Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
Commission File Number: 001-33216
SONOMA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its
charter)
5445 Conestoga Court, Suite 150
Boulder, Colorado80301
(Address of principal executive offices) (Zip
Code)
(800)759-9305
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b)
of the Act:
Common Stock, $0.0001 par value SNOA The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g)
of the Act:
None.
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated Filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value
of the voting and non-voting common stock held by non-affiliates of the registrant on September 30, 2022, was $6,580,267 based on
a total of 3,089,327 shares of the registrant’s common stock held by non-affiliates on September 30, 2022, at the closing price
of $2.13 per share, as reported on the Nasdaq Capital Market.
There were 4,941,596 shares
of the registrant’s common stock issued and outstanding on June 16, 2023.
DOCUMENTS INCORPORATED BY
REFERENCE
Items 10 (as to directors
and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12, 13 and 14 of Part III will incorporate by reference information
from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation
of proxies for the registrant’s 2023 annual meeting of stockholders.
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business 1
ITEM 1A. Risk Factors 20
ITEM 2. Properties 35
ITEM 3. Legal Proceedings 35
ITEM 4. Mine Safety Disclosures 35
PART II
ITEM 6. Selected Financial Data 36
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 42
ITEM 8. Consolidated Financial Statements and Supplementary Data 42
ITEM 9A. Controls and Procedures 43
ITEM 9B. Other Information 44
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance 45
ITEM 11. Executive Compensation 46
ITEM 14. Principal Accounting Fees and Services 46
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 47
Signatures 51
i
PART I
This report includes “forward-looking
statements.” The words “may,” “will,” “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “plan,” “aim,” “seek,” “should,” “likely,”
and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements
by Sonoma regarding expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings
and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not
turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks
discussed in this report under “Part I — Item 1A — Risk Factors.” Any forward-looking statement
speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances, including unanticipated events, after the date as of which such statement
was made.
ITEM 1. Business
Corporate Information
We originally incorporated as Micromed Laboratories,
Inc. in 1999 under the laws of the State of California. We changed our name to Oculus Innovative Sciences, Inc. in 2001. In December 2006
we reincorporated under the laws of the State of Delaware, and in December 2016 we changed our name to Sonoma Pharmaceuticals, Inc.
In 2022, we relocated our principal executive
offices from 645 Molly Lane, Suite 150, Woodstock, Georgia, 30189 to 5445 Conestoga Court, Suite 150, Boulder, Colorado 80301. We have
two active wholly-owned subsidiaries: Oculus Technologies of Mexico, S.A. de C.V., and Sonoma Pharmaceuticals Netherlands, B.V. Our fiscal
year end is March 31. Our corporate telephone number is (800) 759-9305. Our websites are www.sonomapharma.com and www.sonomapharma.eu.
The websites and any information contained therein or connected thereto is not intended to be incorporated into this report.
Overview
We are a global healthcare leader for developing
and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, eye care, oral care,
dermatological conditions, podiatry, animal health care and non-toxic disinfectants. Our 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. Our 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. We sell our products either directly or via partners in 55 countries worldwide.
Business Update
Over the past three years, we have focused on
restructuring Sonoma with the goal of growing our revenues while maintaining costs. During 2022, we consolidated all U.S. operations into
our Boulder, Colorado office, including sales, marketing and finance staff. Our revenues have grown as a result of adding new customers
and distributors, and organic growth from existing customers and distributors. We have also focused on introducing new products into multiple
markets around the world and increasing our regulatory reach by seeking new approvals and clearances.
Some of our recent business updates include:
We continue to invest in research and development,
both in the U.S. and internationally, for our core performance-stabilized hypochlorous acid, or HOCl, technology. We have an active pipeline
of products and we continue to seek new regulatory clearances to expand potential markets we can sell our products into.
Business Channels
Our core market differentiation is based on being
the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. We have been in business for over 20 years, and
in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades
of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while
stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms.
We sell our products into many markets both in
the U.S. and internationally. In international markets, we ship a variety of products to 55 countries. Our core strategy is to work with
partners both in the United States and around the world to market and distribute our products. In some cases, we market and sell our own
products.
Dermatology
We have developed unique, differentiated, prescription-strength
and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our products are primarily targeted
at the treatment of redness and irritation, the management of scars and symptoms of eczema/atopic dermatitis. We are strategically focused
on introducing innovative new products that are supported by human clinical data with applications that address specific dermatological
procedures currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to
new product families.
