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,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,232
|
|
|
$
|
3,689
|
|
Accounts receivable, net
|
|
|
4,735
|
|
|
|
3,481
|
|
Inventories
|
|
|
3,098
|
|
|
|
3,409
|
|
Prepaid expenses and other current assets
|
|
|
2,025
|
|
|
|
1,694
|
|
Current portion of deferred consideration, net of discount
|
|
|
220
|
|
|
|
223
|
|
Total current assets
|
|
|
13,310
|
|
|
|
12,496
|
|
Operating lease right-of-use assets
|
|
|
1,178
|
|
|
|
–
|
|
Property and equipment, net
|
|
|
526
|
|
|
|
727
|
|
Deferred consideration, net of discount, less current portion
|
|
|
1,018
|
|
|
|
1,103
|
|
Other assets
|
|
|
113
|
|
|
|
122
|
|
Total assets
|
|
$
|
16,145
|
|
|
$
|
14,448
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,292
|
|
|
$
|
1,255
|
|
Accrued expenses and other current liabilities
|
|
|
1,374
|
|
|
|
1,501
|
|
Deferred revenue
|
|
|
228
|
|
|
|
47
|
|
Deferred revenue Invekra
|
|
|
54
|
|
|
|
55
|
|
Operating lease liabilities
|
|
|
362
|
|
|
|
–
|
|
Current portion of long-term debt
|
|
|
106
|
|
|
|
322
|
|
Current portion of capital leases
|
|
|
–
|
|
|
|
141
|
|
Common Stock liability
|
|
|
270
|
|
|
|
270
|
|
Total current liabilities
|
|
|
4,686
|
|
|
|
3,591
|
|
Operating lease liabilities non-current
|
|
|
865
|
|
|
|
–
|
|
Long-term deferred revenue Invekra
|
|
|
323
|
|
|
|
356
|
|
Long-term debt, less current portion
|
|
|
–
|
|
|
|
12
|
|
Total liabilities
|
|
|
5,874
|
|
|
|
3,959
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
–
|
|
|
|
–
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at September 30, 2019 and March 31, 2019 respectively; 1.55 shares issued and outstanding at September 30, 2019 and March 31, 2019 respectively
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.0001 par value; 24,000,000 shares authorized at September 30, 2019 and March 31, 2019, respectively, 1,318,004 and 1,316,335 shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
184,499
|
|
|
|
184,074
|
|
Accumulated deficit
|
|
|
(169,785
|
)
|
|
|
(169,238
|
)
|
Accumulated other comprehensive loss
|
|
|
(4,445
|
)
|
|
|
(4,349
|
)
|
Total stockholders’ equity
|
|
|
10,271
|
|
|
|
10,489
|
|
Total liabilities and stockholders’ equity
|
|
$
|
16,145
|
|
|
$
|
14,448
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,712
|
|
|
$
|
4,635
|
|
|
$
|
9,097
|
|
|
$
|
8,730
|
|
Service
|
|
|
256
|
|
|
|
304
|
|
|
|
582
|
|
|
|
578
|
|
Total revenues
|
|
|
4,968
|
|
|
|
4,939
|
|
|
|
9,679
|
|
|
|
9,308
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
2,551
|
|
|
|
2,313
|
|
|
|
4,753
|
|
|
|
4,737
|
|
Service
|
|
|
123
|
|
|
|
199
|
|
|
|
265
|
|
|
|
413
|
|
Total cost of revenues
|
|
|
2,674
|
|
|
|
2,512
|
|
|
|
5,018
|
|
|
|
5,150
|
|
Gross profit
|
|
|
2,294
|
|
|
|
2,427
|
|
|
|
4,661
|
|
|
|
4,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
270
|
|
|
|
390
|
|
|
|
608
|
|
|
|
740
|
|
Selling, general and administrative
|
|
|
3,226
|
|
|
|
4,689
|
|
|
|
6,985
|
|
|
|
9,622
|
|
Total operating expenses
|
|
|
3,496
|
|
|
|
5,079
|
|
|
|
7,593
|
|
|
|
10,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,202
|
)
|
|
|
(2,652
|
)
|
|
|
(2,932
|
)
|
|
|
(6,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
(19
|
)
|
Interest income
|
|
|
42
|
|
|
|
47
|
|
|
|
84
|
|
|
|
102
|
|
Other expense
|
|
|
(41
|
)
|
|
|
(208
|
)
|
|
|
(100
|
)
|
|
|
(157
|
)
|
Gain on sale of assets (Note 4)
|
|
|
–
|
|
|
|
–
|
|
|
|
2,472
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,203
|
)
|
|
|
(2,820
|
)
|
|
|
(488
|
)
|
|
|
(6,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: basic and diluted
|
|
$
|
(0.91
|
)
|
|
$
|
(3.93
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(8.89
|
)
|
Weighted-average number of shares used in per common share calculations: basic and diluted
|
|
|
1,317
|
|
|
|
718
|
|
|
|
1,317
|
|
|
|
706
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,203
|
)
|
|
$
|
(2,820
|
)
|
|
$
|
(488
|
)
|
|
$
|
(6,278
|
)
|
Foreign currency translation adjustments
|
|
|
(163
|
)
|
|
|
350
|
|
|
|
(96
|
)
|
|
|
(152
|
)
|
Comprehensive loss
|
|
$
|
(1,366
|
)
|
|
$
|
(2,470
|
)
|
|
$
|
(584
|
)
|
|
$
|
(6,430
|
)
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(488
|
)
|
|
$
|
(6,278
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
144
|
|
|
|
238
|
|
Stock-based compensation
|
|
|
425
|
|
|
|
932
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,283
|
)
|
|
|
(1,456
|
)
|
Inventories
|
|
|
263
|
|
|
|
(160
|
)
|
Deferred consideration
|
|
|
70
|
|
|
|
–
|
|
Prepaid expenses and other current assets
|
|
|
(358
|
)
|
|
|
169
|
|
Operating lease rights-of-use assets
|
|
|
256
|
|
|
|
–
|
|
Accounts payable
|
|
|
1,052
|
|
|
|
94
|
|
Accrued expenses and other current liabilities
|
|
|
(122
|
)
|
|
|
(147
|
)
|
Operating lease liabilities
|
|
|
(267
|
)
|
|
|
–
|
|
Deferred revenue
|
|
|
148
|
|
|
|
1
|
|
Net cash used in operating activities
|
|
|
(160
|
)
|
|
|
(6,607
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(77
|
)
|
|
|
(57
|
)
|
Deposits
|
|
|
8
|
|
|
|
(38
|
)
|
Net cash used in investing activities
|
|
|
(69
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
–
|
|
|
|
957
|
|
Proceeds from exercise of common stock purchase warrants
|
|
|
–
|
|
|
|
–
|
|
Principal payments on capital leases
|
|
|
(13
|
)
|
|
|
(72
|
)
|
Principal payments on long-term debt
|
|
|
(228
|
)
|
|
|
(210
|
)
|
Net cash used in financing activities
|
|
|
(241
|
)
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
13
|
|
|
|
9
|
|
Net decrease in cash and cash equivalents
|
|
|
(457
|
)
|
|
|
(6,018
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
