Item 1.
|
Financial Statements
|
SONOMA PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance
Sheets
(In thousands, except share and
per share amounts)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,983
|
|
|
$
|
17,461
|
|
Accounts receivable, net
|
|
|
3,035
|
|
|
|
2,108
|
|
Inventories, net
|
|
|
2,603
|
|
|
|
2,221
|
|
Prepaid expenses and other current assets
|
|
|
1,331
|
|
|
|
616
|
|
Current portion of deferred consideration, net of discount
|
|
|
247
|
|
|
|
237
|
|
Total current assets
|
|
|
17,199
|
|
|
|
22,643
|
|
Property and equipment, net
|
|
|
1,358
|
|
|
|
1,239
|
|
Deferred consideration, net of discount, less current portion
|
|
|
1,501
|
|
|
|
1,497
|
|
Other assets
|
|
|
95
|
|
|
|
80
|
|
Total assets
|
|
$
|
20,153
|
|
|
$
|
25,459
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,275
|
|
|
$
|
1,255
|
|
Accrued expenses and other current liabilities
|
|
|
1,391
|
|
|
|
1,302
|
|
Deferred revenue
|
|
|
199
|
|
|
|
345
|
|
Deferred revenue Invekra
|
|
|
151
|
|
|
|
176
|
|
Current portion of long-term debt
|
|
|
49
|
|
|
|
123
|
|
Current portion of capital leases
|
|
|
142
|
|
|
|
74
|
|
Taxes payable
|
|
|
–
|
|
|
|
13
|
|
Total current liabilities
|
|
|
3,207
|
|
|
|
3,288
|
|
Long-term deferred revenue Invekra
|
|
|
531
|
|
|
|
527
|
|
Long-term debt, less current portion
|
|
|
39
|
|
|
|
45
|
|
Long-term capital leases, less current portion
|
|
|
216
|
|
|
|
168
|
|
Total liabilities
|
|
|
3,993
|
|
|
|
4,028
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized, none issued and outstanding at September 30, 2017 and March 31, 2017, respectively
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.0001 par value; 12,000,000 shares authorized at September 30, 2017 and March 31, 2017, 4,323,831 and 4,289,322 shares issued and outstanding at September 30, 2017 and March 31, 2017, respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
169,672
|
|
|
|
168,709
|
|
Accumulated deficit
|
|
|
(149,490
|
)
|
|
|
(143,101
|
)
|
Accumulated other comprehensive loss
|
|
|
(4,023
|
)
|
|
|
(4,178
|
)
|
Total stockholders’ equity
|
|
|
16,160
|
|
|
|
21,431
|
|
Total liabilities and stockholders’ equity
|
|
$
|
20,153
|
|
|
$
|
25,459
|
|
The accompanying footnotes are
an integral part of these condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements
of Comprehensive Loss
(In thousands, except per share
amounts)
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,144
|
|
|
$
|
2,574
|
|
|
$
|
7,747
|
|
|
$
|
4,985
|
|
Service
|
|
|
181
|
|
|
|
224
|
|
|
|
413
|
|
|
|
451
|
|
Total revenues
|
|
|
4,325
|
|
|
|
2,798
|
|
|
|
8,160
|
|
|
|
5,436
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
2,308
|
|
|
|
1,558
|
|
|
|
4,221
|
|
|
|
3,030
|
|
Service
|
|
|
169
|
|
|
|
204
|
|
|
|
329
|
|
|
|
389
|
|
Total cost of revenues
|
|
|
2,477
|
|
|
|
1,762
|
|
|
|
4,550
|
|
|
|
3,419
|
|
Gross profit
|
|
|
1,848
|
|
|
|
1,036
|
|
|
|
3,610
|
|
|
|
2,017
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
368
|
|
|
|
379
|
|
|
|
750
|
|
|
|
739
|
|
Selling, general and administrative
|
|
|
4,337
|
|
|
|
3,643
|
|
|
|
9,100
|
|
|
|
7,773
|
|
Total operating expenses
|
|
|
4,705
|
|
|
|
4,022
|
|
|
|
9,850
|
|
|
|
8,512
|
|
Loss from operations
|
|
|
(2,857
|
)
|
|
|
(2,986
|
)
|
|
|
(6,240
|
)
|
|
|
(6,495
|
)
|
Interest expense
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
Interest income
|
|
|
18
|
|
|
|
1
|
|
|
|
71
|
|
|
|
2
|
|
Other (expense) income, net
|
|
|
(21
|
)
|
|
|
(9
|
)
|
|
|
(189
|
)
|
|
|
(6
|
)
|
Loss from continuing operations before income taxes
|
|
|
(2,870
|
)
|
|
|
(2,995
|
)
|
|
|
(6,378
|
)
|
|
|
(6,501
|
)
|
Income tax benefit
|
|
|
–
|
|
|
|
356
|
|
|
|
–
|
|
|
|
675
|
|
Loss from continuing operations
|
|
|
(2,870
|
)
|
|
|
(2,639
|
)
|
|
|
(6,378
|
)
|
|
|
(5,826
|
)
|
Income from discontinued operations (net of tax) (Note 4)
|
|
|
–
|
|
|
|
690
|
|
|
|
–
|
|
|
|
1,309
|
|
Net loss
|
|
$
|
(2,870
|
)
|
|
$
|
(1,949
|
)
|
|
$
|
(6,378
|
)
|
|
$
|
(4,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.67
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(1.39
|
)
|
Discontinued operations
|
|
|
–
|
|
|
|
0.17
|
|
|
|
–
|
|
|
|
0.31
|
|
|
|
$
|
(0.67
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in per share calculations: basic and diluted
|
|
|
4,313
|
|
|
|
4,202
|
|
|
|
4,303
|
|
|
|
4,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,870
|
)
|
|
$
|
(1,949
|
)
|
|
$
|
(6,378
|
)
|
|
$
|
(4,517
|
)
|
Foreign currency translation adjustments
|
|
|
(45
|
)
|
|
|
(168
|
)
|
|
|
155
|
|
|
|
(401
|
)
|
Comprehensive loss
|
|
$
|
(2,915
|
)
|
|
$
|
(2,117
|
)
|
|
$
|
(6,223
|
)
|
|
$
|
(4,918
|
)
|
The accompanying footnotes are
an integral part of these condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements
of Cash Flows
(In thousands)
(Unaudited)
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(6,378
|
)
|
|
$
|
(5,826
|
)
|
Income from discontinued operations, net of tax
|
|
|
–
|
|
|
|
1,309
|
|
Net loss
|
|
|
(6,378
|
)
|
|
|
(4,517
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
241
|
|
|
|
118
|
|
Stock-based compensation
|
|
|
900
|
|
|
|
817
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(886
|
)
|
|
|
(150
|
)
|
Inventories
|
|
|
(310
|
)
|
|
|
(565
|
)
|
Prepaid expenses and other current assets
|
|
|
(681
|
)
|
|
|
661
|
|
Accounts payable
|
|
|
10
|
|
|
|
(22
|
)
|
Accrued expenses and other current liabilities
|
|
|
34
|
|
|
|
(382
|
)
|
Deferred revenue
|
|
|
(163
|
)
|
|
|
39
|
|
Net cash used in operating activities
|
|
|
(7,233
|
)
|
|
|
(4,001
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(162
|
)
|
|
|
(64
|
)
|
Deposits
|
|
|
(14
|
)
|
|
|
5
|
|
Net cash used in investing activities
|
|
|
(176
|
)
|
|
|
(59
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock purchase warrants
|
|
|
52
|
|
|
|
–
|
|
Principal payments on capital leases
|
|
|
(64
|
)
|
|
|
–
|
|
Principal payments on long-term debt
|
|
|
(80
|
)
|
|
|
(100
|
)
|
Net cash used in financing activities
|
|
|
(92
|
)
|
|
|
(100
|
)
|
Effect of exchange rate on cash and cash equivalents
|
|
|
23
|
|
|
|
(55
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(7,478
|
)
|
|
|
(4,215
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
17,461
|
|
|
|
7,469
|
|
Cash and cash equivalents, end of period
|
|
$
|
9,983
|
|
|
$
|
3,254
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
20
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Non-cash operating and financing activities:
|
|
|
|
|
|
|
|
|
Automobiles financed using capital leases
|
|
$
|
180
|
|
|
$
|
–
|
|
The accompanying footnotes are
an integral part of these condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(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’s principal office is located in Petaluma, California. The Company is a specialty
