Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.DC 20549

FORM 10-Q

or☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission File Number file number: 001-33216

SONOMA PHARMACEUTICALS, INC.

(Exact nameName of registrant as specified in its charter)

1129 North McDowell Blvd.

Petaluma, CA 94954(800)759-9305

(Address of principal executive offices) (Zip Code)

(707) 283-0550

Registrant’s telephone number, including area codecode)

N/A

(Former name or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by checkmarkcheck mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒     No o☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx ☒     No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐    Nox ☒

As of February 9, 2018, theThe number of shares outstanding of the registrant’s common stock, $0.0001 par value $0.0001 per share, as of February 7, 2024 was 4,732,20215,607,433.

SONOMA PHARMACEUTICALS, INC.

Index

PART I —- FINANCIAL INFORMATION

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) IncomeLoss

(In thousands, except per share amounts)

(Unaudited)

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity

For the Nine Months ended December 31, 2023 and 2022

(In thousands)thousands, except share amounts)

(Unaudited)

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Rounded to nearest thousand unless specified)

(Unaudited)

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’sCompany moved its principal office is locatedfrom Petaluma, California to Woodstock, Georgia in Petaluma, California.June 2020 and to Boulder, Colorado in October 2022. The Company is a specialty pharmaceutical company dedicated to identifying,global healthcare leader for developing and commercializing unique, differentiated therapies to millionsproducing stabilized hypochlorous acid (“HOCl”) products for a wide range of patients living with chronic skin conditions.applications, including wound care, eye, oral and nasal care, dermatological conditions, podiatry, animal health care, and as a non-toxic disinfectant. The Company believes itsCompany’s products which are sold throughout the United States and internationally, have improved patient outcomes for more than five million patients globally by treating and reducing certain topical skin diseases including acne, atopic dermatitis,reduce infections, scarring infections, itch, pain and harmful inflammatory responses.responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. The Company’s stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells in the area treated assisting the body in its natural healing process. The Company sells its products either directly or via partners in 55 countries worldwide.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of December 31, 2017 and for the three and nine months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America(“GAAP”) for interim financial informationstatements and pursuant toare in the form prescribed by the Securities and Exchange Commission (the “SEC”) in instructions to Form 10-Q and Article 8Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual auditedS-X. The accompanying condensed consolidated financial statements. The condensed consolidated balance sheet as of December 31, 2017, the condensed consolidated statements of comprehensive (loss) income for the three and nine months ended December 31, 2017 and 2016 and the condensed consolidated statements of cash flows for the nine months ended December 31, 2017 and 2016 are unaudited, but includereflect all adjustments, consisting only of normal recurring adjustments, which the Company considersconsidered necessary for a fair presentationstatement of the consolidatedCompany’s financial position, operating results of operations and cash flows for the periods presented. The results for the threeindicated. All material intercompany accounts and nine months ended December 31, 2017 are not necessarily indicative of results to be expected for the year ending March 31, 2018 or for any future interim period. The condensed consolidated balance sheet at March 31, 2017 has been derived from audited consolidated financial statements. These unaudited condensed consolidated financial statements of the Companytransactions have been preparedeliminated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2017,2023, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on June 28, 2017.21, 2023.

The Company reported a net loss of $9,565,000$866,000 and $1,939,000 for the three months ended December 31, 2023 and 2022, respectively, and $3,768,000 and $3,843,000 for the nine months ended December 31, 2017.2023 and 2022, respectively. At December 31, 20172023 and March 31, 2017,2023, the Company’s accumulated deficit amounted to $152,677,000$193,282,000 and $143,101,000,$189,514,000, respectively. The Company had working capital of $12,279,000$9,428,000 and $19,355,000$10,081,000 as of December 31, 20172023 and March 31, 2017,2023, respectively. The Company expects to continue incurring losses forcash balance at December 31, 2023 and March 31, 2023 was $2,406,000 and $3,820,000, respectively. During the foreseeable future and may need to raise additional capital to pursue its product development initiatives, penetrate markets for the sale of its products and continue as a going concern.

