ITEM 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of our consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to exercise
its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions
that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments
and contingencies at the date of the consolidated financial statements.
On an ongoing basis, we evaluate our estimates
and judgments. Areas in which we exercise significant judgment include, but are not necessarily limited to, our valuation of accounts
receivable, inventory, income taxes, equity transactions (compensatory and financing) and contingencies.
We base our estimates and judgments on a variety
of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the
attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate
our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are
necessary.
While we believe that the factors we evaluate
provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will
always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such
estimates.
For a Summary of all Accounting Policies, please
refer to Notes to Consolidated Financial Statements, Note 3.
Results of Continuing Operations
Comparison of the Year Ended March 31, 2023
and 2022
Revenue
The following table shows our consolidated total
revenue and revenue by geographic region for the year ended March 31, 2023 and 2022:
Years Ended March 31,
(In thousands) 2023 2022 $ Change % Change
The decrease in United States revenues for the
year ended March 31, 2023 compared to the prior year of $0.4 million is primarily the result of softening demand for our over-the-counter
animal health care products, partially offset by increases in our over-the-counter eye and dermatology products. Revenue for wound care
products increased 10% from the prior year.
Our revenues in Europe increased 19% as a result
of bringing on new distributors and a increase in orders from existing distributors.
Our revenues in Asia increased slightly due to
higher demand, and Rest of the World revenues were relatively flat.
The increase in Latin America revenue was primarily
the result of service revenue from selling machinery to a customer for $750,000, which management expects to be a one-time event, partially
offset by a decline in manufacturing for one of our customers.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics are
as follows:
Year ended March 31,
(In thousands, except for percentages) 2023 2022 Change % Change
Cost of Revenue as a % of Revenue 66% 68% (2)%
Gross Profit as a % of Revenue 34% 32% 2%
The gross margin increase of 2% for the year ended
March 31, 2023 compared to the year ended March 31, 2022 is related to greater factory efficiency resulting from higher volumes of product
sold and product mix.
Research and Development Expense
The research and development metrics are as follows:
Year ended March 31,
(In thousands, except for percentages) 2023 2022 Change % Change
Research and Development Expense $ 207 $ 125 $ 82 66%
Research and Development Expense as a % of Revenue 2% 1% 1%
For the year ended March 31, 2023, research and
development expenses increased due to higher clinical trial expense and seeking third party certification of our products.
Selling, General and Administrative Expense
The selling, general and administrative expense
metrics are as follows:
Year ended March 31,
(In thousands, except for percentages) 2023 2022 Change % Change
Selling, General and Administrative Expense $ 8,840 $ 9,755 $ (915 ) (9)%
Selling, General and Administrative Expense as a % of Revenue 67% 77%
The decrease in Selling, General and Administrative
expense for the year ended March 31, 2023 was primarily the result tight control of expenses across all categories and consolidating our
U.S. operations into one office.
Interest (Expense) Income, net
Interest (expense) income, net was $16,000 and
$(10,000), respectively, for the years ended March 31, 2023 and March 31, 2022.
Forgiveness of PPP loan
On May 1,
2020, we received loan proceeds in the amount of $1,310,000 under the Paycheck Protection Program, from Coastal States Bank in Atlanta,
Georgia. We used the loan amount for eligible purposes, such as payroll expenses. For the year ended March 31, 2022, we received approval
for loan forgiveness in the amount of $723,000. The remainder was not forgiven as a result of a decline in headount.
Other Expense, net
Other expense, net for the year ended March 31,
2023 and 2022, was $631,000 and $394,000, respectively. The increase in other expense, net relates primarily to a increase in foreign
exchange losses.
Gain on Sale of Assets
For the year ended March 31, 2023, we sold equipment
for a gain of $1,000 compared to a gain of $150,000 in the year ended March 31, 2022.
Income Tax Benefit (Expense)
Income tax benefit (expense) for the year ended
March 31, 2023 was $33,000 compared to $332,000 for the year ended March 31, 2022.
