Name: Sonoma Pharmaceuticals, Inc. Q3 2018 Earnings Call
Start: 2018-02-08T03:35:07.000Z

Executive Summary

Record quarter: Total revenue reached $4.843M (+44% y/y, +12% q/q), with product revenue $4.647M and gross margin at 49% as mix shifted toward higher-margin U.S. dermatology; cash ended at $8.625M .
U.S. product revenue grew 73% y/y to $2.883M, and U.S. dermatology net revenue reached $2.207M (+78% y/y, +36% q/q), underpinned by Ceramax’s acceleration and broader prescription strength .
Non-GAAP EBITDA loss was $2.383M, flat y/y and modestly higher q/q given one-time marketing and compensation costs; management guided cash OpEx to normalize to $4.3–$4.6M per quarter (ex-June) .
Margin outlook: Management expects low-70% gross margins at breakeven, aided by the sunset of low-margin Latin America manufacturing (Invekra obligation ending October 2018) and U.S. dermatology mix; breakeven annualized revenue run-rate ~$26M .
Near-term catalysts include anticipated FDA clearance in spring, Brazil partner selection, and potential Loyon psoriasis label expansion within 12 months; these can reinforce revenue growth narrative and valuation multiple support .

What Went Well and What Went Wrong

What Went Well

Strong top-line momentum: Record revenue ($4.843M) and product revenue ($4.647M), driven by U.S. dermatology; CEO: “we had a heck of a quarter…total revenue was $4.834 million, our highest revenue number in our company history” .
Dermatology execution: U.S. dermatology net revenue rose to $2.207M (+78% y/y, +36% q/q); Ceramax became the fastest-growing product with prescriptions nearly doubling vs September quarter .
Mix improvement and margin path: Gross margin improved to 49% (from 43% in Q2), with management reiterating a path to low-70% gross margins at breakeven as LatAm 6% margin manufacturing winds down .

What Went Wrong

Elevated OpEx: Cash operating expenses rose to $4.862M (+13% y/y, +15% q/q) due to one-time marketing and compensation items; EBITDA loss widened slightly to $2.383M .
Latin America drag: Continued sales to Invekra at ~6% gross margin weighed on consolidated margin; although slated to end by October 2018, it remains a near-term headwind .
Cash burn: Cash declined to $8.625M (from $9.983M in Q2) reflecting $2.4M cash operating loss, partially offset by a $1M ATM investment; investors raised liquidity/volume concerns on the call .

Financial Results

Metric	Q1 2018	Q2 2018	Q3 2018
Total Revenue ($USD Millions)	$3.835	$4.325	$4.843
Product Revenue ($USD Millions)	$3.603	$4.144	$4.647
Gross Profit ($USD Millions)	$1.762	$1.848	$2.368
Gross Margin (%)	46%	43%	49%
GAAP Operating Expenses ($USD Millions)	$5.145	$4.705	$5.568
Operating Expenses minus non-cash ($USD Millions)	$4.709	$4.237	$4.862
EBITDA (Loss from ops minus non-cash) ($USD Millions)	$(2.836)	$(2.263)	$(2.383)
Net Loss from Continuing Ops ($USD Millions)	$(3.508)	$(2.870)	$(3.187)
Diluted EPS – Continuing Ops ($)	$(0.82)	$(0.67)	$(0.73)
Cash & Equivalents ($USD Millions)	$12.638	$9.983	$8.625

Segment revenue breakdown (Product Revenue):

Geography ($USD Millions)	Q1 2018	Q2 2018	Q3 2018
United States	$1.859	$2.268	$2.883
Latin America	$0.569	$0.754	$0.772
Europe & Rest of World	$1.175	$1.122	$0.992
Total Product Revenue	$3.603	$4.144	$4.647

KPIs:

KPI	Q1 2018	Q2 2018	Q3 2018
U.S. Dermatology Net Revenue ($USD Millions)	—	$1.621	$2.207
Prescriptions Filled (Dermatology) (#)	14,898	17,166	18,104

Notes: EBITDA and cash OpEx are non-GAAP as defined in company materials .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Cash Operating Expenses (ex-June)	Quarterly FY2019 trajectory	Not previously quantified	$4.3–$4.6M per quarter	New
Gross Margin at Breakeven	At EBITDA breakeven	Not previously quantified	Low-70% range	New/affirmed path
Annualized Revenue Run-Rate for Breakeven	Company-level	Not previously quantified	~$26M	New/clarified
Invekra low-margin manufacturing obligation	End date	Not specified	Ends Oct 2018; post-termination pricing not constrained	Clarified timeline
Sales force size plan	To reach profitability	~30 FTEs existing	30–34 reps sufficient; emphasis on telephonic coverage in white spaces	Maintained with detail
Next FDA product approval	Near-term	Not specified	Expected spring	New window
Loyon label expansion (psoriasis)	U.S. indication expansion	Not specified	Target within 12 months, subject to FDA	New window
Brazil commercial partner	Market entry	In discussions	“Pretty advanced” negotiations; dermatology focus	Update
Dividends	Corporate	None discussed	None discussed	No change —

Earnings Call Themes & Trends

Topic	Previous Mentions (Q2 2018)	Previous Mentions (Q1 2018)	Current Period (Q3 2018)	Trend
U.S. dermatology growth	U.S. product revenue +34% y/y; prescriptions 19,660; LOYON loaded to wholesalers; 30 reps	Prescriptions +66% y/y; expanded sales force; LOYON FDA approval	U.S. dermatology net revenue $2.207M (+78% y/y); Ceramax fastest-growing; pricing support	Strengthening
Gross margin & mix	43% GM; reclass effects; mix improving	46% GM; mix vs discontinued ops	49% GM; path to low-70% at breakeven; Invekra 6% margin to end Oct-2018	Improving; structural lift ahead
Latin America transition	Continued supply to Invekra; 754k product revenue	Continued supply; 569k product revenue	772k product revenue; obligation ends Oct 2018	Wind-down scheduled
Regulatory/approvals	7 Brazil approvals; LOYON loaded; portfolio of 6 non-steroidal derm products	FDA approval for LOYON; planned launch	Spring FDA approval expected; Loyon psoriasis expansion targeted; 3 UAE approvals referenced	Pipeline progressing
Sales coverage	30 reps, 5 managers focused on derm	Expanded sales force; growth expectations	30 FTEs; plan for 30–34; leverage telephonic sales to fill white spaces	Optimization vs expansion
Pricing	Noted demand dollars growth	—	Pricing increases contributing; below peers on $/gram	Supportive

Management Commentary

CEO: “our total revenue was $4.834 million, our highest revenue number in our company history…U.S. dermatology revenue was up 78% versus the same period last year” .
CEO on Ceramax: “our sales team turned Ceramax into our fastest growing product…prescriptions…almost doubled when compared to the September quarter…we think the sky is the limit with this product” .
CFO on mix/margins: “Mexico business…6% profitability…will disappear sometime next year…we expect…when we get to the breakeven level, we should be in the low-70%s margins” .
CFO on OpEx: “cash operating expenses…should be in the range…$4.3 million to $4.6 million…we were a little above that this quarter [due to] one-time…marketing and compensation” .
CFO on breakeven: “our annualized revenue run rate would be in the $26 million range, when we achieve profitability…current annualized…about $19 million” .

Q&A Highlights

Margin trajectory and mix: Management reiterated low-70% gross margin at breakeven as U.S. businesses carry 80%+ margins while 6% LatAm margin winds down; product lines have broadly similar margins, with Mondoxyne higher .
OpEx run-rate: Cash OpEx guided to $4.3–$4.6M per quarter (ex-June) after one-time items; SG&A expected to normalize .
Sales coverage strategy: Profitability achievable with 30–34 reps; incremental emphasis on telephonic sales to expand reach without full fixed-cost burden .
Invekra obligation: Contractual end date October 2018; post-termination manufacturing would be discretionary and not bound to 6% margin .
Cash burn and funding: Burn expected to decline as growth continues; recent $1M ATM investment from a long-term holder; management open to attractive buy-and-hold funding .

Estimates Context

S&P Global (Capital IQ) consensus for Q3 FY2018 revenue and EPS was unavailable via our data interface during this analysis; therefore, we cannot determine a formal beat/miss vs consensus. Values would typically be retrieved from S&P Global; consensus not available at this time. Values retrieved from S&P Global.*

Actuals for Q3 FY2018:

Metric	Actual
Revenue ($USD Millions)	$4.843
Diluted EPS – Continuing Ops ($)	$(0.73)

Key Takeaways for Investors

U.S. dermatology is the growth engine: U.S. product revenue rose 73% y/y and dermatology net revenue reached $2.207M (+36% q/q), supported by Ceramax’s rapid adoption and expanding portfolio .
Margin inflection set up: Sequential gross margin improved to 49%; structural lift expected as 6% LatAm manufacturing sunsets in Oct-2018 and U.S. mix expands, targeting low-70% at breakeven .
Operating discipline: One-time items inflated cash OpEx; management guided to $4.3–$4.6M per quarter (ex-June), improving EBITDA trajectory with sales leverage .
Breakeven visibility: EBITDA breakeven implied at ~$26M annualized revenue run-rate (vs current ~$19M), with 30–34 reps and telephonic coverage to drive efficient growth .
Pipeline/catalysts: Anticipated FDA clearance in spring, Brazil partner selection, and Loyon psoriasis label expansion next 12 months can add to revenue and share-of-voice with prescribers .
Pricing and brand: Pricing increases from a low base and growing brand recognition (Alevicyn, Celacyn, Mondoxyne, Ceramax, SebuDerm, Loyon) support revenue per prescription and demand dollars .
Watch liquidity and funding cadence: Cash declined to $8.625M; management may consider additional funding with long-term investors at attractive terms if needed; improving burn expected with growth .

Non-GAAP note: EBITDA and cash operating expenses are non-GAAP measures as defined by the company (loss from operations minus non-cash expenses) **[1367083_0001683168-18-000339_sonoma_ex9901.htm:7]**.

Sonoma Pharmaceuticals, Inc. (SNOA)·Q3 2018 Earnings Summary