On December 8, 2017, the Company entered into an At Market Issuance Sales Agreement, with B. Riley FBR, Inc. (“B. Riley”) under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley acting as its sales agent. The Company will pay B. Riley a commission rate equal to 3.0% of the gross proceeds from the sale of any shares of common stock sold through B. Riley as agent. For the threenine months ended December 31, 2017, the Company sold 228,000 shares of common stock for gross proceeds of $1,034,0002023 and 2022, net proceeds of $968,000 after deducting commissionscash used in operating activities amounted to $2,550,000 and other offering expenses.$3,711,000, respectively.

Management believes that the Company has access to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms, if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively impacted. If the Company is unable to secure additional capital, it may be required to curtail its research and development initiatives and take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.

Use of Estimates

The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, debt discounts, valuation of investments, determination of the relative selling prices of the components sold to Invekra, and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly. The allowance for doubtful accounts represents probable credit losses of $13,000 and $14,000 at December 31, 2017 and March 31, 2017, respectively. Additionally, at December 31, 2017 and March 31, 2017 the Company has allowances of $1,423,000 and $672,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying condensed consolidated balance sheets.

Basic and Diluted Net Income (Loss)Loss per common shareShare

Basic earningsThe following table provides the net loss for each period along with the computation of basic and diluted net loss per share:

The computation of basic loss per share for both continuingthe three and discontinued operations are computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common sharesnine months ended December 31, 2023, and if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and warrants (using the if-converted method). Diluted loss per share2022 excludes the shares issuable uponpotentially dilutive securities summarized in the exercise of stock options and warrants from the calculation of net loss per share astable below because their effectinclusion would be anti-dilutive.

The following securities were excluded from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive.

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 Accounts Receivable(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 generatesderives the majority of its revenue fromthrough 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 sells products directly to end users and to distributors. The Companyhas also has entered into agreements to license its technology and products.

The Company also provides regulatory compliance testing and quality assurance servicesconsiders customer purchase orders, which in some cases are governed by master sales agreements, to medical device and pharmaceutical companies.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.

The Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectabilityFor all of the sale is reasonably assured.

The Company requires all productCompany’s sales to be supported by evidencenon-consignment distribution channels, revenue is recognized when control of a sale transaction that clearly indicates the selling priceproduct is transferred to the customer shipping terms and payment terms. Evidence of an arrangement generally consists of a contract or purchase order approved by the customer. The Company has ongoing relationships with certain customers from(i.e. when its performance obligation is satisfied), which it customarily accepts orders by telephone in lieu of purchase orders.

The Company recognizes revenue at the time it receives confirmation that the goods were either tendered at their destination,typically occurs when shipped “FOB destination,” or transferred to a shipping agent, when shipped “FOB shipping point.” Delivery to the customer is deemed to have occurred when the customer takes title to the product. Generally, 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.

The selling prices 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 all goodsproduct that will be returned. Sales incentives and other programs that the Company may make available to these customers are fixed,considered to be a form of variable consideration, and agreedthe Company maintains estimated accruals and allowances using the expected value method. With the movement of these sales to witha full distributor model in fiscal year 2022, the customer,Company no longer provides these arrangements although the Company still receives some returns from the period prior to shipment. Selling prices are generally based on established list prices. The right to return product is customarily based on the terms of the agreement with the customer. The Company estimates and accrues for potential returns and records this as a reduction of revenue in the same period the related revenue is recognized. Additionally, distribution fees are paid to certain wholesale distributors based on contractually determined rates. The Company estimates and accrues the fee on shipment to the respective wholesale distributors and recognizes the fee as a reduction of revenue in the same period the related revenue is recognized. The Company also offers cash discounts to certain customers, generally 2% of the sales price, as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized. Additionally, the Company participates in certain rebate programs which provide discounted prescriptions to qualified patients. The Company contracts with a third-party to administer the program. The Company estimates and accrues for future rebates based on historical data for rebate redemption rates and the historical value of redemptions. Rebates are recognized as a reduction of revenue in the same period the related revenue is recognized.year ended March 31, 2023.

