Item 1. |
Financial Statements |
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
| |
| | |
| |
| |
June 30, 2022 | | |
March 31, 2022 | |
ASSETS | |
| (Unaudited) | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 5,586 | | |
$ | 7,396 | |
Accounts receivable, net | |
| 2,434 | | |
| 2,407 | |
Inventories, net | |
| 2,788 | | |
| 2,663 | |
Prepaid expenses and other current assets | |
| 3,794 | | |
| 3,746 | |
Current portion of deferred consideration, net of discount | |
| 215 | | |
| 218 | |
Total current assets | |
| 14,817 | | |
| 16,430 | |
Property and equipment, net | |
| 309 | | |
| 320 | |
Operating lease, right of use assets | |
| 478 | | |
| 559 | |
Deferred tax asset | |
| 859 | | |
| 829 | |
Deferred consideration, net of discount, less current portion | |
| 583 | | |
| 630 | |
Other assets | |
| 112 | | |
| 77 | |
Total assets | |
$ | 17,158 | | |
$ | 18,845 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 2,057 | | |
$ | 1,641 | |
Accrued expenses and other current liabilities | |
| 1,952 | | |
| 1,843 | |
Deferred revenue | |
| 100 | | |
| 1,223 | |
Deferred revenue Invekra | |
| 53 | | |
| 54 | |
Current portion of debt-PPP | |
| – | | |
| 120 | |
Short-term debt | |
| 459 | | |
| 688 | |
Operating lease liabilities | |
| 233 | | |
| 250 | |
Total current liabilities | |
| 4,854 | | |
| 5,819 | |
Long-term deferred revenue Invekra | |
| 152 | | |
| 182 | |
Long-term debt | |
| 15 | | |
| – | |
Withholding tax payable | |
| 3,933 | | |
| 3,838 | |
Operating lease liabilities, less current portion | |
| 245 | | |
| 309 | |
Total liabilities | |
$ | 9,199 | | |
$ | 10,148 | |
Commitments and Contingencies (Note 5) | |
| – | | |
| – | |
Stockholders’ Equity | |
| | | |
| | |
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at June 30, 2022 and March 31, 2022, respectively, no shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively | |
| – | | |
| – | |
Common stock, $0.0001 par value; 24,000,000 shares authorized at June 30, 2022 and March 31, 2022, respectively, 3,100,937 and 3,100,937 shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively (Note 7) | |
| 2 | | |
| 2 | |
Additional paid-in capital | |
| 197,584 | | |
| 197,370 | |
Accumulated deficit | |
| (185,250 | ) | |
| (184,363 | ) |
Accumulated other comprehensive loss | |
| (4,377 | ) | |
| (4,312 | ) |
Total stockholders’ equity | |
| 7,959 | | |
| 8,697 | |
Total liabilities and stockholders’ equity | |
$ | 17,158 | | |
$ | 18,845 | |
The accompanying footnotes are an integral part
of these unaudited condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive
Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
| |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
Revenues | |
$ | 3,983 | | |
$ | 3,684 | |
Cost of revenues | |
| 2,537 | | |
| 2,231 | |
Gross profit | |
| 1,446 | | |
| 1,453 | |
Operating expenses | |
| | | |
| | |
Research and development | |
| 6 | | |
| 84 | |
Selling, general and administrative | |
| 2,295 | | |
| 2,273 | |
Total operating expenses | |
| 2,301 | | |
| 2,357 | |
Loss from operations | |
| (855 | ) | |
| (904 | ) |
Interest income (expense), net | |
| – | | |
| (1 | ) |
Other expense, net | |
| (67 | ) | |
| (193 | ) |
Income tax benefit | |
| 35 | | |
| – | |
Net loss | |
$ | (887 | ) | |
$ | (1,098 | ) |
| |
| | | |
| | |
Net loss per share: basic | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
Net loss per share: diluted | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
Weighted-average number of shares used in per common share calculations: basic | |
| 3,101 | | |
| 2,093 | |
Weighted-average number of shares used in per common share calculations: diluted | |
| 3,101 | | |
| 2,093 | |
Other comprehensive loss | |
| | | |
| | |
Net loss | |
$ | (887 | ) | |
$ | (1,098 | ) |
Foreign currency translation adjustments | |
| (65 | ) | |
| 307 | |
Comprehensive loss | |
$ | (952 | ) | |
$ | (791 | ) |
The accompanying footnotes are an integral part
of these unaudited condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (887 | ) | |
$ | (1,098 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 31 | | |
| 48 | |
Stock-based compensation | |
| 214 | | |
| 59 | |
Deferred income tax expense | |
| (40 | ) | |
| – | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (73 | ) | |
| (112 | ) |
Inventories | |
| (175 | ) | |
| (9 | ) |
Deferred consideration | |
| 41 | | |
| 39 | |
Prepaid expenses and other current assets | |
| (76 | ) | |
| (214 | ) |
Operating lease right-of-use assets | |
| 31 | | |
| 67 | |
Accounts payable | |
| 423 | | |
| 28 | |
Accrued expenses and other current liabilities | |
| 114 | | |
| 40 | |
Withholding tax payable | |
| 95 | | |
| 92 | |
Operating lease liabilities | |
| (94 | ) | |
| (66 | ) |
Deferred revenue | |
| (1,137 | ) | |
| (97 | ) |
Net cash used in operating activities | |
| (1,533 | ) | |
| (1,223 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (23 | ) | |
| (49 | ) |
Net cash used in investing activities | |
| (23 | ) | |
| (49 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Payment on ATM agreement offering | |
| – | | |
| (10 | ) |
Principal payments on PPP loan | |
| (120 | ) | |
| – | |
Payment of long-term deposits | |
| (37 | ) | |
| | |
Principal payments on short-term debt | |
| (230 | ) | |
| (199 | ) |
