ITEM 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of our consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to exercise
its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions
that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments
and contingencies at the date of the consolidated financial statements.
On an ongoing basis, we evaluate our estimates
and judgments. Areas in which we exercise significant judgment include, but are not necessarily limited to, our valuation of accounts
receivable, inventory, income taxes, equity transactions (compensatory and financing) and contingencies.
We base our estimates and judgments on a variety
of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the
attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate
our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are
necessary.
While we believe that the factors we evaluate
provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will
always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such
estimates.
For a Summary of Critical Accounting Policies,
please refer to Notes to Consolidated Financial Statements, Note 3.
Results of Continuing Operations
Comparison of the Year Ended March 31, 2022
and 2021
Revenue
The following table shows our consolidated total
revenue and revenue by geographic region for the year ended March 31, 2022 and 2021:
Years Ended March 31,
(In thousands) 2022 2021 $ Change % Change
The decrease in United States revenues for the
year ended March 31, 2022 compared to the same period in the prior year of $1.6 million, is primarily the result of our transition from
a direct sales force to a distributor model for our dermatology and eye care prescription products in the United States. Under the old
direct sales model, our revenues were higher due to higher retail pricing than what we agreed to with the distributors. However, our operating
expenses are also much lower under this new arrangement as we do not have to manage a sales force, provide patient rebates or manage product
substitutions. Revenue for our animal health products declined slightly. Revenue for wound care products increased 19% from the prior
year.
As a result of the asset purchase agreement and
arrangement we entered into on October 27, 2016 with Invekra,with our assistance Invekra built up their own manufacturing of HOCl products
and we manufactured products for Invekra at cost during the transition time. Invekra began their own manufacturing in November 2020. As
we previously disclosed, we expected our revenues to decline following the transition of Invekra towards their own manufacturing. Since
November 2020, we continue to process overflow orders for Invekra but we do so at market prices and at lower volumes. As a result of the
foregoing, Latin America revenue declined by $3.9 million during the year ended March 31, 2022 compared to the year ended March 31, 2021.
The decrease in Europe and Rest of the World revenues
for the year ended March 31, 2022 compared to the prior year was primarily the result of decreases in disinfectant sales in the Middle
East due to the pandemic receding and to a lesser extent a slight decline in European sales.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics are
as follows:
Year ended March 31,
(In thousands, except for percentages) 2022 2021 Change % Change
Cost of Revenue as a % of Revenue 68% 65% 3%
Gross Profit as a % of Revenue 32% 35% (3)%
The gross margin decrease of 3% for the year ended
March 31, 2022 compared to the year ended March 31, 2021 is a result of product mix and higher sales to distributors versus sales through
our direct sales force.
Research and Development Expense
The research and development metrics are as follows:
Year ended March 31,
(In thousands, except for percentages) 2022 2021 Change % Change
Research and Development Expense $ 125 $ 555 $ (430 ) (77)%
Research and Development Expense as a % of Revenue 1% 3% (2)%
For the year ended March 31, 2022, research and
development expenses decreased as a result the closure of our research and development facility in Seattle, Washington and its relocation
to our facility in Mexico.
Selling, General and Administrative Expense
The selling, general and administrative expense
metrics are as follows:
Year ended March 31,
(In thousands, except for percentages) 2022 2021 Change % Change
Selling, General and Administrative Expense $ 9,755 $ 9,453 $ 302 3%
Selling, General and Administrative Expense as a % of Revenue 77% 50% 27%
The increase in Selling, General and Administrative
expense for the year ended March 31, 2022 was primarily the result of an increase in our insurance premiums.
Interest (Expense) Income, net
Interest (expense) income, net was $(10,000) and
$4,000, respectively, for the years ended March 31, 2022 and March 31, 2021.
Forgiveness of PPP loan
On May 1,
2020, we received loan proceeds in the amount of $1,310,000 under the Paycheck Protection Program (“PPP”), from Coastal
States Bank in Atlanta, Georgia. We used the loan amount for eligible purposes, such as payroll expenses. For the year ended March 31,
2022, we received approval for loan forgiveness in the amount of $723,000.
Other Expense, net
Other expense, net for the year ended March 31,
2022 and 2021, was $394,000 and $594,000, respectively. The decrease in other expense, net relates primarily to a reduction in foreign
exchange losses.
