Executive Summary

Q4 FY2018 total revenue was $3.655M, down 9% year over year and sequentially lower versus Q3 FY2018’s $4.843M; gross margin compressed to 36% (vs. 49% in Q3) as higher rebates and wholesaler inventory drawdowns weighed on U.S. dermatology net revenue .
U.S. product revenue fell 26% YoY to $1.362M in Q4; Latin America grew 9% to $0.912M, while Europe/ROW declined 12% to $0.995M, reflecting mix shifts and Latin America’s low-margin Invekra supply .
Management cited deductible resets, increased rebates, and wholesalers reducing inventory as primary reasons for the Q4 miss, and is shifting distribution toward mail‑order to reduce substitutions and narrow gross‑to‑net leakage; cash was $10.1M at quarter-end .
No formal numerical guidance was issued; management expects cash operating expenses to remain fairly flat, moderate price increases, and EBITDA loss to improve as mail‑order penetration rises; Brazil partnership (NC Group/U.SK) adds a potential international growth lever .

What Went Well and What Went Wrong

What Went Well

FY2018 revenue rose 30% to $16.658M, with product revenue up 31% to $15.663M; strong growth in the U.S. and international markets underscored the broader portfolio traction .
Prescriptions filled grew 25% YoY in the March quarter (17,195 vs. 13,794), demonstrating underlying demand resilience even as wholesalers reduced inventory; management is implementing mail‑order to better align shipments with demand and reduce substitutions .
Strategic progress: multiple FDA clearances to add antimicrobial language, UAE approvals, and a Brazil license & supply agreement with NC Group/U.SK covering seven HOCl dermatology products (first three to launch in late summer) .

Quote: “We are pleased to report strong year-over-year revenue growth for all our product categories… The fourth quarter dermatology market was challenging… we are taking steps to reduce the impact on our revenue growth by working with a home delivery pharmacy program and advancing relationships with managed care organizations.”

What Went Wrong

Q4 product revenues declined 14% YoY to $3.269M; U.S. product revenue was down 26% as higher rebate utilization and wholesaler inventory reductions drove a sharp drop in dermatology net revenue (to $0.779M) .
Gross margin compressed to 36% (vs. 49% in Q3), driven by a higher mix of low-margin Latin America shipments to Invekra and weaker U.S. dermatology margins; operating loss widened to $4.749M and EBITDA loss to $3.717M .
Management highlighted a 12% sequential drop in prescriptions from December to March (seasonality), but a much steeper reduction in factory units shipped as wholesalers drew down inventory; rebates (linked to prescriptions filled) inflated as a percent of gross revenue, lowering net revenue .

Financial Results

Metric	Q2 2018 (Sep 2017)	Q3 2018 (Dec 2017)	Q4 2018 (Mar 2018)
Total Revenues ($USD Millions)	$4.325	$4.843	$3.655
Gross Profit ($USD Millions)	$1.848	$2.368	$1.332
Gross Margin (%)	43%	49%	36%
Total Operating Expenses ($USD Millions)	$4.705	$5.568	$6.081
Loss from Operations ($USD Millions)	$(2.857)	$(3.200)	$(4.749)
EBITDA (Non-GAAP) ($USD Millions)	$(2.263)	$(2.383)	$(3.717)
Net (Loss) Income ($USD Millions)	$(2.870) (cont.)	$(3.187) (cont.)	$(4.763)
EPS (Continuing Ops, Basic/Diluted, $)	$(0.67)	$(0.73)	$(0.93)
Cash and Equivalents ($USD Millions)	$9.983	$8.625	$10.066

Segment (Product Revenue by Geography):

Region ($USD Millions)	Q2 2018	Q3 2018	Q4 2018
United States	$2.268	$2.883	$1.362
Latin America	$0.754	$0.772	$0.912
Europe & Rest of World	$1.122	$0.992	$0.995
Total Product Revenue	$4.144	$4.647	$3.269

KPIs (Dermatology):

KPI	Q3 2018	Q4 2018
U.S. Dermatology Gross Revenue ($USD Millions)	$4.647	$2.816
U.S. Dermatology Net Revenue ($USD Millions)	$2.207	$0.779
Net Revenue as % of Gross	~47% (calc)	28%
Prescriptions Filled (Units)	19,660	17,195
Factory Units Shipped (Units)	—	11,729

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Cash Operating Expenses	FY2019 (quarterly)	$4.3–$4.6M per quarter excluding June (audit), relatively flat	“Expected to remain fairly flat throughout the year on a quarterly basis”	Maintained
EBITDA Trajectory	FY2019	Loss improving with stable OpEx and revenue growth	“Should result in a reduction in our EBITDA as we go through the quarter”	Maintained
Pricing	FY2019	Moderate price increases; below competitors on $/gram	Moderate price increases, pricing strategy to avoid large one-time hikes	Maintained
Mail‑order Penetration	CY2018	Program implementation pending, benefits expected	Target ~60% of U.S. prescriptions via home delivery by late 2018; 20% in June, 28% in July	Raised specificity
Gross Margin Outlook	Multi‑year	Margin to rise as low‑margin LatAm supply winds down	LatAm Invekra margin mid‑high teens; derm margins 75–80%+ expected to lift blended margin over time	Updated (timing extended)
Breakeven Run Rate	Target	Annualized ~$26M for breakeven	Reiterated breakeven framework (driven by derm script growth and stable OpEx)	Maintained

Earnings Call Themes & Trends

Topic	Previous Mentions (Q2 & Q3 FY2018)	Current Period (Q4 FY2018)	Trend
Managed care & rebates	Challenges acknowledged; plans to control rebate cost and distribution changes	Deductible resets increased rebates; rebate % higher as prescriptions exceeded shipments; shift to mail‑order to control rebates	Intensified focus; mitigation underway
Wholesaler inventory dynamics	Seasonality noted; wholesalers manage inventory; some lumpy effects	Wholesalers reduced inventory substantially, driving factory units down more than scripts; plan to limit inventory swings via mail‑order	Issue acute in Q4; structural change planned
Mail‑order pharmacy program	Under evaluation and rollout	Active rollout; 20% of derm units in June, 28% in July; aim for ~60% by year-end	Scaling up
International (Brazil, LatAm)	Brazil approvals; partner selection in progress; Invekra supply continues (low margin)	Brazil license with NC Group/U.SK signed; initial POs above first-year minimums; LatAm sales up 9% in Q4	Positive
Product performance & pipeline	Ceramax fastest-growing; portfolio expansion (Loyon, antimicrobial labels)	Continued FDA/market approvals; added antimicrobial language; preparing U.S. product launches (post-laser gel; facial rinse; Ceramax lotion)	Continued expansion
Financial discipline	Target EBITDA profitability; stable cash OpEx; measured sales-force additions	Reaffirmed flat OpEx and EBITDA improvement expectation; moderate pricing strategy	Maintained

Management Commentary

Prepared remarks emphasized robust full-year growth but acknowledged a “challenging” fourth quarter due to deductible resets and increased rebates; mitigation via home delivery and managed care engagement is underway .
CFO detailed the mechanics behind Q4’s miss: wholesalers filled prescriptions from existing inventory (reducing purchase orders), and rebates (linked to scripts filled) increased as a percent of gross revenue, compressing net revenue; mail‑order benefits include lower fees, fewer substitutions, and better rebate control .
Strategic message: global HOCl leadership with regulatory wins; Brazil partnership to commercialize seven dermatology products; ongoing U.S. launches (facial rinse, Ceramax lotion) .

Notable quotes:

“Bottom-line, we believe that by taking more control of the conversation… we can minimize substitution at the pharmacy counter and maximize insurance coverage for our great products.”
“Our operating… cash operating expenses are expected to remain fairly flat throughout the year on a quarterly basis. And this should result in a reduction in our EBITDA as we go through the quarter.”

Q&A Highlights

Growth drivers and Brazil: Management confirmed initial purchase orders from NC Group/U.SK “well over the minimums for the first year,” with minimums rising to ~$1M over five years; expects partnership to accelerate breakeven path .
Loyon label expansion: Pursuing U.S. psoriasis indication similar to Europe; timing dependent on FDA review; current U.S. classification is a medical device .
Pricing strategy: Company prefers gradual price increases over large one‑time hikes; positioned at a lower price per gram than comparables to support payer discussions and patient access .
March quarter normalization: Without rebate/deductible reset impacts, CEO suggested revenue would have likely tracked ~10% below Dec quarter ($4.8M) due to seasonality (indicative only) .
Distribution shift: Detailed mail‑order benefits (lower fees, reduced substitutions, better rebate economics), with early penetration at 20% in June and 28% in July .

Estimates Context

Wall Street consensus estimates (S&P Global) for Q4 FY2018 revenue and EPS were unavailable via our data connection at this time; micro-cap coverage can be limited. As such, we cannot formally benchmark beats/misses to consensus for this quarter [GetEstimates error].

Key Takeaways for Investors

Q4 miss was driven by structural gross‑to‑net headwinds (rebates, wholesaler inventory drawdown) rather than demand erosion; prescriptions filled rose 25% YoY to 17,195 .
Distribution pivot to mail‑order is the key near-term catalyst to narrow gross‑to‑net, reduce substitutions, and stabilize revenue conversion; early traction is visible (20% in June, 28% in July) with ~60% target by year-end .
Mix shift matters: Latin America growth supports revenue but at mid‑teens margins, while U.S. dermatology margins are 75–80%+; as mail‑order improves U.S. net revenue, blended margins should recover .
Operating discipline persists: cash OpEx expected to stay flat quarter‑to‑quarter, with EBITDA loss improvement as topline conversion stabilizes .
Strategic optionality: Brazil partnership with the largest local pharma (NC Group/U.SK) and ongoing U.S. launches (facial rinse, Ceramax lotion) can re-accelerate growth into FY2019 .
Liquidity: Cash of $10.1M at quarter-end provides flexibility to execute distribution and launch plans; monitor working capital as mail‑order penetration rises .
Near-term trading implication: Watch for updates on mail‑order penetration, U.S. dermatology net revenue recovery, and Brazil launch timing; these should drive sentiment and multiple expansion as gross‑to‑net narrows .

Sonoma Pharmaceuticals, Inc. (SNOA)·Q4 2018 Earnings Summary