pharmaceutical company dedicated to identifying, developing and commercializing unique, differentiated therapies to millions of
patients living with chronic skin conditions. The Company believes its products, which are sold throughout the United States and
internationally, have improved patient outcomes for more than five million patients globally by treating and reducing certain topical
skin diseases including acne, atopic dermatitis, scarring, infections, itch, pain and harmful inflammatory responses.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements as of September 30, 2017 and for the three and six months then ended have been prepared in accordance with
the accounting principles generally accepted in the United States of America for interim financial information and pursuant to
the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and
on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance
sheet as of September 30, 2017, the condensed consolidated statements of comprehensive loss for the three and six months ended
September 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the six months ended September 30, 2017
and 2016 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.
The results for the three and six months ended September 30, 2017 are not necessarily indicative of results to be expected for
the year ending March 31, 2018 or for any future interim period. The condensed consolidated balance sheet at March 31, 2017 has
been derived from audited consolidated financial statements. These unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial
information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
for the year ended March 31, 2017, and notes thereto included in the Company’s annual report on Form 10-K, which was filed
with the SEC on June 28, 2017.
Note 2.
|
Liquidity and Financial Condition
|
The Company reported a net loss of $6,378,000
for the six months ended September 30, 2017. At September 30, 2017 and March 31, 2017, the Company’s accumulated deficit
amounted to $149,490,000 and $143,101,000, respectively. The Company had working capital of $13,992,000 and $19,355,000 as of September
30, 2017 and March 31, 2017, respectively. The Company expects to continue incurring losses for the foreseeable future and may
need to raise additional capital to pursue its product development initiatives, penetrate markets for the sale of its products.
The Company currently
anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue its sales
and marketing and research and development efforts for at least 12 months from the date of filing this report.
Note 3.
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America 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 recoverability of long-lived assets, the valuation allowance relating to the Company’s
deferred tax assets, valuation of equity and derivative instruments, debt discounts, valuation of investments, determination of
the relative selling prices of the components sold to Invekra, and the estimated amortization periods of upfront product licensing
fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly. The allowance for doubtful
accounts represents probable credit losses of $11,000 and $14,000 at September 30, 2017 and March 31, 2017, respectively. Additionally,
at September 30, 2017 and March 31, 2017 the Company has allowances of $1,070,000 and $672,000, respectively, related to potential
discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying condensed
consolidated balance sheets.
Net Loss per Share
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. At September 30, 2017 and 2016,
the following outstanding common stock equivalents have been excluded from the calculation of net loss per share because their
impact would be anti-dilutive (all amounts are rounded to the nearest thousand).
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted stock units
|
|
|
57,000
|
|
|
|
–
|
|
Options to purchase common stock
|
|
|
1,393,000
|
|
|
|
746,000
|
|
Warrants to purchase common stock
|
|
|
1,332,000
|
|
|
|
1,466,000
|
|
|
|
|
2,782,000
|
|
|
|
2,212,000
|
|
Revenue Recognition and Accounts
Receivable
The Company generates revenue from sales
of its products to a customer base including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The
Company sells products directly to end users and to distributors. The Company also entered into agreements to license its technology
and products.
The Company also provides regulatory compliance
testing and quality assurance services to medical device and pharmaceutical companies.
The Company records revenue when (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability
of the sale is reasonably assured.
The Company requires all product sales
to be supported by evidence of a sale transaction that clearly indicates the selling price to the customer, shipping terms and
payment terms. Evidence of an arrangement generally consists of a contract or purchase order approved by the customer. The Company
has ongoing relationships with certain customers from which it customarily accepts orders by telephone in lieu of purchase orders.
The Company recognizes revenue at the time
it receives confirmation that the goods were either tendered at their destination, when shipped “FOB destination,”
or transferred to a shipping agent, when shipped “FOB shipping point.” Delivery to the customer is deemed to have occurred
when the customer takes title to the product. Generally, 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.
The selling prices of all goods are fixed,
and agreed to with the customer, prior to shipment. Selling prices are generally based on established list prices. The right to
return product is customarily based on the terms of the agreement with the customer. The Company estimates and accrues for potential
returns and records this as a reduction of revenue in the same period the related revenue is recognized. Additionally, distribution
fees are paid to certain wholesale distributors based on contractually determined rates. The Company estimates and accrues the
fee on shipment to the respective wholesale distributors and recognizes the fee as a reduction of revenue in the same period the
related revenue is recognized. The Company also offers cash discounts to certain customers, generally 2% of the sales price, as
an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount
amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized. Additionally,
the Company participates in certain rebate programs which provide discounted prescriptions to qualified patients. The Company contracts
with a third-party to administer the program. The Company estimates and accrues for future rebates based on historical data for
rebate redemption rates and the historical value of redemptions. Rebates are recognized as a reduction of revenue in the same period
the related revenue is recognized.
