|
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,
|
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,048
|
|
|
$
|
10,066
|
|
|
Accounts receivable, net
|
|
|
2,971
|
|
|
|
1,537
|
|
|
Inventories
|
|
|
2,953
|
|
|
|
2,865
|
|
|
Prepaid expenses and other current assets
|
|
|
1,464
|
|
|
|
1,547
|
|
|
Current portion of deferred consideration, net of discount
|
|
|
232
|
|
|
|
239
|
|
|
Total current assets
|
|
|
11,668
|
|
|
|
16,254
|
|
|
Property and equipment, net
|
|
|
935
|
|
|
|
1,136
|
|
|
Deferred consideration, net of discount, less current portion
|
|
|
1,215
|
|
|
|
1,322
|
|
|
Other assets
|
|
|
530
|
|
|
|
494
|
|
|
Total assets
|
|
$
|
14,348
|
|
|
$
|
19,206
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,362
|
|
|
$
|
1,272
|
|
|
Accrued expenses and other current liabilities
|
|
|
1,241
|
|
|
|
1,406
|
|
|
Deferred revenue
|
|
|
186
|
|
|
|
147
|
|
|
Deferred revenue Invekra
|
|
|
57
|
|
|
|
59
|
|
|
Current portion of long-term debt
|
|
|
74
|
|
|
|
230
|
|
|
Current portion of capital leases
|
|
|
157
|
|
|
|
147
|
|
|
Total current liabilities
|
|
|
3,077
|
|
|
|
3,261
|
|
|
Long-term deferred revenue
|
|
|
399
|
|
|
|
443
|
|
|
Long-term debt, less current portion
|
|
|
25
|
|
|
|
32
|
|
|
Long-term capital leases, less current portion
|
|
|
62
|
|
|
|
144
|
|
|
Total liabilities
|
|
|
3,563
|
|
|
|
3,880
|
|
|
Commitments and Contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized, none issued and outstanding at September 30, 2018 and March 31, 2018 respectively
|
|
|
–
|
|
|
|
–
|
|
|
Common stock, $0.0001 par value; 24,000,000 and 12,000,000 shares authorized at September 30, 2018 and March 31, 2018, respectively, 6,479,633 and 6,171,736 shares issued and outstanding at September 30, 2018 and March 31, 2018, respectively (Note 6)
|
|
|
1
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
178,629
|
|
|
|
176,740
|
|
|
Accumulated deficit
|
|
|
(163,718
|
)
|
|
|
(157,440
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(4,127
|
)
|
|
|
(3,975
|
)
|
|
Total stockholders’ equity
|
|
|
10,785
|
|
|
|
15,326
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
14,348
|
|
|
$
|
19,206
|
|
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,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,635
|
|
|
$
|
4,144
|
|
|
$
|
8,730
|
|
|
$
|
7,747
|
|
|
Service
|
|
|
304
|
|
|
|
181
|
|
|
|
578
|
|
|
|
413
|
|
|
Total revenues
|
|
|
4,939
|
|
|
|
4,325
|
|
|
|
9,308
|
|
|
|
8,160
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
2,313
|
|
|
|
2,308
|
|
|
|
4,737
|
|
|
|
4,221
|
|
|
Service
|
|
|
199
|
|
|
|
169
|
|
|
|
413
|
|
|
|
329
|
|
|
Total cost of revenues
|
|
|
2,512
|
|
|
|
2,477
|
|
|
|
5,150
|
|
|
|
4,550
|
|
|
Gross profit
|
|
|
2,427
|
|
|
|
1,848
|
|
|
|
4,158
|
|
|
|
3,610
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
390
|
|
|
|
368
|
|
|
|
740
|
|
|
|
750
|
|
|
Selling, general and administrative
|
|
|
4,689
|
|
|
|
4,337
|
|
|
|
9,622
|
|
|
|
9,100
|
|
|
Total operating expenses
|
|
|
5,079
|
|
|
|
4,705
|
|
|
|
10,362
|
|
|
|
9,850
|
|
|
Loss from operations
|
|
|
(2,652
|
)
|
|
|
(2,857
|
)
|
|
|
(6,204
|
)
|
|
|
(6,240
|
)
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(10
|
)
|
|
|
(19
|
)
|
|
|
(20
|
)
|
|
Interest income
|
|
|
47
|
|
|
|
18
|
|
|
|
102
|
|
|
|
71
|
|
|
Other expense
|
|
|
(208
|
)
|
|
|
(21
|
)
|
|
|
(157
|
)
|
|
|
(189
|
)
|
|
Net loss
|
|
|
(2,820
|
)
|
|
|
(2,870
|
)
|
|
|
(6,278
|
)
|
|
|
(6,378
|
)
|
|
Net loss per share: basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(1.48
|
)
|
|
Weighted-average number of shares used in per common share calculations: basic and diluted
|
|
|
6,465
|
|
|
|
4,313
|
|
|
|
6,353
|
|
|
|
4,303
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,820
|
)
|
|
$
|
(2,870
|
)
|
|
$
|
(6,278
|
)
|
|
$
|
(6,378
|
)
|
|
Foreign currency translation adjustments
|
|
|
350
|
|
|
|
(45
|
)
|
|
|
(152
|
)
|
|
|
155
|
|
|
Comprehensive loss
|
|
$
|
(2,470
|
)
|
|
$
|
(2,915
|
)
|
|
$
|
(6,430
|
)
|
|
$
|
(6,223
|
)
|
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,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,278
|
)
|
|
$
|
(6,378
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
238
|
|
|
|
241
|
|
|
Stock-based compensation
|
|
|
932
|
|
|
|
900
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,456
|
)
|
|
|
(886
|
)
|
|
Inventories
|
|
|
(160
|
)
|
|
|
(310
|
)
|
|
Prepaid expenses and other current assets
|
|
|
169
|
|
|
|
(681
|
)
|
|
Accounts payable
|
|
|
94
|
|
|
|
10
|
|
|
Accrued expenses and other current liabilities
|
|
|
(147
|
)
|
|
|
34
|
|
|
Deferred revenue
|
|
|
1
|
|
|
|
(163
|
)
|
|
Net cash used in operating activities
|
|
|
(6,607
|
)
|
|
|
(7,233
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(57
|
)
|
|
|
(162
|
)
|
|
Deposits
|
|
|
(38
|
)
|
|
|
(14
|
)
|
|
Net cash used in investing activities
|
|
|
(95
|
)
|
|
|
(176
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
957
|
|
|
|
–
|
|
|
Proceeds from exercise of common stock purchase warrants
|
|
|
–
|
|
|
|
52
|
|
|
Principal payments on capital leases
|
|
|
(72
|
)
|
|
|
(64
|
)
|
|
Principal payments on long-term debt
|
|
|
(210
|
)
|
|
|
(80
|
)
|
|
Net provided by (used in) financing activities
|
|
|
675
|
|
|
|
(92
|
)
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
9
|
|
|
|
23
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(6,018
|
)
|
|
|
(7,478
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
10,066
|
|
|
|
17,461
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,048
|
|
|
$
|
9,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
19
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash operating and financing activities:
|
|
|
|
|
|
|
|
|
|
Automobiles financed using capital leases
|
|
$
|
–
|
|
|
$
|
180
|
|
The accompanying footnotes are an integral
part of these condensed consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
Note 1.
|
Organization and Recent Developments
|
Organization
Sonoma Pharmaceuticals, Inc. (the “Company”)
was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of
Delaware in December 2006. The Company’s principal office is located in Petaluma, California. The Company is a specialty
pharmaceutical company dedicated to identifying, developing and commercializing unique, differentiated therapies to 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, 2018 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, 2018, the condensed consolidated statements of comprehensive loss for the three and six months ended
September 30, 2018 and 2017 and the cash flows for the six months ended September 30, 2018 and 2017 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, 2018 are not necessarily indicative of results to be expected for the year ending March 31, 2019
or for any future interim period. The condensed consolidated balance sheet at March 31, 2018 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, 2018,
and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 26, 2018.
|
Note 2.
|
Liquidity and Financial Condition
|
The Company reported a net loss of $6,278,000
for the six months ended September 30, 2018. At September 30, 2018 and March 31, 2018, the Company’s accumulated deficit
amounted to $163,718,000 and $157,440,000, respectively. The Company had working capital of $8,591,000 and $12,993,000 as of September
30, 2018 and March 31, 2018, respectively.
On December 8, 2017, the Company entered
into an At Market Issuance Sales Agreement, with B. Riley FBR, Inc. under which the Company may issue and sell shares of common
stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley acting as its sales agent. The
Company will pay B. Riley a commission rate equal to 3.0% of the gross proceeds from the sale of any shares of common stock sold
through B. Riley as agent. For the six months ended September 30, 2018, the Company sold 267,394 shares of common stock for gross
proceeds of $999,000 and net proceeds of $957,000 after deducting commissions and other offering expenses.
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 is critical to the realization
of its business plan and the future operations of the Company. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments
that may be necessary should the Company be unable to continue as a going concern.
|
Note 3.
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities
at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs
related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s
deferred tax assets, valuation of equity and derivative instruments, 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, 2018 and 2017 excludes the potentially dilutive securities summarized in
the table below because their inclusion would be anti-dilutive.
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Restricted stock units
|
|
|
40,000
|
|
|
|
57,000
|
|
|
Options to purchase common stock
|
|
|
1,516,000
|
|
|
|
1,393,000
|
|
|
Warrants to purchase common stock
|
|
|
1,375,000
|
|
|
|
1,332,000
|
|
|
|
|
|
2,931,000
|
|
|
|
2,782,000
|
|
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 through 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 the contracts with a customer. For each contract, the
Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In
determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net
consideration to which it expects to be entitled.
For all of its sales to non-consignment
distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e. when 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 and 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 depending on whether a patient is covered by insurance or is not covered by insurance
.
In addition, the Company may incur a revenue deduction related to the use of the Company’s rebate program.
Sales to stocking distributors are made
under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products
held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods
and services in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from
on its own and is separately identifiable from any other promises within the contract. Given that the distinct service is not substantially
the same as other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance
obligation.
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,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Human Skin Care
|
|
$
|
4,074,000
|
|
|
$
|
3,775,000
|
|
|
$
|
7,628,000
|
|
|
$
|
6,939,000
|
|
|
Animal Skin Care
|
|
|
561,000
|
|
|
|
369,000
|
|
|
|
1,102,000
|
|
|
|
808,000
|
|
|
|
|
|
4,635,000
|
|
|
|
4,144,000
|
|
|
|
8,730,000
|
|
|
|
7,747,000
|
|
|
Service
|
|
|
304,000
|
|
|
|
181,000
|
|
|
|
578,000
|
|
|
|
413,000
|
|
|
Total
|
|
$
|
4,939,000
|
|
|
$
|
4,325,000
|
|
|
$
|
9,308,000
|
|
|
$
|
8,160,000
|
|
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 $26,000 and $17,000 at September
30, 2018 and March 31, 2018, respectively. Additionally, at September 30, 2018 and March 31, 2018 the Company has allowances of
$1,103,000 and $1,275,000, 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 $128,000 and
$111,000 at September 30, 2018 and March 31, 2018, 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
Financial Instruments
On April 1, 2018, the Company adopted ASU
2016-01
Financial Instruments-Overall
, which addressed certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. The Company has determined there was no material impact on the Company’s consolidated
financial position and results of operations upon adoption of this topic.
Statement of Cash Flows
On April 1, 2018, the Company adopted ASU
No. 2016-15,
Statement of Cash Flows (Topic 230)
. This amendment provides guidance on the presentation and classification
of specific cash flow items to improve consistency within the statement of cash flows. The Company has determined there was no
material impact on the Company’s consolidated financial position and results of operations upon adoption of this topic.
On April 1, 2018, the Company adopted ASU
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
that changes the presentation of restricted cash and cash
equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The
Company has determined there was no material impact on the Company’s consolidated financial position and results of operations
upon adoption of this topic.
Business Combinations
On April 1, 2018, the Company
adopted ASU 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The amendments in this
Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a
business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The Company has
determined there was no material impact on the Company’s consolidated financial position and results of operations upon
adoption of this topic.
Stock Compensation
On April 1, 2018, the Company adopted ASU
No. 2017-09,
Compensation-Stock Compensation
(Topic 718):
Scope of Modification Accounting
, clarifying when a change
to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification
accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after
a change to the terms and conditions of the award. The Company has determined there was no material impact on the Company’s
consolidated financial position and results of operations upon adoption of this topic.
Recent Accounting Standards
Leases
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02,
Leases (Topic 842)
. This ASU will require lessees to recognize
a right of use asset and lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The amendment
will be effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal
years. In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases
and ASU No. 2018-11,
Leases - Targeted Improvements.
ASU 2018-10 provides certain amendments
that affect narrow aspects of the guidance issued in ASU 2016-02.
ASU No. 2018-11 allows entities the option to prospectively
apply the new lease standard at the adoption date instead of recording the cumulative impact of all comparative reporting periods
presented within retained earnings. The Company is currently evaluating the impact ASU 2016-02, ASU 2018-10 and ASU 2018-11 will
have on its consolidated financial position, results of operations or financial statement disclosure.
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 provides financial statement preparers with an option to
reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the
effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the “Tax Act”)
(or portion thereof) is recorded. 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 Company does not believe that the adoption
of this guidance will have a material impact on the Company's consolidated financial statements due to the presence of a full valuation
allowance. However, the Company is in the process of evaluating the impact of this new guidance on the Company's consolidated financial
statements and disclosures.
Stock Compensation
In June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. The guidance
in this ASU expands the scope of ASC Topic 718 to include all share-based payment arrangements related to the acquisition of goods
and services from both nonemployees and employees. This amendment will be effective for annual and interim periods beginning after
December 31, 2018. The Company is currently evaluating the impact ASU 2018-07 will have on its consolidated financial position,
results of operations or financial statement disclosure.
Accounting standards that have been issued
or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.
|
Note 4.
|
Condensed Consolidated Balance Sheets
|
Inventories
Inventories consist of the following:
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
1,811,000
|
|
|
$
|
1,619,000
|
|
|
Finished goods
|
|
|
1,142,000
|
|
|
|
1,246,000
|
|
|
|
|
$
|
2,953,000
|
|
|
$
|
2,865,000
|
|
|
Note 5.
|
Commitments and Contingencies
|
Legal Matters
On March 17, 2017, the Company filed a
lawsuit against Collidion, Inc. and several of its former employees, officers and directors, alleging the misappropriation of its
confidential, proprietary and trade secret information as well as breach of fiduciary duties in the United States District Court
for the Northern District of California, San Francisco Division. During the three months ended September 30, 2018, the Company
settled the lawsuit to the satisfaction of all parties. There has been no finding of wrongdoing against any party.
Aside from the lawsuit described above,
on occasion, 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, 2018, the Company had
employment agreements in place with five of its key executives. The agreements provide, among other things, for the payment of
nine to twenty-four months of severance compensation for terminations under certain circumstances. With respect to these agreements,
at September 30, 2018, aggregated annual salaries would be $1,167,000 and potential severance payments to these key executives
would be $1,417,000 if triggered.
|
Note 6.
|
Stockholders’ Equity
|
Authorized Capital
At the annual meeting, the Company’s
stockholders approved an amendment to its Restated Certificate of Incorporation, as amended, to increase the number of authorized
common stock, $0.0001 par value per share, from 12,000,000 to a total of 24,000,000 shares. Effective September 13, 2018, the Company
filed a certificate of amendment with the Secretary of State of the State of Delaware in order to effect an increase of the total
number of shares of common stock authorized for issuance to 24,000,000. Additionally, the Company is authorized to issue 714,286
shares of convertible preferred stock with a par value of $0.0001 per share.
Common Stock Issued to Services Providers
The Company entered into an agreement with
Actual, Inc., for certain marketing and branding consulting services. In connection with the agreement, the Company pays a portion
of the service fees in common stock. On July 27, 2017, the Company issued 2,570 shares of restricted common stock valued at $6.74
per share and on August 22, 2017, the Company issued 3,133 shares of restricted common stock valued at $5.53 per share. The aggregate
fair market value of the common stock issued was $35,000. The Company has determined that the fair value of the common stock was
more readily determinable than the fair value of the services rendered. On July 12, 2018, the Company issued 17,741 shares of restricted
common stock valued at $2.48 per share. The aggregate fair market value of the common stock issued was $44,000. The Company has
determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered.
Accordingly, during the three and six months ended September 30, 2017, the Company recorded $35,000 of expense related to common
stock issued. During the three and six months ended September 30, 2018, the Company recorded $44,000 of expense related to common
stock issued. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated
statement of comprehensive loss.
The Company entered into an agreement with
The Benchmark Company, LLC for certain finance related consulting services. In connection with the agreement, the Company pays
a portion of the service fees in common stock. On July 31, 2018, the Company issued 6,881 shares of restricted common stock valued
at $2.18 per share. The aggregate fair market value of the common stock issued was $15,000. The Company has determined that the
fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, during
the three and six months ended September 30, 2018, the Company recorded $15,000 of expense related to common stock issued. The
expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of comprehensive
loss.
|
Note 7.
|
Stock-Based Compensation
|
The weighted average grant date fair values
of options granted during the three months ended September 30, 2018 and 2017 was $1.96 and $5.58, respectively, and the weighted
average grant date fair values of options granted during the six months ended September 30, 2018 and 2017 was $2.20 and $6.01,
respectively.
Share-based awards compensation expense is as follows:
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Cost of service revenue
|
|
$
|
30,000
|
|
|
$
|
49,000
|
|
|
$
|
65,000
|
|
|
$
|
93,000
|
|
|
Research and development
|
|
|
29,000
|
|
|
|
45,000
|
|
|
|
61,000
|
|
|
|
90,000
|
|
|
Selling, general and administrative
|
|
|
467,000
|
|
|
|
333,000
|
|
|
|
747,000
|
|
|
|
682,000
|
|
|
Total stock-based compensation
|
|
$
|
526,000
|
|
|
$
|
427,000
|
|
|
$
|
873,000
|
|
|
$
|
865,000
|
|
At September 30, 2018, there were unrecognized
compensation costs of $1,450,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 1.56 years. At September 30, 2017, there were unrecognized compensation costs of $2,999,000 related to stock options
which is expected to be recognized over a weighted-average amortization period of 2.43 years.
At September 30, 2018, there were unrecognized
compensation costs of $111,000 related to restricted stock which is expected to be recognized over a weighted-average amortization
period of 1.53 years. At September 30, 2017, there were unrecognized compensation costs of $239,000 related to restricted
stock which is expected to be recognized over a weighted-average amortization period of 1.69 years.
No income tax benefit has been recognized
relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.
Stock-Based Award Activity
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, 2018
|
|
|
1,393,000
|
|
|
$
|
12.70
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
159,000
|
|
|
|
2.64
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(33,000
|
)
|
|
|
6.70
|
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(3,000
|
)
|
|
|
18.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,516,000
|
|
|
$
|
11.76
|
|
|
|
7.02
|
|
|
$
|
–
|
|
|
Exercisable at September 30, 2018
|
|
|
1,109,000
|
|
|
$
|
13.75
|
|
|
|
6.48
|
|
|
$
|
–
|
|
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 $1.46 per share at September 30, 2018.
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, 2018
|
|
|
32,000
|
|
|
$
|
6.46
|
|
|
Restricted stock awards granted
|
|
|
28,000
|
|
|
|
1.90
|
|
|
Restricted stock awards forfeited
|
|
|
(4,000
|
)
|
|
|
6.97
|
|
|
Restricted stock awards vested
|
|
|
(16,000
|
)
|
|
|
5.50
|
|
|
Unvested restricted stock awards outstanding at September 30, 2018
|
|
|
40,000
|
|
|
$
|
3.71
|
|
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.
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, 2018. 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, 2018. 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.
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act reduces the federal corporate income tax
rate from 35% to 21%, effective January 1, 2018, which the Company expects will positively impact its future effective tax rate
and after-tax earnings in the United States. The Company recognized a decrease related to its federal deferred tax assets and deferred
tax liabilities, before the valuation allowance. Because a change in the valuation allowance completely offsets the change in deferred
taxes, there was no impact on the consolidated financial statements related to the rate change.
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 will continue to
analyze the effects of the Tax Act and any additional impacts of the Tax Act will be recorded as they are identified during the
measurement period.
Also on December 22, 2017, the SEC staff
issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”),
which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, both of the tax benefits recorded
by the Company for the fiscal year ended March 31, 2018 represent provisional amounts based on its current best estimates. Any
adjustments made to those provisional amounts will be included in income from operations and recorded as an adjustment to tax expense
through the fiscal year ending March 31, 2019. The recorded, provisional amounts reflect assumptions made based upon our current
interpretation of the Tax Act, and may change as the Company receives additional clarification and guidance in the form of technical
corrections to the Tax Act or regulations issued by the U.S. Treasury.
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, 2018. The unrecognized tax benefits may increase or change during the next year for items that arise in the
ordinary course of business.
|
Note 9.
|
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,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
United States
|
|
$
|
2,426,000
|
|
|
$
|
2,268,000
|
|
|
$
|
4,397,000
|
|
|
$
|
4,127,000
|
|
|
Latin America
|
|
|
997,000
|
|
|
|
754,000
|
|
|
|
2,076,000
|
|
|
|
1,323,000
|
|
|
Europe and Rest of the World
|
|
|
1,212,000
|
|
|
|
1,122,000
|
|
|
|
2,257,000
|
|
|
|
2,297,000
|
|
|
Total
|
|
$
|
4,635,000
|
|
|
$
|
4,144,000
|
|
|
$
|
8,730,000
|
|
|
$
|
7,747,000
|
|
The Company’s service revenues amounted
to $304,000 and $181,000 for the three months ended September 30, 2018 and 2017, respectively. During the three months ended September
30, 2018, the Company recorded service revenue related to technical services provided to Invekra in the amount of $14,000.
The Company’s service revenues amounted
to $578,000 and $413,000 for the six months ended September 30, 2018 and 2017, respectively. During the six months ended September
30, 2018 and 2017, the Company recorded service revenue related to technical services provided to Invekra in the amount of $28,000
and $39,000, respectively.
|
Note 10.
|
Significant Customer Concentrations
|
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 three months ended September
30, 2017, one customer represented 22% of net revenue, one customer represented 17% of net revenue, and two customers each represented
13% of net revenue.
For the six months ended September 30,
2018, one customer represented 20% of net revenue and one customer represented 13% of net revenue. For the six months ended September
30, 2017, one customer represented 20% of net revenue, one customer represented 16% of net revenue, and two customers each represented
12% of net revenue.
At September 30, 2018, one customer represented
13%, of the net accounts receivable balance. At March 31, 2018, one customer represented 36%, and one customer represented 18%
of the net accounts receivable balance.
|
Note 11.
|
Subsequent Events
|
On October 4, 2018, the Company sold 113,000 shares of common
stock, at a price of $2.39 per share, through its At Market Issuance Sales Agreement with B. Riley FBR, Inc. for gross proceeds
of $270,000. This sale exceeded the aggregate market value of the Company’s securities sold during the period of twelve
calendar months prior to the sale of one-third of the aggregate market value of its common stock held by non-affiliates, and thus,
the 113,000 shares of common stock were unregistered. The Company could be liable in the event claims or suits for
rescission are brought and successfully concluded for failure to register these securities or for acts or omissions constituting
offenses under the Securities Act, the Securities Exchange Act of 1934, or applicable state securities laws, the Company could
be liable for damages and penalties assessed by the SEC and state securities regulators.
|
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, 2018 and our audited consolidated
financial statements for the year ended March 31, 2018 included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on June 26, 2018.
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; the impact of seasonality on our sales; the progress and timing of our development programs and regulatory approvals for
our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory
standards; the progress and timing of clinical trials and physician studies; our expectations related to the use of our cash reserves;
our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability
to gain sufficient reimbursement from third-party payors; our ability to compete with other companies that are developing or selling
products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products;
the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability
to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market
and generate attractive margins; the expansion of our sales force and distribution network; the ability to attain specified revenue
goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug Administration,
or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory
agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture
sufficient amounts of our product candidates for clinical trials and products for commercialization activities; our ability to
protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability
to continue to expand our intellectual property portfolio; our expectations about the outcome of litigation and controversies with
third parties; the risk we may need to indemnify our distributors or other third parties; risks attendant with conducting a significant
portion of our business outside the United States; our ability to comply with complex federal and state fraud and abuse laws, including
state and federal anti-kickback laws; risks associated with changes to health care laws; our ability to attract and retain qualified
directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our
ability to expand to and commercialize products in markets outside the wound care market; and the impact of the Sarbanes-Oxley
Act of 2002 and any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement is based, except as required by law.
Our Business
We are a specialty pharmaceutical company
dedicated to identifying, developing and commercializing unique, differentiated therapies to millions of patients living with chronic
skin conditions. We 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 six 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:
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Celacyn®
, a prescription HOCl based scar management gel clinically proven to soften and flatten raised scars while reducing redness and discoloration.
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Ceramax Skin Barrier Cream
TM
, a prescription cream that helps manage dry itchy skin, minor skin irritations, rashes, and inflammation caused by various skin conditions.
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Mondoxyne
TM
, a prescription oral tetracycline antibiotic used for the treatment of certain bacterial infections, including acne.
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Levicyn
TM
, a prescription HOCl based atopic dermatitis product line clinically proven to reduce pruritus (itch) and pain associated with various dermatoses.
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Sebuderm
TM
, 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.
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Loyon®
, a prescription liquid
containing Cetiol® CC and medical grade dimethicone, intended to manage and relieve erythema and itching for various types
of dermatoses.
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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.
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Our key product outside the United States
is:
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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.
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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 a 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. In the future, to increase market penetration beyond marketing to core dermatologists, we are also evaluating
how our products fit into the aesthetic dermatologists and plastic surgeons practice.
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 health care products provide
similar benefits to those in human dermatology. For our animal health products, 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.
Through Manna Pro, we primarily target marketing efforts to veterinarians through trade shows and to customers through social media.
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, 2018 and 2017
Total revenues for the three months ended
September 30, 2018 of $4,939,000 increased by $614,000, or 14%, as compared to $4,325,000 for the three months ended September
30, 2017. Product revenues for the three months ended September 30, 2018 of $4,635,000 increased by $491,000, or 12%, as compared
to $4,144,000 for the three months ended September 30, 2017. This increase was primarily the result of growth in product revenue
of $158,000, or 7%, in the United States, and growth of product revenue of $243,000, or 32%, in Latin America.
Product revenues in the United States for
the three months ended September 30, 2018 of $2,427,000 increased by $159,000, or 7%, as compared to $2,268,000 for the three months
ended September 30, 2017. This increase was mostly the result of a $308,000, or 161%, increase in sales of our animal health care
products, partly offset by a decrease of $18,000, or 4%, in sales of our acute care products and a decrease of $137,000, or 8%,
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 three months ended September 30, 2018, we reported $749,000 of Latin
America product revenue related to Invekra as compared to $754,000 during the three months ended September 30, 2017. Additionally,
we reported $248,000 of Latin America product revenue related to dermatology products sold in Brazil.
Product revenue in Europe and the Rest
of the World for the three months ended September 30, 2018 of $1,212,000 increased by $90,000, or 8%, as compared to $1,122,000
for the three months ended September 30, 2017. This increase was mostly the result of increases in Europe and India, partly offset
by decreases in the Middle East, Far East and New Zealand.
The following table shows our product revenues
by geographic region:
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Three Months Ended September 30,
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2018
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2017
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$ Change
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% Change
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United States
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$
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2,426,000
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$
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2,268,000
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$
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158,000
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7%
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Latin America
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997,000
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754,000
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243,000
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32%
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Europe and Rest of the World
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1,212,000
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1,122,000
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90,000
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8%
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Total
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$
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4,635,000
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$
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4,144,000
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$
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491,000
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12%
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Service revenues for the three months ended
September 30, 2018 of $304,000 increased by $123,000, or 68%, when compared to $181,000 in the prior period. The increase was primarily
the result of higher laboratory tests and services in the United States. Additionally, during the three months ended September
30, 2018, the Company recorded service revenue related to technical services provided to Invekra in the amount of $14,000.
Gross Profit
For the three months ended September 30,
2018, we reported total revenues of $4,939,000 and total cost of revenues of $2,512,000, resulting in total gross profit of $2,427,000
or 49% of total revenues, compared to a gross profit of $1,848,000 or 43% of total revenues, for the same period in the prior year.
For the three months ended September 30,
2018, we reported product revenues of $4,635,000 and cost of product revenues of $2,313,000, resulting in product gross profit
of $2,322,000, or 50% of product revenues, compared to product gross profit of $1,836,000, or 44% of product revenues, for the
same period in the prior year. The increase in gross profit as a percentage of product revenues was primarily due to a decrease
in rebate costs in the current period.
For the three months ended September 30,
2018, we reported service revenues of $304,000 and cost of service revenues of $199,000, resulting in service gross profit of $105,000,
or 35% of service revenues, compared to service gross profit of $12,000, or 7% 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, 2018 of $390,000 increased by $22,000, or 6%, as compared to $368,000 for the three months ended
September 30, 2017. The increase is primarily the result of higher salaries and benefits in the current period.
Selling, General and Administrative
Expense
Selling, general and administrative expenses
for the three months ended September 30, 2018 of $4,689,000 increased by $352,000, or 8%, when compared to $4,337,000 for the three
months ended September 30, 2017. The increase the result of increased legal and marketing expenses in the U.S.
Interest Expense
Interest expense for the three months ended
September 30, 2018 of $7,000 decreased by $3,000 when compared to $10,000 for the three months ended September 30, 2017. The decrease
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the three months ended
September 30, 2018 of $47,000 increased by $29,000 when compared to $18,000 for the three months ended September 30, 2017. The
increase is primarily due to interest income reported related to a discount on deferred revenue from our agreement with Invekra.
Other Expense
Other expense for the three months ended
September 30, 2018 of $208,000 increased by $187,000 when compared to other expense of $21,000 for the three months ended September
30, 2017. The increase 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, 2018 of $2,820,000 decreased $50,000, when compared to net loss of $2,870,000 for the three months ended September 30, 2017.
The decrease in net loss is primarily due to a decrease of operating losses, caused by higher sales and gross profitability.
Comparison of the Six Months Ended September
30, 2018 and 2017
Total revenues for the six months ended
September 30, 2018 of $9,308,000 increased by $1,148,000, or 14%, as compared to $8,160,000 for the six months ended September
30, 2017. Product revenues for the six months ended September 30, 2018 of $8,730,000 increased by $983,000, or 13%, as compared
to $7,747,000 for the six months ended September 30, 2017. This increase was primarily the result of growth in product revenue
of $270,000, or 7%, in the United States, and growth of product revenue of $753,000, or 57%, in Latin America.
Product revenues in the United States for
the six months ended September 30, 2018 of $4,397,000 increased by $270,000, or 7%, as compared to $4,127,000 for the six months
ended September 30, 2017. This increase was mostly the result of a $430,000, or 98%, increase in sales of our animal health care
products, partly offset by a decrease of $41,000, or 5%, in sales of our acute care products and a decrease of $126,000, or 4%,
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, 2018, we reported $1,828,000 of Latin
America product revenue related to Invekra as compared to $1,323,000 during the six months ended September 30, 2017. Additionally,
we reported $248,000 of Latin America product revenue related to dermatology products sold in Brazil.
Product revenue in Europe and the Rest
of the World for the six months ended September 30, 2018 of $2,257,000 decreased by $40,000, or 2%, as compared to $2,297,000 for
the six months ended September 30, 2017. This decrease was mostly the result of decreases in the Middle East, Far East and New
Zealand partly offset by increases in Europe and India.
The following table shows our product revenues
by geographic region:
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Six Months Ended September 30,
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2018
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2017
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$ Change
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% Change
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United States
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$
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4,397,000
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$
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4,127,000
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$
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270,000
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7 %
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Latin America
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2,076,000
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1,323,000
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753,000
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57 %
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Europe and Rest of the World
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2,257,000
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2,297,000
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(40,000
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(2)%
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Total
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$
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8,730,000
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$
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7,747,000
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$
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983,000
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13 %
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Service revenues for the six months ended
September 30, 2018 of $578,000 increased by $165,000, or 40%, when compared to $413,000 in the prior period. The increase was primarily
the result of higher laboratory tests and services in the United States. Additionally, during the six months ended September 30,
2018 and 2017, the Company recorded service revenue related to technical services provided to Invekra in the amount of $28,000
and $39,000, respectively.
Gross Profit
For the six months ended September 30,
2018, we reported total revenues of $9,308,000 and total cost of revenues of $5,150,000, resulting in total gross profit of $4,158,000
or 45% of total revenues, compared to a gross profit of $3,610,000 or 44% of total revenues, for the same period in the prior year.
For the six months ended September 30,
2018, we reported product revenues of $8,730,000 and cost of product revenues of $4,737,000, resulting in product gross profit
of $3,993,000, or 46% of product revenues, compared to product gross profit of $3,526,000, or 46% of product revenues, for the
same period in the prior year.
For the six months ended September 30,
2018, we reported service revenues of $578,000 and cost of service revenues of $413,000, resulting in service gross profit of $165,000,
or 29% of service revenues, compared to service gross profit of $84,000, or 20% 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, 2018 of $740,000 decreased as compared to $750,000 for the six months ended September 30, 2017.
The decrease is primarily the result of lower spending for studies in the current period offset by an increase in salaries and
benefits.
Selling, General and Administrative
Expense
Selling, general and administrative expenses
for the six months ended September 30, 2018 of $9,622,000 increased by $522,000, or 6%, when compared to $9,100,000 for the six
months ended September 30, 2017. The increase is the result of increased legal and marketing expenses in the U.S.
Interest Expense
Interest expense for the six months ended
September 30, 2018 of $19,000 decreased by $1,000 when compared to $20,000 for the six months ended September 30, 2017. The decrease
in interest expense relates primarily to capital leases.
Interest Income
Interest income for the six months ended
September 30, 2018 of $102,000 increased by $31,000 when compared to $71,000 for the six months ended September 30, 2017. The increase
is primarily due to interest income reported related to a discount on deferred revenue from our agreement with Invekra.
Other Expense
Other expense for the six months ended
September 30, 2018 of $157,000 decreased by $32,000 when compared to other expense of $189,000 for the six months ended September
30, 2017. The decrease in other expense relates primarily to fluctuations in foreign exchange.
Net Loss
Net Loss for the six months ended September
30, 2018 of $6,278,000 decreased $100,000, when compared to net loss of $6,378,000 for the six months ended September 30, 2017.
The decrease in net loss is primarily due to the decrease of other expense of $32,000 related to foreign exchange fluctuation and
a $36,000 decrease in operating losses.
Liquidity and Capital Resources
We reported a net loss of $6,278,000 for
the six months ended September 30, 2018. At September 30, 2018 and March 31, 2018, our accumulated deficit amounted to $163,718,000
and $157,440,000, respectively. We had working capital of $8,591,000 and $12,993,000 as of September 30, 2018 and March 31, 2018,
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. We cannot provide any assurances that we will be able to
raise additional capital.
Management believes that we have access
to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means;
however, we cannot provide any assurance that new financings 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 take additional measures to reduce costs in order to conserve our cash
in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our continued
efforts to commercialize our products, which is critical to the realization of our business plan and our future operations. These
matters raise substantial doubt about our ability to continue as a going concern.
Sources of Liquidity
As of September 30, 2018, we had cash and
cash equivalents of $4,048,000. Since our inception, substantially all of our operations have been financed through sales of equity
securities. Other sources of financing that we have used to date include our revenues, as well as various loans and the sale of
certain Latin American assets to Invekra.
Since October 1, 2016, substantially all
of our operations have been financed through the following transactions:
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proceeds of $150,000 received from the exercise of common stock purchase warrants and options;
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net proceeds of $18,639,000 received from the sale of certain Latin America assets to Invekra on October 27, 2016;
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net proceeds of $1,925,000 received from the sale of common stock through our At Market Issuance Sales Agreement dated December 8, 2017; and
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net proceeds of $4,500,000 received from the sale of common stock through a registered direct offering which closed on March 6, 2018.
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Cash Flows
As of September 30, 2018, we had cash and
cash equivalents of $4,048,000, compared to $10,066,000 as of March 31, 2018.
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 operating activities during
the six months ended September 30, 2017 was $7,233,000, primarily due to our net loss of $6,378,000 offset by stock related compensation
of $900,000 in the period. Additionally, we had increases in prepaid expenses of $681,000 mostly related to taxes in Mexico, an
increase in accounts receivables of $886,000 and inventories of $310,000 related to increased sales.
Net cash used in investing activities was
$95,000 for six months ended September 30, 2018, primarily related to the purchase of equipment.
Net cash used in investing activities was
$176,000 for six months ended September 30, 2017, primarily related to the purchase of equipment.
Net cash 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.
Net cash used in financing activities was
$92,000 for the six months ended September 30, 2017 related to principal payments on debt and capital leases of $144,000 offset
by proceeds from exercise of common stock purchase warrants of $52,000.
Material Trends and Uncertainties
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. We cannot provide any assurances that we will be able to
raise additional capital as we need it.
Management believes that we have access
to capital resources through possible public or private equity offerings, debt financings, corporate collaborations 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. These matters raise substantial doubt about our ability to continue
as a going concern.
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 three months ended September 30, 2018, dermatology
rebates amounted to $1,415,000 and for the six months ended September 30, 2018, dermatology rebates amounted to $3,317,000.
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, 2018, revenue from sales to our Latin America partner Invekra amounted to approximately 16% and 20% of our total revenue, respectively.
We will continue to supply products to Invekra at a reduced price from list prices, 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.