In the United States, we partner with EMC Pharma,
LLC to sell our prescription dermatology products. Pursuant to our agreement with EMC Pharma, we manufacture products for EMC Pharma and
EMC Pharma has the right to market, sell and distribute them to patients and customers for an initial term of five years, subject to meeting
minimum purchase and other requirements.
On September
28, 2021, we launched a new over-the-counter product, Regenacyn® Advanced Scar Gel, which is clinically proven to improve the overall
appearance of scars while reducing pain, itch, redness, and inflammation. On the same day, we launched Regenacyn® Plus, a prescription-strength
scar gel which is available as an office dispense product through physician offices.
On October
27, 2022, we launched two new over-the-counter dermatology products in the United States, Reliefacyn® Advanced Itch-Burn-Rash-Pain
Relief Hydrogel for the alleviation of red bumps, rashes, shallow skin fissures, peeling, and symptoms of eczema/atopic dermatitis, and
Rejuvacyn® Advanced Skin Repair Cooling Mist for management of minor skin irritations following cosmetic procedures as well as daily
skin health and hydration.
In June 2022, the Natural Products Association
certified Rejuvacyn Advanced as a Natural Personal Care Product.
On January 4, 2023, we launched a line of office
dispense products exclusively for skin care professionals, including two new prescription strength dermatology products, Reliefacyn® Plus
Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Rejuvacyn® Plus Skin
Repair Cooling Mist. These products, along with Regenacyn® Plus Scar Gel, will
be marketed and sold directly to dermatology practices and medical spas.
On April 11, 2023, we introduced a new pediatric
dermatology and wound care product for over-the-counter use, PediacynTM All Natural Skin Care & First Aid For Children.
Our consumer
products are available through Amazon.com, our website and third-party distributors.
We sell dermatology products in Europe and Asia
through a distributor network. In these international markets, we have a network of partners, ranging from country specific distributors
to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners to create products
they can market in their home country. Some products we develop and manufacture are private label while others use branding we have already
developed. We have created or co-developed a wide range of products for international markets using our core HOCl technology.
First Aid and Wound Care
Our HOCl-based wound care products are intended
for the treatment of acute and chronic wounds as well as first- and second-degree burns, and as an intraoperative irrigation treatment.
They work by first removing foreign material and debris from the skin surface and moistening the skin, thereby improving wound healing.
Secondly, our HOCl products assist in the wound healing process by removing microorganisms. Since HOCl is an important constituent of
our innate immune system and is formed and released by the macrophages during phagocytosis, it is advantageous to other wound-irrigation
and antiseptic solutions, as highly organized cell structures such as human tissue can tolerate the action of our wound care solution
while single-celled microorganisms cannot. Due to its unique chemistry, our wound treatment solution is much more stable than similar
products on the market and therefore maintains much higher levels of hypochlorous acid over its shelf life.
In the United States, we sell our wound care products
directly to hospitals, physicians, nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements.
In Europe, we sell our wound care products through a diverse network of distributors.
To respond to market demand for our HOCl technology-based
products, we launched our first direct to consumer over-the-counter product in the United States in February 2021. Microcyn® OTC Wound
and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including
sunburns and other skin irritations. Microcyn OTC is available without prescription through Amazon.com, our online store and third-party
distributors.
In March 2021, we received approval to market
and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation in France, Germany and Portugal. The
approval applies to our products MucoClynsTM for human hygiene to be marketed and commercialized by us, MicrocynAH® for animal
heath marketed and commercialized through our partner, Petagon Limited, and MicroSafe for disinfectant use to be marketed and commercialized
through our partner, MicroSafe Group DMCC.
In June 2022, the Natural Products Association
certified Microcyn OTC as a Natural Personal Care Product in the United States.
In June 2023, we announced a new application of
our HOCl technology for intraoperative pulse lavage irrigation treatment, which can replace commonly used IV bags in a variety of surgical
procedures. The intraoperative pulse lavage container is designed to be used in combination with a pulse lavage irrigation device, or
flush gun, for abdominal, laparoscopic, orthopedic, and periprosthetic procedures. It is expected to be ready for commercial use in Europe
in September 2023, and we anticipate commercial launch in the U.S. in 2024.
Eye Care
Our prescription product
AcuicynTM is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes
and helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to
provide near instant relief, and gentle enough to use as often as needed. In the United States, our partner EMC Pharma is selling our
prescription-based eye care product through its distribution network.
On September 28, 2021,
we launched Ocucyn® Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com, through our online store, and
through third party distributors. Ocucyn® Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective
solution for good eyelid and eyelash hygiene.