The Company evaluateshas entered into consignment arrangements, in which goods are left in the creditworthinesspossession of new customersanother party to sell. As products are sold from the customer to third parties, the Company recognizes revenue based on a variable percentage of a fixed price.  Revenue recognized varies depending on whether a patient is covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the Company’s rebate program.

Sales to stocking distributors are made under terms with fixed pricing and monitorslimited rights of return (known as “stock rotation”) of the creditworthiness of its existing customers to determine whether an event or changesCompany’s products held in their financial circumstances would raise doubt asinventory. Revenue from sales to distributors is recognized upon the transfer of control to the collectability of a sale atdistributor.

The Company assessed the time in which a sale is made. Payment terms on sales madepromised goods and services in the United States are generally 30 to 60 daystechnical support contract with Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and are extended up to 90 daysas separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as other goods and services within the Invekra contract, the Company accounted for initial product launches, payment terms internationally generally range from prepaid prior to shipment to 90 days.the distinct service as a performance obligation.

In the event a saleAccounts 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 made to a customer under circumstancesreserve for uncollectible accounts based on its best estimate of probable credit losses in which collectability is not reasonably assured, the Company either requires the customer to remit payment prior to shipment or defers recognition of the revenue until payment is received.its existing accounts receivable. The Company maintains a reserve for amounts which may not be collectible due to risk of credit losses.

In the event a sale is made to a customer under circumstances in which returns cannot be estimated, the Company defers recognition of the revenue until sell-through is confirmed.

Product license revenue is generated through agreements with strategic partners for the commercialization of Microcyn® products. The terms of the agreements sometimes include non-refundable upfront fees. The Company analyzes multiple element arrangementsperiodically 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 elements canrealization of an account may be separated. Analysis is performed atin doubt. Other factors that the inceptionCompany 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 arrangementlocal economic environment and as each productits 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 delivered. If a product or service is not separable, the combined deliverables are accountedconsidered remote. The Company did not deem it necessary to record an allowance for as a single unit of accountingdoubtful accounts for probable credit losses at December 31, 2023 and recognized over the performance obligation period.

When appropriate, the Company defers recognition of non-refundable upfront fees. IfMarch 31, 2023. Additionally, at December 31, 2023 and March 31, 2023 the Company has continuing performance obligations then such up-frontallowances of $29,000 and $16,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are deferred and recognized overincluded in accounts receivable, net in the period of continuing involvement.

The Company recognizes royalty revenues from licensed products upon the sale of the related products.

Revenue from consulting contracts is recognized as services are provided. Revenue from testing contracts is recognized as tests are completed and a final report is sent to the customer.

accompanying condensed consolidated balance sheets.

Inventories

Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.

Due to changing market conditions, estimated future requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company recorded reservesa provision to reduce the carrying amounts of inventories to their net realizable value in the amountsamount of $201,000$292,000 and $61,000$236,000 at December 31, 20172023 and March 31, 2017, respectively.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2018 presentation. These reclassifications have no impact2023, respectively, which is included in cost of revenues on the Company’s previously reportedaccompanying condensed consolidated netstatements of comprehensive loss.

Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements (Note 11).

Adoption of Recent Accounting Standards

In March 2016 the FASB issued ASU No. 2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.

On April 1, 2017, the Company adopted ASU No. 2016-09. As a result of adopting ASU No. 2016-09, the Company has made an accounting policy election to account for forfeitures as they occur. This change has been applied on a modified retrospective basis, with no material impacts on the Company’s financial statements. The adoption of ASU No. 2016-09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled and recognize all previously unrecognized excess tax benefits and tax deficiencies upon adoption as a cumulative-effect adjustment to retained earnings. As of April 1, 2017, the Company recognized excess tax benefit of approximately $533,000 as an increase to deferred tax assets. However, the entire amount was offset by a full valuation allowance.  Accordingly, no cumulative-effect adjustment to retained earnings was recorded as of December 31, 2017.

Additionally, the adoption of ASU No. 2016-09 related to the accounting for minimum statutory withholding tax requirements and cash paid by an employer when directly withholding shares for tax-withholding purposes had no impact on the Company's current consolidated financial statements or on any prior period financial statements presented.

Recent Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance and most recently issued ASU 2017-13Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

Revenue

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which finalizes its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-10Identifying Performance Obligations and Licensing, which finalizes its amendments to the guidance in the new revenue standard regarding the identification of performance obligations and accounting for the license of intellectual property. In May 2016, the FASB issued ASU 2016-12Narrow-Scope Improvements and Practical Expedients, which finalizes its amendments to the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. In December 2016, the FASB issued ASU 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which continues the FASB’s ongoing project to issue technical corrections and improvements to clarify the codification or correct unintended applications of guidance. In September 2017, the FASB issued ASU 2017-13,Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),which provides additional implementation guidance on the previously issued ASU 2014-09. The amendments are intended to make the guidance more operable and lead to more consistent application. The amendments have the same effective date and transition requirements as the new revenue recognition standard. The Company will adopt the new standard on April 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, the Company does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. The Company has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.

Business Combinations

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

Stock Compensation

In May 2017, the FASB issued ASU No. 2017-09,Compensation–Stock Compensation (Topic 718):Scope of Modification Accounting, clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on April 1, 2018, with early adoption permitted. The Company is currently evaluating the impact that ASU 2017-09 will have on its consolidated financial statements and related disclosures.

Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Description of Sale to Invekra

On October 27, 2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V. (“OTM”), closed on an asset purchase agreement with Invekra, S.A.P.I. de C.V. (“Invekra”), an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of its Latin America assets. Specifically, the Company agreed to sell certain patents, patent applications, trademarks and territory rights for Mexico, the Caribbean and South America, excluding the sale of dermatology products in Brazil, as well as to build and deliver equipment that Invekra will use to produce its own product.

The aggregate purchase price that Invekra will pay for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was paid on March 16, 2017 upon the delivery of certain equipment, and $2,500,000 is to be paid in Mexican currency in quarterly installments over a period of ten years from closing as consideration for the provision of certain services and providing technical assistance, calculated as three percent onInventories, net sales of certain products in Latin America, excluding Mexico. Because the $2,500,000 is to be paid in foreign currency, the Company may receive more or less than $2,500,000 due to currency fluctuations. During the nine months ended December 31, 2017, the Company recorded $39,000 of service revenue and $33,000 of interest income related to technical assistance which is reflected in the accompanying condensed consolidated statement of comprehensive (loss) income for the nine months ended December 31, 2017.

In connection with the asset purchase agreement, the Company agreed to provide the technology, know-how and assistance to Invekra to enable Invekra to manufacture on its own the products as currently produced by the Company (“Technical Services Arrangement”), and continue to supply product to Invekra for a two-year transition period from the Sale Date, subject to mutual extension (“Supply Agreement”). During the three and nine months ended December 31, 2016, the Company reported $465,000 of Latin America product revenue related to the Supply Agreement with Invekra. During the three and nine months ended December 31, 2017, the Company reported $772,000 and $2,095,000, respectively, of Latin America product revenue related to the Supply Agreement with Invekra.

The Company will provide product under the Supply Agreement at a reduced price from its current price list, while Invekra builds its own manufacturing line. At the conclusion of the transition period, the Company will cease to be a supplier of product to Invekra. The Company is uncertain as to the duration of the transition period or when Invekra will complete the build out of its manufacturing line. Pursuant to the Supply Agreement, the Company is subject to a potential penalty for failure to supply the products for a consecutive period of nine months. The penalty, if triggered, will require the Company to make a one-time payment of $2,000,000 to Invekra. The penalty decreases by 12.5% each quarter of the term of the supply period.

Inventories, net consist of the following:

Discontinued operationsLeases

The Company's operating leases are comprised primarily of facility leases. The Company did not have any finance leases as of December 31, 2023 and March 31, 2023. Balance sheet information related to our leases is presented below:

Other information related to leases is presented below:

As of December 31, 2016,2023, the Company determined that the saleannual minimum lease payments of its Latin American operations to Invekra qualifiedour operating lease liabilities were as a sale of a component of its business and, as such, all such activity prior to consummation of the sale is required to be included in discontinued operations on the Company’s statement of operations. This includes the direct labor and materials for the product delivered to Invekra, the revenue on the sales to Invekra and the gain on the sale to Invekra, net of tax.follows:

The operations of its Latin American business included in discontinued operations is summarized as follows:

Inventories, net

Inventories consist of the following:

Legal Matters

The Company on occasion, may be involved in legal matters arising in the ordinary course of business including matters involving proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which the Company is or could become involved in litigation may have a material adverse effect on its business and financial condition of comprehensive (loss) income.loss.

Employment Agreements

As of December 31, 2017, theThe Company hadhas employment agreements in place with sixtwo of its key executives. TheThese executive employment agreements provide, among other things, for the payment of twelveup to eighteen months of severance compensation for terminations under certain circumstances. With

Amendments

On June 16, 2023, we entered into an amended and restated employment agreement with our Chief Executive Officer, Amy Trombly. The amended and restated agreement provides that, in the event of termination upon change of control either without cause or for good reason, Ms. Trombly is entitled to receive, in addition to the other benefits described therein, a lump sum severance equal to one and a half times her base salary and one and a half times her target annual bonus. All other material terms of the amended and restated agreement remain unchanged from her prior employment agreement.

On June 16, 2023, we amended and restated our employment agreement with Bruce Thornton, our Chief Operating Officer. Under the amended and restated agreement, Mr. Thornton will serve as Executive Vice President and Chief Operating Officer of the Company. Mr. Thornton will no longer receive a monthly car allowance; however, his base salary is adjusted to include such amount. The amended and restated agreement also provides that, in the event of termination upon change of control either without cause or for good reason, Mr. Thornton is entitled to receive, in addition to the other benefits described therein, to a lump sum severance equal to one and a half times his base salary and one and a half times his target annual bonus. The agreement further provides that upon termination for any reason, Mr. Thornton’s outstanding and vested equity awards shall remain exercisable for 18 months following termination. Either party may terminate the employment agreement for any reason upon at least 60 days prior written notice. All other material terms of his amended and restated agreement remain unchanged from his prior employment agreement.

Bonus Grants

On June 16, 2023, the Compensation Committee of the Board of Directors approved annual bonus awards of $162,500 for Ms. Trombly and $150,000 for Mr. Thornton.

Equity Awards

On June 16, 2023, the Compensation Committee of the Board of Directors approved an equity award of 100,000 shares of the Company’s common stock to each of Ms. Trombly and Mr. Thornton, to be issued to on June 30, 2023, at a valuation based on the five day weighted trailing average of the Company’s stock price on the day of grant. In addition, the Compensation Committee also approved a one-time cash payment by the Company as reimbursement for estimated taxes payable with respect to such equity awards. On September 22, 2023, the Company paid taxes related to the common stock issuance in the amount of $149,000.

As of December 31, 2023, with respect to these agreements, at December 31, 2017, aggregated annual salaries would be $1,167,000was $586,000 and potential severance payments to these key executives would be $1,417,000was $1,300,000, if triggered.

Financing of Insurance Premiums

On February 1, 2022, the Company entered into a note agreement for $748,000 with an interest rate of 4.68% per annum with final payment on January 1, 2023. This instrument was issued in connection with financing insurance premiums. The note is payable in ten monthly installment payments of principal and interest of $76,000, with the first installment beginning March 1, 2022.

On February 1, 2023, the Company entered into a note agreement for $453,000 with an interest rate of 8.98% per annum with final payment on January 1, 2024. This instrument was issued in connection with financing insurance premiums. The note is payable in eleven monthly installment payments of principal and interest of $43,000, with the first installment beginning March 1, 2023.

Authorized Capital

The Company is authorized to issue up to 12,000,00024,000,000 shares of common stock with a par value of $0.0001$0.0001 per share and 714,286 shares of convertible preferred stock with a par value of $0.0001$0.0001 per share.

At Market IssuanceSale of Common Stock

On December 8, 2017,October 26, 2023, the Company entered into a placement agency agreement with Maxim Group LLC (“Maxim”), pursuant to which Maxim agreed to use its reasonable best efforts to solicit offers to purchase up to an At Market Issuance Sales Agreement, with B. Riley FBR, Inc. (“B. Riley”) under which the Company may issue and sellaggregate of 8,500,000 shares of itsthe Company’s common stock, having an aggregate offering price of up to $5,000,000 from time to time through B. Riley acting as its sales agent.par value $0.0001 per share. The Company willagreed to pay B. RileyMaxim a commission ratecash fee equal to 3.0%8.0% of the gross proceeds from the offering, plus reimbursement of up to $75,000 of legal fees and other expenses. Additionally, on October 26, 2023, the Company entered into a securities purchase agreement with the purchasers party thereto for the sale and issuance of anyan aggregate of up to 8,500,000 shares of the Company’s common stock sold through B. Riley as agent. Forat a public offering price of $0.20 per share.

The closing of the three months ended December 31, 2017,offering occurred on October 30, 2023. In connection with the offering, the Company sold 228,0008,500,000 shares of the Company’s common stock for aggregate gross proceeds of $1,034,000$1,700,000 and net proceeds of $968,000$1,446,000, after deducting commissionsplacement agent fees and other estimated offering expenses.expenses paid by the Company.

Common Stock Issued to Services Provider

During the nine months ended December 31, 2017, the Company entered into an agreement with Actual, Inc., a firm that provides marketing and branding consulting services. On July 27, 2017, the Company issued 2,570 shares of restricted common stock valued at $6.74 per share and on August 22, 2017, the Company issued 3,133 shares of restricted common stock valued at $5.53 per share. The aggregate fair market value of the common stock issued in July and August was $35,000. On December 1, 2017, the Company issued 5,479 shares of restricted common stock valued at $5.02 per share. The aggregate fair market value of the common stock issued was $27,000. The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, during the three and nine months ended December 31, 2017, the Company recorded $28,000 and $62,000, respectively, of expense related to common stock issued. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of comprehensive (loss) income for the three and nine months ended December 31, 2017.

On April 1, 2017,Stock-based compensation expense is as follows:

For the three months ended December 31, 2023 and 2022, the Company adopted ASU 2016-09incurred $140,000 and as a result, made a Company-wide accounting policy change with respect to accounting for forfeitures. The Company applied a modified retrospective approach for adoption$242,000 of the new policy and accordingly recorded an $11,000 increase to opening accumulated deficit at April 1, 2017. In accordance with the adoption of the accounting policy, the Company no longer estimates forfeitures based on historical experience and no longer reducesstock-based compensation expense, based on the expected forfeitures. Beginning April 1, 2017, the Company will record forfeitures as they occurrespectively, and will reduce compensation cost at the time of forfeiture.

The weighted average grant date fair values of options granted duringfor the nine months ended December 31, 2017 was $6.01.

Share-based awards2023 and 2022, the Company incurred $447,000 and $569,000 of stock-based compensation expense, respectively. All stock-based compensation incurred is as follows:included in selling, general and administrative expense in the accompanying condensed consolidated statements of comprehensive loss.

At December 31, 2017,2023, there were unrecognized compensation costs of $2,636,000$312,000 related to stock options which isare expected to be recognized over a weighted-average amortization period of 2.201.44 years.

At December 31, 2017, there were unrecognized compensation costs of $178,000 related to restricted stock whichStock options award activity is expected to be recognized over a weighted-average amortization period of 1.66 years.as follows:

Stock-Based Award Activity

On April 1, 2017, pursuant to “evergreen” provisions in the 2011 Stock Incentive Plan and the 2016 Stock Incentive Plan, the number of shares authorized for issuance in the 2011 Plan increased by 643,383 shares and the number of shares authorized for issuance in the 2016 Plan increased by 343,137 shares.

Stock options award activity is as follows:

The aggregate intrinsic value of stock options of zero is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock, or $5.45$0.18 per share at December 31, 2017.2023.

Restricted stock award activity is as follows:

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

The Company did not capitalize any cost associated with stock-based compensation.

The Company issues new shares of common stock upon exercise of stock options or release of restricted stockstock-based awards.

TheAt the end of each interim reporting period, the Company has completed a study to assess whether a change in control has occurred or whether there have been multiple changes of control sincedetermines the Company’s formation through March 31, 2017. The Company determined, based on the resultsincome tax provision by using an estimate of the study, no changeannual effective tax rate, adjusted for discrete items occurring in control occurredthe quarter.

The Company’s effective tax rate for purposesthe three and nine months ended December 31, 2023 was (2.49)% and 6.43%, respectively. The Company’s effective tax rate for the three and nine months ended December 31, 2023 differed from the federal statutory tax rate of Internal Revenue Code section 382. The Company, after considering all available evidence, fully reserved its21% primarily due to the valuation allowance recognized against deferred tax assets sincein the U.S., and permanent tax adjustment of intercompany interest expense in Mexico and Netherlands.

Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not such benefits,that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of December 31, 2023, the Company continues to maintain a valuation allowance in future periods. the U.S.

The Company incurred losses for both financial reportinggenerates revenues from products which are sold into the human and income tax purposes for the year ended March 31, 2017. Accordingly, the Company is continuinganimal healthcare markets and to fully reserve for its deferred tax assets. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.multiple geographic regions.

As a result of certain realization requirements of Accounting Standards Codification Topic 718,The following table presents the Company’s deferred tax assets and liabilities do not include certain deferred tax assets at December 31, 2017 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting purposes. Equity will be increaseddisaggregated revenues by approximately $533,000 if and when such deferred tax assets are ultimately realized.revenue source:

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending March 31, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate. The Tax Act reduces the federal corporate tax rate to 21 percent in the fiscal year ending March 31, 2018.  Section 15 of the Internal Revenue Code stipulates that our fiscal year ending March 31, 2018, will have a blended corporate tax rate of approximately 30 percent, which is based on the applicable tax rates before and after the Tax Act and the number of days in the year.  The reduction of the corporate tax rate to 21% will cause the Company to reduce its deferred tax asset, consisting primarily of net operating loss carry forwards, research and development tax credit carry-forwards and stock based compensation and adjust the valuation allowance against the deferred tax asset from approximately $42 million as of March 31, 2017 to approximately $28 million.  The effect of this discrete event has no effect on the basic condensed consolidated financial statements for the three and nine month period ended December 31, 2017.

The changes included in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments within one year after the enactment date of the Tax Act.

The Company generates product revenues from products, which are sold into the human and animal healthcare markets, and the Company generates service revenues from laboratory testing services, which are provided to medical device manufacturers. Additionally, the Company provides technical services to Invekra.

The following table shows the Company’s product revenues by geographic region: