,050 | | Animal Care | $1,688 | $1,957 | | Service and Royalty | $322 | $1,251 | | Total | $9,296 | $10,258 | | By Geographic Region | | | | United States | $2,214 | $2,603 | | Europe | $3,488 | $3,117 | | Asia | $1,730 | $1,952 | | Latin America | $1,165 | $1,827 | | Rest of the World | $699 | $759 | | Total | $9,296 | $10,258 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 7% Q3 revenue increase driven by U.S. and Europe, a 9% nine-month decrease, significant gross margin improvement, reduced operating expenses, and capital raises to address liquidity and going concern issues Our Business Sonoma Pharmaceuticals is a global healthcare company specializing in stabilized hypochlorous acid (HOCl) products, utilizing a partnership distribution model, and has recently launched several new products across various care markets - The company's core business is developing and producing stabilized hypochlorous acid (HOCl) products for various healthcare applications[73] - Recent product launches include Pediacyn™ for pediatric dermatology, an intraoperative pulse lavage irrigation treatment, and Lumacyn Clarifying Mist for direct-to-consumer skincare[83][91] - The company primarily uses a partnership model for marketing and distribution across 55 countries, alongside direct sales to consumers and professionals[16][76] Results of Continuing Operations Q3 2024 total revenue increased 7% to $3.1 million, driven by U.S. and European sales, while nine-month revenue decreased 9%, with gross profit surging 76% and operating loss significantly reduced due to lower SG&A Revenue by Geography (Q3, in thousands) | Region | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $868 | $761 | $107 | 14% | | Europe | $1,217 | $1,104 | $113 | 10% | | Asia | $522 | $514 | $8 | 2% | | Latin America | $368 | $384 | ($16) | (4%) | | Total | $3,138 | $2,944 | $194 | 7% | Key Operating Metrics (Q3, in thousands) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Gross Profit | $1,460 | $831 | 76% | | Gross Margin | 47% | 28% | - | | R&D Expense | $601 | $– | 100% | | SG&A Expense | $1,703 | $2,665 | (36%) | - The decrease in nine-month revenue for Latin America was primarily due to a one-time $750,000 sale of machinery in the prior year period[113] Liquidity and Capital Resources The company ended the quarter with $2.4 million in cash, an accumulated deficit of $193.3 million, and raised capital through recent equity offerings, but management still expresses substantial doubt about its going concern ability - The company's cash position was $2.4 million as of December 31, 2023, with an accumulated deficit of $193.3 million[122] - In October 2023, the company raised net proceeds of $1,446,000 through a common stock offering[124] - In December 2023, the company entered an Equity Distribution Agreement, subsequently selling 1,923,100 shares in January 2024 for net proceeds of approximately $356,000[126][67] - Management has concluded there is substantial doubt about the company's ability to continue as a going concern and may need to reduce costs if additional capital is not secured[133] Item 3. 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[141] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting, with remediation efforts underway but not yet fully complete - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in internal controls over financial reporting[143] - Identified weaknesses include inadequate spreadsheet controls, lack of separation of duties in financial reporting, and insufficient analysis of revenue[146] - Remediation measures include hiring an interim CFO and a Controller, separating financial report preparation and review, and implementing additional revenue recognition controls[149] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company may be involved in ordinary course legal matters, but management currently considers them insignificant - While the company may be involved in ordinary course legal matters, management currently considers them to be insignificant[151] Item 1A. Risk Factors A new material risk factor concerns the company's non-compliance with Nasdaq's minimum bid price requirement, potentially leading to delisting if not resolved by March 20, 2024 - The company received a notice from Nasdaq on September 22, 2023, for non-compliance with the minimum bid price rule of $1.00 per share[153] - The company has until March 20, 2024, to regain compliance, with potential delisting materially affecting access to capital markets if unresolved[153][154] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not issue any unregistered securities during the quarter ended December 31, 2023 - No unregistered securities were issued during the quarter ended December 31, 2023[155] Item 5. Other Information Jerome Dvonch was appointed as the permanent Chief Financial Officer effective February 7, 2024, and a new offer letter was issued to the company's Controller - Jerome Dvonch was appointed as the permanent Chief Financial Officer, effective February 7, 2024[158] - Mr. Dvonch's annual salary is $240,000 with a potential bonus of up to 50%[159] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and offer letters for key personnel