The Company evaluates the creditworthiness
of new customers and monitors the creditworthiness of its existing customers to determine whether an event or changes in their
financial circumstances would raise doubt as to the collectability of a sale at the time in which a sale is made. Payment terms
on sales made in the United States are generally 30 to 60 days and are extended up to 90 days for initial product launches,
payment terms internationally generally range from prepaid prior to shipment to 90 days.
In the event a sale is made to a customer
under circumstances in which collectability is not reasonably assured, the Company either requires the customer to remit payment
prior to shipment or defers recognition of the revenue until payment is received. The Company maintains a reserve for amounts which
may not be collectible due to risk of credit losses.
In the event a sale is made to a customer
under circumstances in which returns cannot be estimated, the Company defers recognition of the revenue until sell-through is confirmed.
Product license revenue is generated through
agreements with strategic partners for the commercialization of Microcyn® products. The terms of the agreements sometimes include
non-refundable upfront fees. The Company analyzes multiple element arrangements to determine whether the elements can be separated.
Analysis is performed at the inception of the arrangement and as each product is delivered. If a product or service is not separable,
the combined deliverables are accounted for as a single unit of accounting and recognized over the performance obligation period.
When appropriate, the Company defers recognition
of non-refundable upfront fees. If the Company has continuing performance obligations then such up-front fees are deferred and
recognized over the period of continuing involvement.
The Company recognizes royalty revenues
from licensed products upon the sale of the related products.
Revenue from consulting contracts is recognized
as services are provided. Revenue from testing contracts is recognized as tests are completed and a final report is sent to the
customer.
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 market.
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. The Company
recorded reserves to reduce the carrying amounts of inventories to their net realizable value in the amounts of $191,000 and $61,000
at September 30, 2017 and March 31, 2017, respectively.
Reclassifications
Certain prior
period amounts have been reclassified for comparative purposes to conform to the fiscal 2018 presentation. These reclassifications
have no impact on the Company’s previously reported condensed consolidated net loss.
Subsequent Events
The Company evaluates
events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation,
the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements.
Adoption of Recent Accounting Standards
In March 2016 the FASB issued ASU No. 2016-09,
Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update simplifies the accounting
for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statement of cash flows.
On April 1, 2017,
the Company adopted ASU No. 2016-09. As a result of adopting ASU No. 2016-09, the Company has made an accounting policy
election to account for forfeitures as they occur. This change has been applied on a modified retrospective basis, with no material
impacts on the Company’s financial statements. The adoption of ASU No. 2016-09 also requires excess tax benefits and
tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled
and recognize all previously unrecognized excess tax benefits and tax deficiencies upon adoption as a cumulative-effect adjustment
to retained earnings. As of April 1, 2017, the Company recognized excess tax benefit of approximately $533,000 as an increase to
deferred tax assets. However, the entire amount was offset by a full valuation allowance. Accordingly, no cumulative-effect
adjustment to retained earnings was recorded as of September 30, 2017.
Additionally,
the adoption of ASU No. 2016-09 related to the accounting for minimum statutory withholding tax requirements and cash paid
by an employer when directly withholding shares for tax-withholding purposes had no impact on the Company's current consolidated
financial statements or on any prior period financial statements presented.
Recent Accounting Standards
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue
from Contracts with Customers
, which supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August
2015, the FASB issued ASU 2015-14, which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective
for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning
after December 15, 2016. In March 2016, the FASB issued ASU 2016-08
Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)
which finalizes its amendments to the guidance in the new revenue standard on assessing whether an entity
is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net
basis. In April 2016, the FASB issued ASU 2016-10
Identifying Performance Obligations and Licensing
, which finalizes its
amendments to the guidance in the new revenue standard regarding the identification of performance obligations and accounting for
the license of intellectual property. In May 2016, the FASB issued ASU 2016-12
Narrow-Scope Improvements and Practical Expedients,
which finalizes its amendments to the guidance in the new revenue standard on collectability, noncash consideration, presentation
of sales tax, and transition. In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers,
which continues the FASB’s ongoing project to issue technical corrections
and improvements to clarify the codification or correct unintended applications of guidance. The amendments are intended to make
the guidance more operable and lead to more consistent application. The amendments have the same effective date and transition
requirements as the new revenue recognition standard. The Company will adopt the new standard on April 1, 2018 and currently plans
to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue
stream, the Company does not expect significant differences. However, the Company’s analysis is preliminary and subject to
change. The Company has not completed its assessment of multiple element arrangements and certain discount and trade promotion
programs.
In May 2017, the
FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting, clarifying when
a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires
modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before
and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis
beginning on April 1, 2018, with early adoption permitted. The Company is currently evaluating the impact that ASU 2017-09 will
have on its consolidated financial statements and related disclosures.
Accounting standards that have been issued
or proposed by the Financial Accounting Standards Board, SEC and/or other standards-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.
|
Disposition of Latin American Operations
|
Description of Sale to Invekra
On October 27,
2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V. (“OTM”),
closed on an asset purchase agreement with Invekra, S.A.P.I de C.V. (“Invekra”), an affiliate of Laboratorios Sanfer
S.A. de C.V., for the sale of certain of its Latin America assets. Specifically, the Company agreed to sell certain patents, patent
applications, trademarks and territory rights for Mexico, the Caribbean and South America, excluding the sale of dermatology products
in Brazil, as well as to build and deliver equipment that Invekra will use to produce its own product.
The aggregate purchase price that
Invekra will pay for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was paid on March 16,
2017 upon the delivery of certain equipment, and $2,500,000 is to be paid in Mexican currency in quarterly installments over
a period of ten years from closing as consideration for the provision of certain services and providing technical assistance,
calculated as three percent on net sales of certain products in Latin America, excluding Mexico. Because the $2,500,000 is to
be paid in foreign currency, the Company may receive more or less than $2,500,000 due to currency fluctuations. During the
six months ended September 30, 2017, the Company recorded $39,000 of service revenue and $33,000 of interest income related
to technical assistance which is reflected in the accompanying condensed consolidated statement of comprehensive loss for the
six months ended September 30, 2017. The Company agreed to forego recognition any royalty in the second quarter until
certain replacement parts will be delivered in the third quarter.
In connection with the asset purchase agreement,
the Company agreed to provide the technology, know-how and assistance to Invekra to enable Invekra to manufacture on its own the
products as currently produced by the Company (“Technical Services Arrangement”), and continue to supply product to
Invekra for a two year transition period from the Sale Date, subject to mutual extension (“Supply Agreement”). During
the three and six months ended September 30, 2017, the Company reported $754,000 and $1,323,000, respectively, of Latin America
product revenue related to the Supply Agreement with Invekra.
