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 ofJune 30, 2022 and our audited consolidated financial statements for the year endedMarch 31, 2022 included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onJuly 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 theU.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 outsidethe 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 notsting or irritate skin and oxygenates the cells in the area treated, assisting the body in its natural healing process. 17 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 theU.S. and internationally. In international markets, we ship products to 54 countries. Our core strategy is to work with partners both inthe United States and around the world to market and distribute our products. In some cases, we market and sell our own products. DermatologySonoma 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. Inthe United States , we partner withEMC 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 withEMC Pharma, we manufacture products for EMC Pharma and EMC Pharma markets, sells and distributes them to patients and customers. OnSeptember 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 andU.S. -based distributors. We sell dermatology products inEurope ,Asia , andBrazil 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. 18 Inthe 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 inthe United States inFebruary 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. InJune 2022 , Microcyn OTC received the Natural Personal Care Product certification from theNational Products Association . InMarch 2021 , we received approval to market and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation inFrance ,Germany andPortugal . 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. Inthe United States , our partner EMC Pharma is selling our prescription-based eye care product through its distribution network. OnSeptember 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. OnMay 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™ inItaly ,Germany ,Spain ,Portugal ,France , and theUnited 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 ofAsia , 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
19
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. InNew Zealand andAustralia , our partnerTe 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 ofAsia this year. OnJanuary 18, 2022 , we partnered withAnlicare International to seek regulatory clearances for our dental and oral products inChina andMacau . 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 inEurope . InNew Zealand andAustralia , 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 theU.S. andCanada , we partnered withManna 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, inthe United States andCanada , such as Chewy.com, PetSmart, Tractor Supply,Cabela's , PetExpress, andBass Pro Shops . OnAugust 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 grantedDV Medical Supply Inc. the non-exclusive right to distribute and sell MicrocynVS products in veterinarian clinics and practices throughoutthe United States . For the Asian and European markets, onMay 20, 2019 , we partnered withPetagon, 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. OnAugust 3, 2020 , Petagon received a license fromthe 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 inChina . 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 partnerMicroSafe 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. InMay 2020 , Nanocyn® Disinfectant & Sanitizer, received approval to be entered into theAustralian Register of Therapeutic Goods, or ARTG, as well as inCanada , 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 inAustralia . 20
Through our partner MicroSafe Group DMCC,
OnJuly 31, 2021 , we granted MicroSafe the non-exclusive right to sell and distribute Nanocyn inthe United States provided that MicroSafe secureU.S. EPA approval. In April of 2022, MicroSafe secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold inthe United States as a surface disinfectant, and it was subsequently added to theEPA's list N for use against COVID-19. InJune 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 inEurope , theMiddle East andAustralia . 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
Revenue
The following table shows our consolidated total revenue and revenue by
geographic region for the three months ended
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 inUnited States revenues for the three months endedJune 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
The increase inEurope and Rest of World revenue was primarily the result of an increase in orders from our distribution partners inEurope andAsia . 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. 21
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics are as follows:
Three Months endedJune 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 inMexico tothe United States andEurope .
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
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 endedJune 30, 2022 as compared to the previous year but expenses but were down 4% as a percentage of revenue when comparing the quarter endedJune 30, 2022 to the quarter endedJune 30, 2021 . 22
Interest Income (Expense), net
Interest Income (Expense), net was zero for the three months ended
Other Expense (Income), net
Other expense for the three months endedJune 30, 2022 of$67,000 decreased by$126,000 when compared to other expense of$193,000 for the three months endedJune 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 EndedJune 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
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. 23 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 theU.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 ofJune 30, 2022 , we had cash and cash equivalents of$5,586,000 . Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various loans and the sale of certain assets to Invekra, Petagon,Microsafe and Infinity Labs . Cash Flows
The following table presents a summary of our consolidated cash flows for
operating, investing and financing activities for the three months ended
Three Months endedJune 30 , (In thousands) 2022
2021
Net cash provided by (used in): Operating activities$ (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
Net cash used by operating activities during the three months endedJune 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 endedJune 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
24
Net cash used in investing activities was
Net cash used in financing activities was
Net cash used in financing activities was
Material Trends and Uncertainties
We are exposed to risk from decline in foreign currency for both the Euro and the Mexico Peso versus theU.S. dollar. Most recently there has been a sharp decline in the Euro versus theU.S. dollar which has impacted our financial results. As we have previously discussed in our annual report on Form 10-K filed with theSEC onJuly 13, 2022 , we face a substantialMexico 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
Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe 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. 25
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