3,689
|
|
|
|
10,066
|
|
Cash and cash equivalents, end of period
|
|
$
|
3,232
|
|
|
$
|
4,048
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
12
|
|
|
$
|
19
|
|
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of
Changes in Stockholders’ Equity
(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, 2019
|
|
1.55
|
|
$
|
–
|
|
|
1,316,335
|
|
$
|
2
|
|
$
|
184,074
|
|
$
|
(169,238
|
)
|
$
|
(4,349
|
)
|
$
|
10,489
|
|
Cumulative
effect related to April 1, 2019 adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(59
|
)
|
|
–
|
|
|
(59
|
)
|
Stock based compensation related
to common stock restricted stock grants
|
|
–
|
|
|
–
|
|
|
1,669
|
|
|
–
|
|
|
29
|
|
|
–
|
|
|
–
|
|
|
29
|
|
Stock based compensation,
net of forfeitures
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
396
|
|
|
–
|
|
|
–
|
|
|
396
|
|
Foreign currency translation
adjustment
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(96
|
)
|
|
(96
|
)
|
Net income (loss)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(488
|
)
|
|
–
|
|
|
(488
|
)
|
Balance, September 30, 2019
|
|
1.55
|
|
$
|
–
|
|
|
1,318,004
|
|
$
|
2
|
|
$
|
184,499
|
|
$
|
(169,785
|
)
|
$
|
(4,445
|
)
|
$
|
10,271
|
|
|
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 June 30, 2019
|
|
1.55
|
|
$
|
–
|
|
|
1,317,170
|
|
$
|
2
|
|
$
|
184,366
|
|
$
|
(168,582
|
)
|
$
|
(4,282
|
)
|
$
|
11,504
|
|
Stock based compensation related to common stock restricted stock
grants
|
|
–
|
|
|
–
|
|
|
834
|
|
|
–
|
|
|
9
|
|
|
–
|
|
|
–
|
|
|
9
|
|
Stock based compensation, net of forfeitures
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
124
|
|
|
–
|
|
|
–
|
|
|
124
|
|
Foreign currency translation adjustment
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(163
|
)
|
|
(163
|
)
|
Net income (loss)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(1,203
|
)
|
|
–
|
|
|
(1,203
|
)
|
Balance, September 30, 2019
|
|
1.55
|
|
$
|
–
|
|
|
1,318,004
|
|
$
|
2
|
|
$
|
184,499
|
|
$
|
(169,785
|
)
|
$
|
(4,445
|
)
|
$
|
10,271
|
|
|
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, 2018
|
|
–
|
|
$
|
–
|
|
|
685,747
|
|
$
|
1
|
|
$
|
176,740
|
|
$
|
(157,440
|
)
|
$
|
(3,975
|
)
|
$
|
15,326
|
|
Issuance of common stock in
connection with December 8, 2017 At Market Issuance Sales Agreement, net of commissions, expenses and other offering costs
|
|
–
|
|
|
–
|
|
|
29,710
|
|
|
–
|
|
|
958
|
|
|
–
|
|
|
–
|
|
|
958
|
|
Stock based compensation related
to common stock restricted stock grants
|
|
–
|
|
|
–
|
|
|
1,764
|
|
|
–
|
|
|
61
|
|
|
–
|
|
|
–
|
|
|
61
|
|
Issuance of common stock for
service fees
|
|
|
|
|
|
|
|
2,736
|
|
|
|
|
|
59
|
|
|
–
|
|
|
–
|
|
|
59
|
|
Stock based compensation,
net of forfeitures
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
811
|
|
|
–
|
|
|
–
|
|
|
811
|
|
Foreign currency translation
adjustment
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(152
|
)
|
|
(152
|
)
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(6,278
|
)
|
|
–
|
|
|
(6,278
|
)
|
Balance, September 30, 2018
|
|
–
|
|
$
|
–
|
|
|
719,957
|
|
$
|
1
|
|
$
|
178,629
|
|
$
|
(163,718
|
)
|
$
|
(4,127
|
)
|
$
|
10,785
|
|
|
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 June 30, 2018
|
|
–
|
|
$
|
–
|
|
|
714,751
|
|
$
|
1
|
|
$
|
178,003
|
|
$
|
(160,898
|
)
|
$
|
(4,477
|
)
|
$
|
12,629
|
|
Issuance of common stock in connection with December 8, 2017 At
Market Issuance Sales Agreement, net of commissions, expenses and other offering costs
|
|
–
|
|
|
–
|
|
|
2,470
|
|
|
–
|
|
|
42
|
|
|
–
|
|
|
–
|
|
|
42
|
|
Stock based compensation related to common stock restricted stock
grants
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
16
|
|
|
–
|
|
|
–
|
|
|
16
|
|
Issuance of common stock for service fees
|
|
|
|
|
|
|
|
2,736
|
|
|
|
|
|
59
|
|
|
–
|
|
|
–
|
|
|
59
|
|
Stock based compensation, net of forfeitures
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
509
|
|
|
–
|
|
|
–
|
|
|
509
|
|
Foreign currency translation adjustment
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
350
|
|
|
350
|
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(2,820
|
)
|
|
–
|
|
|
(2,820
|
)
|
Balance, September 30, 2018
|
|
–
|
|
$
|
–
|
|
|
719,957
|
|
$
|
1
|
|
$
|
178,629
|
|
$
|
(163,718
|
)
|
$
|
(4,127
|
)
|
$
|
10,785
|
|
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 patients living
with chronic skin conditions. The Company believes its products, which are sold throughout the United States and internationally,
have improved patient outcomes by treating and reducing certain 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, 2019 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, 2019, the condensed consolidated statements of comprehensive loss for the three and six months ended
September 30, 2019 and 2018 and the cash flows for the six months ended September 30, 2019 and 2018 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, 2019 are not necessarily indicative of results to be expected for the year ending March 31, 2020
or for any future interim period. The condensed consolidated balance sheet at March 31, 2019 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, 2019,
and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on July 1, 2019.
Note 2.
|
Liquidity and Financial Condition
|
The Company reported a net loss of $488,000
for the six months ended September 30, 2019. At September 30, 2019 and March 31, 2019, the Company’s accumulated deficit
amounted to $169,785,000 and $169,238,000, respectively. The Company had working capital of $8,624,000 and $8,905,000 as of September
30, 2019 and March 31, 2019, respectively.