The Company will provide product under
the Supply Agreement at a reduced price from its current price list, while Invekra builds its own manufacturing line. At the conclusion
of the transition period, the Company will cease to be a supplier of product to Invekra. The Company is uncertain as to the duration
of the transition period or when Invekra will complete the build out of its manufacturing line. Pursuant to the Supply Agreement,
the Company is subject to a potential penalty for failure to supply the products for a consecutive period of six months. The penalty,
if triggered, will require the Company to make a one-time payment of $2,000,000 to Invekra. The penalty decreases by 12.5% each
quarter of the term of the supply period. The Company does not expect to incur this penalty.
Discontinued operations
The Company determined that the sale of
its Latin American operations to Invekra qualified as a sale of a component of its business and, as such, all such activity prior
to consummation of the sale is required to be included in discontinued operations on the Company’s statement of operations.
This includes the direct labor and materials for the product delivered to Invekra, the revenue on the sales to Invekra and the
gain on the sale to Invekra, net of tax.
The operations of its Latin American business included in discontinued
operations is summarized as follows:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
1,311,000
|
|
|
$
|
–
|
|
|
$
|
2,484,000
|
|
Cost of revenues
|
|
|
–
|
|
|
|
265,000
|
|
|
|
–
|
|
|
|
500,000
|
|
Income from discontinued operations before tax
|
|
|
–
|
|
|
|
1,046,000
|
|
|
|
–
|
|
|
|
1,984,000
|
|
Income tax expense
|
|
|
–
|
|
|
|
(356,000
|
)
|
|
|
–
|
|
|
|
(675,000
|
)
|
Income from discontinued operations, net of tax
|
|
$
|
–
|
|
|
$
|
690,000
|
|
|
$
|
–
|
|
|
$
|
1,309,000
|
|
Note 5.
|
Condensed Consolidated Balance Sheets
|
Inventories, net
Inventories, net consist of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
Raw materials
|
|
$
|
1,492,000
|
|
|
$
|
1,480,000
|
|
Finished goods
|
|
|
1,111,000
|
|
|
|
741,000
|
|
|
|
$
|
2,603,000
|
|
|
$
|
2,221,000
|
|
Note 6.
|
Commitments and Contingencies
|
Legal Matters
The Company, on occasion, 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 Agreements
As of September 30, 2017, the Company had
employment agreements in place with six of its key executives. The agreements provide, among other things, for the payment of twelve
to eighteen months of severance compensation for terminations under certain circumstances. With respect to these agreements, at
September 30, 2017, aggregated annual salaries would be $1,167,000 and potential severance payments to these key executives would
be $1,417,000 if triggered.
Note 7.
|
Stockholders’ Equity
|
Authorized Capital
The Company is authorized to issue up to
12,000,000 shares of common stock with a par value of $0.0001 per share and 714,286 shares of convertible preferred stock with
a par value of $0.0001 per share.
Common Stock Issued to Services Provider
During the three months ended September
30, 2017, the Company entered into an agreement with Actual, Inc., a firm that provides marketing and branding consulting services.
On July 27, 2017, the Company issued 2,570 shares of restricted common stock valued at $6.74 per share and on August 22, 2017,
the Company issued 3,133 shares of restricted common stock valued at $5.53 per share. The aggregate fair market value of the common
stock issued was $35,000. The Company has determined that the fair value of the common stock was more readily determinable than
the fair value of the services rendered. Accordingly, during the three and six months ended September 30, 2017, the Company recorded
$35,000 of expense related to common stock issued. The expense was recorded as selling, general and administrative expense in the
accompanying condensed consolidated statement of comprehensive loss for the three and six months ended September 30, 2017.
Note 8.
|
Stock-Based Compensation
|
On April 1, 2017, the Company adopted ASU
2016-09 and, as a result, made a company-wide accounting policy change with respect to accounting for forfeitures. The Company
applied a modified retrospective approach for adoption of the new policy and accordingly recorded an $11,000 increase to opening
accumulated deficit at April 1, 2017. In accordance with the adoption of the accounting policy, the Company no longer estimates
forfeitures based on historical experience and no longer reduces compensation expense based on the expected forfeitures. Beginning
April 1, 2017, the Company will record forfeitures as they occur and will reduce compensation cost at the time of forfeiture.
The weighted average grant date fair values
of options granted during the three and six months ended September 30, 2017 was $5.58 and $6.01, respectively.
Share-based awards compensation expense is as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of service revenue
|
|
$
|
49,000
|
|
|
$
|
66,000
|
|
|
$
|
93,000
|
|
|
$
|
134,000
|
|
Research and development
|
|
|
45,000
|
|
|
|
60,000
|
|
|
|
90,000
|
|
|
|
124,000
|
|
Selling, general and administrative
|
|
|
333,000
|
|
|
|
280,000
|
|
|
|
682,000
|
|
|
|
559,000
|
|
Total stock-based compensation
|
|
$
|
427,000
|
|
|
$
|
406,000
|
|
|
$
|
865,000
|
|
|
$
|
817,000
|
|
At September 30, 2017, there were unrecognized
compensation costs of $2,999,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 2.43 years.
At September 30, 2017, there were unrecognized
compensation costs of $239,000 related to restricted stock which is expected to be recognized over a weighted-average amortization
period of 1.69 years.
Stock-Based Award Activity
On April 1, 2017, pursuant to “evergreen” provisions
in the 2011 Plan and the 2016 Plan, the number of shares authorized for issuance in the 2011 Plan increased by 643,383 shares and
the number of shares authorized for issuance in the 2016 Plan increased by 343,137 shares.
Stock options award activity is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at April 1, 2017
|
|
|
899,000
|
|
|
$
|
17.87
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
536,000
|
|
|
|
6.83
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(1,000
|
)
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(33,000
|
)
|
|
|
6.76
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(8,000
|
)
|
|
|
229.31
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,393,000
|
|
|
$
|
12.75
|
|
|
|
7.94
|
|
|
$
|
75,000
|
|
Exercisable at September 30, 2017
|
|
|
739,000
|
|
|
$
|
18.27
|
|
|
|
6.71
|
|
|
$
|
59,000
|
|
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 $5.22 per share at September 30, 2017.
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, 2017
|
|
|
34,000
|
|
|
$
|
7.27
|
|
Restricted stock awards granted
|
|
|
42,000
|
|
|
|
6.12
|
|
Restricted stock awards vested
|
|
|
(19,000
|
)
|
|
|
6.12
|
|
Unvested restricted stock awards outstanding at September 30, 2017
|
|
|
57,000
|
|
|
$
|
6.80
|
|
No income tax benefit has been recognized
relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.