In international markets
we rely on distribution partners to sell our eye products. On May 19, 2020, we entered into an expanded license and distribution agreement
with our existing partner, Brill International S.L. for our Microdacyn60® Eye Care HOCl-based product. Under the license and distribution
agreement, Brill has the right to market and distribute our eye care product under the private label OcudoxTM in Italy, Germany,
Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return,
Brill paid us a one-time fee, and the agreed upon supply prices. In parts of Asia, Dyamed Biotech markets our eye product under the private
label Ocucyn.
Oral, Dental and Nasal Care
We sell
a variety of oral, dental, and nasal products around the world.
In late 2020, we launched a HOCl-based product
in the dental, head and neck markets called Endocyn®, a biocompatible root canal irrigant. In the U.S., we sell our dental products
through U.S.-based distributors.
In international markets, our product Microdacyn60®
Oral Care treats mouth and throat infections and thrush. Microdacyn60 solution assists in reducing inflammation and pain, provides soothing
cough relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications
and is ready for use with no mixing or dilution.
Our international nasal care product SinudoxTM
based on our HOCl technology is intended for nasal irrigation. Sinudox Hypotonic Nasal Hygiene clears and cleans a blocked nose, stuffy
nose and sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is currently sold through Amazon in Europe.
In other parts of the world, we partner with distributors to sell Sinudox.
Podiatry
Our HOCl-based wound care products are also indicated
for the treatment of diabetic foot ulcers. In the United States, we sell our wound care products directly to podiatrists as well as hospitals,
nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements. In Europe, we sell our wound
care products for podiatric use through a diverse network of distributors.
On April 11, 2023, we launched PodiacynTM
Advanced Everyday Foot Care direct to consumers for over-the-counter use in the United States, intended for management of foot odors,
infections, and irritations, as well as daily foot health and hygiene. Podiacyn is available through Amazon.com, our online store and
third-party distributors.
Animal Health Care
MicrocynAH® is a HOCl-based topical product
that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment of a
variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms
and wounds to the outer ear of any animal.
For our animal health products sold in the U.S.
and Canada, we partnered with Manna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro distributes
non-prescription products to national pet-store retail chains, farm animal specialty stores, in the United States and Canada, such as
Chewy.com, PetSmart, Tractor Supply, Cabela’s, PetExpress, and Bass Pro Shops. On August 2, 2022, we announced the launch of a MicrocynVS®
line of products exclusively for veterinarians for the management of wound, skin, ear and eye afflictions in all animal species.
For the
Asian and European markets, on May 20, 2019, we partnered with Petagon, Limited, an international importer and distributor of quality
pet food and products for an initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. On August 3,
2020, Petagon received a license from the People’s Republic of China for the import of veterinary drug products manufactured by
us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.
Surface Disinfectants
Our HOCl technology has been formulated as a disinfectant
and sanitizer solution for our partner MicroSafe and is sold in numerous countries. It is designed to be used to spray in aerosol format
in areas and environments likely to serve as a breeding ground for the spread of infectious disease, which could result in epidemics or
pandemics. The medical-grade surface disinfectant solution is used in hospitals worldwide to protect doctors and patients. In May 2020,
Nanocyn® Disinfectant & Sanitizer received approval to be entered into the Australian Register of Therapeutic Goods, or ARTG for
use against the coronavirus SARS-CoV-2, or COVID-19, and was also authorized in Canada for use against COVID-19. Nanocyn has also met
the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one of the very
few eco-certified, all-natural disinfectant solutions in Australia.
Through our partner MicroSafe, we sell hard surface
disinfectant products into Europe, the Middle East and Australia.
On July 31, 2021, we granted MicroSafe the non-exclusive
right to sell and distribute Nanocyn in the United States provided that MicroSafe secure U.S. EPA approval. In April of 2022, MicroSafe
secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold in the United States as a surface
disinfectant, and it was subsequently added to the EPA’s list N for use against COVID-19. In June 2022, the EPA added Nanocyn to
List Q as a disinfectant for Emerging Viral Pathogens, including Ebola virus, Mpox, and SARS-CoV-2, and in March 2023 added Nanocyn to
Lists G and H, for use against Methicillin Resistant Staphylococcus Aureus (MRSA), Salmonella, Norovirus, Poliovirus, and as a fungicide.
Nanocyn also received the Green Seal® Certification after surpassing a series of rigorous standards that measure environmental
health, sustainability and product performance. Nanocyn is a hospital-grade disinfectant and manufactured by us using our patented HOCl
technology. Nanocyn is currently sold by MicroSafe in Europe, the Middle East and Australia.
Employees
As of June 2, 2023, we employed a total of 8 full-time
employees in the United States, and one full-time employee in the Netherlands. Additionally, we had 162 employees in Mexico. We are not
a party to any collective bargaining agreements. We believe relations with employees are very good.
Products
Our products are all classified as medical devices
and categorized as prescription, over-the-counter (OTC), and office dispense products. Below are some of our key products that we either
sell through our own efforts or through partnership agreements.
Dermatology
In the United States, we offer Regenacyn Advanced
Scar Gel, Reliefacyn Advanced Itch-Burn-Rash-Pain Relief Hydrogel, and Rejuvacyn Advanced Skin Repair Cooling Mist for OTC purchase, and
Regenacyn Plus Scar Gel, Reliefacyn Plus Itch-Burn-Rash-Pain Relief Hydrogel, and Rejuvacyn Plus Skin Repair Cooling Mist for office dispense.
We also offer PodiacynTM Advanced Everyday Foot Care and PediacynTM All Natural Skin Care & First Aid For Children
for over-the-counter use.
Regenacyn® Advanced Scar Gel and Regenacyn® Plus Scar Gel
Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Reliefacyn®
Plus Itch-Burn-Rash-Pain Relief Hydrogel
Rejuvacyn® Advanced Skin Repair Cooling Mist and Rejuvacyn®
Plus Skin Repair Cooling Mist
PediacynTM Skin Care & First Aid for Children
Our prescription product offerings in the U.S.
are sold by our partner EMC Pharma, LLC and include Epicyn® Antimicrobial Facial Cleanser, Levicyn® Antimicrobial Dermal Spray,
Levicyn® Antipruritic Gel, Levicyn® Antipruritic Spray Gel, Celacyn® Scar Management Gel and Sebuderm® Topical Gel.
Internationally, we offer GramaDermTM Hydrogel
and Solution Combo Pack to assist in the treatment of topical mild to moderate acne, EpicynTM Scar Management Hydrogel and PediacynTM
Atopic Dermatitis Hydrogel.
Wound Care
In the United States we offer Microcyn® wound and skin care both
as an OTC and prescription product.
Microcyn® OTC Advanced Wound & Skin Cleanser
Microcyn® Wound Care Management for Professional Use
Eye, Nasal and Oral Care
Ocucyn® Eyelid and Eyelash Cleanser is an OTC product sold directly
in the United States.
Microdacyn60® Oral Care
Podiatry
PodiacynTM Advanced Everyday Foot Care
Animal Health Care
In the United States and internationally, our
HOCl-based MicrocynAH® line offers topical solutions designed to relieve the common symptoms of hot spots, scratches, skin rashes
post-surgical sites and irritated animal skin and promote expedited healing for all animals.
Our MicrocynVS® line is veterinarian-strength
animal care for use in vet clinics and animal hospitals.
Surface Disinfectants
Through our partner MicroSafe DMCC, Dubai, we
sell Nanocyn®. Nanocyn is a hospital-grade disinfectant indicated to sterilize hard surfaces by spraying directly onto the surface,
for medical devices by submerging the device in Nanocyn, and also for fumigation into the air.
When fumigated, Nanocyn has demonstrated the ability
to kill a wide range of airborne pathogens and significantly reduce the spread of infectious disease.
Research and Development
Research and development expense consists primarily
of expenses for clinical studies, personnel, regulatory services and supplies. For the years ended March 31, 2023 and 2022, research and
development expense amounted to $207,000 and $125,000, respectively. A small percentage of these expenses were borne by our customers.
We manufacture all of our products at our facility
in Zapopan, Mexico. We have developed a manufacturing process and conduct quality assurance testing on each production batch in accordance
with current U.S., Mexican and international Current Good Manufacturing Practices. Our facility is required to meet and maintain regulatory
standards applicable to the manufacture of pharmaceutical and medical device products and is certified and complies with U.S. Current
Good Manufacturing Practices, Quality Systems Regulations for medical devices, and International Organization for Standardization, or
ISO, guidelines. Our facility has been approved by the Ministry of Health and is also ISO 13485 certified.
Our machines are tested regularly, which is part
of a validation protocol mandated by U.S., Mexican and international Current Good Manufacturing Practices, Quality Systems Regulation,
and ISO requirements. This validation is designed to ensure that the final product is consistently manufactured in accordance with product
specifications at all manufacturing sites. Certain materials and components used in manufacturing are proprietary to Sonoma. All other
raw materials and supplies utilized in the manufacturing process of our products are available from various third-party suppliers in quantities
adequate to meet our needs.
We believe we own a sufficient factory space and
equipment to produce an adequate amount of product to meet anticipated future requirements for at least the next two years. With expansion
into new geographic markets, we may establish additional manufacturing facilities to better serve those new markets.
