Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA) is a global healthcare leader in the development and production of stabilized hypochlorous acid (HOCl) products for a wide range of applications, including wound care, eye, oral and nasal care, dermatological conditions, podiatry, animal health care, and as a non-toxic disinfectant. The company's innovative HOCl-based solutions have demonstrated impressive antipruritic, antimicrobial, antiviral, and anti-inflammatory properties, making them highly effective in reducing infections, scarring, and harmful inflammatory responses in a safe and efficient manner.
Business Overview
Sonoma Pharmaceuticals operates in several key business channels, leveraging its expertise in HOCl technology to address diverse healthcare needs. In the dermatology market, the company has developed unique, differentiated, prescription-strength and safe products that support healing for various dermatologic conditions, primarily targeting the treatment of redness, irritation, scar management, and symptoms of eczema/atopic dermatitis. The company's dermatology products are sold directly in the U.S. through a partnership with EMC Pharma, LLC, and internationally through a network of distribution partners.
In the first aid and wound care segment, Sonoma's HOCl-based solutions are designed to treat acute and chronic wounds, as well as first- and second-degree burns, and serve as an intraoperative irrigation treatment. The company sells its wound care products directly to healthcare providers in the U.S. and through a diverse network of distributors in Europe, the Middle East, and Asia. To address the growing demand for its HOCl technology, Sonoma has also launched its first direct-to-consumer over-the-counter wound and skin care product, Microcyn® OTC, in the U.S.
Sonoma's eye care products, such as the prescription solution Acuicyn™ and the over-the-counter Ocucyn® Eyelid & Eyelash Cleanser, are designed to treat blepharitis and manage red, itchy, crusty, and inflamed eyes. These products are sold through distribution partners in the U.S. and international markets. The company has also expanded its eye care offerings through a recent licensing agreement with NovaBay Pharmaceuticals, Inc. to market Avenova®-branded Ocudox products in the European Union.
In the oral, dental, and nasal care segment, Sonoma sells a variety of HOCl-based products, including Endocyn®, a biocompatible root canal irrigant, and Microdacyn60® Oral Care, which treats mouth and throat infections and thrush. These products are sold through distributors in the U.S. and international markets. The company's nasal care product, Sinudox™, is an electrolyzed solution intended for nasal irrigation and is currently sold through Amazon in Europe and other international partners.
Sonoma's animal health care products, such as MicrocynAH®, are designed to clean, debride, and treat a wide spectrum of animal wounds and infections. The company partners with Manna Pro Products, LLC for the distribution of its animal health products in the U.S. and Canada, and with Petagon, Limited for the Asian and European markets.
In addition to its healthcare-focused products, Sonoma has also formulated its HOCl technology as a disinfectant and sanitizer solution, which is sold in numerous countries through its partner, MicroSafe Group DMCC. The medical-grade surface disinfectant solution is used in hospitals worldwide to protect doctors and patients.
Financials
Financial Performance
For the fiscal year ended March 31, 2023, Sonoma Pharmaceuticals reported annual revenue of $12,735,000, a decrease of 9% compared to the previous fiscal year. The company's annual net income was -$4,835,000, and its annual operating cash flow and free cash flow were -$2,398,000 and -$2,415,000, respectively.
In the first nine months of fiscal year 2024, which ended on December 31, 2023, Sonoma Pharmaceuticals generated revenue of $9,296,000, a decrease of 9% compared to the same period in the prior year. The company's net loss for the nine-month period was $3,768,000, and its operating cash flow and free cash flow were -$2,550,000 and -$2,570,000, respectively.
Quarterly Performance
For the three months ended December 31, 2023, Sonoma Pharmaceuticals reported revenue of $3,138,000, an increase of 7% compared to the same period in the prior year. The company's net loss for the quarter was $866,000, and its operating cash flow and free cash flow were -$850,000 and -$870,000, respectively.
The increase in revenue for the three-month period was primarily driven by a 14% rise in sales in the United States, a 10% increase in Europe, and a 2% growth in Asia, partially offset by a 4% decline in Latin America and a 10% decrease in the Rest of the World region. The company attributed the increase in U.S. revenue to fluctuations in over-the-counter animal health care sales, while the growth in Europe and Asia was due to increased demand for Sonoma's products in those regions. The decline in Latin America and the Rest of the World was primarily due to timing of customer orders.
Gross profit margin for the three months ended December 31, 2023, improved to 47% from 28% in the same period of the prior year, primarily due to overall product mix, redeployment of labor to research and development projects, and higher costs of materials and transportation in the prior-year period.
Research and development expenses increased significantly in the three-month and nine-month periods ended December 31, 2023, due to increased product development and expanded regulatory efforts in the U.S. and Europe to support new product releases. Selling, general, and administrative expenses, on the other hand, declined by 36% and 22% for the three-month and nine-month periods, respectively, as the company continued its efforts to contain costs across the organization.
Liquidity
As of December 31, 2023, Sonoma Pharmaceuticals had cash and cash equivalents of $2,406,000, compared to $3,820,000 as of March 31, 2023. The company reported working capital of $9,428,000 as of December 31, 2023, compared to $10,081,000 as of March 31, 2023.
During the nine months ended December 31, 2023, Sonoma Pharmaceuticals used $2,550,000 in net cash from operating activities, primarily due to a net loss of $3,768,000, an increase in accounts receivables of $221,000, and an increase in inventory of $93,000, partially offset by stock-based compensation of $447,000 and an increase in prepaid expenses of $546,000.
In October 2023, the company raised $1,446,000 in net proceeds from the sale of 8,500,000 shares of common stock in a public offering. Additionally, in December 2023, Sonoma Pharmaceuticals entered into an Equity Distribution Agreement with Maxim Group LLC, which allows the company to offer and sell, from time to time, shares of its common stock through an "at-the-market" offering program. Subsequent to the end of the quarter, on January 11, 2024, the company sold 1,923,100 shares of common stock for gross proceeds of approximately $392,000 and net proceeds of approximately $356,000 under this agreement.
Risks and Challenges
Sonoma Pharmaceuticals faces several risks and challenges that could impact its future performance. The company relies on certain key customers for a significant portion of its revenues, and the loss of these customers or a decline in their purchases could have a material adverse effect on the company's financial results. Additionally, Sonoma is exposed to the risk of fluctuations in foreign currency exchange rates, particularly the Euro and the Mexican Peso, which could negatively impact its financial performance.
The company also faces a substantial tax liability in Mexico related to intercompany debt, unpaid technical assistance charges, and accrued interest, which are not due until 2027. While management believes there are sufficient assets on the balance sheet to cover this liability, the company's ability to effectively manage this situation could have implications for its future operations and financial condition.
Furthermore, the ongoing effects of the COVID-19 pandemic, including supply chain disruptions, increased shipping costs, and labor shortages, could continue to impact Sonoma's business operations, customer demand, and overall financial performance.
Outlook
Despite the challenges, Sonoma Pharmaceuticals remains well-positioned for growth with its innovative HOCl-based products and diversified business model. The company's recent product launches, expanded distribution partnerships, and strategic initiatives to improve operational efficiency and cost containment suggest a positive outlook for the future.
Conclusion
Sonoma's focus on developing and commercializing its unique HOCl technology across various healthcare segments, coupled with its strong intellectual property portfolio and regulatory approvals, positions the company as a leader in the stabilized hypochlorous acid market. As the company continues to execute on its growth strategy and navigate the evolving market landscape, investors may find Sonoma Pharmaceuticals an attractive investment opportunity.