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.
The Company has completed a study to assess
whether a change in control has occurred or whether there have been multiple changes of control since the Company’s formation.
The Company determined, based on the results of the study, no change in control occurred for purposes of Internal Revenue Code
section 382. The Company, after considering all available evidence, fully reserved its deferred tax assets since it is more likely
than not, such benefits, will not be realized in future periods. The Company incurred losses for both financial reporting and income
tax purposes for the year ended March 31, 2017. Accordingly, the Company is continuing to fully reserve for its deferred tax assets.
The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the
realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income
tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.
As a result of certain realization requirements
of Accounting Standards Codification Topic 718, the Company’s deferred tax assets and liabilities do not include certain
deferred tax assets at September 30, 2017 that arose directly from tax deductions related to equity compensation in excess of compensation
recognized for financial reporting purposes. Equity will be increased by approximately $533,000 if and when such deferred tax assets
are ultimately realized.
Note 10.
|
Segment and Geographic Information
|
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. Additionally, the Company provides technical services to
Invekra.
The following table shows the Company’s
product revenues by geographic region:
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
2,268,000
|
|
|
$
|
1,697,000
|
|
|
$
|
571,000
|
|
|
|
34%
|
|
Latin America
|
|
|
754,000
|
|
|
|
–
|
|
|
|
754,000
|
|
|
|
100%
|
|
Europe and Rest of the World
|
|
|
1,122,000
|
|
|
|
877,000
|
|
|
|
245,000
|
|
|
|
28%
|
|
Total
|
|
$
|
4,144,000
|
|
|
$
|
2,574,000
|
|
|
$
|
1,570,000
|
|
|
|
61%
|
|
|
|
Six Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
4,127,000
|
|
|
$
|
3,070,000
|
|
|
$
|
1,057,000
|
|
|
|
34%
|
|
Latin America
|
|
|
1,323,000
|
|
|
|
–
|
|
|
|
1,323,000
|
|
|
|
100%
|
|
Europe and Rest of the World
|
|
|
2,297,000
|
|
|
|
1,915,000
|
|
|
|
382,000
|
|
|
|
20%
|
|
Total
|
|
$
|
7,747,000
|
|
|
$
|
4,985,000
|
|
|
$
|
2,762,000
|
|
|
|
55%
|
|
In connection with the Company’s
sale of its Latin America business to Invekra, product related revenues were reclassified from continuing operations to discontinued
operations. The amounts were classified in the prior periods as Latin America sales. The amounts reclassified are as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product revenues
|
|
$
|
–
|
|
|
$
|
1,235,000
|
|
Product license fees and royalties
|
|
|
–
|
|
|
|
76,000
|
|
Total product related revenues
|
|
$
|
–
|
|
|
$
|
1,311,000
|
|
|
|
Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product revenues
|
|
$
|
–
|
|
|
$
|
2,333,000
|
|
Product license fees and royalties
|
|
|
–
|
|
|
|
151,000
|
|
Total product related revenues
|
|
$
|
–
|
|
|
$
|
2,484,000
|
|
The Company’s service revenues amounted
to $181,000 and $224,000 for the three months ended September 30, 2017 and 2016, respectively. The Company’s service revenues
amounted to $413,000 and $451,000 for the six months ended September 30, 2017 and 2016, respectively.
Note 11.
|
Significant Customer Concentrations
|
For the three months ended September 30,
2017, one customer represented 22% of net revenue, one customer represented 17% of net revenue, and two customers each represented
13% of net revenue. For the three months ended September 30, 2016, one customer represented 29% of net revenue.
For the six months ended September 30,
2017, one customer represented 20% of net revenue, one customer represented 16% of net revenue, and two customers each represented
12% of net revenue. For the six months ended September 30, 2016, one customer represented 29% of net revenue.
At September 30, 2017, one customer represented
47%, one customer represented 19%, and one customer represented 17% of the net accounts receivable balance. At March 31, 2017,
one customer represented 26%, one customer represented 12%, and one customer represented 10% of the net accounts receivable balance.
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 September 30, 2017 and our audited consolidated
financial statements for the year ended March 31, 2017 included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on June 28, 2017.
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,” “project,” “continue,” “ongoing,”
“potential,” “expect,” “predict,” “believe,” “intend,” “may,”
“will,” “should,” “could,” “would,” “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;
the impact of the Invekra transaction on our business and results of operations; the vulnerability of our Petaluma facility to
extreme weather events; the impact of seasonality on our sales; 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 related to the use of
our cash reserves; our expectations and capabilities relating to the sales and marketing of our current products and our product
candidates; our ability to gain sufficient reimbursement from third-party payors; 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 expansion of our sales force and distribution network; 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 product candidates for clinical trials and 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; our expectations about the outcome of litigation
and controversies with third parties; 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;
and the impact of the Sarbanes-Oxley Act of 2002 and 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 specialty pharmaceutical company
dedicated to identifying, developing and commercializing unique, differentiated therapies to millions of patients living with chronic
skin conditions. We believe our products, which are sold throughout the United States and internationally, have improved patient
outcomes for more than five million patients globally by treating and reducing certain topical skin diseases including acne, atopic
dermatitis, scarring, infections, itch, pain and harmful inflammatory responses.
We are focused on the development and commercialization
of therapeutic solutions in medical dermatology to treat skin conditions, such as acne, atopic dermatitis and scarring. These diseases
impact millions of patients worldwide and can have significant, multi-dimensional effects on patients’ quality of life, including
their physical, functional and emotional well-being.
Some of our key products in the United States are:
|
·
|
Celacyn®
, a prescription hypochlorous acid based scar management gel clinically proven to soften and flatten raised scars while reducing redness and discoloration.
|
|
·
|
Ceramax™ Skin Barrier Cream
helps manage dry itchy skin, minor skin irritations, rashes, and inflammation caused by various skin conditions.
|
|
·
|
Mondoxyne™
, a prescription oral tetracycline antibiotic used for the treatment of certain bacterial infections, including acne.
|
|
·
|
Alevicyn™
, a prescription hypochlorous acid based atopic dermatitis product line clinically proven to reduce pruritus (itch) and pain associated with various dermatoses.
|
|
·
|
SebuDerm™
, a prescription topical gel used as an alternative to corticosteroids for the management of the burning, itching and scaling experienced with seborrhea and seborrheic dermatitis.
|
|
·
|
Loyon™
, a prescription liquid containing Cetiol® CC and medical grade dimethicone, intended to manage and relieve erythema and itching for various types of dermatoses.
|
|
|
|
|
·
|
Microcyn®
(sold under a variety of brand names), a line of products based on electrically charged oxychlorine small molecules designed to target a wide range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains.
|
Our key product outside the United States
is:
|
·
|
Microcyn®
or
Microdacyn60®
(sold under a variety of brand names), a line of products based on electrically charged oxychlorine small molecules designed to target a wide range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains.
|
As of September 30, 2017, we have obtained
17 clearances from the U.S. Food and Drug Administration, or FDA, that permit us to sell our products as medical devices for Section
510(k) of the Federal Food, Drug and Cosmetic Act in the United States.