Net cash used in financing activities | |
| (387 | ) | |
| (209 | ) |
Effect of exchange rate on cash and cash equivalents | |
| 133 | | |
| 72 | |
Net decrease in cash and cash equivalents | |
| (1,810 | ) | |
| (1,409 | ) |
Cash and cash equivalents, beginning of period | |
| 7,396 | | |
| 4,220 | |
Cash and cash equivalents, end of period | |
$ | 5,586 | | |
$ | 2,811 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 4 | | |
$ | 4 | |
Cash paid for taxes | |
$ | 55 | | |
$ | – | |
The accompanying footnotes are an integral part
of these unaudited condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes
in Stockholders’ Equity
For the Three Months ended June 30, 2022 and
2021
(In thousands, except share amounts)
(Unaudited)
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
Series C Preferred Stock ($0.0001 par Value) | | |
Common Stock ($0.0001 par Value) | | |
Additional Paid in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Loss | | |
Total | |
Balance, March 31, 2022 | |
| – | | |
$ | – | | |
| 3,100,937 | | |
$ | 2 | | |
$ | 197,370 | | |
$ | (184,363 | ) | |
$ | (4,312 | ) | |
$ | 8,697 | |
Employee stock-based compensation expenses | |
| – | | |
| – | | |
| – | | |
| – | | |
| 214 | | |
| – | | |
| – | | |
| 214 | |
Foreign currency translation adjustment | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (65 | ) | |
| (65 | ) |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (887 | ) | |
| – | | |
| (887 | ) |
Balance, June 30, 2022 | |
| – | | |
$ | – | | |
| 3,100,937 | | |
$ | 2 | | |
$ | 197,584 | | |
$ | (185,250 | ) | |
$ | (4,377 | ) | |
$ | 7,959 | |
| |
Series C Preferred Stock ($0.0001 par Value) | | |
Common Stock ($0.0001 par Value) | | |
Additional Paid in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Loss | | |
Total | |
Balance, March 31, 2021 | |
| – | | |
$ | – | | |
| 2,092,909 | | |
$ | 2 | | |
$ | 189,217 | | |
$ | (179,277 | ) | |
$ | (4,579 | ) | |
$ | 5,363 | |
Transaction costs related to ATM agreement offering | |
| – | | |
| – | | |
| – | | |
| – | | |
| (10 | ) | |
| – | | |
| – | | |
| (10 | ) |
Employee stock-based compensation expenses | |
| – | | |
| – | | |
| – | | |
| – | | |
| 56 | | |
| – | | |
| – | | |
| 56 | |
Stock based compensation related to issuance of common stock restricted | |
| – | | |
| – | | |
| – | | |
| – | | |
| 3 | | |
| – | | |
| – | | |
| 3 | |
Foreign currency translation adjustment | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 307 | | |
| 307 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (1,098 | ) | |
| – | | |
| (1,098 | ) |
Balance, June 30, 2021 | |
| – | | |
$ | – | | |
| 2,092,909 | | |
$ | 2 | | |
$ | 189,266 | | |
$ | (180,375 | ) | |
$ | (4,272 | ) | |
$ | 4,621 | |
The accompanying footnotes are an integral part
of these unaudited 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 is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”)
products for a wide range of applications, including wound care, animal health care, eye care, oral care and dermatological conditions.
The Company’s stabilized HOCl relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and
oxygenates the cells in the area treated assisting the body in its natural healing process. The Company sells its products either directly
or via partners in 54 countries worldwide.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements as of June 30, 2022 and for the three 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 June 30, 2022, and the condensed
consolidated statements of comprehensive income (loss), cash flows, and changes in stockholders’ equity for the three months ended
June 30, 2022 and 2021 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 months ended June 30, 2022 are not necessarily indicative of results to be expected for the year ending March
31, 2023 or for any future interim period. The condensed consolidated balance sheet at March 31, 2022 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, 2022, and notes thereto
included in the Company’s annual report on Form 10-K, which was filed with the SEC on July 13, 2022.
Note 2. |
Liquidity and Financial Condition |
The Company reported a net loss of $887,000 for
the three months ended June 30, 2022. At June 30, 2022 and March 31, 2022, the Company’s accumulated deficit amounted to $185,250,000
and $184,363,000, respectively. The Company had working capital of $9,963,000 and $10,611,000 as of June 30, 2022 and March 31, 2022,
respectively.
Management believes that the Company has access
to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other
means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms,
if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively
impacted. If the Company is unable to secure additional capital, it may be required to take additional measures to reduce costs in order
to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays
in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and
the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any adjustments that may be necessary should the Company be
unable to continue as a going concern.
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, and the estimated amortization periods of upfront product licensing fees received from customers. Periodically,
the Company evaluates and adjusts estimates accordingly.
