ITEM 1A. Risk Factors
Risks Related to Our Business
We have a history of losses, we expect to continue
to incur losses and we may never achieve profitability, and our March 31, 2025 audited consolidated financial statements included disclosure
that casts substantial doubt regarding our ability to continue as a going concern.
We reported a net loss of $3,457,000 and $4,835,000
for the years ended March 31, 2025 and 2024, respectively. At March 31, 2025 and 2024, our accumulated deficit amounted to $197,806,000
and $194,349,000, respectively. We had working capital of $8,552,000 and $8,829,000 as of March 31, 2025 and 2024, respectively. During
the years ended March 31, 2025 and 2024, net cash used in operating activities amounted to $88,000 and $2,398,000, respectively. As of
March 31, 2025, we had cash and cash equivalents of $5,374,000.
We spent the most recent years working to reduce our
losses and have made significant progress. However, we expect to continue incurring losses for the foreseeable future. We may never achieve
or sustain profitability. We must raise additional capital to pursue our product development initiatives, penetrate markets for the sale
of our products and continue as a going concern. We cannot provide any assurance that we will raise additional capital. We believe that
we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, or
other means. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and
take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations.
These measures could cause significant delays in our efforts to further commercialize our products, which are critical to the realization
of our business plan and to our future operations. These matters raise substantial doubt about our ability to continue as a going concern
or become profitable.
We depend on third party distributors and intend
to continue to license or collaborate with third parties in various potential markets, and events involving these strategic partners or
any future collaboration could delay or prevent us from developing or commercializing products.
Our business strategy and our short- and long-term
operating results depend in part on our ability to execute on existing strategic collaborations and to license or partner with new strategic
partners. We believe collaborations allow us to leverage our resources and technologies and to access markets that are compatible with
our own core areas of expertise while avoiding the cost of establishing or maintaining a direct sales force in each market. We may incur
significant costs in the use of third parties and other resources to identify and assist in establishing relationships with potential
collaborators. We currently use distributors for most of our products.
We have limited control over the amount and timing
of resources that our current partners or any future collaborators devote to our collaborations or potential products. These partners
may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely
manner. Further, our partners may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient
resources to the development, manufacture, marketing or sale of these products.
To penetrate our target markets, we may need to enter
into additional collaborative agreements to assist in the development and commercialization of products. Establishing strategic collaborations
is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory
or intellectual property position and our internal capabilities. Our discussions with potential collaborators may not lead to the establishment
of new collaborations on favorable terms and may have the potential to provide collaborators with access to our key intellectual property
filings and next generation formations. By entering into collaboration, we may preclude opportunities to collaborate with other third
parties who do not wish to associate with our existing third-party strategic partners. Moreover, in the event of termination of a collaboration
agreement, termination negotiations may result in less favorable terms.
Mexican tax law prevents us from deducting intercompany
interest expense incurred by our Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V and requires withholding tax on payments
remitted to the US. At the same time, we are unable to recognize tax benefits for foreign tax credits for U.S. tax purposes.
Since 2004, we loaned substantial amounts to our Mexico
subsidiary Oculus Technologies of Mexico, S.A. de C.V. at various interest rates to fund their operations. As of March 31, 2025, our Mexico
subsidiary owes approximately $10.9 million in principal, $8.6 million in technical assistance payments and $26.4 million in accrued interest.
The intercompany loans mature in 2027. There is no guarantee that our Mexican subsidiary will be able to pay any or all of the amounts
due. If we were to forgive the debt or if we were to convert the debt to equity, it would be subject to Mexico income tax at 30%, or approximately
$13.8 million, as well as Mexican withholding tax of 15%.
Mexico’s thin capitalization rules also require
taxpayers to maintain a debt-to-equity ratio of 3:1. Any interest paid to foreign related parties that results in indebtedness exceeding
a ratio of 3:1 to their stockholder’s equity is not deductible for Mexican corporate income tax purposes and we did not meet that
condition. Therefore, we have not been able to deduct the intercompany interest on our Mexico tax returns since 2004. It has prevented
our Mexico subsidiary from accruing net operating losses in Mexico to offset potential future profits. At the same time the intercompany
interest income in the United States decreases our U.S. net operating losses and reduces our ability to apply these carryforwards to offset
future taxable income in the United States.
In addition, any interest paid to a foreign lender
is subject to Mexico withholding tax of 15%. We also have interest owed on our intercompany technical assistance agreement and royalty
withholding of 10% on our technical assistance agreement. This would amount to approximately $5.1 million in Mexico withholding tax at
March 31, 2025, if all of the interest and technical assistance were to be repaid to us. In general, the foreign related party parent
can then claim a credit for these withholding taxes on their U.S. income tax return. However, because of our substantial U.S. net operating
losses, we are prevented from claiming any credit on any withholding tax for U.S. income tax purposes. Any such failure to pay intercompany
debt, inability to deduct income taxes or apply credits, or liability for tax payments could have a material adverse effect on our business,
financial condition, and results of operations.
We rely on a number of key customers who may
not consistently purchase our products in the future, and if we lose any one of these customers, our revenues may decline.
Although we have a significant number of customers
in each of the geographic markets that we operate in, we rely on certain key customers for a significant portion of our revenues. For
the year ended March 31, 2025, customer B represented 21% and customer C represented 18% of net revenues. For the year ended March 31,
2024, customer A represented 17%, customer B represented 15% and customer C represented 14% of net revenues. In the future, a small number
of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently
purchase our products at a particular rate over any subsequent period. The loss of any of these customers could adversely affect our revenues.
A majority of our business is conducted outside
of the United States, exposing us to additional risks that may not exist in the United States, which in turn could cause our business
and operating results to suffer.
We have material international operations in Mexico,
Asia and Europe. During the years ended March 31, 2025 and 2024, approximately 82% and 76% of our total revenue, respectively, were generated
from sales outside of the United States. Our business is highly regulated for the use, marketing and manufacturing of our HOCl-based products
both domestically and internationally. Our international operations are subject to risks, including:
· local political or economic instability;
· economic downturn or recession;
· changes in exchange rates;
· changes in governmental regulation;
· changes in import/export duties, tariffs, or trade agreements;
· trade restrictions;
· lack of experience in foreign markets;
· work stoppages or other changes in labor conditions;
· adverse tax consequences or overlapping tax structures.
We plan to continue to market and sell our products
internationally to respond to customer requirements and market opportunities. We currently have manufacturing facilities in Mexico. Establishing
operations in any foreign country or region presents risks such as those described above as well as risks specific to the particular country
or region. In addition, until a payment history is established over time with customers in a new geographic area or region, the likelihood
of collecting receivables generated by such operations could be less than our expectations. As a result, there is a greater risk that
the reserves set with respect to the collection of such receivables may be inadequate. If our operations in any foreign country are unsuccessful,
we could incur significant losses and we may not achieve profitability.
In addition, changes in policies or laws of the United
States or foreign governments resulting in, among other things, changes in regulations and the approval process, higher taxation, currency
conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits
of our international expansion. If we fail to realize the anticipated revenue growth of our future international operations, our business
and operating results could suffer.
If we fail to obtain, or experience significant
delays in obtaining, additional regulatory clearances or approvals to market our current or future products, we may be unable to commercialize
these products.
The developing, testing, manufacturing, marketing
and selling of medical technology products is subject to extensive regulation by numerous governmental authorities in the United States
and other countries. The process of obtaining regulatory clearance and approval of medical technology products is costly and time consuming.
Even though their underlying product formulations may be the same or similar, our products are subject to different regulations and approval
processes depending upon their intended use.
The FDA generally clears marketing of a medical device
through the 510(k) pre-market clearance process if it is demonstrated the new product has the same intended use and the same or similar
technological characteristics as another legally marketed Class II device, such as a device already cleared by the FDA through the
510(k) premarket notification process, and otherwise meets the FDA’s requirements. Product modifications, including labeling the
product for a new intended use, may require the submission of a new 510(k) clearance and FDA approval before the modified product can
be marketed.
On November 30, 2023, the FDA issued a proposed rule
to classify certain wound dressings and liquid wound washes, including hypochlorous acid, into Class II medical devices. If finalized,
we would be required to submit new 510(k) applications for our products and to demonstrate compliance with special controls that require
specific information relating to performance testing and technical specifications, specific labeling requirements, and other requirements.
While we believe we will be able to demonstrate compliance with these special controls if the proposed rule is finalized, there is no
guarantee that the FDA will issue new clearance letters for our products, and the process of obtaining additional clearances may be costly
and time consuming.
In addition, we do not know whether the necessary
approvals or clearances will be granted or delayed for future products. The FDA could request additional information, changes to product
formulation(s) or clinical testing that could adversely affect the time to market and sale of products as drugs. If we do not obtain the
requisite regulatory clearances and approvals, we will be unable to commercialize our products and may never recover any of the substantial
costs we have invested in the development of HOCl.
Distribution of our products outside the United States
is subject to extensive government regulation. These regulations, including the requirements for approvals or clearance to market, the
time required for regulatory review and the sanctions imposed for violations, vary from country to country. We do not know whether we
will obtain regulatory approvals in such countries or that we will not be required to incur significant costs in obtaining or maintaining
these regulatory approvals. In addition, the export by us of certain of our products that have not yet been cleared for domestic commercial
distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the restriction, suspension
or revocation of existing approvals or any other failure to comply with regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of operations.
If we fail to comply with ongoing regulatory
requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal
from the market.
Regulatory approvals or clearances that we currently
have and that we may receive in the future are subject to limitations on the indicated uses for which the products may be marketed, and
any future approvals could contain requirements for potentially costly post-marketing follow-up studies. If the FDA determines that our
promotional materials or activities constitute promotion of an unapproved use or we otherwise fail to comply with FDA regulations, we
may be subject to regulatory enforcement actions, including warning letters, injunctions, seizures, civil fines or criminal penalties.