Outside the United States, we sell products
for dermatological and advanced tissue care with a European Conformity marking (known as Conformité Européenne or
CE) covering 25 of our products, and various approvals in China, Southeast Asia, South Korea, India, Australia, New Zealand, and
the Middle East.
Our Strategy
Our strategy is to in-license, acquire,
develop and commercialize unique, affordable and differentiated therapies that we believe advance the standard of care for patients
with dermatological diseases. The key components of our strategy are to:
|
·
|
Expand our Internal U.S. Sales Force:
We continue to hire additional experienced sales people who have established relationships with dermatologists in their territories and we currently have a sales force of 35 sales professionals.
|
|
·
|
Develop and Launch New Dermatology Products:
We currently sell nine prescription dermatology products in the United States, and have a strong product pipeline of new products, including an oral antibiotic for severe acne and Ceramax™, which utilizes a “state of the art” skin repair technology.
|
|
·
|
In-License and Acquire New Product Candidates:
Since beginning our turn-around strategy in 2014, we have executed multiple transactions resulting in adding new products and product candidates to our growing portfolio. In 2015, we acquired the U.S. marketing rights to Mondoxyne™, an oral antibiotic indicated for severe acne. In 2016, we in-licensed Ceramax™ indicated for various dermatoses, and Loyon® indicated as a descaler of various dermatoses and psoriasis.
|
|
·
|
Create a Competitive Pricing Strategy:
We have and will continue to develop a unique product pricing strategy, which we believe solves many of the challenges associated with the prescription dermatology market’s current pricing and rebate programs.
|
|
·
|
Develop a Pharmaceutical Line:
We plan to acquire or develop pharmaceutical products with affordable clinical trials to increase our market presence and create innovator patent protection.
|
Our plan is to evolve into a leading dermatology
company, providing innovative and cost-effective solutions to patients, while generating strong, consistent revenue growth and
maximizing long-term shareholder value.
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.
Comparison of the Three Months Ended
September 30, 2017 and 2016
Revenues
Total revenues for the three months ended
September 30, 2017 of $4,325,000 increased by $1,527,000, or 55%, as compared to $2,798,000 for the three months ended September
30, 2016. Product revenues for the three months ended September 30, 2017 of $4,144,000 increased by $1,570,000, or 61%, as compared
to $2,574,000 for the three months ended September 30, 2016. This increase was the result of strong growth in the United States,
Europe, and the Rest of the World.
Product revenues in the United States for
the three months ended September 30, 2017 of $2,268,000 increased by $571,000, or 34%, as compared to $1,697,000 for the three
months ended September 30, 2016. This increase was mostly the result of higher sales of our dermatology and acute care products,
partly offset by a decline in sales of $120,000 related to our animal health care products.
Product revenue in Europe and the Rest
of the World for the three months ended September 30, 2017 of $1,122,000 increased by $245,000, or 28%, as compared to $877,000
for the three months ended September 30, 2016. This increase was mostly the result of higher sales in Europe, China, Hong Kong,
Singapore, and India partly offset by a decrease in the Middle East.
As a result of the asset purchase agreement
and arrangement we entered into on October 27, 2016 with Invekra, we expect our revenues in Latin America will decrease significantly.
We will continue to supply Invekra with product at a reduced price until they set up their manufacturing facility. During the three
months ended September 30, 2017, we reported $754,000 of Latin America product revenue related to Invekra. Additionally, pursuant
to the arrangement, we will receive a royalty of 2.5% on all Latin American net revenues excluding Mexico, with a minimum payment
of $250,000 per year for the next ten years, to be paid quarterly in Mexican pesos.
The following table shows our product revenues
by geographic region:
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
2,268,000
|
|
|
$
|
1,697,000
|
|
|
$
|
571,000
|
|
|
|
34%
|
|
Latin America
|
|
|
754,000
|
|
|
|
–
|
|
|
|
754,000
|
|
|
|
100%
|
|
Europe and Rest of the World
|
|
|
1,122,000
|
|
|
|
877,000
|
|
|
|
245,000
|
|
|
|
28%
|
|
Total
|
|
$
|
4,144,000
|
|
|
$
|
2,574,000
|
|
|
$
|
1,570,000
|
|
|
|
61%
|
|
In connection with our sale of our Latin
American business to Invekra, product revenues and cost of revenues reported in the prior period were reclassified from continuing
operations to discontinued operations as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product revenues
|
|
$
|
–
|
|
|
$
|
1,235,000
|
|
Product license fees and royalties
|
|
|
–
|
|
|
|
76,000
|
|
Total product related revenues
|
|
$
|
–
|
|
|
$
|
1,311,000
|
|
Service revenues for the three months ended
September 30, 2017 of $181,000 decreased by $43,000, or 19%, when compared to $224,000 in the prior period. The decrease in service
revenues was related to a decrease in our lab services business.
Gross Profit
For the three months ended September 30,
2017, we reported total revenues of $4,325,000 and total cost of revenues of $2,477,000, resulting in total gross profit of $1,848,000
or 43% of total revenues, compared to a gross profit of $1,036,000 or 37% of total revenues, for the same period in the prior year.
The increase in gross profit was primarily due to the reclassification, in the prior period, of Latin America product and license
revenue and related variable cost of goods sold from continuing operations to discontinued operations. Additionally, as dermatology
product revenues increase as an overall percentage of our product revenues, we expect our margins will improve due to higher gross
margins associated with our dermatology products.
For the three months ended September 30,
2017, we reported product revenues of $4,144,000 and cost of product revenues of $2,308,000, resulting in product gross profit
of $1,836,000, or 44% of product revenues, compared to product gross profit of $1,016,000, or 39% of product revenues, for the
same period in the prior year. The increase in gross profit was primarily due to the reclassification, in the prior period, of
Latin America product and related variable cost of goods sold from continuing operations to discontinued operations. Additionally,
as dermatology product revenues increase as an overall percentage of our product revenues, we expect our margins will improve due
to higher gross margins associated with our dermatology products.