Net Income (Loss) per Share
The following table provides the net income (loss)
for each period along with the computation of basic and diluted net income per share:
Computation of earnings per share | |
| | |
| |
| |
For the Three Months Ended June 30, | |
(In thousands, except per share data) | |
2022 | | |
2021 | |
Numerator: | |
| | |
| |
Net loss | |
$ | (887 | ) | |
$ | (1,098 | ) |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Weighted-average number of common shares outstanding: basic | |
| 3,101 | | |
| 2,093 | |
Weighted-average number of commons shares outstanding: diluted | |
| 3,101 | | |
| 2,093 | |
| |
| | | |
| | |
Net income (loss) per share - basic | |
| | | |
| | |
Net income (loss) per share | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
Net income (loss) per share - diluted | |
| | | |
| | |
Net income (loss) per share | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
The computation of basic income per share for
the three months ended June 30, 2022 and 2021 excludes the potentially dilutive securities summarized in the table below because their
inclusion would be anti-dilutive.
Schedule of antidilutive shares | |
| | |
| |
| |
June 30, | |
| |
2022 | | |
2021 | |
Common stock to be issued upon vesting of restricted stock units | |
| – | | |
| 1,000 | |
Common stock to be issued upon exercise of options | |
| 448,000 | | |
| 254,000 | |
Common stock to be issued upon exercise of warrants | |
| 108,000 | | |
| 119,000 | |
Common stock to be issued upon exercise of common stock units (1) | |
| 46,000 | | |
| 46,000 | |
| |
| 602,000 | | |
| 420,000 | |
(1) |
Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock |
Revenue Recognition
The Company recognizes revenue in accordance with
Accounting Standards Codification (“ASC”), Topic 606 Revenue from Contracts with Customers (“Topic 606”). Revenue
is recognized when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration which
the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized
as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the
promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations,
including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint
on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable
that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company derives the majority of its revenue
through sales of its products directly to end users and to distributors. The Company also sells products to a customer base, including
hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company also has 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 considers customer purchase orders,
which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers
the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction
price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects
to be entitled.
For all of its sales to non-consignment distribution
channels, revenue is recognized when control of the product is transferred to the customer (i.e. when its performance obligation is satisfied),
which typically occurs when 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. For product sales to its value-added resellers, non-stocking distributors and end-user customers,
the Company grants return privileges to its customers, and because the Company has a long history with its customers, the Company is able
to estimate the amount of product that will be returned. Sales incentives and other programs that the Company may make available
to these customers are considered to be a form of variable consideration, and the Company maintains estimated accruals and allowances
using the expected value method.
The Company has entered into consignment arrangements,
in which goods are left in the possession of another party to sell. As products are sold from the customer to third parties, the Company
recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending on whether a patient is
covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the
Company’s rebate program.
Sales to stocking distributors are made under
terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in
their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods and services
in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and is
separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as
other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.
Trade accounts receivable are recorded net of
allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns
are based on analysis of contractual terms and historical trends.
The Company’s policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers
include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis
of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on
government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts represents
probable credit losses of $0 and $0 at June 30, 2022 and March 31, 2022, respectively. Additionally, at June 30, 2022 and March 31, 2022
the Company has allowances of $81,000 and $81,000 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.
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 net realizable value.
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 a provision
to reduce the carrying amounts of inventories to their net realizable value in the amount of $217,000 and $218,000 at June 30, 2022 and
March 31, 2022, respectively, which is included in cost of product revenues on the Company’s accompanying condensed consolidated
statements of comprehensive income (loss).
Recent Accounting Standards
Accounting standards that have been issued or
proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption.
Note 4. |
Condensed Consolidated Balance Sheet |
Inventories, net
Inventories, net consist of the following:
Schedule of Inventories | |
| | |
| |
| |
June 30, | | |
March 31, | |
| |
2022 | | |
2022 | |
Raw materials | |
$ | 1,612,000 | | |
$ | 1,626,000 | |
Finished goods | |
| 1,176,000 | | |
| 1,037,000 | |
Inventories, net | |
$ | 2,788,000 | | |
$ | 2,663,000 | |
Leases
The Company's operating leases are comprised primarily
of facility leases. The Company did not have any finance leases as of June 30, 2022 and March 31, 2022. Balance sheet information related
to our leases is presented below:
Lease information | |
| | |
| |
| |
June 30, | | |
March 31, | |
| |
2022 | | |
2022 | |
Operating leases: | |
| | | |
| | |
Operating lease right-of-use assets | |
$ | 478,000 | | |
$ | 559,000 | |
Operating lease liabilities – current | |
| 233,000 | | |
| 250,000 | |
Operating lease liabilities – non- current | |
| 245,000 | | |
| 309,000 | |
Other information related to leases is presented below:
Three Months Ended June 30, 2022 | |
| |
Operating lease cost | |
| 94,000 | |
Other information: | |
| | |
Operating cash flows from operating leases | |
| 31,000 | |
Weighted-average remaining lease term – operating leases (in months) | |
| 25.30 | |
Weighted-average discount rate – operating leases | |
| 6.00% | |
As of June 30, 2022, the annual minimum lease payments of our operating
lease liabilities were as follows:
Schedule of minimum operating lease liabilities | |
| |
For Years Ending March 31, | |
| |
2023 (excluding the three months ended June 30, 2022) | |
$ | 210,000 | |
2024 | |
| 208,000 | |
2025 | |
| 104,000 | |
2026 | |
| 14,000 | |
Total future minimum lease payments, undiscounted | |
| 536,000 | |
Less: imputed interest | |
| (58,000 | ) |
Present value of future minimum lease payments | |
$ | 478,000 | |
Note 5. |
Commitments and Contingencies |
Legal Matters
The Company 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 June 30, 2022, the Company had employment
agreements in place with three of its key executives. These executive employment agreements provide, among other things, for the payment
of up to twelve months of severance compensation for terminations under certain circumstances. With respect to these agreements, at June
30, 2022, aggregated annual salaries would be $775,000 and potential severance payments to these key executives would be $775,000 if triggered.