Net Loss
The following table provides the net loss for
each period along with the computation of basic and diluted net income per share:
For the Year Ended March 31,
(In thousands, except per share data) 2023 2022
Weighted-average shares outstanding: basic and diluted 3,394 2,653
Net loss per share: basic and diluted $ (1.52 ) $ (1.92 )
Liquidity and Capital Resources
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. As of March 31, 2023, we had cash and cash equivalents of $3,820,000 compared to $7,396,000 on March 31,
2022. Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of
financing that we have used to date include our revenues, as well as various loans and the sale of certain assets to Invekra, Petagon
and MicroSafe.
Since April 1, 2022, substantially all of our
operations have been financed through cash on hand and the following transaction:
The following table presents a summary of our
consolidated cash flows for operating, investing and financing activities for the year ended March 31, 2023 and 2022 as well balances
of cash and cash equivalents and working capital:
Year ended March 31,
Net cash provided by (used in):
Operating activities $ (6,152 ) $ (4,248 )
Investing activities (258 ) (99 )
Effect of exchange rates on cash 345 127
Net change in cash and cash equivalents (3,576 ) 3,176
Cash and cash equivalents, beginning of the period 7,396 4,220
Cash and cash equivalents, end of the period $ 3,820 $ 7,396
(1) Defined as current assets minus current liabilities.
As of March 31, 2023, we had cash and cash equivalents
of $3,820,000 compared to $7,396,000 as of March 31, 2022.
Net cash used in operating activities during the
year ended March 31, 2023 was $6,152,000, primarily due to net loss of $5,151,000 and a decline in deferred revenue.
Net cash used in operating activities during the
year ended March 31, 2022 was $4,248,000, primarily due to a net loss of $5,086,000 and partially offset by an increase from accounts
receivable net provision for write-offs and returns and an increase of $900,000 from deferred revenue.
Net cash used in investing activities for the
year ended March 31, 2023 was $258,000, primarily related to the purchase of capital property and equipment.
Net cash used in investing activities for the
year ended March 31, 2022 was $99,000, primarily related to the purchase of property and equipment.
Net cash provided by financing activities for
the year ended March 31, 2023 was $2,489,000 primarily related to related to proceeds of $2,868,000 from the sale of common stock on our
At-the-Market facility with Ladenburg Thalmann & Co. Inc. and proceeds of $515,000 from short-term notes, offset by payments on PPP
loan and short-term notes.
Net cash provided by financing activities for
the year ended March 31, 2022 was $7,396,000 primarily related to proceeds of $7,554,000 from the sale of common stock on our At-the-Market
facility with HC Wainwright and proceeds of $216,000 from the exercise of stock options and warrants, partially offset by the payments
on PPP loan and long term debt.
We expect revenues to fluctuate and may incur
losses in the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to penetrate
markets for the sale of our products and continue as a going concern. We cannot provide any assurances that we will be able to raise additional
capital.
Management believes that we have access to capital
resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, we cannot
provide any assurance that new financing will be available on commercially acceptable terms, if at all. If the economic climate in the
U.S. deteriorates, our ability to raise additional capital could be negatively impacted. If we are unable to secure additional capital,
we may be required to take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations
and meet our obligations. These measures could cause significant delays in our continued efforts to commercialize our products, which
is critical to the realization of our business plan and our future operations. These matters raise substantial doubt about our ability
to continue as a going concern.
Capital Expenditures
We currently forecast capital expenditures in
order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures will ultimately
be determined by the volume of business. We currently do not anticipate that a material amount will be purchased for the year ended March
31, 2024. If we purchase capital equipment, we expect to pay cash for those expenditures or to finance them through equipment leases.
Material Trends and Uncertainties
We rely on certain key customers for a significant
portion of our 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.
We are exposed to risk from decline in foreign
currency for both the Euro and the Mexico Peso versus the US dollar. Most recently there has been a sharp decline in the Euro versus the
U.S. Dollar which has impacted our financial results.