The Company expects to continue incurring
losses for the foreseeable future and will need to raise additional capital to pursue its product development initiatives, to penetrate
markets for the sale of its products and continue as a going concern. The Company cannot provide any assurances that it will be
able to raise additional capital.
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 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 are 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, 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.
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.
The computation of basic loss per share
for the three and six months ended September 30, 2019 and 2018 excludes the potentially dilutive securities summarized in the table
below because their inclusion would be anti-dilutive.
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Common stock to be issued upon vesting of restricted stock units
|
|
|
2,000
|
|
|
|
4,000
|
|
Common stock to be issued upon exercise of options
|
|
|
136,000
|
|
|
|
169,000
|
|
Common stock to be issued upon exercise of warrants
|
|
|
446,000
|
|
|
|
153,000
|
|
Common stock to be issued upon exercise of common stock units (1)
|
|
|
46,000
|
|
|
|
–
|
|
|
|
|
630,000
|
|
|
|
326,000
|
|
______________
(1)
|
Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock
|
Revenue Recognition
On April 1, 2018, the Company adopted Accounting
Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers Topic 606” (“Topic 606”)
using the modified retrospective method. There was no impact to the Company upon the adoption of Topic 606. Revenue is recognized
when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity
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 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 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 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 our 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. The Company has a long history with its customers and 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 based on if 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.
Revenue from testing contracts is recognized
as tests are completed and a final report is sent to the customer.
Disaggregation of Revenue
The following table presents the Company’s disaggregated
revenues by revenue source:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
|
|
Human Skin Care
|
|
$
|
3,800,000
|
|
|
$
|
4,074,000
|
|
|
$
|
7,762,000
|
|
|
$
|
7,628,000
|
|
Animal Skin Care
|
|
|
912,000
|
|
|
|
561,000
|
|
|
|
1,335,000
|
|
|
|
1,102,000
|
|
|
|
|
4,712,000
|
|
|
|
4,635,000
|
|
|
|
9,097,000
|
|
|
|
8,730,000
|
|
Service
|
|
|
256,000
|
|
|
|
304,000
|
|
|
|
582,000
|
|
|
|
578,000
|
|
Total
|
|
$
|
4,968,000
|
|
|
$
|
4,939,000
|
|
|
$
|
9,679,000
|
|
|
$
|
9,308,000
|
|
Accounts Receivable
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 $33,000 and $24,000 at September
30, 2019 and March 31, 2019, respectively. Additionally, at September 30, 2019 and March 31, 2019 the Company has allowances of
$274,000 and $443,000, 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 $86,000 and $184,000
at September 30, 2019 and March 31, 2019, respectively, which is included in cost of product revenues on the Company’s accompanying
condensed consolidated statements of comprehensive loss.
Subsequent Events
Management has evaluated subsequent events
or transactions occurring through the date the condensed consolidated financial statements were issued.
Adoption of Recent Accounting Standards
Leases
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the
recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify
this guidance and most recently issued ASU 2017-13 Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July
20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The Company
adopted ASU 2016-02 on April 1, 2019. As a result of adopting this guidance, the consolidated balance sheet as of March 31, 2019
was not restated and is not comparative. The adoption of this standard did not have a material impact on the Company’s results
of operations. (Note 5)
Reporting Comprehensive Income
In February 2018, the FASB issued ASU No.
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 is effective for fiscal years beginning after December 15,
2018. Early adoption is permitted for any interim period for which financial statements have not been issued. The adoption of this
guidance did not have an impact on the Company's condensed consolidated financial statements due the presence of a full valuation
allowance for deferred tax assets.
Stock Compensation
In June 2018, the FASB issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07
aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments
to employees, with certain exceptions. Under the new standard, equity-classified share-based payment awards issued to nonemployees
will be measured on the grant date, instead of the current requirement to remeasure the awards through the performance completion
date. The Company adopted ASU 2018-07 effective April 1, 2019, and this guidance did not have a material impact on the Company’s
condensed consolidated financial statements.
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.
|
Sale of Assets to Petagon Limited
|
On May 20, 2019, the Company closed on
an Asset Purchase Agreement for the sale of certain animal health product rights and assets for the Asian and European markets
to Petagon, Limited, (“Petagon”) an international importer and distributor of quality pet food and products. The purchase
price for the assets was $2,700,000. The Company agreed that it will continue to supply products to Petagon for five years at certain
agreed upon transfer prices. The sale involves certain Asian patents and trademarks, the exclusive right to distribute animal health
care products in Asia and Europe and production equipment.
The Company determined that there were
two separate performance obligations under the Asset Purchase Agreement. These performance obligations were the delivery of production
equipment to Petagon and the transfer of the intellectual property and territory rights.
The Company estimated the value of the
production equipment by determining the cost and applying a mark up to the selling price at a market participant margin. The Company
then applied the residual approach to derive the fair value of the intellectual property and territory rights.
The Company will provide product under
a reduced price from its prior list price, while Petagon builds its own manufacturing line. At the conclusion of the transition
period, the Company will cease to be a supplier of product to Petagon. The Company is uncertain as to the duration of the transition
period or when Petagon will complete the build out of its manufacturing line. The Company will incur costs of approximately $163,000
to fulfill its obligations to deliver certain production equipment to Petagon.
The proceeds from the sale were allocated to the components
of the sale utilizing the residual approach as follows:
Total proceeds
|
|
$
|
2,700,000
|
|
Less - Production equipment
|
|
|
228,000
|
|
Residual attributable to the intellectual property and territory rights
|
|
$
|
2,472,000
|
|
The proceeds related to the production
equipment were included in deferred revenue and will be recognized upon delivery of the equipment. The proceeds related to the
intellectual property and territory rights were included in gain on sale on the closing date.
For a certain period after closing, Petagon
shall have first refusal rights to acquire other certain marketing territories.
Note 5.
|
Condensed Consolidated Balance Sheets
|
Inventories
Inventories consist of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Raw materials
|
|
$
|
1,758,000
|
|
|
$
|
1,766,000
|
|
Finished goods
|
|
|
1,340,000
|
|
|
|
1,643,000
|
|
|
|
$
|
3,098,000
|
|
|
$
|
3,409,000
|
|
Leases
Sonoma has entered into operating and finance
leases as the lessee for office space, manufacturing facilities, R&D laboratories, warehouses, vehicles and equipment. On April
1, 2019 (“Effective Date”), the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases ("ASC
842"), which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from
leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance requires the recognition
of the right-of-use ("ROU") assets and related operating and finance lease liabilities on the balance sheet. The Company
adopted the new guidance using the modified retrospective approach with a cumulative-effect adjustment recorded on April 1, 2019.