For the three months ended September 30,
2017, we reported service revenues of $181,000 and cost of service revenues of $169,000, resulting in service gross profit of $12,000,
or 7% of service revenues, compared to service gross profit of $20,000, or 9% of service revenues, for the same period in the prior
year. The decrease in service gross profit was primarily related to lower service revenue in the current period and the mix of
tests and services performed.
Research and Development Expense
Research and development expenses for the
three months ended September 30, 2017 of $368,000 decreased by $11,000, or 3%, as compared to $379,000 for the three months ended
September 30, 2016. The decrease is largely due to a decrease in spending on product development.
Selling, General and Administrative Expense
Selling, general and administrative expenses
for the three months ended September 30, 2017 of $4,337,000 increased by $694,000, or 19%, when compared to $3,643,000 for the
three months ended September 30, 2016. The increase for the three months ended September 30, 2017 was primarily due to higher sales
expenses related to our growing dermatology sales force.
Interest Expense
Interest expense for the three months ended
September 30, 2017 of $10,000 increased by $9,000 when compared to $1,000 for the three months ended September 30, 2016. The increase
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the three months ended
September 30, 2017 of $18,000 increased by $17,000 when compared to $1,000 for the three months ended September 30, 2016. The increase
is due to interest income earned on increased cash and cash equivalent balances.
Other Expense
Other expense for the three months ended
September 30, 2017 of $21,000 increased by $12,000 when compared to $9,000 for the three months ended September 30, 2016. The increase
in other expense relates primarily to fluctuation in foreign exchange and increased franchise tax payments.
Loss from Continuing Operations
Loss from continuing operations
for the three months ended September 30, 2017 of $2,870,000 increased $231,000, or 9%, when compared to $2,639,000 for the three
months ended September 30, 2016. The increase in net loss from continuing operations is due to $356,000 of income tax benefit recorded
in the prior period offset by a decrease in loss from continuing operations before income taxes of $125,000 in the current period.
Income from Discontinued Operations, net of Tax
Income from discontinued operations, net
of tax for the three months ended September 30, 2016 includes $1,046,000 of gross profit reclassified from continuing operations
to discontinued operations during the period. Additionally, for the three months ended September 30, 2016, we recorded income tax
expense related to the transaction in the amount of $356,000 and we recorded a $356,000 tax benefit resulting in no tax expense
during the period.
The following summarizes operations of our Latin American business
included in discontinued operations:
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
1,311,000
|
|
Cost of revenues
|
|
|
–
|
|
|
|
265,000
|
|
Income from discontinued operations before tax
|
|
|
–
|
|
|
|
1,046,000
|
|
Income tax expense
|
|
|
–
|
|
|
|
(356,000
|
)
|
Income from discontinued operations, net of tax
|
|
$
|
–
|
|
|
$
|
690,000
|
|
Comparison of the Six Months Ended September
30, 2017 and 2016
Revenues
Total revenues for the six months ended
September 30, 2017 of $8,160,000 increased by $2,724,000, or 50%, as compared to $5,436,000 for the six months ended September
30, 2016. Product revenues for the six months ended September 30, 2017 of $7,747,000 increased by $2,762,000, or 55%, as compared
to $4,985,000 for the six months ended September 30, 2016. This increase was the result of strong growth in the United States,
Europe, and the Rest of the World.
Product revenues in the United States for
the six months ended September 30, 2017 of $4,127,000 increased by $1,057,000, or 34%, as compared to $3,070,000 for the six months
ended September 30, 2016. This increase was mostly the result of higher sales of our dermatology and acute care products, partly
offset by a decline in sales of $265,000 related to our animal health care products.
Product revenue in Europe and the Rest
of the World for the six months ended September 30, 2017 of $2,297,000 increased by $382,000, or 20%, as compared to $1,915,000
for the six months ended September 30, 2016. This increase was mostly the result of increases in Europe, China, Hong Kong, Singapore,
New Zealand and India partly offset by a decrease in the Middle East.
As a result of the asset purchase agreement
and arrangement we entered into on October 27, 2016 with Invekra, we expect our revenues in Latin America will decrease significantly.
We will continue to supply Invekra with product at a reduced price until they set up their manufacturing facility. During the six
months ended September 30, 2017, we reported $1,323,000 of Latin America product revenue related to Invekra. Additionally, pursuant
to the arrangement, we will receive a royalty of 2.5% on all Latin American net revenues excluding Mexico, with a minimum payment
of $250,000 per year for the next ten years, to be paid quarterly in Mexican pesos.
The following table shows our product revenues
by geographic region:
|
|
Six Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
4,127,000
|
|
|
$
|
3,070,000
|
|
|
$
|
1,057,000
|
|
|
|
34%
|
|
Latin America
|
|
|
1,323,000
|
|
|
|
–
|
|
|
|
1,323,000
|
|
|
|
100%
|
|
Europe and Rest of the World
|
|
|
2,297,000
|
|
|
|
1,915,000
|
|
|
|
382,000
|
|
|
|
20%
|
|
Total
|
|
$
|
7,747,000
|
|
|
$
|
4,985,000
|
|
|
$
|
2,762,000
|
|
|
|
55%
|
|
In connection with our sale of our Latin
American business to Invekra, product revenues and cost of revenues reported in the prior period were reclassified from continuing
operations to discontinued operations as follows:
|
|
Six Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product revenues
|
|
$
|
–
|
|
|
$
|
2,333,000
|
|
Product license fees and royalties
|
|
|
–
|
|
|
|
151,000
|
|
Total product related revenues
|
|
$
|
–
|
|
|
$
|
2,484,000
|
|
Service revenues for the six months ended
September 30, 2017 of $413,000 decreased by $38,000, or 8%, when compared to $451,000 in the prior period. The decrease in service
revenues was related to a decrease in our lab services business.
Gross Profit
For the six months ended September 30,
2017, we reported total revenues of $8,160,000 and total cost of revenues of $4,550,000, resulting in total gross profit of $3,610,000
or 44% of total revenues, compared to a gross profit of $2,017,000 or 37% of total revenues, for the same period in the prior year.
The increase in gross profit was primarily due to the reclassification, in the prior period, of Latin America product and license
revenue and related variable cost of goods sold from continuing operations to discontinued operations. Additionally, as dermatology
product revenues increase as an overall percentage of our product revenues, we expect our margins will improve due to higher gross
margins associated with our dermatology products.
For the six months ended September 30,
2017, we reported product revenues of $7,747,000 and cost of product revenues of $4,221,000, resulting in product gross profit
of $3,526,000, or 46% of product revenues, compared to product gross profit of $1,955,000, or 39% of product revenues, for the
same period in the prior year. The increase in gross profit was primarily due to the reclassification, in the prior period, of
Latin America product and related variable cost of goods sold from continuing operations to discontinued operations. Additionally,
as dermatology product revenues increase as an overall percentage of our product revenues, we expect our margins will improve due
to higher gross margins associated with our dermatology products.
