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, 2024
and 2023
Revenue
The following table shows our consolidated total
revenue and revenue by geographic region for the year ended March 31, 2024 and 2023:
Year Ended March 31,
(In thousands) 2024 2023 $ Change % Change
The decrease in United States revenue of $370,000
for the year ended March 31, 2024, was primarily the result of fluctuations in over-the-counter animal health care sales.
The increase in Europe revenue for the year ended
March 31, 2024 of $730,000 was the result of a general increase in demand for our products and, more specifically, an increase in demand
for our wound care products from our customer in Poland due to recent world events.
The decrease in Asia revenue of $153,000 for the
year ended March 31, 2024, was primarily due to timing of orders. Revenues from our international distributors tend to fluctuate from
period to period due to customer placement of larger but less frequent orders to benefit from quantity discounts and reduced shipping
costs.
The decrease in Latin America revenue for the
year ended March 31, 2024 of $657,000 was primarily due to a one-time event in the prior year related to the sale of machinery to a customer.
We recorded $750,000 of service revenue in the prior year in connection with this transaction.
The decrease in Rest of World revenue for the
year ended March 31, 2024 of $87,000 was primarily due to timing of customer orders.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics for
the year ended March 31, 2024 and 2023 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2024 2023 $ Change % Change
Cost of Revenue as a % of Revenues 63% 66%
Gross Profit as a % of Revenues 37% 34%
The increase in gross profit margin of $268,000
for the year ended March 31, 2024, as compared to the prior year, was primarily due to overall product mix, redeployment of labor to research
and development projects in the current year and higher costs of materials and transportation in the prior year.
Research and Development Expense
The research and development expense metrics for
the year ended March 31, 2024 and 2023 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2024 2023 $ Change % Change
Research and Development Expense as a % of Revenues 15% 2%
Increases in research and development expenses
for the year ended March 31, 2024 of $1,664,000 was primarily due to increased product development and expanded regulatory efforts in
the U.S. and Europe to support new product releases.
Selling, General and Administrative Expense
The selling, general and administrative expense
metrics for the years ended March 31, 2024 and 2023 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2024 2023 Change % Change
Selling, General and Administrative Expense $ 7,575 $ 8,840 $ (1,265 ) (14% )
Selling, General and Administrative Expense as a % of Revenues 59% 67%
The decline in selling, general and administrative
expenses for the year ended March 31, 2024 of $1,265,000 was the result of ongoing efforts to contain expenses across all parts of the
company.
Other Expense, net
Other expense, net for the year ended March 31,
2024 was $330,000 compared to $614,000 for the year ended March 31, 2023. The changes in other expense, net primarily relate to exchange
rate fluctuations.
Income Tax Benefit
Income tax benefit for the year ended March 31,
2024 and 2023 was $196,000 and $33,000, respectively. The increase is primarily related to the release of our valuation allowance on deferred
tax assets in Europe.
Net Loss
The following table provides the net loss for
each period along with the computation of basic and diluted net loss per share:
For the Year Ended March 31,
(In thousands, except per share data) 2024 2023
Weighted-average shares outstanding: basic and diluted 9,090 3,394
Net loss per share: basic and diluted $ (0.53 ) $ (1.52 )
Liquidity and Capital Resources
We reported a net loss of $4,835,000 and $5,151,000
for the years ended March 31, 2024 and 2023, respectively. At March 31, 2024 and 2023, our accumulated deficit amounted to $194,349,000
and $189,514,000, respectively. As of March 31, 2024 and 2023, we had cash and cash equivalents of $3,128,000 and $3,820,000, respectively.
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 customers.
Since April 1, 2023, substantially all of our
operations have been financed through cash on hand and the following transactions:
The following table presents a summary of our
consolidated cash flows for operating, investing and financing activities for the years ended March 31, 2024 and 2023 as well balances
of cash and cash equivalents and working capital:
Year ended March 31,
Net cash provided by (used in):
Operating activities $ (2,398 ) $ (6,152 )
Investing activities (2 ) (258 )
Effect of exchange rates on cash 32 345
Net change in cash and cash equivalents (692 ) (3,576 )
Cash and cash equivalents, beginning of the period 3,820 7,396
Cash and cash equivalents, end of the period $ 3,128 $ 3,820
Working capital (1), end of period $ 8,829 $ 10,081
(1) Defined as current assets minus current liabilities.
As of March 31, 2024 and 2023, we had cash and
cash equivalents of $3,128,000 and $3,820,000, respectively.