U.S. Regulatory Approvals and Clearances
To date, we have obtained 21 U.S. Food and Drug
Administration, or FDA, clearances permitting the sale of products as medical devices for Section 510(k) of the Federal Food, Drug and
Cosmetic Act in the United States.
Outside the United States, we sell products for
dermatological and advanced tissue care with a European Conformity marking, Conformité Européenne, or CE. On April 9, 2020,
we received an updated CE certificate covering 39 products in 54 countries with various approvals in Brazil, China, Southeast Asia, South
Korea, India, Australia, New Zealand, and the Middle East.
The following table summarizes
our current material regulatory approvals and clearances by brand.
Brand Approval Type Summary Indication
HOCl-based Products:
Significant Customers
We rely on certain key customers for a significant
portion of revenues. At March 31, 2023, customer A represented 22% of our net accounts receivable balance and customer D represented 21%
of our net accounts receivable balance. At March 31, 2022, customer B represented 20% of our net accounts receivable balance, customer
D represented 15% of our net accounts receivable balance, and customer E represented 14% of our net accounts receivable balance. For the
year ended March 31, 2023, customer A represented 16%, customer B represented 18% and customer C represented 11% of net revenues. For
the year ended March 31, 2022, customer A represented 21%, customer B represented 17%, and customer C represented 10% of net revenues.
Intellectual Property
Our success depends in part on an ability to obtain
and maintain proprietary protection for product technology and know-how, to operate without infringing proprietary rights of others, and
to prevent others from infringing on our proprietary rights. We seek to protect a proprietary position by, among other methods, filing,
when possible, U.S. and foreign patent applications relating to our technology, inventions and improvements that are important to the
business. We have patented certain aspects of our HOCl technology in the United States and worldwide. We also rely on trade secrets, know-how,
continuing technological innovation, and in-licensing opportunities to develop and maintain a proprietary position.
Although we work diligently to protect proprietary
technology, there are no assurances that any patent will be issued from currently pending patent applications or from future patent applications.
The scope of any patent protection may not exclude competitors or provide competitive advantages, and any patent may not be held valid
if subsequently challenged, and others may claim rights in or ownership of patents and proprietary rights. Furthermore, others may develop
products similar to ours and may duplicate any of the products or design around patents.
We have also filed for trademark protection for
marks used with products in each of the following regions: United States, Europe, Canada, certain countries in Central and South America,
including Mexico and Brazil, certain countries in the Middle East and certain countries in Asia, including Japan, China, Hong Kong, the
Republic of Korea, India and Australia. In addition to patents and trademarks, we rely on trade secret and other intellectual property
laws, nondisclosure agreements and other measures to protect intellectual property rights. We believe that in order to have a competitive
advantage, we must develop and maintain the proprietary aspects of technologies. Employees, consultants and advisors are required to execute
confidentiality agreements in connection with their employment, consulting or advisory relationships. Employees, consultants and advisors
with whom we expect to work with are also required to disclose and assign to us all inventions made in the course of a working relationship
with them, while using intellectual property or which relate to our business. Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of the products or to wrongfully obtain or use information that is regarded as proprietary.
Competition
We compete globally across six main channels:
dermatology, eye, nasal and oral care, wound and acute care, podiatry, animal health care and surface disinfectants with our HOCl technology.
Dermatology
Our dermatology products are at the forefront
of HOCl-based solutions, a safe and highly effective active ingredient designed to relieve itching, burning and inflammation and acts
as a highly effective antimicrobial agent. We believe no other solutions on the market provide the same patient benefits at the levels
of safety and cost. Our HOCl-based solutions face significant competition in the United States from prescription products including corticosteroids,
topical steroids and topical antibiotics. Our opportunity as an adjunct to these steroids is based on the insight that many doctors and
patients limit steroid and antibiotic use due to potential side effects. These side effects include bacterial resistance, stinging, burning
and inflammation for topical antibiotics and stretch marks, easy bruising, tearing of the skin and, to a lesser extent, enlarged blood
vessels for topical steroids. Our HOCl-based products are safe, non-toxic and have shown few side effects in clinical studies.
Wound and Acute Care Markets
Similar to our dermatology products, our HOCl-based
wound and acute care solutions provide improved efficacy at lower costs than traditional acute care products. Our HOCl-based solutions
compete with topical anti-infectives and antibiotics, as well as some advanced wound technologies, such as skin substitutes, growth factors
and delayed release silver-based dressings. Our opportunity in this space relative to antibiotics is based on the insight that competing
antibiotic solutions may have resistance-building properties.