As we have previously
discussed in our annual report on Form 10-K filed with the SEC on July 14, 2022, we face a substantial Mexico tax liability, intercompany
debt, unpaid technical assistance charges and accrued interest. These amounts are not due until 2027. At this time, management believes
there are sufficient assets on the balance sheet to more than cover any tax obligation without interrupting the Company’s operations
or business. We have engaged tax professionals to review all options to limit our exposure to these amounts and to proceed in a manner
that is most advantageous to the Company.
The effects of the recent
pandemic continue to impact economies worldwide, and we are closely watching inflation, increased volatility within financial markets,
shipping costs, supply chain issues and labor costs. Any impact to our business operations, customer demand and supply chain due to increased
shipping costs may ultimately impact sales. We continue to evaluate our end-to-end supply chain and assess opportunities to refine the
impact on sales. Currently, most of our customers pay for shipping expenses, including increased shipping costs, if any. We have not yet
faced labor shortages however it is possible we may have difficulties retaining and finding qualified employees in a tight labor market
in the future. Furthermore, overall inflation tendencies may put pressure on our product pricing and/or costs.
We also closely monitor
overall economic conditions and consumer sentiment and the prospect of a recession in the United States which may impact our financial
results.
Use of Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from
these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability
of long-lived assets, the valuation allowance related to our deferred tax assets, valuation of equity and derivative instruments, debt
discounts, valuation of investments and the estimated amortization periods of upfront product licensing fees received from customers.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk
As a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore
are not required to provide the information requested by this Item.
ITEM 8. Consolidated Financial Statements and Supplementary
Data
Sonoma Pharmaceuticals, Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB No. 215) F-1
Consolidated Balance Sheets as of March 31, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of
Sonoma Pharmaceuticals, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sonoma
Pharmaceuticals, Inc. and Subsidiaries (the “Company”) as of March 31, 2023 and 2022, and the related consolidated statements
of comprehensive loss, changes in stockholders' equity and cash flows for the years ended March 31, 2023 and 2022, and the related
notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of their operations
and cash flows for the years ended March 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United
States of America.
Substantial Doubt About the Company's Ability to Continue as a Going
Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the
Company has incurred significant losses and negative operating cash flows and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period
audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
We have served as the Company’s auditor since 2021.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
June 21, 2023
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 3,820 $ 7,396
Prepaid expenses and other current assets 4,308 3,746
Current portion of deferred consideration, net of discount 240 218
Property and equipment, net 488 320
Operating lease, right of use assets 418 559
Deferred consideration, net of discount, less current portion 505 630
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities 2,029 1,843
Deferred revenue Invekra 60 54
Current portion of debt-PPP – 120
Operating lease liabilities 256 250
Deferred revenue Invekra, net of current portion 140 182
Operating lease liabilities, less current portion 162 309
Commitments and Contingencies (Note 11) – –
Stockholders’ Equity
Accumulated other comprehensive loss (3,418 ) (4,312 )
Total liabilities and stockholders’ equity $ 16,231 $ 18,845
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(In thousands, except per share amounts)
Year ended March 31,
Operating expenses
Research and development 207 125
Selling, general and administrative 8,840 9,755
Interest income (expense), net 16 (10 )
Forgiveness of PPP Loan – 723
Other expense, net (631 ) (394 )
Gain on sale of assets 1 150
Loss from operations before income taxes (5,184 ) (5,418 )
Income tax benefit (expense) 33 332
Net loss per share: basic and diluted $ (1.52 ) $ (1.92 )
Weighted-average shares outstanding: basic and diluted 3,394 2,653
Other comprehensive loss
Foreign currency translation adjustments 894 267
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For the Years Ended March 31, 2023 and 2022
(In thousands, except share amounts)
Shares Amount Shares Amount Capital Deficit Loss Total
Employee stock-based compensation expense – – – – 649 – – 649
Foreign currency translation adjustment – – – – – – 894 894
Shares Amount Shares Amount Capital Deficit Loss Total
Employee stock-based compensation expense – – – – 372 – – 372
Foreign currency translation adjustment – – – – – 267 267
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 125 186
Recovery of doubtful accounts – (125 )
Recovery of discounts, rebates, distributor fees and returns (66 ) (1,407 )
Stock-based compensation 669 382
Forgiveness of PPP loan – (723 )
Deferred income tax expense (37 ) (829 )
Operating lease right-of-use asset 173 223
Gain on sale of assets (1 ) –
Changes in operating assets and liabilities:
Inventories – (100 )
Prepaid expenses and other current assets (306 ) (460 )
Deferred consideration, net of discount 190 160
Accrued expenses and other current liabilities 127 679
Withholding tax payable 396 360
Operating lease liabilities (173 ) (222 )
Net cash used in operating activities (6,152 ) (4,248 )
Cash flows from investing activities:
Purchases of property and equipment (269 ) (137 )
Net cash used in investing activities (258 ) (99 )
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 2,868 7,554
Payments on PPP Loan (120 ) (467 )
Proceeds from exercise of common stock options and purchase warrants – 216
Principal payments on short-term debt (774 ) (30 )
Proceeds on short-term debt 515 123
Net cash provided by financing activities 2,489 7,396
Effect of exchange rate on cash and cash equivalents 345 127
Net (decrease) increase in cash and cash equivalents (3,576 ) 3,176
Cash and cash equivalents, beginning of year 7,396 4,220
Cash and cash equivalents, end of year $ 3,820 $ 7,396
Supplemental disclosure of cash flow information:
Cash paid for interest $ 17 $ 24
Cash paid for taxes $ – $ 767
Non-cash operating and financing activities:
Insurance premiums financed $ 515 $ 748
The accompanying footnotes are an integral part
of these consolidated financial statements.
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Organization and Recent
Developments
Organization
Sonoma Pharmaceuticals, Inc. (the “Company”)
was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware
in December 2006. The Company’s principal office was moved to Woodstock, Georgia from Petaluma, California in June 2020 and to Boulder,
Colorado in October 2022. The Company is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”)
products for a wide range of applications, including wound care, animal health care, eye care, oral care and dermatological conditions.
The Company’s products reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner.
In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties.
The Company’s stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate
skin and oxygenates the cells in the area treated assisting the body in its natural healing process. The Company sells its products either
directly or via partners in 55 countries worldwide.
NOTE 2 – Liquidity and Financial
Condition
The Company reported a net loss of $5,151,000
and $5,086,000for the years ended March 31, 2023 and 2022, respectively. At March 31, 2023 and 2022, the Company’s accumulated
deficit amounted to $189,514,000and $184,363,000, respectively. The Company 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 $6,152,000and $4,248,000, respectively
Management believes that the Company has access
to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other
means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms,
if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively
impacted. If the Company is unable to secure additional capital, it may be required to take additional measures to reduce costs in order
to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays
in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and
the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to
continue as a going concern.
COVID – 19 Pandemic Update
The impact from the COVID-19 pandemic, including
recent COVID-19 variants, and the related disruptions had a significant adverse impact on the Company’s results of operations in
the years ended March 31, 2021, 2022 and 2023. The full extent to which the COVID-19 outbreak will impact the Company’s business,
results of operations, financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be
accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact
and the economic impact on local, regional, national, and international markets. As the COVID-19 pandemic continues, the Company’s
results of operations, financial condition, and cash flows may continue to be materially adversely affected, particularly if the pandemic
continues to persist for a significant amount of time.
NOTE 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies
of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”). Aquamed has no current
operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency for
the Company's wholly-owned subsidiaries incorporated outside the United States (“U.S.”) is denominated in local currency.