For the six months ended September 30,
2017, we reported service revenues of $413,000 and cost of service revenues of $329,000, resulting in service gross profit of $84,000,
or 20% of service revenues, compared to service gross profit of $62,000, or 14% of service revenues, for the same period in the
prior year. The increase in service gross profit was primarily related to the mix of tests and services performed.
Research and Development Expense
Research and development expenses for the
six months ended September 30, 2017 of $750,000 increased by $11,000, or 1%, as compared to $739,000 for the six months ended September
30, 2016. The increase is largely due to an increase in spending on product development.
Selling, General and Administrative
Expense
Selling, general and administrative expenses
for the six months ended September 30, 2017 of $9,100,000 increased by $1,327,000, or 17%, when compared to $7,773,000 for the
six months ended September 30, 2016. The increase for the six months ended September 30, 2017 was primarily due to higher sales
expenses related to our growing dermatology sales force.
Interest Expense
Interest expense for the six months ended
September 30, 2017 of $20,000 increased by $18,000 when compared to $2,000 for the six months ended September 30, 2016. The increase
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the six months ended
September 30, 2017 of $71,000 increased by $69,000 when compared to $2,000 for the six months ended September 30, 2016. The increase
is due to interest income earned on increased cash and cash equivalent balances.
Other Expense
Other expense for the six months ended
September 30, 2017 of $189,000 increased by $183,000 when compared to $6,000 for the six months ended September 30, 2016. The increase
in other expense relates primarily to fluctuation in foreign exchange and increased franchise tax payments.
Loss from Continuing Operations
Loss from continuing operations for the six months
ended September 30, 2017 of $6,378,000 increased $552,000, or 9%, when compared to $5,826,000 for the six months ended September
30, 2016. The increase in net loss from continuing operations is due to $675,000 of income tax benefit recorded in the prior period
offset by a decrease in loss from continuing operations before income taxes of $123,000 in the current period.
Income from Discontinued Operations, net of Tax
Income from discontinued operations, net
of tax for the six months ended September 30, 2016 includes $1,984,000 of gross profit reclassified from continuing operations
to discontinued operations during the period. Additionally, for the six months ended September 30, 2016, we recorded income tax
expense related to the transaction in the amount of $675,000 and we recorded a $675,000 tax benefit resulting in no tax expense
during the period.
The following summarizes operations of our Latin American business
included in discontinued operations:
|
|
Six Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
2,484,000
|
|
Cost of revenues
|
|
|
–
|
|
|
|
500,000
|
|
Income from discontinued operations before tax
|
|
|
–
|
|
|
|
1,984,000
|
|
Income tax expense
|
|
|
–
|
|
|
|
(675,000
|
)
|
Income from discontinued operations, net of tax
|
|
$
|
–
|
|
|
$
|
1,309,000
|
|
Liquidity and Capital Resources
We reported a net loss of $6,378,000 for
the six months ended September 30, 2017. At September 30, 2017 and March 31, 2017, our accumulated deficit amounted to $149,490,000
and $143,101,000, respectively. We had working capital of $13,992,000 and $19,355,000 as of September 30, 2017 and March 31, 2017,
respectively.
We currently anticipate that our cash and
cash equivalents will be sufficient to meet our working capital requirements to continue our sales and marketing and research and
development efforts for at least 12 months from the date of filing this report.
Sources of Liquidity
As of September 30, 2017, we had cash and
cash equivalents of $9,983,000. 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 Latin American assets to Invekra.
Since October 1, 2015, substantially all
of our operations have been financed through the following transactions:
|
·
|
proceeds of $150,000 received from the exercise of common stock purchase warrants and options;
|
|
·
|
net proceeds of $2,994,000 received from an underwritten public offering on March 18, 2016;
|
|
·
|
net proceeds of $1,150,000 received from the sale of common stock through our At the Market Issuance Sales Agreement
|
|
·
|
net proceeds of $18,639,000 received from the sale of certain Latin America assets to Invekra on October 27, 2016.
|
Cash Flows
As of September 30, 2017, we had cash and
cash equivalents of $9,983,000, compared to $17,461,000 as of March 31, 2017.
Net cash used in operating activities during
the six months ended September 30, 2017 was $7,233,000, primarily due to our net loss of $6,378,000 offset by stock related compensation
of $900,000 in the period. Additionally, we had increases in prepaid expenses of $681,000 mostly related to taxes in Mexico, an
increase in accounts receivables of $886,000 and inventories of $310,000 related to increased sales.
Net cash used in operating activities during
the six months ended September 30, 2016 was $4,001,000, primarily due to our net loss of $4,517,000.
Net cash used in investing activities was
$176,000 for six months ended September 30, 2017, primarily related to the purchase of equipment.
Net cash used in investing activities was
$59,000 for the six months ended September 30, 2016, consisting of primarily $64,000 related to equipment purchases and $5,000
related to changes in long-term assets.
Net cash used in financing activities was
$92,000 for the six months ended September 30, 2017 related to principal payments on debt and capital leases of $144,000 offset
by proceeds from exercise of common stock purchase warrants of $52,000.
Net cash used in financing activities for
the six months ended September 30, 2016 was $100,000 related to principal payments on debt.
Operating Capital and Capital Expenditure
Requirements
We reported a net loss of $6,378,000 for
the six months ended September 30, 2017. At September 30, 2017 and March 31, 2017, our accumulated deficit amounted to $149,490,000
and $143,101,000, respectively. We had working capital of $13,992,000 and $19,355,000 as of September 30, 2017 and March 31, 2017,
respectively.
We may need to raise additional capital
from external sources in order to continue the long-term efforts contemplated under our business plan. We expect to continue incurring
losses for the foreseeable future and may need to raise additional capital to pursue our product development initiatives and to
penetrate markets for the sale of our products.
Our future funding requirements
will depend on many factors, including:
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our current and future revenues;
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the scope, rate of progress and cost of our research and development activities;
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future clinical trial results;
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the terms and timing of any collaborative, licensing and other arrangements that we may establish;
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the cost and timing of regulatory approvals;
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the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products;
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the cost and timing of establishing sales, marketing and distribution capabilities;
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the effect of competing technological and market developments;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
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the extent to which we acquire or invest in businesses, products and technologies.
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Use of Estimates
The preparation of 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 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 recoverability of long-lived assets, the valuation allowance related to our deferred tax assets, valuation
of equity and derivative instruments, debt discounts, valuation of investments and the estimated amortization periods of upfront
product licensing fees received from customers.
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.