As a result, the consolidated balance sheet as of March 31, 2019 was not restated and is not comparative.
The adoption of ASC 842 resulted in the
recognition of ROU assets of $1,443,000, lease liabilities for operating leases of $1,502,000 on the Company's condensed consolidated
balance sheet as of April 1, 2019, and a cumulative-effect adjustment of $59,000 to the Company’s accumulated deficit, with
no material impact to its condensed consolidated statements of operations. The difference between the ROU assets and the operating
lease liability represents the effect of previously unrecognized deferred rent balances. The Company's accounting for finance leases
remained substantially unchanged from its accounting for capital leases in prior periods. Finance leases are not material to the
Company’s condensed consolidated statements of comprehensive loss, condensed consolidated balance sheets, or condensed consolidated
statement of cash flows.
The Company elected the package of practical
expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii)
classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs.
Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets
and the expedient to allow the Company to not have to separate lease and non-lease components. The Company has also elected the
short-term lease accounting policy under which Sonoma would not recognize a lease liability or ROU asset for any lease that at
the commencement date has a lease term of twelve months or less and does not include a purchase option that Sonoma is more than
reasonably certain to exercise.
For contracts entered into on or after
the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company's
assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained
the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company
has the right to direct the use of the asset. Leases entered into prior to April 1, 2019, which were accounted for under ASC 840,
were not reassessed for classification.
For operating leases, the lease liability
is initially and subsequently measured at the present value of the unpaid lease payments. For finance leases, the lease liability
is initially measured in the same manner and date as for operating leases, and is subsequently presented at amortized cost using
the effective interest method. The Company generally uses its incremental borrowing rate as the discount rate for leases, unless
an interest rate is implicitly stated in the lease. The present value of the lease payments is calculated using the incremental
borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest
that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The lease
term for all of the Company’s leases includes the noncancelable period of the lease plus any additional periods covered by
either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease
controlled by the lessor. All ROU assets are reviewed for impairment.
Lease expense for operating leases consists
of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Lease expense
for finance leases consists of the amortization of the asset on a straight-line basis over the shorter of the lease term or its
useful life and interest expense determined on an amortized cost basis, with the lease payments allocated between a reduction of
the lease liability and interest expense.
The Company's operating leases are comprised
primarily of facility leases. Finance leases are comprised primarily of vehicle leases. Balance sheet information related to our
leases is presented below:
|
|
September 30,
|
|
|
April 1,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
1,178,000
|
|
|
$
|
1,442,000
|
|
|
$
|
–
|
|
Operating lease liabilities – current
|
|
|
362,000
|
|
|
|
497,000
|
|
|
|
–
|
|
Operating lease liabilities – non- current
|
|
|
865,000
|
|
|
|
1,005,000
|
|
|
|
–
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
–
|
|
|
|
95,000
|
|
|
|
95,000
|
|
Current portion of capital leases
|
|
|
–
|
|
|
|
141,000
|
|
|
|
141,000
|
|
Other information related to leases is presented below:
|
|
Three Months Ended September 30, 2019
|
|
|
Six Months Ended September 30, 2019
|
|
Lease cost
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
148,000
|
|
|
$
|
298,000
|
|
As of September 30, 2019
|
|
|
|
Other information:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
309,000
|
|
Weighted-average remaining lease term – operating leases (in months)
|
|
|
49.7
|
|
Weighted-average discount rate – operating leases
|
|
|
6.00%
|
|
As of September 30, 2019, the annual minimum lease payments
of our operating lease liabilities were as follows:
For Years Ending March 31,
|
|
|
|
|
|
2020 (excluding the six months ended September 30, 2019)
|
|
|
$
|
259,000
|
|
|
2021
|
|
|
|
307,000
|
|
|
2022
|
|
|
|
270,000
|
|
|
2023
|
|
|
|
247,000
|
|
|
2024
|
|
|
|
223,000
|
|
|
Thereafter
|
|
|
|
83,000
|
|
|
Total future minimum lease payments, undiscounted
|
|
|
|
1,389,000
|
|
|
Less: imputed interest
|
|
|
|
(162,000
|
)
|
|
Present value of future minimum lease payments
|
|
|
$
|
1,227,000
|
|
Note 6.
|
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 September 30, 2019, the Company had
employment agreements in place with four of its key executives. Three of the 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 September 30, 2019, aggregated annual salaries would be $984,000 and potential severance payments to these
key executives would be $684,000 if triggered.
Related Party Transactions
Effective September 25, 2019, Ms. Trombly was appointed the
Interim 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 and six months ended September 30, 2019,
the Company received $97,000 and $181,000 in legal services from Trombly Business Law, PC, respectively. During the three and six
months ended September 30, 2018, the Company received $101,000 and $204,000 in legal services from Trombly Business Law, PC, respectively.
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
|
Share-based awards compensation expense is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of service revenue
|
|
$
|
17,000
|
|
|
$
|
30,000
|
|
|
$
|
34,000
|
|
|
$
|
65,000
|
|
Research and development
|
|
|
19,000
|
|
|
|
29,000
|
|
|
|
41,000
|
|
|
|
61,000
|
|
Selling, general and administrative
|
|
|
97,000
|
|
|
|
467,000
|
|
|
|
350,000
|
|
|
|
747,000
|
|
Total stock-based compensation
|
|
$
|
133,000
|
|
|
$
|
526,000
|
|
|
$
|
425,000
|
|
|
$
|
873,000
|
|
At September 30, 2019, there were unrecognized
compensation costs of $257,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 0.61 years.
At September 30, 2019, there were unrecognized
compensation costs of $26,000 related to restricted stock which is expected to be recognized over a weighted-average amortization
period of 1.71 years.
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, 2019
|
|
|
165,000
|
|
|
$
|
72.88
|
|
|
|
–
|
|
|
|
–
|
|
Options granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Options forfeited
|
|
|
(7,000
|
)
|
|
|
30.72
|
|
|
|
–
|
|
|
|
–
|
|
Options expired
|
|
|
(22,000
|
)
|
|
|
91.79
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2019
|
|
|
136,000
|
|
|
$
|
71.96
|
|
|
|
4.14
|
|
|
$
|
–
|
|
Exercisable at September 30, 2019
|
|
|
123,000
|
|
|
$
|
73.72
|
|
|
|
3.76
|
|
|
$
|
–
|
|
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 $5.76 per share at September 30, 2019.
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, 2019
|
|
|
4,000
|
|
|
$
|
27.96
|
|
Restricted stock awards granted
|
|
|
–
|
|
|
|
–
|
|
Restricted stock awards vested
|
|
|
(2,000
|
)
|
|
|
33.54
|
|
Restricted stock awards forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested restricted stock awards outstanding at September 30, 2019
|
|
|
2,000
|
|
|
$
|
22.58
|
|
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.
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 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
through March 31, 2019. 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 for these and its other
deferred tax assets since it is more likely than not such benefits will not be realized in future periods. The Company has incurred
losses for both financial reporting and income tax purposes for the year ended March 31, 2019. 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.
The Company only recognizes tax benefits
from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate
resolution. To date, the Company has not recognized such tax benefits in its consolidated financial statements.
The Company may also be affected by certain
other aspects of the Tax Act, including, without limitation, provisions regarding repatriation of accumulated foreign earnings
and deductibility of capital expenditures. However, these assessments are based on preliminary review and analysis of the Tax Act
and are subject to change as the Company continues to evaluate these highly complex rules as additional interpretive guidance is
issued. The Company is also in the process of determining the impacts of the new Global Intangibles Low-Taxed Income (“GILTI”)
tax law and has not yet included any potential GILTI tax or elected any related accounting policy.
The Company does not have any tax positions
for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within twelve
months of March 31, 2019. The unrecognized tax benefits may increase or change during the next year for items that arise in the
ordinary course of business.
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 presents the Company’s
disaggregated product revenues by geographic region:
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
2,207,000
|
|
|
$
|
2,426,000
|
|
|
$
|
4,694,000
|
|
|
$
|
4,397,000
|
|
Latin America
|
|
|
935,000
|
|
|
|
997,000
|
|
|
|
1,589,000
|
|
|
|
2,076,000
|
|
Europe and Rest of the World
|
|
|
1,570,000
|
|
|
|
1,212,000
|
|
|
|
2,814,000
|
|
|
|
2,257,000
|
|
Total
|
|
$
|
4,712,000
|
|
|
$
|
4,635,000
|
|
|
$
|
9,097,000
|
|
|
$
|
8,730,000
|
|
The Company’s service revenues amounted
to $256,000 and $304,000 for the three months ended September 30, 2019 and 2018, respectively.
The Company’s service revenues amounted
to $582,000 and $578,000 for the six months ended September 30, 2019 and 2018, respectively.
Note 11.
|
Significant Customer Concentrations
|
For the three months ended September 30,
2019, one customer represented 16% of net revenue and one customer represented 18% of net revenue. For the three months ended September
30, 2018, one customer represented 15% of net revenue and one customer represented 13% of net revenue.
For the six months ended September 30,
2018, one customer represented 11% of net revenue and one customer represented 16% of net revenue. For the six months ended September
30, 2018, one customer represented 20% of net revenue and one customer represented 13% of net revenue.
At September 30, 2019, one customer represented
14%, of the net accounts receivable balance. At March 31, 2019, no customer represented more than 10% of the net accounts receivable
balance.
Note 12.
|
Subsequent Events
|
Employment Agreement with our Interim
Chief Executive Officer
On October 11, 2019, the Company entered
into an employment agreement with Amy Trombly, the Company’s Interim Chief Executive Officer. The agreement is effective
as of September 25, 2019, the date of her appointment and has a term of three months, subject to mutual extension by one-month
increments. The Company agreed to pay Ms. Trombly a base salary of $25,000 per month, which will include legal services Ms. Trombly
has traditionally provided to the Company. The Company will also provide standard medical, dental and vacation benefits. Certain
legal services not provided by Ms. Trombly will continue to be billed by Trombly Business Law, PC. The Board also agreed that
during her time as Interim Chief Executive Officer, Ms. Trombly may continue to represent other clients in her role as attorney.
The employment agreement may be terminated by the Company upon ten days’ written notice or by Ms. Trombly upon thirty days’
written notice at any time and for any reason. Upon termination of employment, Ms. Trombly will be entitled to the accrued amounts
and shall have no further rights to any compensation or any other benefits from the Company.
Employment Agreement with our Chief
Financial Officer
On October 11, 2019, the Company entered
into an employment agreement with John Dal Poggetto, the Company’s Chief Financial Officer. The agreement is effective as
of September 25, 2019, the date of his appointment. The terms of the employment agreement provide for an annual salary of $230,000
and an annual bonus amount not to exceed 40% of his base salary to be determined by the Compensation Committee in its sole discretion.
He will also receive an equity award in the amount of $100,000 as a signing bonus which has not been issued yet. The further
details of such signing bonus award shall be determined by the Compensation Committee at a later date. Mr. Dal Poggetto also receives
certain benefits, such as participation in the Company’s health and welfare plans, vacation, and reimbursement of expenses.
The employment agreement provides certain
separation benefits in the event of termination without cause or resignation by Mr. Dal Poggetto for good reason, as such terms
are defined in the employment agreement. In the event Mr. Dal Poggetto is terminated without cause or resigns for good reason,
he is entitled to:
|
·
|
a lump sum severance payment equal to one time his base salary;
|
|
·
|
a bonus, as determined by the Compensation Committee, however the Compensation Committee may decide to grant no bonus;
|
|
·
|
automatic vesting of all unvested time-based options and equity awards and exercisability of awards for up to 12 months;
|
|
·
|
vesting of performance-based equity compensation awards in accordance with the terms of the awards, if the performance goals are satisfied, such determination to be in the sole discretion of the Compensation Committee; and
|
|
·
|
reimbursement for health care premiums under COBRA until the earliest of: (i) three months following the date of termination; (ii) the date he is no longer eligible to receive COBRA continuation coverage; or (iii) until he becomes eligible for medical insurance coverage provided by another employer.
|
Mr. Dal Poggetto may terminate his employment
for any reason upon at least 30 days prior written notice. Receipt of the termination benefits described above is contingent on
executing a general release of claims against our Company, resignation from any and all directorships and every other position
held by the executive with our Company or any of our subsidiaries, and the executive’s return to the Company of all Company
property received from or on account of the Company or any of its affiliates by him. In addition, Mr. Dal Poggetto will not be
entitled to such benefits if he does not comply with the non-competition, non-disparagement and invention assignment provisions
of his employment agreement during the term of employment or the confidentiality provisions of the employment agreement, whether
during or after the term of his employment. These provisions apply during the term of employment and for two years following termination.
Departure of Director
On October 8, 2019, Mr. Frederick Sandford
notified the Company’s Board of Directors of his resignation as a director.
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, 2019 and our audited consolidated
financial statements for the year ended March 31, 2019 included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on July 1, 2019.