All intercompany transactions and balances have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
and are in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company’s fiscal year end is
March 31. Unless otherwise stated, all years and dates refer to the fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand
and all highly liquid investments with an original maturity of three months or less when purchased. The Company’s cash equivalents
are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include
reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating
to the Company’s deferred tax assets, valuation of options, and the estimated amortization periods of upfront product licensing
fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Revenue Recognition
On April 1, 2018, the Company adopted Accounting
Standards Update (“ASU”), "Revenue from Contracts with Customers Topic 606” (“Topic 606”) using the
modified retrospective method. There was no material impact to the Company upon the adoption of Topic 606. Revenue is recognized when
the Company transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company expects
to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills
its obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services
in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they
are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration;
(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company derives the majority of its revenue
through sales of its products directly to end users and to distributors. The Company also sells products to a customer base, including
hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company also has entered into agreements to license
its technology and products.
The Company considers customer purchase orders,
which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers
the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction
price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects
to be entitled.
During the year ended March 31, 2022, for all
of its sales to non-consignment distribution channels, revenue is recognized when control of the product is transferred to the customer
(i.e. when its performance obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could
occur when the customer receives the product based on the terms of the agreement with the customer. For product sales to its value-added
resellers, non-stocking distributors and end-user customers, the Company grants return privileges to its customers, and because the Company
has a long history with its customers, the Company is able to estimate the amount of product that will be returned. Sales incentives
and other programs that the Company may make available to these customers are considered to be a form of variable consideration, and the
Company maintains estimated accruals and allowances using the expected value method. With the movement of these sales to a full distributor
model in the year ended March 31, 2023 there were none of these arrangements anymore although we were still having returns from the period
prior to the year ended March 31, 2023.
The Company has entered into consignment arrangements,
in which goods are left in the possession of another party to sell. As products are sold from the customer to third parties, the Company
recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending on whether a patient is
covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the
Company’s rebate program.
Sales to stocking distributors are made under
terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in
their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods and services
in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and is
separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as
other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.
Service revenue from testing contracts is recognized
as tests are completed and a final report is sent to the customer.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents
are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is exposed to credit risk in the
event of default by these financial institutions for amounts in excess of the Federal Deposit Insurance Corporation insured limits. Cash
and cash equivalents held in foreign banks are intentionally kept at minimal levels, and therefore have minimal credit risk associated
with them. We currently have $2.5 million of deposits above federally insured limits.
The Company grants credit to its business customers,
which are primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables. The Company
maintains allowances for potential credit losses. At March 31, 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 C represented 10%, customer B represented 17%, and customer A represented
21% of net revenues.
Accounts Receivable
Trade accounts receivable are recorded net of
allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns
are based on analysis of contractual terms and historical trends.
The Company’s policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers
include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis
of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on
government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts represents
probable credit losses at March 31, 2023 and 2022 in the amounts of $0 and $0, respectively. Additionally, at March 31, 2023 and 2022,
the Company has allowances of $16,000 and $81,000, respectively, related to potential discounts, returns, distributor fees and rebates.
The allowances are included in Accounts Receivable, net in the accompanying consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost, cost
being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.
Due to changing market conditions, estimated future
requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand
and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company recorded a provision
to reduce the carrying amounts of inventories to their net realizable value in the amounts of $236,000 and $218,000 at March 31, 2023
and 2022, respectively, which is included in cost of revenues on the Company’s accompanying consolidated statements of comprehensive
loss.
Financial Assets and Liabilities
Financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable are carried at cost, which management believes approximates fair value due to the
short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts
as a market rate of interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based
on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes
the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of
inputs that may be used to measure fair value:
Level 1 – quoted prices in active
markets for identical assets or liabilities
Level 2 – quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 – inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
Level 3 liabilities are valued using unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements
categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief
Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level
3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department
and are approved by the Chief Financial Officer.