Net cash used in operating activities during the
year ended March 31, 2024 was $2,398,000, primarily due to our net loss of $4,835,000, offset by stock compensation of $516,000, a decrease
in inventory of $184,000, and a decrease in prepaid expenses of $1,107,000.
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 investing activities for the
year ended March 31, 2024 was $2,000, primarily related to the purchase of capital property and equipment.
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 provided by financing activities for
the year ended March 31, 2024 was $1,676,000 primarily related to proceeds of $1,784,000 from the sale of common stock.
Net cash provided by financing activities for
the year ended March 31, 2023 was $2,489,000 primarily related to proceeds of $2,868,000 from the sale of common stock, proceeds of $515,000
from short-term notes, offset by payments on our PPP loan and short-term notes.
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, 2025. 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.
We face a substantial
Mexico tax liability, intercompany debt, unpaid technical assistance charges and accrued interest. These amounts are due in 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, 2024 and 2023 F-2
Notes to Consolidated Financial Statements F-6
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, 2024 and 2023, and the related consolidated statements
of comprehensive loss, changes in stockholders' equity and cash flows for the years ended March 31, 2024 and 2023, 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, 2024 and 2023, and the results of their operations
and cash flows for the years ended March 31, 2024 and 2023, 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.
/s/ Frazier & Deeter, LLC
We have served as the Company's auditor since 2021.
Tampa, Florida
June 17, 2024
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 3,128 $ 3,820
Prepaid expenses and other current assets 3,541 4,308
Current portion of deferred consideration, net of discount 262 240
Property and equipment, net 365 488
Operating lease, right of use assets 286 418
Deferred consideration, net of discount, less current portion 330 505
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities 2,113 2,029
Operating lease liabilities, current portion 198 256
Deferred revenue, net of current portion 87 140
Operating lease liabilities, less current portion 87 162
Commitments and Contingencies (Note 11) – –
Stockholders’ Equity:
Accumulated other comprehensive loss (2,723 ) (3,418 )
Total liabilities and stockholders’ equity $ 14,740 $ 16,231
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:
Selling, general and administrative 7,575 8,840
Other expense, net (330 ) (614 )
Loss from operations before income taxes (5,031 ) (5,184 )
Net loss per share: basic and diluted $ (0.53 ) $ (1.52 )
Weighted-average shares outstanding: basic and diluted 9,090 3,394
Other comprehensive loss:
Foreign currency translation adjustments 695 894
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, 2024 and 2023
(In thousands, except share amounts)
Shares Amount Capital Deficit Loss Total
Employee stock-based compensation expense – – 649 – – 649
Foreign currency translation adjustment – – – – 894 894
Adjustment to correct par value – (4 ) 4 – – –
Employee stock-based compensation expenses – – 255 – – 255
Foreign currency translation adjustment – – – – 695 695
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 176 125
Stock-based compensation 516 669
Deferred income tax expense (109 ) (37 )
Operating lease right-of-use asset 161 173
Gain on sale of assets – (1 )
Changes in operating assets and liabilities:
Accounts receivable, net (230 ) (4 )
Inventories, net 184 –
Prepaid expenses and other current assets 1,107 (306 )
Deferred consideration, net of discount 222 190
Accrued expenses and other current liabilities 19 127
Withholding tax payable 475 396
Operating lease liabilities (161 ) (173 )
Net cash used in operating activities (2,398 ) (6,152 )
Cash flows from investing activities:
Purchases of property and equipment (17 ) (269 )
Net cash used in investing activities (2 ) (258 )
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering expenses 1,784 2,868
Payments on PPP Loan – (120 )
Principal payments on short-term debt (481 ) (774 )
Insurance premiums financed 373 515
Net cash provided by financing activities 1,676 2,489
Effect of exchange rate on cash and cash equivalents 32 345
Net decrease in cash and cash equivalents (692 ) (3,576 )
Cash and cash equivalents, beginning of year 3,820 7,396
Cash and cash equivalents, end of year $ 3,128 $ 3,820
Supplemental disclosure of cash flow information:
Cash paid for interest $ 22 $ 17
Non-cash operating and financing activities:
Insurance premiums financed $ 373 $ 515
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 moved its principal office from Petaluma, California to Woodstock, Georgia 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, eye, oral and nasal care, dermatological conditions, podiatry, animal
health care, and as a non-toxic disinfectant. The Company’s products are clinically proven to reduce itch, pain, scarring, and irritation
safely and without damaging healthy tissue. In-vitro and clinical studies of HOCl show it to safely manage skin abrasions, lacerations,
minor irritations, cuts, and intact skin. 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 $4,835,000
and $5,151,000 for the years ended March 31, 2024 and 2023, respectively. At March 31, 2024 and 2023, the Company’s accumulated
deficit amounted to $194,349,000 and $189,514,000, respectively. The Company had working capital of $8,829,000 and $10,081,000 as of March
31, 2024 and 2023, respectively. During the years ended March 31, 2024 and 2023, net cash used in operating activities amounted to $2,398,000
and $6,152,000, 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. This uncertainty along with the Company’s history of losses indicates that there is substantial
doubt about the Company’s ability to continue as a going concern within one
year after the date that the financial statements are issued. 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.
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 accounting principles generally accepted in the United States of America 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 valuation
allowance relating to the Company’s deferred tax assets, valuation of equity and the estimated amortization periods of upfront product
licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Revenue Recognition
The Company recognizes revenue in accordance with
Accounting Standards Codification (“ASC”), Topic 606 Revenue from Contracts with Customers (“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 has also entered into agreements to license
its technology and products.
The Company considers customer purchase orders,
which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers
the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction
price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects
to be entitled.
For all of the Company’s 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.
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 contract with Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its
own and as 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.
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 $1,185,000 of deposits above federally insured limits.
The following table shows major customers revenues
as a percentage of net revenue:
Schedule of concentration of risk
For the Year Ended March 31,
Customer D –*% –*%
The following table shows major customers accounts
receivable balances as a percentage of net accounts receivables:
Customer A –*% –*%
Customer C –*% –*%
* Represents less than 10%
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 Company did not deem it necessary to record
an allowance for doubtful accounts for probable credit losses at March 31, 2024 and March 31, 2023. Additionally, at March 31, 2024 and
2023, the Company has allowances of $27,000 and $16,000, 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. At March 31, 2024 and 2023,
the Company recorded provisions to reduce the carrying amounts of inventories to their net realizable value in the amounts of $296,000
and $236,000, respectively. which is included in inventories, net on the Company’s accompanying consolidated balance sheets.
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, 2024 and 2023, 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.
The Company did not record impairment losses for the years ended March 31, 2024 and 2023.
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, 2024 and 2023, research and development expense amounted to $1,871,000 and $207,000, respectively.
Advertising Costs
Advertising costs are charged to operations as
incurred. Advertising costs amounted to $156,000 and $156,000 for the years ended March 31, 2024 and 2023, 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, 2024 and 2023, the Company recorded revenue related to shipping and
handling costs of $28,000 and $42,000, 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 $695,000 and $894,000 for the
years ended March 31, 2024 and 2023, respectively. These amounts were recorded in other comprehensive loss in the accompanying consolidated
statements of comprehensive loss for the years ended March 31, 2024 and 2023.
Foreign currency transaction 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 $825,000 and $692,000 for the years
ended March 31, 2024 and 2023, respectively. 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 statements 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, 2024 and 2023 were $2,723,000 and $3,418,000, respectively.
Net Loss per Share
The Company computes basic net loss per share
by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period
and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution
that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock”
and/or “if converted” methods as applicable.
Schedule of computation of earnings per share
For the Year Ended March 31,
(In thousands, except per share data) 2024 2023
Weighted-average shares outstanding: basic and diluted 9,090 3,394
Net loss per share: basic and diluted $ (0.53 ) $ (1.52 )
The computation of basic loss per share for the
years ended March 31, 2024 and 2023 excludes the potentially dilutive securities summarized in the table below because their inclusion
would be anti-dilutive.
Schedule of antidilutive shares
Common stock to be issued upon exercise of options 1,033 565
Common stock to be issued upon exercise of warrants – 104
Common stock to be issued upon exercise of common stock units (1) – 46
Common Stock Purchase Warrants and Other
Derivative Financial Instruments
The Company classifies common stock purchase warrants
and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement
or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).
The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net cash settlement or
settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability.
The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification
between assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants
to purchase common stock, satisfied the criteria for classification as equity instruments, other than certain warrants that contained
reset provisions and certain warrants that required net-cash settlement that the Company classified as derivative liabilities. The company
currently does not have any active derivative financial instruments.
Preferred Stock
The Company applies the accounting standards for
distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject
to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally
redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the
holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity.