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 income taxes.
On an ongoing basis, we evaluate our estimates and
judgments. 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, 2026 and
2025
Revenue
The following table shows our consolidated total revenue
and revenue by geographic region for the year ended March 31, 2026 and 2025:
Year Ended March 31,
(In thousands, except for percentages) 2026 2025 $ Change % Change
Revenues in the U.S. increased 117%, primarily as
a result of an increase in sales of over-the-counter products and increased sales by new and existing distributors.
Europe revenues increased 25% as a result of increased
demand for our products and favorable exchange rates.
Revenues in Asia increased 25% and Rest of World revenues
increased 92% due to timing of customer orders and royalty revenue from our customer in India. Revenues from these regions tend to fluctuate
due to customers placing larger, but less frequent, orders to benefit from quantity discounts and reduced shipping costs when ordering
larger quantities.
Latin America revenues decreased 20%, primarily due
to timing of customer orders for overflow manufacturing.
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics for the
year ended March 31, 2026 and 2025 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2026 2025 $ Change % Change
Cost of Revenue as a % of Revenues 62% 62%
Gross Profit as a % of Revenues 38% 38%
The gross profit margin of 38% for the year ended
March 31, 2026 was consistent with the prior year.
Research and Development Expense
The research and development expense metrics for the
year ended March 31, 2026 and 2025 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2026 2025 $ Change % Change
Research and Development Expense as a % of Revenues 12% 13%
Increase in research and development expenses for
the year ended March 31, 2026 of 25% was primarily due to increased product development to support new product releases.
Selling, General and Administrative Expense
The selling, general and administrative expense metrics
for the years ended March 31, 2026 and 2025 are as follows:
Year Ended March 31,
(In thousands, except for percentages) 2026 2025 Change % Change
Selling, General and Administrative Expense $ 7,605 $ 7,361 $ 244 3%
Selling, General and Administrative Expense as a % of Revenues 39% 52%
The increase in selling, general and administrative
expenses for the year ended March 31, 2026 of 3% was primarily due to inflation driven salary increases in Mexico.
Other (Expense) Income, net
Other (expense) income, net for the year ended March
31, 2026 was ($958,000) compared to $803,000 for the year ended March 31, 2026. Other (expense) income, net in the current period primarily
relates to exchange rate fluctuations, offset by the recognition of income of approximately $374,000 related to employee retention credits.
Other (expense) income, net in the prior period primarily relates to exchange rate fluctuations.
Income Tax Benefit (Expense)
Income tax benefit (expense) for the year ended March
31, 2026 and 2025 was $244,000 and ($550,000), respectively. The benefit for the current period was related to an expected tax loss in
Mexico this fiscal year. The expense for the prior period is primarily related to the use of our Mexico deferred tax asset.
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) 2026 2025
Weighted-average shares outstanding: basic and diluted 1,684 1,241
Net loss per share: basic and diluted $ (1.89 ) $ (2.79 )
Liquidity and Capital Resources
We reported a net loss of $3,175,000 and $3,457,000
for the years ended March 31, 2026 and 2025, respectively. At March 31, 2026 and 2025, our accumulated deficit amounted to $200,981,000
and $197,806,000, respectively. As of March 31, 2026 and 2025, we had cash and cash equivalents of $2,399,000 and $5,374,000, 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, 2025, substantially all of our operations
have been financed through cash on hand and the following transactions:
· Proceeds of $374,000 stemming from employee retention credits.
The following table presents a summary of our consolidated
cash flows for operating, investing and financing activities for the years ended March 31, 2026 and 2025 as well as balances of cash and
cash equivalents and working capital:
Year ended March 31,
Net cash (used in) provided by :
Operating activities $ (3,933 ) $ (88 )
Investing activities (192 ) (80 )
Effect of exchange rates on cash 673 (616 )
Net change in cash and cash equivalents (2,975 ) 2,246
Cash and cash equivalents, beginning of the period 5,374 3,128
Cash and cash equivalents, end of the period $ 2,399 $ 5,374
Working capital (1), end of period $ 7,268 $ 8,552
(1) Defined as current assets minus current liabilities.
As of March 31, 2026 and 2025, we had cash and cash
equivalents of $2,399,000 and $5,374,000, respectively.
Net cash used in operating activities during the year
ended March 31, 2026 was $3,933,000, primarily due to our net loss of $3,175,000 offset by stock compensation of $255,000, a increase
in accounts receivable of $122,000, an increase in prepaid expenses of $1,312,000 and a decrease in accounts payable of $871,000.
Net cash used in operating activities during the year
ended March 31, 2025 was $88,000, primarily due to our net loss of $3,457,000 offset by stock compensation of $224,000, a decrease in
accounts receivable of $434,000, a decrease in prepaid expenses of $1,086,000 and an increase in accounts payable of $416,000.
Net cash used in investing activities for the year
ended March 31, 2026 was $192,000, primarily related to the purchase of capital property and equipment.
Net cash used in investing activities for the year
ended March 31, 2025 was $80,000, primarily related to the purchase of capital property and equipment
Net cash provided by financing activities for the
year ended March 31, 2026 was $477,000, primarily related to proceeds of $427,000 from the sale of common stock.
Net cash provided by financing activities for the
year ended March 31, 2025 was $3,030,000, primarily related to proceeds of $3,079,000 from the sale of common stock.
We believe that our existing cash and operating plans
are sufficient to fund our anticipated operations for the next twelve months. We also have access to additional capital resources, which
may include public or private equity offerings, debt financings, corporate collaborations, or other means, if and when appropriate to
support strategic initiatives. However, there can be no assurance that such financings will be available on commercially acceptable terms,
or at all, if pursued in the future. If the economic climate in the U.S. deteriorates, our ability to access additional capital could
be negatively impacted. If we elect to pursue additional financing in the future, we may do so to support growth initiatives, extend our
financial flexibility, or fund strategic opportunities. Any such activities could result in delays or changes to planned commercialization
activities depending on timing and market conditions.
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 anticipate spending $500,000 to purchase equipment to increase efficiency in operations
for the year ended March 31, 2027. 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 foreign currency devaluation
for both the Mexico Peso and the Euro versus the US dollar. Risk related to foreign currency valuation tends to be unpredictable and can
be affected by various factors outside of our control.
We face a substantial Mexico
tax liability, intercompany debt, unpaid technical assistance charges and accrued interest. These amounts are due in 2032. At this time,
management believes there are sufficient assets on the balance sheet to cover any tax obligation without interrupting our 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 us.
We also closely monitor global
economic conditions, including the risk of economic downturn or recession, the prospect of new or increased tariffs, as well as overall
consumer sentiment, any of 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 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 the valuation allowance relating to the Company’s deferred tax assets.
Periodically, the Company evaluates and adjusts estimates accordingly.
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. AND SUBSIDIARIES
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, 2026 and 2025 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, 2026 and 2025, and the related consolidated
statements of comprehensive loss, changes in stockholders' equity, and cash flows for the years ended March 31, 2026 and 2025, 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, 2026 and 2025, and the results of their
operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
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.
Nashville,
Tennessee
June 16, 2026
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 2,399 $ 5,374
Prepaid expenses and other current assets 3,436 1,915
Current portion of deferred consideration, net of discount 87 212
Property and equipment, net 310 225
Operating lease, right of use assets 602 84
Deferred tax asset, net 884 589
Deferred consideration, net of discount, less current portion – 73
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other current liabilities 2,252 2,224
Deferred revenue, current portion 284 641
Operating lease liabilities, current portion 151 58
Deferred revenue, net of current portion – 17
Operating lease liabilities, less current portion 469 27
Commitments and Contingencies (Note 11) – –
Stockholders’ Equity:
Accumulated other comprehensive loss (3,243 ) (4,376 )
Total liabilities and stockholders’ equity $ 13,960 $ 13,693
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 7,605 7,361
Other (expense) income (958 ) 803
Loss from operations before income taxes (3,419 ) (2,907 )
Income tax benefit (expense) 244 (550 )
Net loss per share: basic and diluted $ (1.89 ) $ (2.79 )
Weighted-average shares outstanding: basic and diluted 1,684 1,241
Other comprehensive loss:
Foreign currency translation adjustments 1,133 (1,653 )
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, 2026 and 2025
(In thousands, except share amounts)
Shares Amount Capital Deficit Loss Total
Payments for fractional shares related to reverse-split (288 ) – (1 ) – – (1 )
Exercise of employee stock options 27,750 82 82
Employee stock-based compensation – – 170 – – 170
Foreign currency translation adjustment – – – – (1,653 ) (1,653 )
Exercise of employee stock options 15,500 – 44 – – 44
Employee stock-based compensation – – 255 – – 255
Foreign currency translation adjustment – – – – 1,133 1,133
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:
Stock-based compensation 255 224
Deferred income tax (benefit) expense (231 ) 357
Operating lease right-of-use asset (515 ) 174
Changes in operating assets and liabilities:
Accounts receivable, net (122 ) 434
Prepaid expenses and other current assets (1,312 ) 1,086
Deferred consideration, net of discount 237 194
Accrued expenses and other current liabilities (100 ) 295
Withholding tax payable 422 432
Operating lease liabilities 515 (174 )
Net cash used in operating activities (3,933 ) (88 )
Cash flows from investing activities:
Purchases of property and equipment (192 ) (80 )
Net cash used in investing activities (192 ) (80 )
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering expenses 427 3,079
Proceeds from exercise of employee stock options 44 82
Payments for fractional shares related to reverse-split – (1 )
Principal payments on short-term debt (271 ) (404 )
Insurance premiums financed 277 274
Net cash provided by financing activities 477 3,030
Effect of exchange rate on cash and cash equivalents 673 (616 )
Net (decrease) increase in cash and cash equivalents (2,975 ) 2,246
Cash and cash equivalents, beginning of year 5,374 3,128
Cash and cash equivalents, end of year $ 2,399 $ 5,374
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6 $ 11
Non-cash operating and financing activities:
Insurance premiums financed $ 277 $ 274
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.
Reverse Stock Split
Effective August 29, 2024, the Company effected a
reverse stock split of its common stock, par value $0.0001 per share. Every twenty shares of common stock were reclassified and combined
into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each fractional share
was settled with cash. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 21,174,693
to 1,058,447. The total number of authorized shares of common stock was not proportionally decreased and the par value per share of the
common stock continues to be $0.0001.
NOTE 2 – Liquidity and Financial
Condition
The Company reported a net loss of $3,175,000 and
$3,457,000 for the years ended March 31, 2026 and 2025, respectively. At March 31, 2026 and 2025, the Company’s accumulated deficit
amounted to $200,981,000 and $197,806,000, respectively. The Company had working capital of $7,268,000 and $8,552,000 as of March 31,
2026 and 2025, respectively. During the years ended March 31, 2026 and 2025, net cash used in operating activities amounted to $3,933,000
and $88,000, respectively.
On April 24, 2026, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc. (the “Underwriter”). At the close
of the offering, the Company issued 2,962,963 shares of common stock. The Company received gross proceeds of $4,000,000 and net proceeds
of $3,574,000 after deducting commissions and other offering expenses paid by the Company (Note 17).
Management believes that the Company's existing cash,
proceeds from the Dawson offering, and will be sufficient to fund its projected operating requirements for at least the next twelve months
from the issuance date of these financial statements. This conclusion differs from prior periods due primarily to the Company's improved
liquidity position resulting from the capital raise through the Dawson offering, together with actions taken to align operating expenditures
with available resources and expected cash flow management. Additionally, the Company has access to capital resources, which may include
public or private equity offerings, debt financings, corporate collaborations, or other means, if and when appropriate to support strategic
initiatives. However, there can be no assurance that such financings will be available on commercially acceptable terms, or at all, if
pursued in the future. If the economic climate in the U.S. deteriorates, the Company’s ability to access additional capital could
be negatively impacted. If the Company elects to pursue additional financing in the future, it may do so to support growth initiatives,
extend its financial flexibility, or fund strategic opportunities. Any such activities could result in delays or changes to planned commercialization
activities depending on timing and market conditions.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and
all highly liquid investments with an original maturity of three months or less when purchased. The Company’s cash equivalents are
held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include
the valuation allowance relating to the Company’s deferred tax asset. 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.
All of the Company’s revenue is recognized when
control of the product is transferred to the customer (i.e. when its performance obligation is satisfied), which typically occurs when
title passes to the customer upon shipment but could occur when the customer receives the product based on the terms of the agreement
with the customer. For product sales to its value-added resellers, non-stocking distributors and end-user customers, the Company grants
return privileges to its customers, and because the Company has a long history with its customers, the Company is able to estimate the
amount of product that will be returned.
Sales 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.
At March 31, 2026, 2025 and 2024, the Company deferred
revenue in the amounts of $284,000, $658,000 and $565,000, respectively.
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 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 $1,544,000
of deposits above insured limits.
The following table shows major customers revenues
as a percentage of revenue:
Schedule of concentration of risk
For the Year Ended March 31,
Customer B –*% 21%
The following table shows major customers accounts
receivable balances as a percentage of net accounts receivables:
Customer A 12% –*%
Customer C 19% –*%
Customer D –*% 24%
* % 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, 2026, 2025 and 2024. Additionally, at March 31, 2026, 2025
and 2024, the Company has allowances of $19,000, $8,000 and $27,000, respectively, related to potential discounts, returns, distributor
fees and rebates. The allowances are included in accounts receivable, net in the accompanying consolidated balance sheets. Accounts receivable,
net at March 31, 2024 was $2,898,000.
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, 2026 and 2025,
the Company recorded provisions to reduce the carrying amounts of inventories to their net realizable value in the amounts of $614,000
and $298,000, respectively. The provisions are included in inventories, net in the 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 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).
As of March 31, 2026 and 2025, there were no material
Level 2 or Level 3 assets or liabilities.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. 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, 2026 and 2025.
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.
Advertising Costs
Advertising costs are charged to operations as incurred.
Advertising costs amounted to $91,000 and $190,000 for the years ended March 31, 2026 and 2025, 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, 2026 and 2025, the Company recorded revenue related to shipping and
handling costs of $180,000 and $18,000, respectively. These amounts are included in 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 gains of $1,133,000 and losses of $1,653,000
for the years ended March 31, 2026 and 2025, respectively. These amounts were recorded in other comprehensive loss in the accompanying
consolidated statements of comprehensive loss for the years ended March 31, 2026 and 2025.
Foreign currency transactions 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 $1,446,000 and gains of $243,000 for
the years ended March 31, 2026 and 2025, respectively. The related amounts were recorded in other income (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.
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) 2026 2025
Weighted-average shares outstanding: basic and diluted 1,684 1,241
Net loss per share: basic and diluted $ (1.89 ) $ (2.79 )
The computation of basic and diluted loss per share
for the years ended March 31, 2026 and 2025 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 129 73
Common stock to be issued upon vesting of restricted stock units 118 45
Convertible 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. At all other
times, preferred shares are classified as stockholders' equity. There are no shares issued as of March 31, 2026 and 2025. All convertible
preferred stock is presented as stockholders' equity as of March 31, 2026 and 2025.
Segment Reporting
The Company has one primary business activity and
operates in one reportable segment. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer
(“CEO”) who evaluates performance and makes operating decisions about allocating resources based on financial data presented
on a consolidated basis. The measures of profitability and the significant segment expenses reviewed by the CODM are consistent with these
financial statements and footnotes.
Recent Accounting Standards
The Company has evaluated all the recent accounting
standards and determined that none are material to it.
NOTE 4 – Accounts Receivable
Accounts receivable, net consists of the following:
Schedule of accounts receivable
Less: discounts, rebates, distributor fees and returns (19,000 ) (8,000 )
NOTE 5 – Inventories
Inventories, net consists of the following:
Schedule of inventories
Less: allowance for obsolete and excess inventory (614,000 ) (298,000 )
NOTE 6 – Prepaid Expenses and Other
Current Assets
Prepaid expenses and other current assets consist
of the following:
Schedule of prepaid expenses and other current assets
Other prepaid expenses and other current assets 296,000 148,000
Total prepaid expenses and other current assets $ 3,436,000 $ 1,915,000
NOTE 7 – Property and Equipment
Property and equipment, net consists of the following:
Schedule of property and equipment, net
Depreciation expense amounted to $139,000
and $138,000 for the years ended March 31, 2026 and 2025, respectively.
NOTE 8 – Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current liabilities consist
of the following:
Schedule of accrued expenses and other current liabilities
Total accrued expenses and other current liabilities $ 2,252,000 $ 2,224,000
NOTE 9 – Debt
Financing of Insurance Premiums