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 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; the vulnerability of our Petaluma facility to extreme weather
events; our ability to manage our accounts receivable; 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
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 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 specialty pharmaceutical company
dedicated to identifying, developing and commercializing unique, differentiated therapies to millions of patients living with chronic
skin conditions. We offer early-intervention relief with virtually no side-effects or contraindications. We believe our products,
which are sold throughout the United States and internationally, have improved patient outcomes for more than nine million patients
by treating and reducing certain skin diseases including acne, atopic dermatitis, scarring, infections, itch, pain and harmful
inflammatory responses. Our vision is to be a catalyst for improved care and increased access for all patients.
Some of our key products in the United States are:
|
·
|
Celacyn®, a prescription HOCl based scar management gel clinically proven to soften and flatten raised scars while reducing redness and discoloration.
|
|
·
|
Ceramax Skin Barrier CreamTM, a prescription cream / lotion that helps manage dry itchy skin, minor skin irritations, rashes, and inflammation caused by various skin conditions.
|
|
·
|
LevicynTM, a prescription HOCl based atopic dermatitis product line clinically proven to reduce pruritus (itch) and pain associated with various dermatoses.
|
|
|
|
|
·
|
SebudermTM, 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.
|
|
|
|
|
·
|
EpicynTM, a prescription topical antimicrobial facial cleanser helps achieve clear skin and provide relief from irritation when used as part of a daily skin care regimen for patients with acute and chronic dermal lesions.
|
|
|
|
|
·
|
Acuicyn™ Eyelid and Eyelash Hygiene, a HOCl-based topical prescription product indicated to relieve itch and inflammation while helping to keep areas around the eye clean.
|
|
|
|
|
·
|
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.
|
To date, we have obtained 21 U.S. Food
and Drug Administration, or FDA, clearances permitting the sale of 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, Conformité Européenne, or CE. These
CEs cover 25 products in 48 countries with various approvals in Brazil, China, Southeast Asia, South Korea, India, Australia, New
Zealand, and the Middle East.
Business Channels
Our core market differentiation is based
on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. 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.
Our core market includes patients who suffer
from various skin diseases, including dermatoses, acne, scarring, skin-barrier and scaly skin conditions. Our secondary market
includes eye-hygiene and acute care markets. These conditions impact patients worldwide who have had to live with less than optimal
solutions or ones that come with significant side-effects. Skin conditions can have significant, multi-dimensional effects on quality
of life, including on patient’s physical, functional and emotional well-being.
We have also built on our HOCl technology
foundation by adding two complementary technology platforms: Lipogrid® Skin Barrier solutions and Exuvimax™ Skin de-scaling
solutions. Lipogrid is a lipid structural matrix of solid lipid particles and vesicles containing phospholipids, ceramides, fatty
acids and cholesterol-type stabilizers that deliver building blocks to the dermis and protect the skin. Exuvimax contains a combination
of dicaprylyl carbonate (Cetiol® Oil) and dimethicones that provide a patented formulation designed for a very effective
but safe keratolytic effect which is the shedding of the top layer of skin. Our product Loyon® is based on the Exuvimax technology
and its key benefit is to remove scale and therefore allow the topical treatments to work more effectively and faster on the underlying
condition.
Dermatology
In the United States, we sell into dermatology
markets with an in-house sales team that visits or calls dermatologists. Our dermatology products are primarily purchased by distributors,
wholesalers, and pharmacies.
Although specific customer requirements
can vary depending on applications, customers generally demand quality, innovation, affordability and clinically-supported efficacy.
We have responded to these customer demands by introducing new products that treat persistent and common dermatological afflictions,
as well as promote healing and improve results for patients opting for cosmetic dermatology procedures. 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.
We seek to extend and expand our strong
ongoing relationships with customers through new products, sales of existing products, ongoing training and support, and distribution
of skincare products. We primarily target practitioners through office visits, workshops, trade shows, webinars and trade journals.
We also market to potential patients through brochures, workshops and websites. In addition, we offer clinical forums with recognized
expert panelists to promote advanced treatment.
Eye Care and Advanced Tissue Care
Our eye care and advanced tissue care products
provide patients similar benefits to those in dermatology. We support the eye care and advanced tissue care markets with a dedicated
in-house sales force and through an inside call center. We have also entered into strategic partnerships with respected and influential
physicians and surgeons to promote our products. Our eye care products include prescription and dispensing solutions prescribed
mainly by ophthalmologists and optometrists supported by pharmacies and, in some cases, sold through wholesale networks. Our tissue
care products are primarily purchased by hospitals, physicians, nurses, and other healthcare practitioners.
Animal Health Care
Our animal healthcare products provide
similar benefits to those in human dermatology. 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, farm animal veterinarians, grocery stores and mass retailers in
the United States and Canada.
On
May 20, 2019, we sold certain animal health product rights and assets for the Asian and European markets to Petagon, Limited, an
international importer and distributor of quality pet food and products. The purchase price for the assets is $2,700,000. We agreed
that we will continue to supply products to Petagon for five years at certain agreed upon transfer prices. The sale involves certain
Asian patents and trademarks and the exclusive right to distribute animal health care products in Asia and Europe.
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 Operations
Comparison of the Three Months Ended
September 30, 2019 and 2018
Total revenues for the three months ended
September 30, 2019 of $4,968,000 increased by $29,000, or 1%, as compared to $4,939,000 for the three months ended September 30,
2018. Product revenues for the three months ended September 30, 2019 of $4,712,000 increased by $77,000, or 2%, as compared to
$4,635,000 for the three months ended September 30, 2018. This increase was primarily the result of growth in product revenue of
$358,000, or 30%, in Europe and Rest of World, offset by a decrease of $219,000, or 9% in the United States, and a decrease of
product revenue of $62,000, or 6%, in Latin America.
Product revenues in the United States for
the three months ended September 30, 2019 of $2,207,000 decreased by $219,000, or 9%, as compared to $2,426,000 for the three months
ended September 30, 2018. This decrease was mostly the result of a decrease of $39,000, or 9%, in sales of our acute care products
and a decrease of $474,000, or 32%, in sales of our dermatology products, partly offset by an increase of $294,000, or 59%, increase
in sales of our animal health care products.
As a result of the asset purchase agreement
and arrangement we entered into on October 27, 2016 with Invekra, we will continue to supply Invekra with product at a reduced
price until they set up their manufacturing facility. We expect our revenues in Latin America will decrease significantly once
Invekra has set up their manufacturing facility. During the three months ended September 30, 2019, we reported $935,000 of Latin
America product revenue related to Invekra as compared to $749,000 during the three months ended September 30, 2018.
Product revenue in Europe and the Rest
of the World for the three months ended September 30, 2019 of $1,570,000 increased by $358,000, or 30%, as compared to $1,212,000
for the three months ended September 30, 2018. This increase was mostly the result of increases in Europe and India, partly offset
by decreases in the Middle East, Far East and New Zealand.
The following table shows our product revenues
by geographic region:
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
2,207,000
|
|
|
$
|
2,426,000
|
|
|
$
|
(219,000
|
)
|
|
|
(9)%
|
|
Latin America
|
|
|
935,000
|
|
|
|
997,000
|
|
|
|
(62,000
|
)
|
|
|
(6)%
|
|
Europe and Rest of the World
|
|
|
1,570,000
|
|
|
|
1,212,000
|
|
|
|
358,000
|
|
|
|
30%
|
|
Total
|
|
$
|
4,712,000
|
|
|
$
|
4,635,000
|
|
|
$
|
77,000
|
|
|
|
2%
|
|
Service revenues for the three months ended
September 30, 2019 of $256,000 decreased by $48,000, or 16%, when compared to $304,000 in the prior period. The decrease was primarily
the result of fewer laboratory tests and services in the United States.
Gross Profit
For the three months ended September 30,
2019, we reported total revenues of $4,968,000 and total cost of revenues of $2,674,000, resulting in total gross profit of $2,294,000
or 46% of total revenues, compared to a gross profit of $2,427,000 or 49% of total revenues, for the same period in the prior year.
For the three months ended September 30,
2019, we reported product revenues of $4,712,000 and cost of product revenues of $2,551,000, resulting in product gross profit
of $2,161,000, or 46% of product revenues, compared to product gross profit of $2,322,000, or 50% of product revenues, for the
same period in the prior year. The decrease in gross profit as a percentage of product revenues was primarily due to an increase
in rebate costs in the current period and product mix.
For the three months ended September 30,
2019, we reported service revenues of $256,000 and cost of service revenues of $123,000, resulting in service gross profit of $133,000,
or 52% of service revenues, compared to service gross profit of $105,000, or 35% of service revenues, for the same period in the
prior year.
Research and Development Expense
Research and development expenses for the
three months ended September 30, 2019 of $270,000 decreased by $120,000, or 31%, as compared to $390,000 for the three months ended
September 30, 2018. The decrease is primarily the result of lower salaries and benefits in the current period.
Selling, General and Administrative
Expense
Selling, general and administrative expenses
for the three months ended September 30, 2019 of $3,226,000 decreased by $1,463,000, or 31%, when compared to $4,689,000 for the
three months ended September 30, 2018. The decrease in selling, general and administrative expenses was primarily the result of
certain cost savings measures implemented during fiscal year 2019, including a reduction in headcount.
Interest Expense
Interest expense for the three months ended
September 30, 2019 of $2,000 decreased by $5,000 when compared to $7,000 for the three months ended September 30, 2018. The decrease
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the three months ended
September 30, 2019 of $42,000 decreased by $5,000 when compared to $47,000 for the three months ended September 30, 2018. The decrease
in interest income primarily relates to a discount on deferred revenue from our agreement with Invekra.
Other Expense
Other expense for the three months ended
September 30, 2019 of $41,000 decreased by $167,000, or 80% when compared to other expense of $208,000 for the three months ended
September 30, 2018. The decrease in other expense relates primarily to fluctuations in foreign exchange and state franchise taxes.
Net Loss
Net Loss for the three months ended September
30, 2019 of $1,203,000 decreased by $1,617,000, or 57%, when compared to net loss of $2,820,000 for the three months ended September
30, 2018. The decrease in net loss is due to a decrease in operating expenses of $1,583,000, or 31%, as a result of certain cost
savings measures implemented during fiscal year 2019 including a reduction in headcount.
Comparison of the Six Months Ended September
30, 2019 and 2018
Total revenues for the six months ended
September 30, 2019 of $9,679,000 increased by $371,000, or 4%, as compared to $9,308,000 for the six months ended September 30,
2018. Product revenues for the six months ended September 30, 2019 of $9,097,000 increased by $367,000, or 4%, as compared to $8,730,000
for the six months ended September 30, 2018. This increase was primarily the result of growth in product revenue of $557,000, or
25%, in Europe and the Rest of the World, an increase of product revenue of $297,000, or 7%, in the United States and a decrease
of product revenue of $487,000 or 23% in Latin America.
Product revenues in the United States for
the six months ended September 30, 2019 of $4,694,000 increased by $297,000, or 7%, as compared to $4,397,000 for the six months
ended September 30, 2018. This increase was mostly the result of a $186,000, or 21%, increase in sales of our animal health care
products, an increase of $34,000, or 4%, in sales of our acute care products and an increase of $77,000 or 3%, in sales of our
dermatology products.
As a result of the asset purchase agreement
and arrangement we entered into on October 27, 2016 with Invekra, we will continue to supply Invekra with product at a reduced
price until they set up their manufacturing facility. We expect our revenues in Latin America will decrease significantly once
Invekra has set up their manufacturing facility. During the six months ended September 30, 2019, we reported $1,589,000 of Latin
America product revenue related to Invekra as compared to $1,828,000 during the six months ended September 30, 2018.
Product revenue in Europe and the Rest
of the World for the six months ended September 30, 2019 of $2,814,000 increased by $557,000, or 25%, as compared to $2,257,000
for the six months ended September 30, 2018. This increase was mostly the result of increased revenues in Europe of $198,000, or
21%, due to the addition of new customers and combined increases of $274,000, or 41%, in China and Singapore.
The following table shows our product revenues
by geographic region:
|
|
Six Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
United States
|
|
$
|
4,694,000
|
|
|
$
|
4,397,000
|
|
|
$
|
297,000
|
|
|
|
7%
|
|
Latin America
|
|
|
1,589,000
|
|
|
|
2,076,000
|
|
|
|
(487,000
|
)
|
|
|
(23)%
|
|
Europe and Rest of the World
|
|
|
2,814,000
|
|
|
|
2,257,000
|
|
|
|
557,000
|
|
|
|
25%
|
|
Total
|
|
$
|
9,097,000
|
|
|
$
|
8,730,000
|
|
|
$
|
367,000
|
|
|
|
4%
|
|
Service revenues for the six months ended
September 30, 2019 of $582,000 increased by $4,000, or 1%, when compared to $578,000 in the prior period. The increase was primarily
the result of higher laboratory tests and services in the United States and Invekra serive fees in Mexico.
Gross Profit
For the six months ended September 30,
2019, we reported total revenues of $9,679,000 and total cost of revenues of $5,018,000, resulting in total gross profit of $4,661,000
or 48% of total revenues, compared to a gross profit of $4,158,000 or 45% of total revenues, for the same period in the prior year.
For the six months ended September 30,
2019, we reported product revenues of $9,097,000 and cost of product revenues of $4,753,000, resulting in product gross profit
of $4,344,000, or 48% of product revenues, compared to product gross profit of $3,993,000, or 46% of product revenues, for the
same period in the prior year.
For the six months ended September 30,
2019, we reported service revenues of $582,000 and cost of service revenues of $265,000, resulting in service gross profit of $317,000,
or 54% of service revenues, compared to service gross profit of $165,000, or 29% of service revenues, for the same period in the
prior year.
Research and Development Expense
Research and development expenses for the
six months ended September 30, 2019 of $608,000 decreased by $132,000 or 18% as compared to $740,000 for the six months ended September
30, 2018. The decrease is primarily the result of lower salaries and benefits in the current period.
Selling, General and Administrative
Expense
Selling, general and administrative expenses
for the six months ended September 30, 2019 of $6,985,000 decreased by $2,637,000, or 27%, when compared to $9,622,000 for the
six months ended September 30, 2018. The decrease in selling, general and administrative expenses was primarily the result of certain
cost savings measures implemented during fiscal year 2019 including a reduction in headcount.
Interest Expense
Interest expense for the six months ended
September 30, 2019 of $12,000 decreased by $7,000 when compared to $19,000 for the six months ended September 30, 2018. The decrease
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the six months ended
September 30, 2019 of $84,000 decreased by $18,000 when compared to $102,000 for the six months ended September 30, 2018. The decrease
in interest income primarily relates to a discount on deferred revenue from our agreement with Invekra.
Gain on Sale of Petagon Assets
For the nine months ended September 30,
2019, we reported income related to the sale of certain assets to Petagon in the amount of $2,472,000.
Other Expense
Other income for the six months ended September
30, 2019 of $100,000 decreased by $57,000 when compared to other expense of $157,000 for the six months ended September 30, 2018.
The decrease in other expense relates primarily to fluctuations in foreign exchange and state franchise taxes.
Net Loss
Net loss for the six months ended September
30, 2019 of $488,000 decreased by $5,790,000, when compared to net loss of $6,278,000 for the six months ended September 30, 2018.
The decrease in net loss is due to a decrease in operating loss of $3,272,000 as a result of an increase in gross profit of $503,000
and a decrease in operating expenses of $2,769,000 primarily due to certain cost savings measures implemented during fiscal year
2019. Additionally, for the six months ended September 30, 2019, we reported income related to the sale of certain assets to Petagon
in the amount of $2,472,000.
Liquidity and Capital Resources
We reported a net loss of $488,000 for
the six months ended September 30, 2019. At September 30, 2019 and March 31, 2019, our accumulated deficit amounted to $169,785,000
and $169,238,000, respectively. We had working capital of $8,624,000 and $8,905,000 as of September 30, 2019 and March 31, 2019,
respectively.
We expect to continue incurring losses
for the foreseeable future and will 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, selling non-core
assets or other means; however, we cannot provide any assurance that new financing will 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 curtail our research and development and other business
initiatives and 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.
Sources of Liquidity
As of September 30, 2019, we had cash and
cash equivalents of $3,232,000. 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 and Petagon.
Since October 1, 2017, substantially all
of our operations have been financed through the following transactions:
|
•
|
net proceeds of $1,925,000 received from the sale of common stock through our At Market Issuance Sales Agreement dated December 8, 2017;
|
|
•
|
net proceeds of $4,500,000 received from the sale of common stock through a registered direct offering which closed on March 6, 2018;
|
|
•
|
net proceeds of $4,743,000 received from the sale of common stock and preferred stock units through a public offering which closed on November 21, 2018 and;
|
|
•
|
proceeds of $2,700,000 received from the sale of certain assets to Petagon.
|
Cash Flows
As of September 30, 2019, we had cash and
cash equivalents of $3,232,000, compared to $3,689,000 as of March 31, 2019.
Net cash used in operating activities during
the six months ended September 30, 2019 was $160,000, primarily due to our net loss of $488,000 offset by non-cash stock compensation
of $425,000 in the period. Additionally, we had an increase in accounts payable of $1,052,000 and a decrease in accounts receivable
of $1,283,000.
Net cash used in operating activities during
the six months ended September 30, 2018 was $6,607,000, primarily due to our net loss of $6,278,000 offset by non-cash stock compensation
of $932,000 in the period. Additionally, we had an increase in accounts receivable of $1,456,000 related an increase in sales.
Net cash used in investing activities was
$69,000 for six months ended September 30, 2019, primarily related to the purchase of equipment.
Net cash used in investing activities was
$95,000 for six months ended September 30, 2018, primarily related to the purchase of equipment.
Net cash used by financing activities was
$241,000 for the six months ended September 30, 2019 related to principal payments on debt and capital leases.
Net cash provided by financing activities
was $675,000 for the six months ended September 30, 2018 related to net proceeds from the sale of common stock of $957,000 offset
by principal payments on debt and capital leases of $282,000.
Material Trends and Uncertainties
Consistent with other pharmaceutical companies
in the United States, we experience seasonal fluctuations in the first quarter of each year, or our fourth fiscal quarter. This
decrease in sales of pharmaceutical products is due to patients facing the need to satisfy health insurance deductibles which are
reset at the beginning of each year and adjusting to changing copays.
Healthcare providers and insurers heavily
influence the price patients pay for our products. Generally, insurers cover a lower percentage of our products compared to other
medical products making our products seem relatively more expensive than other medical care. As a result, to remain competitive,
we offer rebates on our products directly to patients. Most patients use these rebates to make our products more affordable. While
we believe these rebates are necessary for many patients to buy our products and without them our revenues would likely decline,
the impact of rebates on our bottom line has been significant. For example, in the six months ended September 30, 2019, dermatology
rebates amounted to $1,742,000.
We continue to work with healthcare providers,
insurers, third-party payors, pharmacies and others to manage pricing of our products to the consumer and to reduce the impact
of rebates on our overall revenue. However, there is no guarantee we will be successful in reducing patient rebate use. Additionally,
the legal landscape in healthcare is constantly changing. Adoption of new legislation at the federal or state level could further
affect demand for, or pricing of, our products. For example, we face uncertainties due to federal legislative and administrative
efforts to repeal, substantially modify or invalidate some or all of the provisions of the Affordable Care Act, or ACA, which could
leave more patients without insurance coverage which, in turn, could reduce the price patients are willing to pay for our products
if they must bear the entire cost.
During the three and six months ended September
30, 2019, revenue from sales to our Latin America partner amounted to approximately 18% and 16%, respectively, of our total revenue.
We will continue to supply products at a reduced price from list prices to Invekra pursuant to our contractual obligations for
a transition period until, at the latest, October 27, 2020, while Invekra builds its own manufacturing lines. However, we expect
that our future revenues from Latin American sales will be substantially reduced.
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.