SONOMA PHARMACEUTICALS, INC. (NASDAQ:SNOA) Files An 8-K Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
On November 12, 2020, the Audit Committee of the Board of Directors and executive management determined, after review and discussion with our independent public accounting firm, Marcum LLP, that the Company’s unaudited condensed consolidated interim financial statements for the quarter ended June 30, 2020 should no longer be relied upon. The financial statements for the quarter ended June 30, 2020 as filed with the U.S. Securities and Exchange Commission on August 14, 2020, contained material errors. The Audit Committee concluded that material adjustments to the financial statements for the quarter ended June 30, 2020 are required and that the Company will need to restate them.
Specifically, during the course of preparation of the financial statements for the quarter ended September 30, 2020, our Chief Executive Officer and our Chief Financial Officer discovered that revenues were overstated in the financial statements for the quarter ended June 30, 2020 as adequate reserves were not taken for wholesaler and specialty pharmacy rebates, distributor fees and customer returns and that certain expenses were understated and not properly recorded. It was determined that the Europe and Mexico financial translations on the profit and loss statement was run twice for one month of the quarter which resulted in an overstatement of revenue and expenses for that period. Finally, it was determined that income from discontinued operations for both years was incorrectly calculated.
At this time, we estimate that these errors resulted in accounts receivable being overstated by $446,000, prepaid expenses being overstated by $123,000, accrued expenses being understated by $175,000 in the consolidated balance sheet as of June 30, 2020. The errors further resulted in revenues being overstated by $1,487,000, cost of revenue being overstated by $779,000 and gross profit being overstated by $708,000, total operating expenses being understated by $75,000, other income (expense) being overstated $35,000, income from discontinued operations being overstated 5,000 in the consolidated statements of comprehensive income (loss) for the quarter ended June 30, 2020. With the errors being corrected in the restated financial statements for the quarter ended June 30, 2020, net income (loss) decreased by $753,000 to $240,000. Additionally, the changes resulted in a decrease of basic and diluted net income (loss) per common share of $0.41.
We are working with our Audit Committee and the Company’s independent auditors to determine the full impact of these potential adjustments on the financial statements for the quarter ended June 30, 2020. However, until the review is complete and a final determination is made, we cannot provide assurance regarding the complete impact of any adjustments on the financial statements for the affected periods, and we cannot provide assurance that the adjustments identified above are representative of the adjustments that will be required when the review is complete. Furthermore, we cannot provide assurance that the review will not identify further adjustments that may be required.
In connection with the Audit Committee’s internal review, we are evaluating our internal control over financial reporting to determine if any significant deficiencies or material weaknesses in such controls caused or contributed to any potential adjustments that may be required.
The Audit Committee has discussed the matters disclosed in this Item 4.02 with Marcum LLP.
We plan to file Amendment No. 1 on Form 10-Q/A for the quarterly period ended June 30, 2020 with SEC, or the Amended Report, as soon as practicable and prior to the filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2020. On November 16, 2020, we requested an extension to file our quarterly report for the quarter ended September 30, 2020 in accordance with Rule 12b-25 under the Securities Exchange Act of 1934, as amended. However, there can be no assurance that we will be able to file such report within the time period prescribed by Rule 12b-25.
This report contains forward-looking statements. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements related to our future activities or future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performances and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed in our Annual Report on Form 10-K and in other documents that we file from time to time with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report, except as required by law.
About SONOMA PHARMACEUTICALS, INC. (NASDAQ:SNOA)
Sonoma Pharmaceuticals, Inc., formerly Oculus Innovative Sciences, Inc., is a specialty pharmaceutical company that develops and markets solutions for the treatment of dermatological conditions and advanced tissue care. The Company’s product portfolio consists of dermatology and advanced tissue care products based upon its technologies, such as Microcyn and Lipogrid. Microcyn is a small-molecule oxychlorine compound with antimicrobial and anti-inflammatory properties that, in clinical settings, reduces itch and pain associated with dermal irritations and wounds, such as sores, injuries and ulcers of dermal tissue. Lipogrid Technology contains selected lipids and a lipid precursor designed to penetrate the bilayers of the skin by blending with the natural lipid building blocks. Its products serve over five million patients across the globe by reducing infections, itch, pain, scarring and inflammatory responses. Its products are sold throughout the United States and internationally.