ITEM 1A. Risk Factors
Risks Related to Our Business
We have a history of losses, we expect to
continue to incur losses and we may never achieve profitability and our March 31, 2023 audited consolidated financial statements included
disclosure that casts substantial doubt regarding our ability to continue as a going concern.
We reported a net loss of $5,151,000 and $5,086,000
for the years ended March 31, 2023 and 2022, respectively. At March 31, 2023 and 2022, our accumulated deficit amounted to $189,514,000
and $184,363,000, respectively. We had working capital of $10,081,000 and $10,611,000 as of March 31, 2023 and 2022, respectively. During
the years ended March 31, 2023 and 2022, net cash used in operating activities amounted to $6,152,000 and $4,248,000, respectively. As
of March 31, 2023, we had cash and cash equivalents of $3,820,000.
We spent the most recent years working to reduce
our losses and have made significant progress. However, we expect to continue incurring losses for the foreseeable future. We may never
achieve or sustain profitability. We must raise additional capital to pursue our product development initiatives, penetrate markets for
the sale of our products and continue as a going concern. We cannot provide any assurance that we will raise additional capital. We believe
that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations,
or other means. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives
and 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 efforts to further commercialize our products, which are critical to the realization
of our business plan and to our future operations. These matters raise substantial doubt about our ability to continue as a going concern
or become profitable.
We depend on third party distributors and
intend to continue to license or collaborate with third parties in various potential markets, and events involving these strategic partners
or any future collaboration could delay or prevent us from developing or commercializing products.
Our business strategy and our short- and long-term
operating results depend in part on our ability to execute on existing strategic collaborations and to license or partner with new strategic
partners. We believe collaborations allow us to leverage our resources and technologies and to access markets that are compatible with
our own core areas of expertise while avoiding the cost of establishing or maintaining a direct sales force in each market. We may incur
significant costs in the use of third parties to identify and assist in establishing relationships with potential collaborators. We currently
use distributors for most of our products.
We have limited control over the amount and timing
of resources that our current partners or any future collaborators devote to our collaborations or potential products. These partners
may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely
manner. Further, our partners may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient
resources to the development, manufacture, marketing or sale of these products.
To penetrate our target markets, we may need to
enter into additional collaborative agreements to assist in the development and commercialization of products. Establishing strategic
collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial,
regulatory or intellectual property position and our internal capabilities. Our discussions with potential collaborators may not lead
to the establishment of new collaborations on favorable terms and may have the potential to provide collaborators with access to our key
intellectual property filings and next generation formations. By entering into collaboration, we may preclude opportunities to collaborate
with other third parties who do not wish to associate with our existing third-party strategic partners. Moreover, in the event of termination
of a collaboration agreement, termination negotiations may result in less favorable terms.
Mexican tax law prevents us from deducting
intercompany interest expense incurred by our Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V and requires withholding tax
on payments remitted to the US. At the same time, we are unable to recognize tax benefits for foreign tax credits for U.S. tax purposes.
Since 2004, we loaned
substantial amounts to our Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V. at various interest rates to fund their operations.
As of March 31, 2023, our Mexico subsidiary owes approximately $12.3 million in principal, $11.1 million in technical assistance payments
and $21.8 million in accrued interest. The intercompany loans mature in 2027. There is no guarantee that our Mexican subsidiary will be
able to pay any or all of the amounts due. If we were to forgive the debt or if we were to convert the debt to equity, it would be subject
to Mexico income tax at 30%, or approximately $10.2 million, as well as Mexican withholding tax of 15%.
Mexico’s thin capitalization
rules also require taxpayers to maintain a debt-to-equity ratio of 3:1. Any interest paid to foreign related parties that results in indebtedness
exceeding a ratio of 3:1 to their stockholder’s equity is not deductible for Mexican corporate income tax purposes and we did not
meet that condition. Therefore, we have not been able to deduct the intercompany interest on our Mexico tax returns since 2004. It has
prevented our Mexico subsidiary from accruing net operating losses in Mexico to offset potential future profits. At the same time the
intercompany interest income in the United States decreases our U.S. net operating losses and reduces our ability to apply these carryforwards
to offset future taxable income in the United States.
In addition, any interest
paid to a foreign lender is subject to Mexico withholding tax of 15%. We also have interest owed on our intercompany technical assistance
agreement and royalty withholding of 10% on our technical assistance agreement. This would amount to approximately $4.2 million in Mexico
withholding tax at March 31, 2023, if all of the interest and technical assistance were to be repaid to us. In general, the foreign related
party parent can then claim a credit for these withholding taxes on their U.S. income tax return. However, because of our substantial
U.S. net operating losses, we are prevented from claiming any credit on any withholding tax for U.S. income tax purposes. Any such failure
to pay intercompany debt, inability to deduct income taxes or apply credits, or liability for tax payments could have a material adverse
effect on our business, financial condition, and results of operations.
We rely on a number of key customers who
may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.
Although we have a significant number of customers
in each of the geographic markets that we operate in, we rely on certain key customers for a significant portion of our revenues. 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.
In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period.
These customers may not consistently purchase our products at a particular rate over any subsequent period. The loss of any of these customers
could adversely affect our revenues.
A majority of our business is conducted
outside of the United States, exposing us to additional risks that may not exist in the United States, which in turn could cause our business
and operating results to suffer.
We have material international operations in Mexico,
Asia and Europe. During the years ended March 31, 2023 and 2022, approximately 74% and 70% of our total revenue, respectively, were generated
from sales outside of the United States. Our business is highly regulated for the use, marketing and manufacturing of our HOCl-based products
both domestically and internationally. Our international operations are subject to risks, including:
· local political or economic instability;
· continuing restrictions related to the Covid-19 pandemic;
· changes in exchange rates;
· changes in governmental regulation;
· changes in import/export duties;
· trade restrictions;
· lack of experience in foreign markets;
· work stoppages or other changes in labor conditions;
· adverse tax consequences or overlapping tax structures.
We plan to continue to market and sell our products
internationally to respond to customer requirements and market opportunities. We currently have manufacturing facilities in Mexico. Establishing
operations in any foreign country or region presents risks such as those described above as well as risks specific to the particular country
or region. In addition, until a payment history is established over time with customers in a new geographic area or region, the likelihood
of collecting receivables generated by such operations could be less than our expectations. As a result, there is a greater risk that
the reserves set with respect to the collection of such receivables may be inadequate. If our operations in any foreign country are unsuccessful,
we could incur significant losses and we may not achieve profitability.
In addition, changes in policies or laws of the
United States or foreign governments resulting in, among other things, changes in regulations and the approval process, higher taxation,
currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated
benefits of our international expansion. If we fail to realize the anticipated revenue growth of our future international operations,
our business and operating results could suffer.
If we fail to obtain, or experience significant
delays in obtaining, additional regulatory clearances or approvals to market our current or future products, we may be unable to commercialize
these products.
The developing, testing, manufacturing, marketing
and selling of medical technology products is subject to extensive regulation by numerous governmental authorities in the United States
and other countries. The process of obtaining regulatory clearance and approval of medical technology products is costly and time consuming.
Even though their underlying product formulations may be the same or similar, our products are subject to different regulations and approval
processes depending upon their intended use.
The FDA generally clears marketing of a medical
device through the 510(k) pre-market clearance process if it is demonstrated the new product has the same intended use and the same or
similar technological characteristics as another legally marketed Class II device, such as a device already cleared by the FDA through
the 510(k) premarket notification process, and otherwise meets the FDA’s requirements. Product modifications, including labeling
the product for a new intended use, may require the submission of a new 510(k) clearance and FDA approval before the modified product
can be marketed.
In addition, we do not know whether the necessary
approvals or clearances will be granted or delayed for future products. The FDA could request additional information, changes to product
formulation(s) or clinical testing that could adversely affect the time to market and sale of products as drugs. If we do not obtain the
requisite regulatory clearances and approvals, we will be unable to commercialize our products and may never recover any of the substantial
costs we have invested in the development of HOCl.
Distribution of our products outside the United
States is subject to extensive government regulation. These regulations, including the requirements for approvals or clearance to market,
the time required for regulatory review and the sanctions imposed for violations, vary from country to country. We do not know whether
we will obtain regulatory approvals in such countries or that we will not be required to incur significant costs in obtaining or maintaining
these regulatory approvals. In addition, the export by us of certain of our products that have not yet been cleared for domestic commercial
distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the restriction, suspension
or revocation of existing approvals or any other failure to comply with regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of operations.
If our products do not gain market acceptance,
our business will suffer because we might not be able to fund future operations.
A number of factors may affect the market acceptance
of our products or any other products we develop or acquire, including, among others:
· our ability to fund our sales and marketing efforts; and
Our ability to effectively promote and sell any
approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price
and our ability to obtain sufficient third-party coverage or reimbursement, if any. In addition, our efforts to educate the medical community
on the benefits of our product candidates may require significant resources, may be constrained by FDA rules and policies on product promotion,
and may never be successful. If our products do not gain market acceptance, we may not be able to fund future operations, including developing,
testing and obtaining regulatory approval for new product candidates and expanding our sales and marketing efforts for our approved products,
which would cause our business to suffer.
If our competitors develop products with
similar characteristics to HOCl, we may need to modify or alter our business strategy, which may delay the achievement of our goals.
Competitors have and may continue to develop products
with similar characteristics to HOCl. Such similar products marketed by larger competitors can hinder our or our partners’ efforts
to penetrate the market. As a result, we may be forced to modify or alter our business and regulatory strategy and sales and marketing
plans, as a response to changes in the market, competition and technology limitations, among others. Such modifications may pose additional
delays in achieving our goals.
Negative economic conditions increase the
risk that we could suffer unrecoverable losses on our customers’ accounts receivable which would adversely affect our financial
results.
We grant credit to our business customers, which
are primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables. We maintain
allowances for potential credit losses. 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. While we believe we have a varied customer base and have experienced strong collections in the past, if current economic conditions
disproportionately impact any one of our key customers, including reductions in their purchasing commitments to us or their ability to
pay their obligations, it could have a material adverse effect on our revenues and liquidity. We have not purchased insurance on our accounts
receivable balances.
If we fail to comply with ongoing regulatory
requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal
from the market.
Regulatory approvals or clearances that we currently
have and that we may receive in the future are subject to limitations on the indicated uses for which the products may be marketed, and
any future approvals could contain requirements for potentially costly post-marketing follow-up studies. If the FDA determines that our
promotional materials or activities constitute promotion of an unapproved use or we otherwise fail to comply with FDA regulations, we
may be subject to regulatory enforcement actions, including warning letters, injunctions, seizures, civil fines or criminal penalties.
In addition, the manufacturing, labeling, packaging, adverse event reporting, storing, advertising, promoting, distributing and record-keeping
for approved products are subject to extensive regulation. We are subject to continued supervision by European regulatory agencies relating
to our CE markings and are required to report any serious adverse incidents to the appropriate authorities. Our manufacturing facilities,
processes and specifications are subject to periodic inspection by the FDA, Mexican and other regulatory authorities and, from time to
time, we may receive notices of deficiencies from these agencies as a result of such inspections. Our failure to continue to meet regulatory
standards or to remedy any deficiencies could result in restrictions being imposed on our products or manufacturing processes, fines,
suspension or loss of regulatory approvals or clearances, product recalls, termination of distribution, product seizures or the need to
invest substantial resources to comply with various existing and new requirements. In the more egregious cases, criminal sanctions, civil
penalties, disgorgement of profits or closure of our manufacturing facilities are possible. The subsequent discovery of previously unknown
problems with HOCl, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of our
products, and could include voluntary or mandatory recall or withdrawal of products from the market.
New government regulations may be enacted and
changes in FDA policies and regulations and, their interpretation and enforcement, could prevent or delay regulatory approval of our products.
We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative
action, either in the United States or abroad. Therefore, we do not know whether we will be able to continue to comply with any regulations
or that the costs of such compliance will not have a material adverse effect on our future business, financial condition, and results
of operations. If we are not able to maintain regulatory compliance, we will not be permitted to market our products and our business
would suffer.
We may experience difficulties in manufacturing
our products, which could prevent us from commercializing one or more of our products.
The machines used to manufacture our products
are complex, use complicated software and must be monitored by highly trained engineers. Slight deviations anywhere in our manufacturing
process, including quality control, labeling, and packaging, could lead to a failure to meet the specifications required by the FDA, the
Environmental Protection Agency, European notified bodies, Mexican regulatory agencies and other foreign regulatory bodies, which may
result in lot failures or product recalls. If we are unable to obtain quality internal and external components, mechanical and electrical
parts, if our software contains defects or is corrupted, or if we are unable to attract and retain qualified technicians to manufacture
our products, our manufacturing output of HOCl, or any other product candidate based on our platform that we may develop, could fail to
meet required standards, our regulatory approvals could be delayed, denied or revoked, and commercialization of one or more of our products
may be delayed or foregone. Manufacturing processes that are used to produce the smaller quantities of HOCl-based products needed for
clinical tests and current commercial sales may not be successfully scaled up to allow production of significant commercial quantities.
Any failure to manufacture our products to required standards on a commercial scale could result in reduced revenues, delays in generating
revenue and increased costs.
Our competitive position depends on our
ability to protect our intellectual property and our proprietary technologies.
Our ability to compete and to achieve and maintain
profitability depends on our ability to protect our intellectual property and proprietary technologies. We currently rely on a combination
of patents, patent applications, trademarks, trade secret laws, confidentiality agreements, license agreements and invention assignment
agreements to protect our intellectual property rights. We also rely upon unpatented know-how and continuing technological innovation
to develop and maintain our competitive position. These measures may not be adequate to safeguard our HOCl technology. If we do not protect
our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced.
Our pending patent applications and any patent
applications we may file in the future may not result in issued patents, and we do not know whether any of our in-licensed patents or
any additional patents that might ultimately be issued by the U.S. Patent and Trademark Office or foreign regulatory body will protect
our HOCl technology. Any claims that are issued may not be sufficiently broad to prevent third parties from producing competing substitutes
and may be infringed, designed around, or invalidated by third parties. Even issued patents may later be found to be invalid or may be
modified or revoked in proceedings instituted by third parties before various patent offices or in courts. For example, our European patent
that was initially issued on May 30, 2007 was revoked by the Opposition Division of the European Patent Office in December 2009 following
opposition proceedings instituted by a competitor.
The degree of future protection for our proprietary
rights is more uncertain in part because legal means afford only limited protection and may not adequately protect our rights, and we
will not be able to ensure that:
· we were the first to invent the inventions described in patent applications;
· we were the first to file patent applications for inventions;
· we will develop proprietary technologies that are patentable; or
The policies we use to protect our trade secrets
may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality and invention assignment
agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use or disclosures.
We cannot be certain that the steps we have taken
will prevent the misappropriation and use of our intellectual property in the United States, or in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States.
We may face intellectual property infringement
claims that could be time-consuming, costly to defend and could result in our loss of significant rights and, in the case of patent infringement
claims, the assessment of treble damages.
On occasion, we may receive notices of claims
of infringement, misappropriation, or misuse of other parties’ proprietary rights. We may have disputes regarding intellectual property
rights with the parties that have licensed those rights to us. We may also initiate claims to defend our intellectual property. Intellectual
property litigation, regardless of its outcome, is expensive and time-consuming, and could divert management’s attention from our
business and have a material negative effect on our business, operating results, or financial condition. In addition, the outcome of such
litigation may be unpredictable. If there is a successful claim of infringement against us, we may be required to pay substantial damages,
including treble damages if we were to be found to have willfully infringed a third party’s patent, to the party claiming infringement,
develop non-infringing technology, stop selling our products or using technology that contains the allegedly infringing intellectual property
or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure
to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. In addition, modifying
our products to exclude infringing technologies could require us to seek re-approval or clearance from various regulatory bodies for our
products, which would be costly and time consuming. Also, we may be unaware of pending patent applications that relate to our technology.
Parties making infringement claims on future issued patents may be able to obtain an injunction that would prevent us from selling our
products or using technology that contains the allegedly infringing intellectual property, which could harm our business.
We could be required to indemnify third
parties for alleged intellectual property infringement, which could cause us to incur significant costs.
Some of our distribution agreements contain commitments
to indemnify our distributors against liability arising from infringement of third-party intellectual property, such as patents. We may
be required to indemnify our customers for claims made against them or to contribute to license fees they are required to pay. If we are
forced to indemnify for claims or to pay license fees, our business and financial condition could be substantially harmed.
Our international operations are subject
to trade policies and trade agreements and unfavorable changes could harm our business.
We have significant international operations in
Mexico and Europe, and we manufacture products for export in Mexico. There may be changes to existing trade agreements, like the USMCA,
which went to effect on July 1, 2020, greater restrictions on free trade generally, and significant increases in tariffs on goods imported
into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. Any changes to USMCA (or
subsequent trade agreements) could impact our operations in countries where we manufacture or sell products or source components, or materials,
which could adversely affect our operating results and our business.
Our sales in international markets subject
us to foreign currency exchange and other risks and costs which could harm our business.
A substantial portion of our revenues are derived
from outside the United States, primarily from Mexico and Europe. We anticipate that revenues from international customers will continue
to represent a substantial portion of our revenues for the foreseeable future. Because we generate revenues in foreign currencies, we
are subject to the effects of exchange rate fluctuations. The functional currency of our Mexican subsidiary is the Mexican Peso and the
functional currency of our Netherlands subsidiary is the Euro. For the preparation of our consolidated financial statements, the financial
results of our foreign subsidiaries are translated into U.S. dollars using average exchange rates during the applicable period. If
the U.S. dollar appreciates against the Mexican Peso or the Euro, as applicable, the revenues we recognize from sales by our subsidiaries
will be adversely impacted. Foreign exchange gains or losses as a result of exchange rate fluctuations in any given period could harm
our operating results and negatively impact our revenues. Additionally, if the effective price of our products were to increase as a result
of fluctuations in foreign currency exchange rates, demand for our products could decline and adversely affect our results of operations
and financial condition.
The markets in which we operate are highly
competitive and subject to rapid technological change. If our competitors are better able to develop and market products that are less
expensive or more effective than any products that we may develop, our commercial opportunity may be reduced or eliminated.
Our success depends, in part, upon our ability
to stay at the forefront of technological change and to maintain a competitive position. We compete with large healthcare, pharmaceutical
and biotechnology companies, along with smaller or early-stage companies that have collaborative arrangements with larger pharmaceutical
companies, academic institutions, government agencies and other public and private research organizations. Many of our competitors have
significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing approved products than we do. Our competitors may:
· develop and patent processes or products earlier than we will;
As a result, we may not be able to successfully
commercialize any future products.
The success of our research and development
efforts may depend on our ability to find suitable collaborators to fully exploit our capabilities. If we are unable to establish collaborations
or if these future collaborations are unsuccessful, our research and development efforts may be unsuccessful, which could adversely affect
our results of operations and financial condition.
An important element of our business strategy
is to enter into collaborative or license arrangements under which we license our HOCl technology to other parties for development and
commercialization. We expect to seek collaborators for our potential products because of the expense, effort and expertise required to
conduct clinical trials and further develop those potential product candidates. Because collaboration arrangements are complex to negotiate,
we may not be successful in our attempts to establish these arrangements. If we need third party assistance in identifying and negotiating
one or more acceptable arrangements, it might be costly. Also, we may not have products that are desirable to other parties, or we may
be unwilling to license a potential product because the party interested in it is a competitor. The terms of any arrangements that we
establish may not be favorable to us. Alternatively, potential collaborators may decide against entering into an agreement with us because
of our financial, regulatory or intellectual property position or for scientific, commercial or other reasons. If we are unable to establish
collaborative agreements, we may not be able to develop and commercialize new products, which would adversely affect our business and
our revenues.
In order for any of these collaboration or license
arrangements to be successful, we must first identify potential collaborators or licensees whose capabilities complement and integrate
well with ours. We may rely on these arrangements for not only financial resources, but also for expertise or economies of scale that
we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for licensing technology rights.
However, it is likely that we will not be able to control the amount and timing or resources that our collaborators or licensees devote
to our programs or potential products. If our collaborators or licensees prove difficult to work with, are less skilled than we originally
expected, or do not devote adequate resources to the program, the relationship will not be successful. If a business combination involving
a collaborator or licensee and a third party were to occur, the effect could be to diminish, terminate or cause delays in development
of a potential product.
If we are unable to comply with broad and
complex federal and state fraud and abuse laws, including state and federal anti-kickback laws, we could face substantial penalties and
our products could be excluded from government healthcare programs.
We are subject to various federal and state laws
pertaining to healthcare fraud and abuse, which include, among other things, “anti-kickback” laws that prohibit payments to
induce the referral of products and services, and “false claims” statutes that prohibit the fraudulent billing of federal
healthcare programs. Our operations are subject to the Federal Anti-Kickback Statute, a criminal statute that, subject to certain statutory
exceptions, prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly,
to induce or reward a person either (i) for referring an individual for the furnishing of items or services for which payment may
be made in whole or in part by a government healthcare program such as Medicare or Medicaid, or (ii) for purchasing, leasing, ordering
or arranging for or recommending the purchasing, leasing or ordering of an item or service for which payment may be made under a government
healthcare program. Because of the breadth of the Federal Anti-Kickback Statute, the Office of Inspector General of the U.S. Department
of Health and Human Services, was authorized to adopt regulations setting forth additional exceptions to the prohibitions of the statute
commonly known as “safe harbors.” If all of the elements of an applicable safe harbor are fully satisfied, an arrangement
will not be subject to prosecution under the Federal Anti-Kickback Statute.
In addition, if there is a change in law, regulation
or administrative or judicial interpretations of these laws, we may have to change our business practices or our existing business practices
could be challenged as unlawful, which could have a negative effect on our business, financial condition and results of operations.
Healthcare fraud and abuse laws are complex, and
even minor, inadvertent irregularities can potentially give rise to claims that a statute or regulation has been violated. The frequency
of suits to enforce these laws has increased significantly in recent years and has increased the risk that a healthcare company will have
to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as
a result of an investigation arising out of such action. We cannot guarantee that we will not become subject to such litigation. Any violations
of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could harm our reputation,
be costly to defend and divert management’s attention from other aspects of our business. Similarly, if the physicians or other
providers or entities with which we do business are found to have violated abuse laws, they may be subject to sanctions, which could also
have a negative impact on us.
We may not be able to maintain sufficient
product liability insurance to cover claims against us.
Product liability insurance for the healthcare
industry is generally expensive to the extent it is available at all. We may not be able to maintain such insurance on acceptable terms
or be able to secure increased coverage if the commercialization of our products progresses, nor can we be sure that existing or future
claims against us will be covered by our product liability insurance. Moreover, the existing coverage of our insurance policy or any rights
of indemnification and contribution that we may have may not be sufficient to offset existing or future claims. A successful claim against
us with respect to uninsured liabilities or in excess of insurance coverage and not subject to any indemnification or contribution could
have a material adverse effect on our future business, financial condition, and results of operations.
If any of our third-party
contractors fail to perform their responsibilities to comply with FDA rules and regulations, the manufacture, marketing and sales of our
products could be delayed, which could decrease our revenues.
Supplying the market
with our HOCl technology products requires us to manage relationships with an increasing number of collaborative partners, suppliers and
third-party contractors. As a result, our success depends partially on the success of these third parties in performing their responsibilities
to comply with FDA rules and regulations. Although we pre-qualify our contractors and we believe that they are fully capable of performing
their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to
these activities. For example, we and our suppliers are required to comply with the FDA’s quality system regulations, which cover
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping
of our products. The FDA enforces the quality system regulation through inspections.
If any of our partners
or contractors fail to perform their obligations in an adequate and timely manner or fail to comply with the FDA’s rules and regulations,
including failure to comply with quality systems regulations or a corrective action submitted to the FDA after notification by the FDA
of a deficiency is deemed insufficient, then the manufacture, marketing and sales of our products could be delayed. Our products could
be detained or seized, the FDA could order a recall, or require our partner to replace or offer refunds for our products. The FDA could
also require our partner, and depending on our agreement with our partner, us, to notify healthcare professionals and others that the
products present unreasonable risks of substantial harm to the public health. If any of these events occur, the manufacture, marketing
and sales of our products could be delayed which could decrease our revenues.
If we fail to comply
with the FDA’s rules and regulations and are subject to an FDA recall as part of an FDA enforcement action, the associated costs
could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our Company, our products,
the manufacturing facilities for our products, the distribution of our products, and our promotion and marketing materials are subject
to strict and continual review and periodic inspection by the FDA and other regulatory agencies for compliance with pre-approval and post-approval
regulatory requirements.
If we fail to comply
with the FDA’s rules and regulations, we could be subject to an enforcement action by the FDA. The FDA could undertake regulatory
actions, including seeking a consent decree, recalling or seizing our products, ordering a total or partial shutdown of production, delaying
future marketing clearances or approvals, and withdrawing or suspending certain of our current products from the market. A product recall,
restriction, or withdrawal could result in substantial and unexpected expenditures, destruction of product inventory, and lost revenues
due to the unavailability of one or more of our products for a period of time, which could reduce profitability and cash flow. In addition,
a product recall or withdrawal could divert significant management attention and financial resources. If any of our products are subject
to an FDA recall, we could incur significant costs and suffer economic losses. Production of our products could be suspended and we could
be required to establish inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to
products we, or our third-party contractors, manufacture. A recall of a material amount of our products could have a significant, unfavorable
impact on our future gross margins.
If our products
fail to comply with FDA and other governmental regulations, or our products are deemed defective, we may be required to recall our products
and we could suffer adverse public relations that could adversely impact our sales, operating results, and reputation which would adversely
affect our business operations.
We may be exposed to
product recalls, including voluntary recalls or withdrawals, and adverse public relations if our products are alleged to cause injury
or illness, or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental regulations. Governmental
authorities can also require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues.
For the same reasons, we may also voluntarily elect to recall, restrict the use of a product or withdraw products that we consider below
our standards, whether for quality, packaging, appearance or otherwise, in order to protect our brand reputation.
Product recalls, product
liability claims, even if unmerited or unsuccessful, or any other events that cause consumers to no longer associate our brand with high
quality and safe products may also result in adverse publicity, hurt the value of our brand, harm our reputation among our customers and
other healthcare professionals who use or recommend the products, lead to a decline in consumer confidence in and demand for our products,
and lead to increased scrutiny by federal and state regulatory agencies of our operations, any of which could have a material adverse
effect on our brand, business, performance, prospects, value, results of operations and financial condition.
Our ability to generate revenue will be
diminished if we or our partners are unable to obtain acceptable prices or an adequate level of reimbursement from third-party payors,
or our partners may face pricing pressure from private third-party payers, including customers, from rebates and restrictive reimbursement
practices.
Our partner’s ability to commercialize our
products successfully will depend in part on the extent to which appropriate coverage and reimbursement levels for the cost of our products
and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance
organizations, or HMOs. In the United States, governmental and private payors have limited the growth of health care costs through price
regulation or controls, competitive pricing programs and drug rebate programs.
There is significant uncertainty concerning third-party
coverage and reimbursement of newly approved medical products. Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed healthcare in the United States and the concurrent growth of organizations
such as HMOs, as well as the “Affordable Care Act,” or any new healthcare laws may result in lower prices for or rejection
of our products. The cost containment measures that health care payors and providers are instituting and the effect of any healthcare
reform or changes to managed healthcare could materially and adversely affect our ability to generate revenues.
In the United States and some foreign jurisdictions,
there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our partner’s
abilities to sell our products profitably, and thus lead to decreased demand for our products and revenues for us. We were able to negotiate
minimum purchase requirements in certain of our third-party distributor agreements. However, we have limited control over purchases by
our distributors, to meet the minimum purchase thresholds or above the minimum purchase thresholds.
Increasingly, private health insurance companies
and self-insured employers have been raising co-payments required from beneficiaries and looking for other ways to shift more of the cost
burden to manufacturers and patients. This cost shifting has given consumers greater control of medication choices, as they pay for a
larger portion of their prescription costs and may cause consumers to favor lower cost generic alternatives to branded pharmaceuticals.
Additionally, patients continue to face cost reduction pressures that may cause them to curtail their use of, or seek reimbursement for,
our products, to negotiate reduced fees or other concessions or to delay payment. Third-party payors may reduce or limit reimbursement
for our products in the future, such as by withdrawing their coverage policies, canceling any future contracts, reviewing and adjusting
the rate of reimbursement, or imposing limitations on coverage. Any such changes could negatively impact the sales of our products by
our partners, and therefore, have a material adverse effect on our revenues.
Our ability to generate revenue will be
diminished if we or our partners are unable to manage customer product substitutions for our prescription products.
Similar to other pharmaceutical companies, patients
are increasingly seeking lower-cost substitutes to our products. Even if our patients have a prescription for our product, the pharmacist
may recommend a less expensive product even if that product is less effective or designed for conditions different from what the patient
is seeking to treat. As a result, the patient may choose to abandon purchasing our prescribed product for a less expensive alternative
product resulting in a lost sale for our partners. If the number of consumers substituting our products increases, it could have a material
adverse effect on sales of our products by our partners, and therefore, our revenues, financial position, cash flows and results of operations.
Our inability to raise additional capital
on acceptable terms in the future may cause us to curtail certain operational activities, including regulatory trials, sales and marketing,
and international operations, in order to reduce costs and sustain the business, and such inability would have a material adverse effect
on our business and financial condition.
We expect capital outlays and operating expenditures
to increase over the next several years as we work to expand our sales force, conduct regulatory trials, commercialize our products and
expand our infrastructure. We may need to raise additional capital in order to, among other things:
· sustain commercialization of our current products or new products;
· acquire or license technologies;
· develop new products;
· expand our manufacturing capabilities; and
· finance capital expenditures and our general and administrative expenses.
Our present and future funding requirements will
depend on many factors, including:
· competing technological and market developments; and
· changes in regulatory policies or laws that affect our operations.
If we raise additional funds by issuing equity
securities, it will result in dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges
senior to those of holders of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have
rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose
significant restrictions on our operations. If we raise additional funds through collaborations or licensing arrangements, we might be
required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. A
failure to obtain adequate funds may cause us to curtail certain operational activities, including regulatory trials, sales and marketing,
and international operations, in order to reduce costs and sustain our business, and would have a material adverse effect on our business
and financial condition.
Our information technology and infrastructure
may be breached or attacked.
In the ordinary course of our business, we collect
and store a limited amount of sensitive data, including intellectual property, our proprietary business information and that of our customers,
suppliers, business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks.
The secure processing, maintenance, and transmission of this information is critical to our operations and business strategy. Despite
our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee
error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed,
publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings,
liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services
we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely
affect our business, revenues and competitive position.
Our cash and cash equivalents may be exposed
to failure of our banking institutions.
We maintain our cash at financial institutions,
in balances that exceed current FDIC insurance limits. On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California
Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed receiver of SVB. While
none of our cash and cash equivalents was held at SVB, if the banks where we hold deposits were to become insolvent or enter receivership,
our ability to access our cash, cash equivalents and investments, including transferring funds, making payments or receiving funds, may
be threatened, and this could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
The market price of our common stock may
be volatile, and the value of your investment could decline significantly.
The trading price for our common stock has been,
and we expect it to continue to be, volatile. The price at which our common stock trades depends upon a number of factors, including our
historical and anticipated operating results, our financial situation, announcements of new products by us or our competitors, our ability
or inability to raise the additional capital we may need and the terms on which we raise it, and general market and economic conditions.
Some of these factors are beyond our control. Broad market fluctuations may lower the market price of our common stock and affect the
volume of trading in our stock, regardless of our financial condition, results of operations, business or prospects. It is impossible
to assure you that the market price of our shares of common stock will not fall in the future.
Our operating results may fluctuate, which
could cause our stock price to decrease.
Fluctuations in our operating results may lead
to fluctuations, including declines, in our share price. Our operating results and our share price may fluctuate from period to period
due to a variety of factors, including:
· issues in manufacturing our product candidates or products;
· the development and commercialization of product enhancements;
· changes in the regulatory environment;
· delays in establishing new strategic relationships;
· costs associated with collaborations and new product candidates;
· changes in recommendations of securities analysts or lack of analyst coverage;
· failure to meet analyst expectations regarding our operating results;
· additions or departures of key personnel; and
· general market conditions.
Variations in the timing of our future revenues
and expenses could also cause significant fluctuations in our operating results from period to period and may result in unanticipated
earning shortfalls or losses. In addition, The Nasdaq Capital Market, in general, and the market for life sciences companies, in particular,
have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance
of those companies.
Anti-takeover provisions in our certificate
of incorporation and bylaws and under Delaware law may make it more difficult for stockholders to change our management and may also make
a takeover difficult.
Our corporate documents and Delaware law contain
provisions that limit the ability of stockholders to change our management and may also enable our management to resist a takeover. These
provisions include:
We are subject to Section 203 of the Delaware
General Corporation Law, which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware
corporation and an “interested stockholder,” which is generally defined as a stockholder who became a beneficial owner of
15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an
interested stockholder.
These provisions might discourage, delay or prevent
a change of control in our management. These provisions could also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other corporate actions. In addition, the existence of these provisions, together
with Delaware law, might hinder or delay an attempted takeover other than through negotiations with our Board of Directors.
Our stockholders may experience substantial
dilution in the value of their investment if we issue additional shares of our capital stock or other securities convertible into common
stock.
Our Restated Certificate of Incorporation, as
amended, allows us to issue up to 24,000,000 shares of our common stock and to issue and designate, without stockholder approval, the
rights of up to 714,286 shares of preferred stock. In the event we issue additional shares of our capital stock, dilution to our stockholders
could result. In addition, if we issue and designate a class of convertible preferred stock, these securities may provide for rights,
preferences or privileges senior to those of holders of our common stock. Additionally, if we issue preferred stock, it may convert into
common stock at a ratio of 1:1 or greater because our Restated Certificate of Incorporation, as amended, allows us to designate a conversion
ratio without limitations.
Shares issuable upon the conversion of warrants
or preferred stock or the exercise of outstanding options may substantially increase the number of shares available for sale in the public
market and depress the price of our common stock.
As of March 31, 2023, we had outstanding warrants
exercisable for an aggregate of 104,000 shares of our common stock at a weighted average exercise price of approximately $9.27 per share.
We also had units convertible into 46,000 shares of common stock at an exercise price of $11.25 per unit. In addition, as of March 31,
2023, options to purchase an aggregate of 565,000 shares of our common stock were outstanding at a weighted average exercise price of
$8.84 per share and a weighted average contractual term of 8.41 years. In addition, 982,000 shares of our common stock were available
on March 31, 2023 for future option grants under our 2016 Equity Incentive Plan and our 2021 Equity Incentive Plan. To the extent any
of these warrants or options are exercised and any additional options are granted and exercised, there will be further dilution to stockholders
and investors. Until the options and warrants expire, these holders will have an opportunity to profit from any increase in the market
price of our common stock without assuming the risks of ownership. Holders of options and warrants may convert or exercise these securities
at a time when we could obtain additional capital on terms more favorable than those provided by the options or warrants. The exercise
of the options and warrants will dilute the voting interest of the owners of presently outstanding shares by adding a substantial number
of additional shares of our common stock.
We have filed several registration statements
with the SEC, so that substantially all of the shares of our common stock which are issuable upon the exercise of outstanding warrants
and options may be sold in the public market. The sale of our common stock issued or issuable upon the exercise of the warrants and options
described above, or the perception that such sales could occur, may adversely affect the market price of our common stock.
ITEM 2. Properties
At March 31, 2023, we have a corporate office
in Boulder, Colorado and our manufacturing facility in Zapopan, Mexico. We currently lease the following material properties:
Location Rent per month Purpose
We believe that our properties will be adequate
to meet our needs for at least the next 12 months.
ITEM 3. Legal Proceedings
We may be involved in legal matters arising in
the ordinary course of our business including matters involving proprietary technology. While management believes that such matters are
currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may
have a material adverse effect on our business, financial condition or results of comprehensive (loss) income.
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on The Nasdaq Capital
Market under the symbol “SNOA.” Previously, it traded under the symbol “OCLS” until December 6, 2016. Our common
stock has been trading since our initial public offering on January 25, 2007.
Holders
As of June 12, 2023, we had approximately 301
holders of record of our common stock. Holders of record include nominees who may hold shares on behalf of multiple owners.
Dividends
We have never declared or paid any cash dividends
on our common stock. We currently anticipate that we will retain all future earnings for the operation of our business and we do not currently
intend to pay any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity
Compensation Plans
The information required to be disclosed by Item
201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by
reference. Refer to Item 12 of Part III of this annual report on Form 10-K for additional information.
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during
the year ended March 31, 2023 and through June 12, 2023.
ITEM 6. Selected Financial Data
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 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