As of March 31, 2023 and 2022, there were no transfers
in or out of Level 3 from other levels in the fair value hierarchy.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the
estimated useful lives of the respective assets. Depreciation of leasehold improvements is computed using the straight-line method over
the lesser of the estimated useful life of the improvement or the remaining term of the lease. Estimated useful asset life by classification
is as follows:
Schedule of property and equipment estimated useful life
Years
Office equipment 3
Manufacturing, lab and other equipment 5
Furniture and fixtures 7
Upon retirement or sale, the cost and related
accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations. Maintenance
and repairs are charged to operations as incurred.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying
values of its long-lived assets when events or changes in circumstances would indicate that it is more likely than not that their carrying
values may exceed their realizable values, and records impairment charges when considered necessary. Specific potential indicators of
impairment include, but are not necessarily limited to:
· a significant decrease in the fair value of an asset;
When circumstances indicate that an impairment
may have occurred, the Company tests such assets for recoverability by comparing the estimated undiscounted future cash flows expected
to result from the use of such assets and their eventual disposition to their carrying amounts. In estimating these future cash flows,
assets and liabilities are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the
cash flows generated by other such groups. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment
loss, measured as the excess of the carrying value of the asset over its estimated fair value, will be recognized. The cash flow estimates
used in such calculations are based on estimates and assumptions, using all available information that management believes is reasonable.
Research and Development
Research and development expenses are charged
to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies. For the years ended
March 31, 2023 and 2022, research and development expense amounted to $207,000and $125,000, respectively.
Advertising Costs
Advertising costs are charged to operations as
incurred. Advertising costs amounted to $156,000 and $86,000 for the years ended March 31, 2023 and 2022, respectively. Advertising costs
are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.
Shipping and Handling Costs
The Company classifies amounts billed to customers
related to shipping and handling in sale transactions as product revenues. The corresponding shipping and handling costs incurred are
recorded in cost of product revenues. For the years ended March 31, 2023 and 2022, the Company recorded revenue related to shipping and
handling costs of $42,000 and $52,000, respectively. These amounts are included in product revenues in the accompanying consolidated statements
of comprehensive loss.
Foreign Currency Reporting
The Company’s subsidiary, OTM, uses the
local currency (Mexican Pesos) as its functional currency and its subsidiary, SP Europe, uses the local currency (Euro) as its functional
currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenue and expense accounts
are translated at average exchange rates during the period. Resulting translation adjustments amounted to $894,000 and $267,000 for the
years ended March 31, 2023 and 2022, respectively. These amounts were recorded in other comprehensive loss in the accompanying consolidated
statements of comprehensive loss for the years ended March 31, 2023 and 2022.
Foreign currency transaction gains (losses) relate
primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and SP Europe. These transactions are
expected to be settled in the foreseeable future. The Company recorded foreign currency transaction losses of $692,000 for the year ended
March 31, 2023, and foreign currency transaction losses of $579,000, for the year ended March 31, 2022. The related amounts were recorded
in other expense in the accompanying consolidated statements of comprehensive loss.
Stock-Based Compensation
The Company accounts for share-based awards exchanged
for employee services at the estimated grant date fair value of the award. The Company estimates the fair value of employee stock option
awards using the Black-Scholes option pricing model. The Company amortizes the fair value of employee stock options on a straight-line
basis over the requisite service period of the awards. Compensation expense includes the impact of forfeitures for all stock options
as incurred.
The Company accounts for equity instruments issued
to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment
as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over
the vesting period or as earned.
Income Taxes
Deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards
using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Tax benefits claimed or expected to be claimed
on a tax return are recorded in the Company’s consolidated financial statements. A tax benefit from an uncertain tax position is
only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based
on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain
tax positions have had no impact on the Company’s consolidated financial condition, results of comprehensive loss or cash flows.
Comprehensive Loss
Other comprehensive loss includes all changes
in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statement of changes in stockholders’
equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments. Accumulated other
comprehensive losses at March 31, 2023 and 2022 were $3,418,000 and $4,312,000, respectively.
Net Income Loss per Share
The Company computes basic net loss per share