Factors Affecting Competitive Position
While some other companies are able to produce
small molecule, HOCl-based formulations, based on our research, their products may become unstable after a relatively short period of
time or have large ranges of effectiveness. We believe our HOCl-based solutions are among the most stable therapeutics available.
Some of our competitors in the dermatology, wound
care, eye, nasal and oral care, animal health care and surface disinfectant markets enjoy several competitive advantages. These include:
· greater name recognition;
· established distribution networks;
Government Regulation
Government authorities in the United States, at
the federal, state and local levels, and foreign countries extensively regulate, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and export of pharmaceutical products, biologics
and medical devices. All of our products in development will require regulatory approval or clearance by government agencies prior to
commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local and foreign statutes and
regulations also govern testing, manufacturing, safety, labeling, storage, distribution and record-keeping related to such products and
their marketing. The process of obtaining these approvals and clearances, and the subsequent process of maintaining substantial compliance
with appropriate federal, state, local, and foreign statutes and regulations, require the expenditure of substantial time and financial
resources. In addition, statutes, rules, regulations and policies may change and new legislation or regulations may be issued that could
delay such approvals.
Medical Device Regulation
To date, we have received 21 510(k) clearances
for use of products as medical devices in tissue care management, such as cleaning, debridement, lubricating, moistening and dressing,
including for acute and chronic wounds, and in dermatology applications. Any future product candidates or new applications classified
as medical devices will require clearance by the FDA.
Medical devices are subject to FDA clearance and
extensive regulation under the Federal Food Drug and Cosmetic Act. Under the Federal Food Drug and Cosmetic Act, medical devices are classified
into one of three classes: Class I, Class II or Class III. The classification of a device into one of these three classes generally depends
on the degree of risk associated with the medical device and the extent of control needed to ensure safety and effectiveness. Devices
may also be designated unclassified. Unclassified devices are legally marketed pre-amendment devices for which a classification regulation
has yet to be finalized and for which a pre-market approval is not required.
Class I devices are devices for which safety and
effectiveness can be assured by adherence to a set of general controls. These general controls include compliance with the applicable
portions of the FDA’s Quality System Regulation, which sets forth good manufacturing practice requirements; facility registration,
device listing and product reporting of adverse medical events; truthful and non-misleading labeling; and promotion of the device only
for its cleared or approved intended uses. Class II devices are also subject to these general controls, and any other special controls
as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Review and clearance by the FDA for these devices
is typically accomplished through the 510(k) pre-market notification procedure. When 510(k) clearance is sought, a sponsor must submit
a pre-market notification demonstrating that the proposed device is substantially equivalent to a legally marketed device. If the FDA
agrees that the proposed device is substantially equivalent to the predicate device, then 510(k) clearance to market will be granted.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new 510(k) clearance or could require a pre-market approval.
Clinical trials are almost always required to
support a pre-market approval application and are sometimes required for a 510(k) pre-market notification. These trials generally require
submission of an application for an investigational device exemption. An investigational device exemption must be supported by pre-clinical
data, such as animal and laboratory testing results, which show that the device is safe to test in humans and that the study protocols
are scientifically sound. The FDA must approve an investigational device exemption, in advance, for a specified number of patients, unless
the product is deemed a non-significant risk device and is eligible for more abbreviated investigational device exemption requirements.
Both before and after a medical device is commercially
distributed, manufacturers and marketers of the device have ongoing responsibilities under FDA regulations. The FDA reviews design and
manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other information
to identify potential problems with marketed medical devices. Device manufacturers are subject to periodic and unannounced inspection
by the FDA for compliance with the Quality System Regulation, which sets forth the Current Good Manufacturing Practice requirements that
govern the methods used in, and the facilities and controls used for the design, manufacture, packaging, servicing, labeling, storage,
installation and distribution of all finished medical devices intended for human use.
FDA regulations prohibit the advertising and promotion
of a medical device for any use outside the scope of a 510(k) clearance or pre-market approval or for unsupported safety or effectiveness
claims. Although the FDA does not regulate physicians’ practice of medicine, the FDA does regulate manufacturer communications with
respect to off-label use.
If the FDA finds that a manufacturer has failed
to comply with FDA laws and regulations or that a medical device is ineffective or poses an unreasonable health risk, it can institute
or seek a wide variety of enforcement actions and remedies, ranging from a public warning letter to more severe actions such as:
· imposing fines, injunctions and civil penalties
· requiring a recall or seizure of products
· refusing requests for 510(k) clearance or pre-market approval of new products
· withdrawing 510(k) clearance or pre-market approval approvals already granted
· criminal prosecution
The FDA also has the authority to require a company
to repair, replace, or refund the cost of any medical device.
The FDA also administers certain controls over
the export of medical devices from the United States, as international sales of medical devices that have not received FDA clearance are
subject to FDA export requirements. Additionally, each foreign country subjects such medical devices to its own regulatory requirements.
In the European Union, there is a single regulatory approval process and approval is represented by the presence of a CE marking.
Other Regulation in the United States
The Physician Payments Sunshine Act
The Physician Payments Sunshine Act signed into
law in 2010 as part of the Affordable Care Act requires manufacturers of medical devices, drugs, biologicals, and medical supplies to
track and report certain payments made to and transfers of value provided to physicians and teaching hospitals as well as to report certain
ownership and investment interests held by physicians and their immediate family members. These manufacturers must report annually to
the Center for Medicare & Medicaid Services any direct or indirect payments and transfers of value of $10 or more, or annual aggregate
of $100 or more, made to physicians or to a third party at the request of or on behalf of a physician, including dentists. Payment includes:
consulting fees, compensation for services other than consulting, honoraria, gifts, entertainment, food, travel (including the specified
destinations), education, research, charitable contribution, royalty or license, current or prospective ownership or investment interest,
direct compensation for serving as faculty or as a speaker for a medical education program, grants, any other nature of the payment, or
other transfer of value. Manufacturers face monetary penalties for non-compliance. Certain payments related to research must be reported
separately. Product samples intended for patient use need not be reported.
Health Care Coverage and Reimbursement by Third-Party
Payors
Commercial success in marketing and selling products
depends, in part, on the availability of adequate coverage and reimbursement from third-party health care payors, such as government and
private health insurers and managed care organizations. Third-party payors are increasingly challenging the pricing of medical products
and services. Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive
pricing, and managed-care arrangements, are continuing in many countries where we do business, including the United States. These changes
are causing the marketplace to be more cost-conscious and focused on the delivery of more cost-effective medical products. Government
programs, including Medicare and Medicaid, private health care insurance companies, and managed-care plans control costs by limiting coverage
and the amount of reimbursement for particular procedures or treatments. This has created an increasing level of price sensitivity among
customers for our products. Some third-party payors also require that a favorable coverage determination be made for new or innovative
medical devices or therapies before they will provide reimbursement of those medical devices or therapies. Even though a new medical product
may have been cleared or approved for commercial distribution, we may find limited demand for the product until adequate coverage and
reimbursement have been obtained from governmental and other third-party payors.
Fraud and Abuse Laws
In the United States, we are subject to various
federal and state laws pertaining to healthcare fraud and abuse, which, among other things, prohibit the offer or acceptance of remuneration
intended to induce or in exchange for the purchase of products or services reimbursed under a federal healthcare program and the submission
of false or fraudulent claims with the government. These laws include the federal Anti-Kickback Statute, the False Claims Act and comparable
state laws. These laws regulate the activities of entities involved in the healthcare industry, such as Sonoma, by limiting the kinds
of financial arrangements such entities may have with healthcare providers who use or recommend the use of medical products, including,
for example, sales and marketing programs, advisory boards and research and educational grants. In addition, in order to ensure that healthcare
entities comply with healthcare laws, the Office of Inspector General of the U.S. Department of Health and Human Services recommends
that healthcare entities institute effective compliance programs. To assist in the development of effective compliance programs, the Office
of Inspector General has issued model Compliance Program Guidance, materials for a variety of healthcare entities which, among other things,
identify practices to avoid that may implicate the federal Anti-Kickback Statute and other relevant laws and describes elements of an
effective compliance program. While compliance with the Compliance Program Guidance materials is voluntary, a California law requires
pharmaceutical and devices manufacturers to initiate compliance programs that incorporate the Compliance Program Guidance and the July
2002 Pharmaceuticals Research and Manufacturers of America Code on Interactions with Healthcare Professionals.
Due to the scope and breadth of the provisions
of some of these laws, it is possible that some of our practices might be challenged by the government under one or more of these laws
in the future. Violations of these laws, which are discussed more fully below, can lead to civil and criminal penalties, damages, imprisonment,
fines, exclusion from participation in Medicare, Medicaid and other federal health care programs, and the curtailment or restructuring
of operations. Any such violations could have a material adverse effect on our business, financial condition, results of operations or
cash flows.
Anti-Kickback Laws
Our operations are subject to federal and state
anti-kickback laws. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or
providing remuneration directly or indirectly to induce either the referral of an individual for a good or service reimbursed under a
federal healthcare program, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a
federal healthcare program, such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to
include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, waiver of co-payments, and
providing anything at less than its fair market value. Because the Anti-Kickback Statute makes illegal a wide variety of common, even
beneficial, business arrangements, the Office of Inspector General was tasked with issuing regulations, commonly known as “safe
harbors,” that describe arrangements where the risk of illegal remuneration is minimal. As long as all of the requirements of a
particular safe harbor are strictly met, the entity engaging in that activity will not be prosecuted under the federal Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal
or that prosecution will be pursued. However, business arrangements that do not fully satisfy an applicable safe harbor may result in
increased scrutiny by government enforcement authorities, such as the Office of Inspector General. Our agreements to pay compensation
to our advisory board members and physicians who provide other services for us may be subject to challenge to the extent they do not fall
within relevant safe harbors under state and federal anti-kickback laws. In addition, many states have adopted laws similar to the federal
Anti-Kickback Statute, which apply to the referral of patients for health care services reimbursed by Medicaid, and some have adopted
such laws with respect to private insurance. Violations of the Anti-Kickback Statute are subject to significant fines and penalties and
may lead to a company being excluded from participating in federal health care programs.
False Claims Laws
The federal False Claims Act prohibits knowingly
filing a false claim, knowingly causing the filing of a false claim, or knowingly using false statements to obtain payment from the federal
government. Certain violations of the Anti-Kickback Statute constitute per se violations of the False Claims Act. Under the False Claims
Act, such suits are known as “qui tam” actions. Individuals may file suit on behalf of the government and share in any amounts
received by the government pursuant to a settlement. In addition, certain states have enacted laws modeled after the federal False Claims
Act under the Deficit Reduction Act of 2005, where the federal government created financial incentives for states to enact false claims
laws consistent with the federal False Claims Act. As more states enact such laws, we expect the number of qui tam lawsuits to increase.
Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend false
claims actions, pay fines or be excluded from Medicare, Medicaid or other federal or state government healthcare programs as a result
of investigations arising out of such actions.
HIPAA
Two federal crimes were created under the Health
Insurance Portability and Accountability Act of 1996, or HIPAA: healthcare fraud and false statements relating to healthcare matters.
The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including
private payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or
making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services.
Health Information Privacy and Security
Individually identifiable health information is
subject to an array of federal and state regulation. Federal rules promulgated pursuant to HIPAA regulate the use and disclosure of health
information by “covered entities.” Covered entities include individual and institutional health care providers from which
we may receive individually identifiable health information. These regulations govern, among other things, the use and disclosure of health
information for research purposes, and require the covered entity to obtain the written authorization of the individual before using or
disclosing health information for research. Failure of the covered entity to obtain such authorization could subject the covered entity
to civil and criminal penalties. We may experience delays and complex negotiations in dealing with each entity’s differing interpretation
of the regulations and what is required for compliance. Also, where our customers or contractors are covered entities, including hospitals,
universities, physicians or clinics, we may be required by the HIPAA regulations to enter into “business associate” agreements
that subject the company to certain privacy and security requirements. In addition, many states have laws that apply to the use and disclosure
of health information, and these laws could also affect the manner in which we conduct research and other aspects of business. Such state
laws are not preempted by the federal privacy law when such laws afford greater privacy protection to the individual than the federal
law. While activities to assure compliance with health information privacy laws are a routine business practice, we are unable to predict
the extent to which resources may be diverted in the event of an investigation or enforcement action with respect to such laws.
Foreign Regulation
Whether or not we obtain FDA approval for a product,
approval of a product by the applicable regulatory authorities of foreign countries must be obtained before clinical trials or marketing
of the product in those countries can begin. The approval process varies from country to country, and the time may be longer or shorter
than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement
also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the United
States typically are administered under a three-phase sequential process similar to that discussed above for medical devices.
European Union Regulation
Medical Device Regulation
Our products are classified as medical devices
in the European Union. In order to sell medical device products within the European Union, we are required to comply with the requirements
of the Medical Devices Regulation, and its national implementations, including affixing CE markings on products. The CE marking indicates
a product’s compliance with EU legislation and so enables the sale of products throughout the European Economic Area, or the EEA,
comprising the 28 Member States of the EU and European Free Trade Association, or EFTA, countries Iceland, Norway, and Liechtenstein.
In order to comply with the Medical Devices Regulation, we must meet certain requirements relating to the safety and performance of products
and, prior to marketing products, we must successfully undergo verification of products’ regulatory compliance, or conformity assessment.
The Medical Devices Regulation was adopted in
the EU on May 26, 2017 to replace the existing Medical Device Directive, and became applicable on May 26, 2021, with a transition period
until May 26, 2024. Under the new Medical Devices Regulation, certain devices are classified in higher classes, new devices are classified,