In addition, the manufacturing, labeling, packaging, adverse event reporting, storing, advertising, promoting, distributing and record-keeping
for approved products are subject to extensive regulation. We are subject to continued supervision by European regulatory agencies relating
to our CE markings and are required to report any serious adverse incidents to the appropriate authorities. Our manufacturing facilities,
processes and specifications are subject to periodic inspection by the FDA, Mexican and other regulatory authorities and, from time to
time, we may receive notices of deficiencies from these agencies as a result of such inspections. Our failure to continue to meet regulatory
standards or to remedy any deficiencies could result in restrictions being imposed on our products or manufacturing processes, fines,
suspension or loss of regulatory approvals or clearances, product recalls, termination of distribution, product seizures or the need to
invest substantial resources to comply with various existing and new requirements. In the more egregious cases, criminal sanctions, civil
penalties, disgorgement of profits or closure of our manufacturing facilities are possible. The subsequent discovery of previously unknown
problems with HOCl, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of our
products, and could include voluntary or mandatory recall or withdrawal of products from the market.
New government regulations may be enacted and changes
in FDA policies and regulations and, their interpretation and enforcement, could prevent or delay regulatory approval of our products.
We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative
action, either in the United States or abroad. Therefore, we do not know whether we will be able to continue to comply with any regulations
or that the costs of such compliance will not have a material adverse effect on our future business, financial condition, and results
of operations. If we are not able to maintain regulatory compliance, we will not be permitted to market our products and our business
would suffer.
If we fail to comply with ongoing regulatory
requirements for our European products under the new Medical Devices Regulation, these products could be subject to withdrawal from the
market.
Our products are classified as medical devices in
the European Union (EU). In order to sell medical device products within the European Union, we are required to comply with the requirements
of the Medical Devices Regulation, and its national implementations, including affixing CE markings on products.
The Medical Devices Regulation was adopted in the
EU on May 26, 2017 to replace the existing Medical Device Directive, and became applicable on May 26, 2021, with a transition period until
extended to December 31, 2028 for non-implantable Class IIb and lower risk devices. We received a CE certificate for 39 of our Class IIB
medical devices under the Medical Device Directive. Under the new Medical Devices Regulation, certain devices are classified in higher
classes, new devices are classified, and certain new obligations are imposed on manufacturers and distributors. In addition, the pre-market
approval and post-market surveillance requirements are enhanced.
We have successfully completed transition to the new
Medical Device Regulation (MDR) for all of our commercialized products in Europe, including Microdacyn60 Wound Care and Microdacyn60
Hydrogel, our scar gel product Epicyn®, and Pediacyn® for atopic dermatitis, which are each classified
as Class IIb medical devices, and our eye care product Ocudox and acne products GramaDerm Solution and GramaDerm Hydrogel, which are each
classified as Class IIa medical devices. Our nasal product Sinudox, Microdacyn® Oral and MucoClyns®, a disinfectant,
will not be transitioned without additional studies. We currently have no commercial sales of these products and are evaluating whether
to conduct the additional studies necessary to transition these products.
We can provide no assurance that we will be able to
maintain the requirements established for CE markings for any or all of our products in the EU or be able to produce these products in
a timely and profitable manner while complying with the requirements of the Medical Devices Regulation and other regulatory requirements.
Failure to comply with these requirements could result in these products being withdrawn from the market and could have a material negative
impact on our future results.
If any of our third-party
contractors fail to perform their responsibilities to comply with FDA rules and regulations, the manufacture, marketing and sales of our
products could be delayed, which could decrease our revenues.
Supplying the market with
our HOCl technology products requires us to manage relationships with an increasing number of collaborative partners, suppliers and third-party
contractors. As a result, our success depends partially on the success of these third parties in performing their responsibilities to
comply with FDA rules and regulations. Although we pre-qualify our contractors and we believe that they are fully capable of performing
their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to
these activities. For example, we and our suppliers are required to comply with the FDA’s quality system regulations, which cover
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping
of our products. The FDA enforces the quality system regulation through inspections.
If any of our partners or contractors fail to perform
their obligations in an adequate and timely manner or fail to comply with the FDA’s rules and regulations, including failure to
comply with quality systems regulations or a corrective action submitted to the FDA after notification by the FDA of a deficiency is deemed
insufficient, then the manufacture, marketing and sales of our products could be delayed. Our products could be detained or seized, the
FDA could order a recall, or require our partner to replace or offer refunds for our products. The FDA could also require our partner,
and depending on our agreement with our partner, us, to notify healthcare professionals and others that the products present unreasonable
risks of substantial harm to the public health. If any of these events occur, the manufacture, marketing and sales of our products could
be delayed which could decrease our revenues.
If we fail to comply
with the FDA’s rules and regulations and are subject to an FDA recall as part of an FDA enforcement action, the associated costs
could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our Company, our products,
the manufacturing facilities for our products, the distribution of our products, and our promotion and marketing materials are subject
to strict and continual review and periodic inspection by the FDA and other regulatory agencies for compliance with pre-approval and post-approval
regulatory requirements.
If we fail to comply with
the FDA’s rules and regulations, we could be subject to an enforcement action by the FDA. The FDA could undertake regulatory actions,
including seeking a consent decree, recalling or seizing our products, ordering a total or partial shutdown of production, delaying future
marketing clearances or approvals, and withdrawing or suspending certain of our current products from the market. A product recall, restriction,
or withdrawal could result in substantial and unexpected expenditures, destruction of product inventory, and lost revenues due to the
unavailability of one or more of our products for a period of time, which could reduce profitability and cash flow. In addition, a product
recall or withdrawal could divert significant management attention and financial resources. If any of our products are subject to an FDA
recall, we could incur significant costs and suffer economic losses. Production of our products could be suspended and we could be required
to establish inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to products we,
or our third-party contractors, manufacture. A recall of a material amount of our products could have a significant, unfavorable impact
on our future gross margins.
If our products fail
to comply with FDA and other governmental regulations, or our products are deemed defective, we may be required to recall our products
and we could suffer adverse public relations that could adversely impact our sales, operating results, and reputation which would adversely
affect our business operations.
We may be exposed to product
recalls, including voluntary recalls or withdrawals, and adverse public relations if our products are alleged to cause injury or illness,
or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental regulations. Governmental authorities
can also require product recalls or impose restrictions for product design, manufacturing, labeling, clearance, or other issues. For the
same reasons, we may also voluntarily elect to recall, restrict the use of a product or withdraw products that we consider below our standards,
whether for quality, packaging, appearance or otherwise, in order to protect our brand reputation.
Product recalls, product
liability claims, even if unmerited or unsuccessful, or any other events that cause consumers to no longer associate our brand with high
quality and safe products may also result in adverse publicity, hurt the value of our brand, harm our reputation among our customers and
other healthcare professionals who use or recommend the products, lead to a decline in consumer confidence in and demand for our products,
and lead to increased scrutiny by federal and state regulatory agencies of our operations, any of which could have a material adverse
effect on our brand, business, performance, prospects, value, results of operations and financial condition.
If our products do not gain market acceptance,
our business will suffer because we might not be able to fund future operations.
A number of factors may affect the market acceptance
of our products or any other products we develop or acquire, including, among others:
· our ability to fund our sales and marketing efforts; and
Our ability to effectively promote and sell any approved
products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our
ability to obtain sufficient third-party coverage or reimbursement, if any. In addition, our efforts to educate the medical community
on the benefits of our product candidates may require significant resources, may be constrained by FDA rules and policies on product promotion,
and may never be successful. If our products do not gain market acceptance, we may not be able to fund future operations, including developing,
testing and obtaining regulatory approval for new product candidates and expanding our sales and marketing efforts for our approved products,
which would cause our business to suffer.
If our competitors develop products with similar
characteristics to our HOCl technology, we may need to modify or alter our business strategy, which may delay the achievement of our goals.
Competitors have and may continue to develop products
with similar characteristics to our HOCl technology. Such similar products marketed by larger competitors can hinder our or our partners’
efforts to penetrate the market. As a result, we may be forced to modify or alter our business and regulatory strategy and sales and marketing
plans, as a response to changes in the market, competition and technology limitations, among others. Such modifications may pose additional
delays in achieving our goals.
Negative economic conditions increase the risk
that we could suffer unrecoverable losses on our customers’ accounts receivable which would adversely affect our financial results.
We grant credit to our business customers, which are
primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables. We maintain allowances
for potential credit losses. We rely on certain key customers for a significant portion of revenues. At March 31, 2025, customer D represented
24% of our net accounts receivable balance. At March 31, 2024, customer B represented 13% of our net accounts receivable balance and customer
D represented 17% of our net accounts receivable balance. While we believe we have a varied customer base and have experienced strong
collections in the past, if current economic conditions disproportionately impact any one of our key customers, including reductions in
their purchasing commitments to us or their ability to pay their obligations, it could have a material adverse effect on our revenues
and liquidity. We have not purchased insurance on our accounts receivable balances.
We may experience difficulties in manufacturing
our products, which could prevent us from commercializing one or more of our products.
The machines used to manufacture our products are
complex, use complicated software and must be monitored by highly trained engineers. Slight deviations anywhere in our manufacturing process,
including quality control, labeling, and packaging, could lead to a failure to meet the specifications required by the FDA, the Environmental
Protection Agency, European notified bodies, Mexican regulatory agencies and other foreign regulatory bodies, which may result in lot
failures or product recalls. If we are unable to obtain quality internal and external components, mechanical and electrical parts, if
our software contains defects or is corrupted, or if we are unable to attract and retain qualified technicians to manufacture our products,
our manufacturing output of HOCl, or any other product candidate based on our platform that we may develop, could fail to meet required
standards, our regulatory approvals could be delayed, denied or revoked, and commercialization of one or more of our products may be delayed
or foregone. Manufacturing processes that are used to produce the smaller quantities of HOCl-based products needed for clinical tests
and current commercial sales may not be successfully scaled up to allow production of significant commercial quantities. Any failure to
manufacture our products to required standards on a commercial scale could result in reduced revenues, delays in generating revenue and
increased costs.
Our competitive position depends on our ability
to protect our intellectual property and our proprietary technologies.
Our ability to compete and to achieve and maintain
profitability depends on our ability to protect our intellectual property and proprietary technologies. We currently rely on a combination
of patents, patent applications, trademarks, trade secret laws, confidentiality agreements, license agreements and invention assignment
agreements to protect our intellectual property rights. We also rely upon unpatented know-how and continuing technological innovation
to develop and maintain our competitive position. These measures may not be adequate to safeguard our HOCl technology. If we do not protect
our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced.
Our pending patent applications and any patent applications
we may file in the future may not result in issued patents, and we do not know whether any of our in-licensed patents or any additional
patents that might ultimately be issued by the U.S. Patent and Trademark Office or foreign regulatory body will protect our HOCl
technology. Any claims that are issued may not be sufficiently broad to prevent third parties from producing competing substitutes and
may be infringed, designed around, or invalidated by third parties. Even issued patents may later be found to be invalid or may be modified
or revoked in proceedings instituted by third parties before various patent offices or in courts.
The degree of future protection for our proprietary
rights is more uncertain in part because legal means afford only limited protection and may not adequately protect our rights, and we
will not be able to ensure that:
· we were the first to invent the inventions described in patent applications;
· we were the first to file patent applications for inventions;
· we will develop proprietary technologies that are patentable; or
The policies we use to protect our trade secrets may
not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality and invention assignment
agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use or disclosures.
We cannot be certain that the steps we have taken
will prevent the misappropriation and use of our intellectual property in the United States, or in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States.
We may face intellectual property infringement
claims that could be time-consuming, costly to defend and could result in our loss of significant rights and, in the case of patent infringement
claims, the assessment of treble damages.
On occasion, we may receive notices of claims of infringement,
misappropriation, or misuse of other parties’ proprietary rights. We may have disputes regarding intellectual property rights with
the parties that have licensed those rights to us. We may also initiate claims to defend our intellectual property. Intellectual property
litigation, regardless of its outcome, is expensive and time-consuming, and could divert management’s attention from our business
and have a material negative effect on our business, operating results, or financial condition. In addition, the outcome of such litigation
may be unpredictable. If there is a successful claim of infringement against us, we may be required to pay substantial damages, including
treble damages if we were to be found to have willfully infringed a third party’s patent, to the party claiming infringement, develop
non-infringing technology, stop selling our products or using technology that contains the allegedly infringing intellectual property
or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure
to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. In addition, modifying
our products to exclude infringing technologies could require us to seek re-approval or clearance from various regulatory bodies for our
products, which would be costly and time consuming. Also, we may be unaware of pending patent applications that relate to our technology.
Parties making infringement claims on future issued patents may be able to obtain an injunction that would prevent us from selling our
products or using technology that contains the allegedly infringing intellectual property, which could harm our business.
We could be required to indemnify third parties
for alleged intellectual property infringement, which could cause us to incur significant costs.
Some of our distribution agreements contain commitments
to indemnify our distributors against liability arising from infringement of third-party intellectual property, such as patents. We may
be required to indemnify our customers for claims made against them or to contribute to license fees they are required to pay. If we are
forced to indemnify for claims or to pay license fees, our business and financial condition could be substantially harmed.
Our international operations are subject to
trade policies, tariffs and trade agreements, and recent and future changes could harm our business.
We have significant international operations in Mexico
and Europe, and we manufacture all of our products for export from Mexico. New or increased tariffs on goods imported into the United
States, particularly tariffs on products manufactured in Mexico, could adversely affect our business.
Any changes to existing trade agreements, like the
United States-Mexico-Canada Agreement (USMCA), which went into effect on July 1, 2020 (or subsequent trade agreements), or greater restrictions
on free trade generally, could impact our operations in countries where we manufacture or sell products or source components, or materials,
which could adversely affect our operating results and our business.
Given the uncertainty regarding the scope and duration
of any trade actions by the U.S. government or other countries, we can provide no assurance that the impact on our operations and results
in the future will not be material.
Our sales in international markets subject us
to foreign currency exchange and other risks and costs which could harm our business.
A substantial portion of our revenues are derived
from outside the United States, primarily from Mexico and Europe. We anticipate that revenues from international customers will continue
to represent a substantial portion of our revenues for the foreseeable future. Because we generate revenues in foreign currencies, we
are subject to the effects of exchange rate fluctuations. The functional currency of our Mexican subsidiary is the Mexican Peso and the
functional currency of our Netherlands subsidiary is the Euro. For the preparation of our consolidated financial statements, the financial
results of our foreign subsidiaries are translated into U.S. dollars using average exchange rates during the applicable period. If
the U.S. dollar appreciates against the Mexican Peso or the Euro, as applicable, the revenues we recognize from sales by our subsidiaries
will be adversely impacted. Foreign exchange gains or losses as a result of exchange rate fluctuations in any given period could harm
our operating results and negatively impact our revenues. Additionally, if the effective price of our products were to increase as a result
of fluctuations in foreign currency exchange rates, demand for our products could decline and adversely affect our results of operations
and financial condition.
The markets in which we operate are highly competitive
and subject to rapid technological change. If our competitors are better able to develop and market products that are less expensive or
more effective than any products that we may develop, our commercial opportunity may be reduced or eliminated.
Our success depends, in part, upon our ability to
stay at the forefront of technological change and to maintain a competitive position. We compete with large healthcare, pharmaceutical
and biotechnology companies, along with smaller or early-stage companies that have collaborative arrangements with larger pharmaceutical
companies, academic institutions, government agencies and other public and private research organizations. Many of our competitors have
significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical
trials, obtaining regulatory approvals and marketing approved products than we do. Our competitors may:
· develop and patent processes or products earlier than we will;
As a result, we may not be able to successfully commercialize
any future products.
The success of our research and development
efforts may depend on our ability to find suitable collaborators to fully exploit our capabilities. If we are unable to establish collaborations
or if these future collaborations are unsuccessful, our research and development efforts may be unsuccessful, which could adversely affect
our results of operations and financial condition.
An element of our business strategy is to enter into
collaborative or license arrangements under which we license our HOCl technology to other parties for development and commercialization.
We expect to seek collaborators for our potential products because of the expense, effort and expertise required to conduct clinical trials
and further develop those potential product candidates. Because collaboration arrangements are complex to negotiate, we may not be successful
in our attempts to establish these arrangements. If we need third party assistance in identifying and negotiating one or more acceptable
arrangements, it might be costly. Also, we may not have products that are desirable to other parties, or we may be unwilling to license
a potential product because the party interested in it is a competitor. The terms of any arrangements that we establish may not be favorable
to us. Alternatively, potential collaborators may decide against entering into an agreement with us because of our financial, regulatory
or intellectual property position or for scientific, commercial or other reasons. If we are unable to establish collaborative agreements,
we may not be able to develop and commercialize new products, which would adversely affect our business and our revenues.
In order for any of these collaboration or license
arrangements to be successful, we must first identify potential collaborators or licensees whose capabilities complement and integrate
well with ours. We may rely on these arrangements for not only financial resources, but also for expertise or economies of scale that
we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for licensing technology rights.
However, it is likely that we will not be able to control the amount and timing of resources that our collaborators or licensees devote
to our programs or potential products. If our collaborators or licensees prove difficult to work with, are less skilled than we originally
expected, or do not devote adequate resources to the program, the relationship will not be successful. If a business combination involving
a collaborator or licensee and a third party were to occur, the effect could be to diminish, terminate or cause delays in development
of a potential product.
If we are unable to comply with broad and complex
federal and state fraud and abuse laws, including state and federal anti-kickback laws, we could face substantial penalties and our products
could be excluded from government healthcare programs.
We are subject to various federal and state laws pertaining
to healthcare fraud and abuse, which include, among other things, “anti-kickback” laws that prohibit payments to induce the
referral of products and services, and “false claims” statutes that prohibit the fraudulent billing of federal healthcare
programs. Our operations are subject to the Federal Anti-Kickback Statute, a criminal statute that, subject to certain statutory exceptions,
prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce
or reward a person either (i) for referring an individual for the furnishing of items or services for which payment may be made in
whole or in part by a government healthcare program such as Medicare or Medicaid, or (ii) for purchasing, leasing, ordering or arranging
for or recommending the purchasing, leasing or ordering of an item or service for which payment may be made under a government healthcare
program. Because of the breadth of the Federal Anti-Kickback Statute, the Office of Inspector General of the U.S. Department of Health
and Human Services, was authorized to adopt regulations setting forth additional exceptions to the prohibitions of the statute commonly
known as “safe harbors.” If all of the elements of an applicable safe harbor are fully satisfied, an arrangement will not
be subject to prosecution under the Federal Anti-Kickback Statute.
In addition, if there is a change in law, regulation
or administrative or judicial interpretations of these laws, we may have to change our business practices or our existing business practices
could be challenged as unlawful, which could have a negative effect on our business, financial condition and results of operations.
Healthcare fraud and abuse laws are complex, and even
minor, inadvertent irregularities can potentially give rise to claims that a statute or regulation has been violated. The frequency of
suits to enforce these laws has increased significantly in recent years and has increased the risk that a healthcare company will have
to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as
a result of an investigation arising out of such action. We cannot guarantee that we will not become subject to such litigation. Any violations
of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could harm our reputation,
be costly to defend and divert management’s attention from other aspects of our business. Similarly, if the physicians or other
providers or entities with which we do business are found to have violated abuse laws, they may be subject to sanctions, which could also
have a negative impact on us.
We may not be able to maintain sufficient product
liability insurance to cover claims against us.
Product liability insurance for the healthcare industry
is generally expensive to the extent it is available at all. We may not be able to maintain such insurance on acceptable terms or be able
to secure increased coverage if the commercialization of our products progresses, nor can we be sure that existing or future claims against
us will be covered by our product liability insurance. Moreover, the existing coverage of our insurance policy or any rights of indemnification
and contribution that we may have may not be sufficient to offset existing or future claims. A successful claim against us with respect
to uninsured liabilities or in excess of insurance coverage and not subject to any indemnification or contribution could have a material
adverse effect on our future business, financial condition, and results of operations.
Our ability to generate revenue will be diminished
if our partners are unable to obtain acceptable prices or an adequate level of reimbursement from third-party payors, or our partners
may face pricing pressure from private third-party payers, including customers, from rebates and restrictive reimbursement practices.
Our partner’s ability to commercialize our products
successfully will depend in part on the extent to which appropriate coverage and reimbursement levels for the cost of our products and
related treatment are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance
organizations, or HMOs. In the United States, governmental and private payors have limited the growth of health care costs through price
regulation or controls, competitive pricing programs and drug rebate programs.
There is significant uncertainty concerning third-party
coverage and reimbursement of newly approved medical products. Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed healthcare in the United States and the concurrent growth of organizations
such as HMOs, as well as the “Affordable Care Act,” or any new healthcare laws may result in lower prices for or rejection
of our products. The cost containment measures that healthcare payors and providers are instituting and the effect of any healthcare reform
or changes to managed healthcare could materially and adversely affect our ability to generate revenues.
In the United States and some foreign jurisdictions,
there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our partner’s
abilities to sell our products profitably, and thus lead to decreased demand for our products and revenues for us. We were able to negotiate
minimum purchase requirements in certain of our third-party distributor agreements. However, we have limited control over purchases by
our distributors, to meet the minimum purchase thresholds or above the minimum purchase thresholds.
Increasingly, private health insurance companies and
self-insured employers have been raising co-payments required from beneficiaries and looking for other ways to shift more of the cost
burden to manufacturers and patients. This cost shifting has given consumers greater control of medication choices, as they pay for a
larger portion of their prescription costs and may cause consumers to favor lower cost generic alternatives to branded pharmaceuticals.
Additionally, patients continue to face cost reduction pressures that may cause them to curtail their use of, or seek reimbursement for,
our products, to negotiate reduced fees or other concessions or to delay payment. Third-party payors may reduce or limit reimbursement
for our products in the future, such as by withdrawing their coverage policies, canceling any future contracts, reviewing and adjusting
the rate of reimbursement, or imposing limitations on coverage. Any such changes could negatively impact the sales of our products by
our partners, and therefore, have a material adverse effect on our revenues.
Our ability to generate revenue will be diminished
if our partners are unable to manage customer product substitutions for our prescription products.
Similar to other pharmaceutical companies, patients
are increasingly seeking lower-cost substitutes to our products. Even if our patients have a prescription for our product, the pharmacist
may recommend a less expensive product even if that product is less effective or designed for conditions different from what the patient
is seeking to treat. As a result, the patient may choose to abandon purchasing our prescribed product for a less expensive alternative
product resulting in a lost sale for our partners. If the number of consumers substituting our products increases, it could have a material
adverse effect on sales of our products by our partners, and therefore, our revenues, financial position, cash flows and results of operations.
Our inability to raise additional capital on
acceptable terms in the future may cause us to curtail certain operational activities, including regulatory trials, sales and marketing,
and international operations, in order to reduce costs and sustain the business, and such inability would have a material adverse effect
on our business and financial condition.
We may need to raise additional capital in the future
in order to, among other things:
· sustain commercialization of our current products or new products;
· acquire or license technologies;
· develop new products;
· expand our manufacturing capabilities; and
· finance capital expenditures and our general and administrative expenses.
Our present and future funding requirements will depend
on many factors, including:
· competing technological and market developments; and
· changes in regulatory policies or laws that affect our operations.
If we raise additional funds by issuing equity securities,
it will result in dilution to our stockholders. Any equity securities issued also may provide for rights, preferences or privileges senior
to those of holders of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights,
preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant
restrictions on our operations. If we raise additional funds through collaborations or licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. A failure to obtain
adequate funds may cause us to curtail certain operational activities, including regulatory trials, sales and marketing, and international
operations, in order to reduce costs and sustain our business, and would have a material adverse effect on our business and financial
condition.
Our information technology and infrastructure
may be breached or attacked, which could expose us to liability, damage our reputation, compromise our confidential information or otherwise
adversely affect our business.
In the ordinary course of our business, we collect
and store a limited amount of sensitive data, including intellectual property, our proprietary business information and that of our customers,
suppliers, business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks.
The secure processing, maintenance, and transmission of this information is critical to our operations and business strategy. Despite
our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee
error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed,
publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings,
liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services
we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely
affect our business, revenues and competitive position.
Our cash and cash equivalents may be exposed
to failure of our banking institutions.
We maintain our cash at financial institutions, in
balances that exceed current FDIC insurance limits. If the banks where we hold deposits were to become insolvent or enter receivership,
our ability to access our cash, cash equivalents and investments, including transferring funds, making payments or receiving funds, may
be threatened, and this could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
The market price of our common stock may be
volatile, and the value of your investment could decline significantly.
The trading price for our common stock has been, and
we expect it to continue to be, volatile. The price at which our common stock trades depends upon a number of factors, including our historical
and anticipated operating results, our financial situation, announcements of new products by us or our competitors, our ability or inability
to raise the additional capital we may need and the terms on which we raise it, and general market and economic conditions. Some of these
factors are beyond our control. Broad market fluctuations may lower the market price of our common stock and affect the volume of trading
in our stock, regardless of our financial condition, results of operations, business or prospects. It is impossible to assure you that
the market price of our shares of common stock will not fall in the future.
Our operating results may fluctuate, which could
cause our stock price to decrease.
Fluctuations in our operating results may lead to
fluctuations, including declines, in our share price. Our operating results and our share price may fluctuate from period to period due
to a variety of factors, including:
· issues in manufacturing our product candidates or products;
· the development and commercialization of product enhancements;
· changes in the regulatory environment;
· delays in establishing new strategic relationships;
· costs associated with collaborations and new product candidates;
· changes in recommendations of securities analysts or lack of analyst coverage;
· failure to meet analyst expectations regarding our operating results;
· additions or departures of key personnel; and
· general market conditions.
Variations in the timing of our future revenues and
expenses could also cause significant fluctuations in our operating results from period to period and may result in unanticipated earning
shortfalls or losses. In addition, The Nasdaq Capital Market, in general, and the market for life sciences companies, in particular, have
experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance
of those companies.
Anti-takeover provisions in our certificate
of incorporation and bylaws and under Delaware law may make it more difficult for stockholders to change our management and may also make
a takeover difficult.
Our corporate documents and Delaware law contain provisions
that limit the ability of stockholders to change our management and may also enable our management to resist a takeover. These provisions
include:
We are subject to Section 203 of the Delaware General
Corporation Law, which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware
corporation and an “interested stockholder,” which is generally defined as a stockholder who became a beneficial owner of
15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an
interested stockholder.
These provisions might discourage, delay or prevent
a change of control in our management. These provisions could also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other corporate actions. In addition, the existence of these provisions, together
with Delaware law, might hinder or delay an attempted takeover other than through negotiations with our Board of Directors.
Our stockholders may experience substantial
dilution in the value of their investment if we issue additional shares of our capital stock or other securities convertible into common
stock.
Our Restated Certificate of Incorporation, as amended,
allows us to issue up to 50,000,000 shares of our common stock and to issue and designate, without stockholder approval, the rights of
up to 714,286 shares of preferred stock. In the event we issue additional shares of our capital stock, dilution to our stockholders could
result. In addition, if we issue and designate a class of convertible preferred stock, these securities may provide for rights, preferences
or privileges senior to those of holders of our common stock. Additionally, if we issue preferred stock, it may convert into common stock
at a ratio of 1:1 or greater because our Restated Certificate of Incorporation, as amended, allows us to designate a conversion ratio
without limitations.
Shares issuable upon the exercise of outstanding
options may substantially increase the number of shares available for sale in the public market and depress the price of our common stock.
As of March 31, 2025, we had outstanding options to
purchase an aggregate of 73,081 shares of our common stock at a weighted average exercise price of $43.27 per share and a weighted average
contractual term of 8.82 years. In addition, 14,670 shares of our common stock were available on March 31, 2025 for future option grants
under our 2016 Equity Incentive Plan, our 2021 Equity Incentive Plan and our 2024 Equity Incentive Plan. To the extent any additional
options are granted and exercised, there will be further dilution to stockholders and investors. Until the options expire, these holders
will have an opportunity to profit from any increase in the market price of our common stock without assuming the risks of ownership.
Holders of options may convert or exercise these securities at a time when we could obtain additional capital on terms more favorable
than those provided by the options. The exercise of the options will dilute the voting interest of the owners of presently outstanding
shares by adding a substantial number of additional shares of our common stock.
We have filed several registration statements with
the SEC, so that substantially all of the shares of our common stock which are issuable upon the exercise of outstanding warrants and
options may be sold in the public market. The sale of our common stock issued or issuable upon the exercise of the warrants and options
described above, or the perception that such sales could occur, may adversely affect the market price of our common stock.
Our failure to maintain compliance with Nasdaq’s
continued listing requirements could result in the delisting of our common stock.
If we fail to satisfy the continued listing requirements
of the Nasdaq Capital Market, such as the minimum closing bid price requirement and corporate governance requirements, Nasdaq may take
steps to delist our common stock. The delisting of our common stock from Nasdaq would have a material adverse effect on our access to
capital markets, and any limitation on market liquidity or reduction in the price of its common stock as a result of that delisting would
adversely affect our ability to raise capital on terms acceptable to the Company, if at all.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
ITEM 1C. Cybersecurity
Risk Management and Strategy
We identify and address cybersecurity threats and
risks related to our business with an approach that includes assessments by our management and use of an outside consultant to manage
our information technology. In addition, we rely on operating systems and software from established and reliable third-party service providers
to provide security. We have employee policies in place designed to reduce risk of cyber-attacks and educate employees on protocol in
the event of a potential cybersecurity incident.
Currently we are not aware of any risks from cybersecurity
threats, including as a result of any previous cybersecurity incidents, that have materially affected our business strategy, results of
operations or financial condition or are reasonably likely to have such a material effect. However, cyber-attacks are increasing in frequency,
sophistication and intensity, and despite our ongoing efforts we cannot eliminate all risks from cybersecurity threats, or provide assurances
that we have not experienced undetected cybersecurity incidents. Please refer to “Risk Factors” in Part I, Item 1A of this
Form 10-K for more information on the risks posed to us by cybersecurity threats.
Governance
The Board of Directors takes an active role, as a