Gain on Sale of Assets
For the year ended March 31, 2022, we sold equipment
for a gain of $150,000. Gain on the sale of assets for the year ended March 31, 2021 was $137,000. We sold fixed assets no longer needed
after closing our Petaluma manufacturing facility.
Income Tax Benefit (Expense)
Income tax benefit (expense) for the year ended
March 31, 2022 was $332,000 compared to $(713,000) for the year ended March 31, 2021. The increase in income tax benefit is the result
of the reversal of the valuation allowance for Mexico as the result of three years of taxable income.
Net Loss from Continuing Operations
Net loss from continuing operations for the year
ended March 31, 2022 and 2021, was $5,086,000 and $4,615,000, respectively.
Results of Discontinued Operations
Comparison of Year ended March 31, 2022 and 2021
On June 24, 2020, we closed on an asset purchase
agreement with Infinity Labs SD, Inc. We decided to divest our Micromed business, resulting in a strategic shift that had a major effect
on our operations and financial results. Therefore, the divested Micromed operations meet the criteria to be reported as discontinued
operations.
The related assets, liabilities, results of operations
and cash flows for our Micromed business are classified as discontinued operations for all periods presented.
The operations of the Micromed business included in discontinued operations
is summarized as follows:
Year ended March 31,
Selling general and administrative expenses – 38,000
Income from discontinued operations before tax – 123,000
Gain on disposal of discontinued operations before income taxes – 770,000
Total income from discontinued operating, before tax – 893,000
Income Tax benefit (expense) – (228,000 )
Income from discontinued operations, net of tax $ – $ 665,000
Gain on disposal of discontinued operations for
the year ended March 31, 2021, includes $770,000 of gain primarily from the value of the customer base of Micromed partially offset by
a working capital adjustment.
Net Loss
The following table provides the net loss for
each period along with the computation of basic and diluted net income per share:
For the Year Ended March 31,
(In thousands, except per share data) 2022 2021
Numerator:
Loss from continuing operations $ (5,086 ) $ (4,615 )
Income from discontinued operations – 665
Denominator:
Loss per share from continuing operations $ (1.92 ) $ (2.31 )
Income per share from discontinued operations – 0.33
Net loss per share: basic and diluted $ (1.92 ) $ (1.97 )
Liquidity and Capital Resources
We reported a net loss of $5,086,000 and $3,950,000
for the years ended March 31, 2022 and 2021, respectively. At March 31, 2022 and 2021, our accumulated deficit amounted to $184,363,000
and $179,277,000, respectively. As of March 31, 2022, we had cash and cash equivalents of $7,396,000 compared to $4,220,000 on March 31,
2021. 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 assets to Invekra, Petagon,
MicroSafe and Infinity Labs.
Since April 1, 2021, substantially all of our
operations have been financed through the following transactions:
· Proceeds of $7,554,000 from sales on the ATM facility with HC Wainwright; and
· Proceeds of $217,000 from the exercise of stock options and warrants
The following table presents a summary of our
consolidated cash flows for operating, investing and financing activities for the year ended March 31, 2022 and 2021 as well balances
of cash and cash equivalents and working capital:
Year ended March 31,
Net cash provided by (used in):
Operating activities $ (4,248 ) $ (3,378 )
Investing activities (99 ) 388
Effect of exchange rates on cash 127 211
Net change in cash and cash equivalents 3,176 529
Cash and cash equivalents, beginning of the period 4,220 3,691
Cash and cash equivalents, end of the period $ 7,396 $ 4,220
Working capital (1), end of period $ 10,611 $ 8,905
(1) Defined as current assets minus current liabilities.
As of March 31, 2022, we had cash and cash equivalents
of $7,396,000 compared to $4,220,000 as of March 31, 2021.
Net cash used in operating activities during the
year ended March 31, 2022 was $4,248,000, primarily due to a net loss of $5,086,000 and partially offset by an increase from accounts
receivable net provision for write-offs and returns and an increase of $900,000 from deferred revenue.
Net cash used in operating activities during the
year ended March 31, 2021 was $3,378,000, primarily due to a net loss of $3,950,000 for the period.
Net cash used in investing activities for the
year ended March 31, 2022 was $99,000, primarily related to the purchase of property and equipment.
Net cash provided by investing activities for
the year ended March 31, 2021 was $388,000, primarily related to the proceeds from the sale of our Micromed division of $610,000 partially
offset by the purchase of equipment.
Net cash provided by financing activities for
the year ended March 31, 2022 was $7,396,000 primarily related to proceeds of $7,554,000 from the sale of common stock on our At-the-Market
facility with HC Wainwright, proceeds of $216,000 from the exercise of stock options and warrants, partially offset by the payments on
PPP loan and long term debt.
Net cash provided by financing activities for
the year ended March 31, 2021 was $3,308,000, primarily related to proceeds from the exercise of stock options and warrants of $2,287,000,
and PPP loans of $1,310,000 partially offset by payments on long term debt.
We expect revenues to fluctuate and may incur
losses in the foreseeable future and may 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 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 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.
Capital Expenditures
We currently forecast capital expenditures in
order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures will ultimately
be determined by the volume of business. We currently do not anticipate that a material amount will be purchased for the year ended March
31, 2023. If we purchase capital equipment, we expect to pay cash for those expenditures or to finance them through equipment leases.
Material Trends and Uncertainties
We are exposed to risk from decline in foreign
currency for both the Euro and the Mexico Peso versus the US dollar. Most recently there has been a sharp decline in the Euro versus the
US Dollar which has impacted our financial results.
As we have previously
discussed in our annual report on Form 10-K filed with the SEC on July 14, 2021, we face a substantial Mexico tax liability, intercompany
debt, unpaid technical assistance charges and accrued interest. These amounts are not due until 2027. At this time, management believes
there are sufficient assets on the balance sheet to more than cover any tax obligation without interrupting the Company’s operations
or business. We have engaged tax professionals to review all options to limit our exposure to these amounts and to proceed in a manner
that is most advantageous to the Company.
As the pandemic continues
to impact economies worldwide, we are closely watching inflation, increased volatility within financial markets, shipping costs, supply
chain issues and labor costs. At this time, the overall impact of these issues has been minimal. The potential impact to our business
operations, customer demand and supply chain due to increased shipping costs may ultimately impact sales. We continue to evaluate our
end-to-end supply chain and assess opportunities to refine the impact on sales. Currently, most of our customers pay for shipping expenses,
including increased shipping costs, if any. We have not yet faced labor shortages however it is possible we may have difficulties retaining
and finding qualified employees in a tight labor market in the future. Furthermore, overall inflation tendencies may put pressure on our
product pricing and/or costs.
We also closely monitor
overall economic conditions and consumer sentiment and the prospect of a recession in the United States which may impact our financial
results.
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.
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk
As a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore
are not required to provide the information requested by this Item.
ITEM 8. Consolidated Financial Statements and Supplementary
Data
Sonoma Pharmaceuticals, Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB No. 215) F-1
Report of Independent Registered Public Accounting Firm (PCAOB No. 688) F-2
Consolidated Balance Sheets as of March 31, 2022 and 2021 F-4
Notes to Consolidated Financial Statements F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of Sonoma Pharmaceuticals,
Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Sonoma
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2022, and the related consolidated statements of comprehensive
loss, changes in stockholders' equity and cash flows for the year ended March 31, 2022, and the related notes (collectively referred to
as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of March 31, 2022, and the results of their operations and cash flows for the year ended March
31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue
as a Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred
significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period
audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:
(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Frazier & Deeter, LLC
We have served as the Company's auditor since 2021.
Atlanta, Georgia
July 13, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of
Sonoma Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of Sonoma Pharmaceuticals, Inc. and Subsidiaries (the “Company”) as of March 31, 2021, the related consolidated
statements of comprehensive loss, changes in stockholders’ equity and cash flow for the year ended March 31, 2021 , and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of March 31, 2021, and the results of its operations and its cash flow
for the year ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred
significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition from Contracts with Customers - Measurement
of the Transaction Price, including the Constraint on Variable Consideration for Rebates And Discounts
Critical Audit Matter Description
As discussed in Note 3 to the consolidated financial
statements, the Company offers sales incentives and other programs that they may make available to certain customers, which are considered
to be a form of variable consideration. The Company maintains estimated accruals and allowances using the expected value method. 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 deductions related to the use of the Company’s rebate program.
The principal considerations for our determination
that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price
is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized
nature of the Company’s customer arrangements. This in turn led to significant effort in performing our audit procedures which were
designed to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition
were appropriately identified and determined by management and to evaluate the reasonableness of management’s estimates.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
How We Addressed the Matter in Our Audit
Our audit procedures included, amongst others:
/s/ Marcum llp
Marcum llp
We are uncertain as to the year we began serving
consecutively as the auditor of the Company’s financial statements; however, we are aware that we have been the Company’s
auditor consecutively since at least 2006.
New York, NY
July 14, 2021
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 7,396 $ 4,220
Prepaid expenses and other current assets 3,746 3,218
Current portion of deferred consideration, net of discount 218 209
Property and equipment, net 320 360
Operating lease, right of use assets 559 769
Deferred tax asset 829 –
Deferred consideration, net of discount, less current portion 630 763
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities 1,843 1,154
Deferred revenue Invekra 54 52
Current portion of debt-PPP 120 -
Operating lease liabilities 250 240
Long-term deferred revenue Invekra 182 229
Long-term debt, less current portion – PPP – 1,310
Operating lease liabilities, less current portion 309 529
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Accumulated other comprehensive loss (4,312 ) (4,579)
Total liabilities and stockholders’ equity $ 18,845 $ 14,987
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC., AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Loss)
(In thousands, except per share amounts)
Year ended March 31,
Operating expenses
Research and development 125 555
Selling, general and administrative 9,755 9,453
Interest income (expense), net (10 ) 4
Forgiveness of PPP Loan 723 –
Other expense, net (394 ) (594 )
Loss from continuing operations before income taxes (5,418 ) (3,902 )
Income tax benefit (expense) 332 (713 )
Loss from continuing operations, net of tax (5,086 ) (4,615 )
Income from discontinued operations, net of tax – 665
Loss per share: basic and diluted
Continuing operations $ (1.92 ) $ (2.31 )
Discontinued operations – 0.33
Total loss per share $ (1.92 ) $ (1.97 )
Weighted-average shares outstanding: basic and diluted 2,653 1,996
Other comprehensive loss
Foreign currency translation adjustments 267 1,031
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For the Years Ended March 31, 2022 and 2021
(In thousands, except share amounts)
Shares Amount Shares Amount Capital Deficit Loss Total
Employee stock-based compensation expense – – – – 372 – – 372
Foreign currency translation adjustment – – – – – 267 267
Shares Amount Shares Amount Capital Deficit Loss Total
Shares issued in connection with vesting of restricted stock – – 3,919 – – – – –
Shares issued with conversion of C shares (1.55 ) – 17,222 – – – – –
Employee stock-based compensation expense – – – – 332 – – 332
Foreign currency translation adjustment – – – – – 1,031 1,031
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 186 227
Recovery of doubtful accounts (125 ) (903 )
Stock-based compensation 382 371
Forgiveness of PPP loan (723 ) –
Deferred income tax expense (829 ) –
Operating lease right-of-use asset 223 –
Gain on sale of assets – (770 )
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (460 ) (5 )
Deferred consideration, net of discount 160 143
Accrued expenses and other current liabilities 679 (668 )
Withholding tax payable 360 397
Operating lease liabilities (222 ) (215 )
Deferred revenue 900 (15 )
Net cash used in operating activities (4,248 ) (3,378 )
Cash flows from investing activities:
Purchases of property and equipment (137 ) (179 )
Proceeds from Micromed Transaction – 610
Net cash (used in) provided by investing activities (99 ) 388
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 7,554 –
Payments on PPP Loan (467 ) –
Proceeds from PPP Loan – 1,310
Proceeds from exercise of common stock options and purchase warrants 216 2,287
Principal payments on short-term debt (30 ) (481 )
Proceeds on short-term debt 123 –
Benefit from lease assumed less principal payments on ROU Assets – 192
Net cash provided by financing activities 7,396 3,308
Effect of exchange rate on cash and cash equivalents 127 211
Net increase in cash and cash equivalents 3,176 529
Cash and cash equivalents, beginning of year 4,220 3,691
Cash and cash equivalents, end of year $ 7,396 $ 4,220
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24 $ 12
Cash paid for taxes $ 767 $ 941
Non-cash operating and financing activities:
Insurance premiums financed $ 748 $ 596
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was moved to Woodstock, Georgia from Petaluma, California in June 2020. The Company
is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”) products for a wide range
of applications, including wound care, animal health care, eye care, oral care and dermatological conditions. The Company’s products
reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner. In-vitro and clinical studies
of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. The Company’s stabilized
HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells
in the area treated assisting the body in its natural healing process. The Company sells its products either directly or via partners
in 54 countries worldwide.