Related Party Transactions
Ms. Trombly was appointed the Chief Executive
Officer of the Company. Ms. Trombly is the owner of Trombly Business Law, PC which has been retained by the Company to advise on certain
corporate and securities law matters. During the three months ended June 30, 2022 and 2021, the Company incurred $27,000 and $50,000,
respectively, in legal services from Trombly Business Law, PC.
Financing of Insurance Premiums
On February 1, 2021, the Company entered into
a note agreement for $584,000 with an interest rate of 4.98% per annum with final payment on October 1, 2021. This instrument was issued
in connection with financing insurance premiums. The note was payable in three quarterly installment payments of principal and interest
of $199,000, with the first installment beginning April 1, 2021. These amounts were paid off during the year ended March 31, 2022.
On February 1, 2022, the Company entered into
a note agreement for $748,000 with an interest rate of 4.68% per annum with final payment on January 1, 2023. This instrument was issued
in connection with financing insurance premiums. The note is payable in ten monthly installment payments of principal and interest of
$76,000, with the first installment beginning March 1, 2022.
Paycheck Protection Program Loan
On May 1, 2020, the Company received loan proceeds
in the amount of $1,310,000 under the Paycheck Protection Program (“PPP”), from Coastal States Bank in Atlanta, Georgia. The
PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, “CARES Act”, provided for loans to qualifying
businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest
were forgivable after eight or 24 weeks as long as the Company used the loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and maintains payroll levels. The amount of loan forgiveness was reduced if the Company terminated employees or reduced
salaries during the applicable period.
The unsecured loan, which was in the form of a
note dated April 29, 2020, matured on April 29, 2022 and bore interest at a rate of 1% per annum, payable monthly commencing on May 1,
2021. The note allowed for prepayment at any time prior to maturity with no prepayment penalties. The Company used the loan amount for
eligible purposes, such as payroll expenses. The Company met the conditions for $723,000 in forgiveness of the loan. At June 30, 2022
the loan had been paid back in full.
Note 7. |
Stockholders’ Equity |
Authorized Capital
The Company is authorized to issue up to 24,000,000
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.
Note 8. |
Stock-Based Compensation |
Stock-based compensation expense is as follows:
Employee stock-based compensation expense | |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
Cost of revenues | |
$ |
– | | |
$ |
– | |
Research and development | |
| – | | |
| – | |
Selling, general and administrative | |
| 214,000 | | |
| 59,000 | |
Total stock-based compensation | |
$ | 214,000 | | |
$ | 59,000 | |
At June 30, 2022, there were unrecognized compensation
costs of $1,037,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 1.88 years.
Stock options award activity is as follows:
Schedule of option activity | |
| | |
| |
| |
Number of Shares | | |
Weighted- Average Exercise Price | |
Outstanding at April 1, 2022 | |
| 466,234 | | |
$ | 12.09 | |
Options granted | |
| – | | |
| – | |
Options exercised | |
| – | | |
| – | |
Options forfeited | |
| (18,166 | ) | |
| 4.73 | |
Options expired | |
| – | | |
| – | |
Outstanding at June 30, 2022 | |
| 448,068 | | |
$ | 12.39 | |
Exercisable at June 30, 2022 | |
| 115,144 | | |
$ | 32.56 | |
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 $8.60 per share at June 30, 2022.
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 issues new shares of common stock
upon exercise of stock-based awards.
At the end of each interim reporting period, the Company determines
the income tax provision by using an estimate of the annual effective tax rate, adjusted for discrete items occurring in the quarter.
Our effective tax rate for the three months ended June 30, 2022 was
4.08%. The Company’s effective tax rate for the three months ended June 30, 2022 differed from the federal statutory tax rate of
21% primarily due to the valuation allowance recognized against deferred tax assets in the U.S. and Netherlands.
Judgment is required in determining whether deferred tax assets will
be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate
if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized,
and a valuation allowance must be established. As of June 30, 2022, the Company continues to maintain a valuation allowance in the U.S.
Note 10. |
Revenue Disaggregation |
The Company generates revenues from products which
are sold into the human and animal healthcare markets.
The following table presents the Company’s disaggregated revenues
by revenue source:
Disaggregated Revenue by Source | |
| | |
| |
| |
Three Months Ended June 30, | |
Product | |
2022 | | |
2021 | |
Human Care | |
$ | 2,168,000 | | |
$ | 2,715,000 | |
Animal Care | |
| 787,000 | | |
| 812,000 | |
Service and Royalty | |
| 1,028,000 | | |
| 157,000 | |
Total | |
$ | 3,983,000 | | |
$ | 3,684,000 | |
The following table shows the Company’s
revenues by geographic region:
Schedule of geographic sales | |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2022 | | |
2021 | |
United States | |
$ | 871,000 | | |
$ | 1,592,000 | |
Latin America | |
| 1,048,000 | | |
| 565,000 | |
Europe and Rest of the World | |
| 2,064,000 | | |
| 1,527,000 | |
Total | |
$ | 3,983,000 | | |
$ | 3,684,000 | |
Note 11. |
Significant Customer Concentrations |
For the three months ended June 30, 2022, one
customer represented 15% and another comprised 26% of net revenue. For the three months ended June 30, 2021, one customer represented
15% and another comprised 22% of net revenue.
At June 30, 2022, one customer represented 25%,
and another customer represented 18% of the net accounts receivable balance. At June 30, 2021 no customer represented more than 10% of
the net accounts receivable balance.
Note 12. |
Subsequent Events |
Management has evaluated subsequent events or transactions occurring
through the date the condensed consolidated financial statements were issued.
Appointment of New Director
Effective July 22, 2022, the Company’s Board
of Directors appointed Amy Trombly, its Chief Executive Officer, to serve as a member of the Company’s Board of Directors. Ms. Trombly
will not receive additional compensation for her Board service. Ms. Trombly will serve as a Class I Director until the 2024 Annual Meeting
of Stockholders.
Employment Agreements with Chief Executive
Officer and Chief Operating Officer
Effective July 22, 2022, the Company entered into
an amended and restated employment agreement with its Chief Executive Officer, Amy Trombly. Under the amended and restated agreement,
Ms. Trombly will devote substantially all of her time, energy and skill to the performance of her duties as Chief Executive Officer for
the Company. The amended and restated agreement also provides that, in the event of termination without cause or for good reason, Ms.
Trombly is entitled to a lump sum severance equal to one time her base salary. All other material terms of the amended and restated agreement
remain unchanged from her prior employment agreement.
Also effective July 22, 2022, the Company amended
and restated its employment agreement with Bruce Thornton, its Chief Operating Officer. The amended and restated agreement provides that,
in the event of termination upon change of control, Mr. Thornton is entitled to receive, in addition to the other benefits described therein,
a target annual bonus amount of 50% of his base salary. All other material terms of his amended and restated agreement remain unchanged
from his prior employment agreement.
Bonus Grants
Effective July 22, 2022, the Compensation
Committee of the Board of Directors approved annual bonus awards of $162,500 for Ms. Trombly and $150,000 for Mr. Thornton.
Departure of Chief Financial Officer
As part of its ongoing effort to cut costs and
streamline Company operations, on July 22, 2022 the Company commenced consolidating all of its corporate functions in the United States
to its office in Boulder, Colorado. Effective on or before December 31, 2022, the Company will close its office in Woodstock, Georgia.
In connection with the Woodstock office closure, Mr. Jerry Dvonch resigned as the Company’s Chief Financial Officer. Mr. Dvonch
has agreed to assist with transitioning the Company’s operations to the Boulder office on or before December 31, 2022.
Upon Mr. Dvonch’s termination, the Company
will pay him severance consisting of $100,000, contingent upon his execution of a general release of claims against the Company. He will
also be entitled to up to six months’ COBRA reimbursement. All outstanding time-based equity-based compensation awards will become
fully vested and all outstanding performance-based equity compensation awards will remain outstanding and will vest or be forfeited in
accordance with the terms of the applicable award agreements.
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 June 30, 2022 and our audited consolidated financial statements for the
year ended March 31, 2022 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 13, 2022.
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: the impact of the COVID-19 pandemic on the overall
economy and our results of operations; our ability to become profitable; the impact of changes to reimbursement levels from third-party
payors or increased pricing pressure due to rebates; the impact of the Invekra transaction on our business and results of operations;
our dependence on third-party distributors; certain tax impacts of inter-company loans between us and our Mexican subsidiary; 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 and capabilities relating to the sales and marketing of our current products and our product candidates; 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 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 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; 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; our ability to protect our information technology and infrastructure; and the impact of 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 global healthcare leader for developing
and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, animal health care,
eye care, oral care and dermatological conditions. Our products reduce infections, itch, pain, scarring and harmful inflammatory responses
in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral
and anti-inflammatory properties. Our stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does
not sting or irritate skin and oxygenates the cells in the area treated, assisting the body in its natural healing process.
Business Channels
Our core market differentiation is based on being
the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. Unlike many of our competitors, we have been in
business for over 20 years, and in that time we have developed significant scientific knowledge of how best to develop and manufacture
HOCl products backed by decades of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve
itch, inflammation and burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms
and biofilms.
We sell our products into many markets both in
the U.S. and internationally. In international markets, we ship products to 54 countries. Our core strategy is to work with partners both
in the United States and around the world to market and distribute our products. In some cases, we market and sell our own products.
Dermatology
Sonoma Dermatology has developed unique, differentiated,
prescription-strength and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our products
are primarily targeted at the treatment of acne, the management of scars and eczema/atopic dermatitis. We are strategically focused on
introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures
currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to new product
families.
In the United States, we partner with EMC Pharma,
LLC to sell our prescription dermatology products for an initial term of five years, subject to meeting minimum purchase and other requirements.
Pursuant to our agreement with EMC Pharma, we manufacture products for EMC Pharma and EMC Pharma markets, sells and distributes them to
patients and customers.
On September
28, 2021, we launched a new over-the-counter product, Regenacyn® Advanced Scar Gel, which is clinically proven to improve the overall
appearance of scars while reducing pain, itch, redness, and inflammation. Additionally, on the same day, we launched Regenacyn® Plus,
a prescription-strength scar gel which is available as an office-dispense product through physician offices. Our consumer products are
available through Amazon.com, our website and U.S.-based distributors.
We sell dermatology products in Europe, Asia,
and Brazil through a distributor network. In these international markets, we have a network of partners, ranging from country specific
distributors to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners
to create products they can market in their home country. Some products we develop and manufacture are private label while others use
branding we have already developed. We have created or co-developed a wide range of products for international markets using our core
HOCl technology.
First Aid and Wound Care
Our HOCl-based wound care products are intended
for the treatment of acute and chronic wounds as well as first- and second-degree burns. They work by first removing foreign material
and debris from the skin surface and moistening the skin, thereby improving wound healing. Second, our HOCl products assist in the wound
healing process through their antimicrobial properties by removing microorganisms. Since HOCl is an important constituent of our innate
immune system and is formed and released by the macrophages during phagocytosis, it is advantageous to other wound-irrigation and antiseptic
solutions as highly organized cell structures such as human tissue can tolerate the action of our wound care solution while single-celled
microorganisms cannot. Due to its unique chemistry, our wound treatment solution is much more stable than similar products on the market
and therefore maintains much higher levels of hypochlorous acid over its shelf life.
In the United States, we sell our wound care products
directly to hospitals, physicians, nurses, and other healthcare practitioners and indirectly through several non-exclusive distribution
arrangements.
To respond to market demand for our HOCl technology-based
products, we launched our first direct to consumer over-the-counter product in the United States in February 2021. Microcyn® OTC Wound
and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including
sunburns and other skin irritations. Microcyn® OTC Wound and Skin Cleanser is available without prescription through our online store.
In June 2022, Microcyn OTC received the Natural Personal Care Product certification from the National Products Association.
In March 2021, we received approval to market
and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation in France, Germany and Portugal. The
approval applies to our products MucoClyns™ for human hygiene to be marketed and commercialized by us, MicrocynAH® for animal
heath marketed and commercialized through our partner, Petagon Limited, and MicroSafe for disinfectant use to be marketed and commercialized
through our partner, MicroSafe Group Dubai.
Eye Care
Our prescription product
Acuicyn™ is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes
and helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to
provide near instant relief, and gentle enough to use as often as needed. In the United States, our partner EMC Pharma is selling our
prescription-based eye care product through its distribution network.
On September 28, 2021, we launched Ocucyn®
Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com and through our online store. Ocucyn® Eyelid
& Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective solution for good eyelid & eyelash hygiene.
In international markets
we rely on distribution partners to sell our eye products. On May 19, 2020, we entered into an expanded license and distribution agreement
with our existing partner, Brill International S.L. for our Microdacyn60® Eye Care HOCl-based product. Under the license and distribution
agreement, Brill has the right to market and distribute our eye care product under the private label Ocudox™ in Italy, Germany,
Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return,
Brill paid us a one-time fee, and the agreed upon supply prices. In parts of Asia, Dyamed Biotech markets our eye product under the private
label Ocucyn.
Oral, Dental and Nasal Care
We sell
a variety of oral, dental, and nasal products around the world.
In late 2020, we launched a HOCl-based product
in the dental, head and neck markets called Endocyn®, a biocompatible root canal irrigant. In the U.S., we sell our dental products
through U.S.-based distributors.
In international markets, our product Microdacyn60®
Oral Care treats mouth and throat infections and thrush. Microdacyn60 solution assists in reducing inflammation, pain, soothing cough
relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications
and is ready for use with no mixing or dilution. In New Zealand and Australia, our partner Te Arai BioFarma Ltd. markets our oral product
under their label Oracyn® Oral Care. Our partner, Dyamed Biotech, expects to launch Oracyn® Oral Care in parts of Asia this year.
On January 18, 2022, we partnered with Anlicare International to seek regulatory clearances for our dental and oral products in China
and Macau.
Our international nasal care product Sinudox™
based on our HOCl technology is a solution intended for nasal irrigation. Sinudox Hypotonic Nasal Hygiene clears and cleans a blocked
nose, stuffy nose and sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is sold through Amazon in Europe.
In New Zealand and Australia, our partner Te Arai markets our nasal product under their label Nasocyn® Nasal Care.
Animal Health Care
MicrocynAH® is a HOCl-based topical product
that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment of a
variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms
and wounds to the outer ear of any animal.
For our animal health products sold in the U.S.
and Canada, we partnered with Manna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro distributes
non-prescription products to national pet-store retail chains, farm animal specialty stores, in the United States and Canada, such as
Chewy.com, PetSmart, Tractor Supply, Cabela’s, PetExpress, and Bass Pro Shops. On August 2, 2022, we announced the launch of a MicrocynVS®
line of products exclusively for veterinarians for the management of wound, skin, ear and eye afflictions in all animal species. We granted
DV Medical Supply Inc. the non-exclusive right to distribute and sell MicrocynVS products in veterinarian clinics and practices throughout
the United States.
For the
Asian and European markets, on May 20, 2019, we partnered with Petagon, Limited, an international importer and distributor of quality
pet food and products for an initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. On August 3,
2020, Petagon received a license from the People’s Republic of China for the import of veterinary drug products manufactured by
us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.
Surface Disinfectants
In-vitro and clinical studies of HOCl show it
to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. HOCl has been formulated as a disinfectant
and sanitizer solution for our partner MicroSafe Group, Dubai, and is sold in numerous countries. It is designed to be used to spray in
aerosol format to areas and environments which are suspected to serve as a breeding ground for the spread of infectious disease, likely
to result in epidemics or pandemics. The medical-grade surface disinfectant solution is used in hospitals worldwide to keep doctors and
patients protected and safe. In May 2020, Nanocyn® Disinfectant & Sanitizer, received approval to be entered into the Australian
Register of Therapeutic Goods, or ARTG, as well as in Canada, for use against the coronavirus SARS-CoV-2, or COVID-19. Nanocyn has also
met the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one of the
very few eco-certified, all-natural disinfectant solutions in Australia.
Through our partner MicroSafe Group DMCC, Dubai,
we sell hard surface disinfectant products into Europe, the Middle East and Australia.
On July 31, 2021, we granted MicroSafe the non-exclusive
right to sell and distribute Nanocyn in the United States provided that MicroSafe secure U.S. EPA approval. In April of 2022, MicroSafe
secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold in the United States as a surface
disinfectant, and it was subsequently added to the EPA’s list N for use against COVID-19. In June 2022, the EPA added Nanocyn to
List Q as a disinfectant for Emerging Viral Pathogens, including Monkeypox. We intend to build upon this ground-breaking approval by securing
further approvals of this nature. Nanocyn® is a hospital-grade disinfectant and manufactured by us using our patented HOCl technology.
Nanocyn® is currently sold by MicroSafe in Europe, the Middle East and Australia.
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.
Results of Continuing Operations
Comparison of the Three Months Ended June 30,
2022 and 2021
Revenue
The following table shows our consolidated total
revenue and revenue by geographic region for the three months ended June 30, 2022 and 2021:
| |
Three Months Ended June 30, | | |
| | |
| |
(In thousands) | |
2022 | | |
2021 | | |
$ Change | | |
% Change | |
United States | |
$ | 871 | | |
$ | 1,592 | | |
$ | (721 | ) | |
| (45% | ) |
Latin America | |
| 1,048 | | |
| 565 | | |
| 483 | | |
| 85% | |
Europe and Rest of the World | |
| 2,064 | | |
| 1,527 | | |
| 537 | | |
| 35% | |
Total | |
$ | 3,983 | | |
$ | 3,684 | | |
$ | 299 | | |
| 8% | |
The decrease in United States revenues for the
three months ended June 30, 2022 compared to the same periods in the prior year of $721,000, is primarily the result of divesting our
prescription dermatology business to our partner, EMC. Divesting our prescription dermatology business resulted in a reduction of revenues,
however, we also eliminated significant expenses related to that line of products including a direct sales force.
The increase in Latin America revenue was primarily
the result of service revenue from selling machinery to a customer for $750,000 which management expects to be a one-time event.
The increase in Europe and Rest of World revenue
was primarily the result of an increase in orders from our distribution partners in Europe and Asia. Revenues from our international distributors
tend to be choppy when viewed on a quarterly basis due to customers placing larger but less frequent orders to benefit from quantity discounts
and reduced shipping costs when ordering sufficient quantities to fill standard sized shipping containers.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics are
as follows:
| |
Three Months ended June 30, | | |
| | |
| |
(In thousands, except for percentages) | |
2022 | | |
2021 | | |
Change | | |
% Change | |
Cost of Revenue | |
$ | 2,537 | | |
$ | 2,231 | | |
$ | 306 | | |
| 14% | |
Cost of Revenue as a % of Revenue | |
| 64% | | |
| 61% | | |
| | | |
| | |
Gross Profit | |
$ | 1,446 | | |
$ | 1,453 | | |
$ | (7 | ) | |
| (1 | )% |
Gross Profit as a % of Revenue | |
| 36% | | |
| 39% | | |
| | | |
| | |
The decline in gross profit is primarily as a
result of product and customer mix and 1% of the decline is the result of increased shipping costs to transport product from our manufacturing
facility in Mexico to the United States and Europe.
Research and Development Expense
The research and development metrics are as follows:
| |
Three Months ended June 30, | | |
| | |
| |
(In thousands, except for percentages) | |
2022 | | |
2021 | | |
Change | | |
% Change | |
Research and Development Expense | |
$ | 6 | | |
$ | 84 | | |
$ | (78 | ) | |
| (93 | )% |
Research and Development Expense as a % of Revenue | |
| 0% | | |
| 2% | | |
| (2 | )% | |
| | |
For the three months ended June 30, 2022, research
and development expenses decreased as a result reduced clinical trial expense.
Selling, General and Administrative Expense
The selling, general and administrative expense
metrics are as follows:
| |
Three Months ended June 30, | | |
| | |
| |
(In thousands, except for percentages) | |
2022 | | |
2021 | | |
Change | | |
% Change | |
Selling, General and Administrative Expense | |
$ | 2,295 | | |
$ | 2,273 | | |
$ | 22 | | |
| 1% | |
Selling, General and Administrative Expense as a % of Revenue | |
| 58% | | |
| 62% | | |
| (4 | )% | |
| | |
Selling, general and administrative expenses were
essentially flat for the three months ended June 30, 2022 as compared to the previous year but expenses but were down 4% as a percentage
of revenue when comparing the quarter ended June 30, 2022 to the quarter ended June 30, 2021.
Interest Income (Expense), net
Interest Income (Expense), net was zero for the
three months ended June 30, 2022 as compared to (1,000) for the three months ended June 30, 2021.
Other Expense (Income), net
Other expense for the three months ended June
30, 2022 of $67,000 decreased by $126,000 when compared to other expense of $193,000 for the three months ended June 30, 2021. The decrease
in other income relates primarily to fluctuations in foreign exchange.
Net Loss
The following table provides the net loss for
each period along with the computation of basic and diluted net income per share:
| |
| | |
| |
| |
For the Three Months Ended June 30, | |
(In thousands, except per share data) | |
2022 | | |
2021 | |
Numerator: | |
| | |
| |
Net income (loss) | |
$ | (887 | ) | |
$ | (1,098 | ) |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Weighted-average number of common shares outstanding: basic | |
| 3,101 | | |
| 2,093 | |
Weighted-average number of commons shares outstanding: diluted | |
| 3.101 | | |
| 2,093 | |
| |
| | | |
| | |
Net income (loss) per share - basic | |
| | | |
| | |
Net income (loss) per share | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
Net income (loss) per share - diluted | |
| | | |
| | |
Net income (loss) per share | |
$ | (0.29 | ) | |
$ | (0.52 | ) |
Liquidity and Capital Resources
We reported a net loss of $887,000 for the three
months ended June 30, 2022. At June 30, 2022 and March 31, 2022, our accumulated deficit amounted to $185,250,000 and $184,363,000, respectively.
We had working capital of $9,963,000 and $10,611,000 as of June 30, 2022 and March 31, 2022, respectively.
We expect revenues to fluctuate and may incur
losses in the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to penetrate
markets for the sale of our products and continue as a going concern.
Management believes that we have access to capital
resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, it is
possible that new financing will not be available on commercially acceptable terms, if at all. If the economic climate in the U.S. deteriorates,
our ability to raise additional capital could be negatively impacted. If we are unable to secure additional capital, we may be required
to take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations.
These measures could cause significant delays in our continued efforts to commercialize our products, which is critical to the realization
of our business plan and our future operations. These matters raise substantial doubt about our ability to continue as a going concern.
Sources of Liquidity
As of June 30, 2022, we had cash and cash equivalents
of $5,586,000. 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 assets to Invekra, Petagon,
Microsafe and Infinity Labs.
Cash Flows
The following table presents a summary of our
consolidated cash flows for operating, investing and financing activities for the three months ended June 30, 2022 and 2021 as well balances
of cash and cash equivalents and working capital:
| |
Three Months ended June 30, | |
(In thousands) | |
2022 | | |
2021 | |
Net cash provided by (used in): | |
| | | |
| | |
Operating activities | |
$ | (1,533 | ) | |
$ | (1,223 | ) |
Investing activities | |
| (23 | ) | |
| (49 | ) |
Financing activities | |
| (387 | ) | |
| (209 | ) |
Effect of exchange rates on cash | |
| 133 | | |
| 72 | |
Net change in cash and cash equivalents | |
| (1,810 | ) | |
| (1,409 | ) |
Cash and cash equivalents, beginning of the period | |
| 7,396 | | |
| 4,220 | |
Cash and cash equivalents, end of the period | |
$ | 5,586 | | |
$ | 2,811 | |
Working capital (1), end of period | |
$ | 9,963 | | |
$ | 6,924 | |
|
(1) |
Defined as current assets minus current liabilities. |
As of June 30, 2022, we had cash and cash equivalents
of $5,586,000, compared to $2,811,000 as of June 30, 2021.
Net cash used by operating activities during the
three months ended June 30, 2022 was $1,533,000, primarily due to a net loss of $887,000 and a decrease in deferred revenue.
Net cash used by operating activities during the
three months ended June 30, 2021 was $1,223,000, primarily due to a net loss of $1,098,000 and an increase in accounts receivable.
Net cash used in investing activities was $23,000
for three months ended June 30, 2022, primarily related to the purchase of equipment.
Net cash used in investing activities was $49,000
for three months ended June 30, 2021, primarily related to the purchase of equipment.
Net cash used in financing activities was $387,000
for the three months ended June 30, 2022, primarily related to principal payments on PPP loan and short-term debt of $350,000 and to a
payment of a long-term deposit.
Net cash used in financing activities was $209,000
for the three months ended June 30, 2021, primarily related to principal payments on long-term debt of $199,000.
Material Trends and Uncertainties
We are exposed to risk from decline in foreign
currency for both the Euro and the Mexico Peso versus the U.S. dollar. Most recently there has been a sharp decline in the Euro versus
the U.S. dollar which has impacted our financial results.
As we have previously
discussed in our annual report on Form 10-K filed with the SEC on July 13, 2022, we face a substantial Mexico tax liability, intercompany
debt, unpaid technical assistance charges and accrued interest. These amounts are not due until 2027. At this time, management believes
there are sufficient assets on the balance sheet to more than cover any tax obligation without interrupting our operations or business.
We have engaged tax professionals to review all options to limit our exposure to these amounts and to proceed in a manner that is most
advantageous to us.
As the pandemic continues
to impact economies worldwide, we are closely watching inflation, increased volatility within financial markets, shipping costs, supply
chain issues and labor costs. At this time, we have seen an increase in shipping costs however, the overall impact of these issues has
been minimal. The potential impact to our business operations, customer demand and supply chain due to increased shipping costs may ultimately
impact sales. We continue to evaluate our end-to-end supply chain and assess opportunities to refine the impact on sales. Currently, our
customers pay for most of the shipping expenses necessary to get products to their home countries, including increased shipping costs,
if any. We have not yet faced labor shortages however it is possible we may have difficulties retaining and finding qualified employees
in a tight labor market in the future. Furthermore, overall inflation tendencies may put pressure on our product pricing and/or costs.
We also closely monitor
overall economic conditions, consumer sentiment and the prospect of a recession in the United States which may impact our financial results.
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.