NOTE 2 – Liquidity and Financial
Condition
The Company reported a net loss of $5,086,000
for the year ended March 31, 2022. At March 31, 2022 and 2021, the Company’s accumulated deficit amounted to $184,363,000
and $179,277,000, respectively. The Company had working capital of $10,611,000 and $8,905,000 as of March 31, 2022 and 2021,
respectively.
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 to 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 consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to
continue as a going concern.
COVID – 19
On March 11, 2020 the
World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment
and mitigation measures worldwide. In an effort to mitigate the continued spread of the virus, federal, state and local governments, as
well as certain private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings
and quarantining of people who may have been exposed to the virus. As a result of these restrictions, together with a general fear of
the impact on the global economy and financial markets, there is significant uncertainty surrounding the potential impact on the Company.
As events are rapidly changing, the Company is unable to accurately predict the impact that COVID-19 will have on its business due to
uncertainties including, but not limited to, the duration of quarantines and other travel restrictions within China, the U.S. and other
affected countries, the ultimate geographical spread of the virus, the severity of the disease, the duration of the outbreak and the public’s
response to the outbreak.
NOTE 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies
of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”). Aquamed has no current
operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency for
the Company's wholly-owned subsidiaries incorporated outside the United States (“U.S.”) is denominated in local currency.
All intercompany transactions and balances have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated
financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
("SEC") and are in conformity with U.S. generally accepted accounting principles ("GAAP"). The Company’s fiscal
year end is March 31. Unless otherwise stated, all years and dates refer to the fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents
include cash on hand and all highly liquid investments with an original maturity of three months or less when purchased. The Company’s
cash equivalents are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP 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 relating
to the Company’s deferred tax assets, valuation of equity, fair value allocation of assets sold to Invekra, and the estimated amortization
periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Revenue Recognition
On April 1, 2018, the Company adopted Accounting
Standards Update ("ASU"), "Revenue from Contracts with Customers Topic 606” (“Topic 606”) using the modified
retrospective method. There was no material impact to the Company upon the adoption of Topic 606. Revenue is recognized when the Company
transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company 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 directly to end users and to distributors. The Company also sells products to a customer base, including
hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company also has entered into agreements to license
its technology and products.
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 its 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 because the Company has a long history with its customers, the Company 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.
Service revenue from testing contracts is recognized
as tests are completed and a final report is sent to the customer.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents
are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is exposed to credit risk in the
event of default by these financial institutions for amounts in excess of the Federal Deposit Insurance Corporation insured limits. Cash
and cash equivalents held in foreign banks are intentionally kept at minimal levels, and therefore have minimal credit risk associated
with them.
The Company grants credit to its business customers,
which are primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables. The Company
maintains allowances for potential credit losses. At March 31, 2022, one customer represented 20% of our net accounts
receivable balance, one customer represented 15% of our net accounts receivable balance, and one customer represented
14% of our net accounts receivable balance. At March 31, 2021, one customer represented 17% of our net accounts receivable balance, one customer represented 16%
of our net accounts receivable balance, and one customer represented 14% of our net accounts receivable balance. For the year ended March 31, 2022, one customer represented 10%, one customer represented 17%, and one customer represented
21% of net revenues. For the year ended March 31, 2021, one customer represented 32%, and one customer represented 15% of net revenues.
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 at March 31, 2022 and 2021 in the amounts of $0 and $125,000, respectively. Additionally, at March 31, 2022 and
2021, the Company has allowances of $81,000 and $1,488,000, respectively, related to potential discounts, returns, distributor fees and
rebates. The allowances are included in Accounts Receivable, net in the accompanying 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