The accompanying footnotes are an integral part
of these consolidated financial statements.
The accompanying footnotes are an integral part
of these consolidated financial statements.
The accompanying footnotes are an integral part
of these consolidated financial statements.
The accompanying footnotes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Organization and Recent
Developments
Organization
Sonoma Pharmaceuticals, Inc. (the “Company”)
was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware
in December 2006. The Company’s principal office was moved to Woodstock, Georgia from Petaluma, California in June 2020. The Company
is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”) products for a wide range
of applications, including wound care, animal health care, eye care, oral care and dermatological conditions. The Company’s products
reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner. In-vitro and clinical studies
of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. The Company’s stabilized
HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells
in the area treated assisting the body in its natural healing process. The Company sells its products either directly or via partners
in 54 countries worldwide.
NOTE 2 – Liquidity and Financial
Condition
The Company reported a net loss of $5,086,000
for the year ended March 31, 2022. At March 31, 2022 and 2021, the Company’s accumulated deficit amounted to $184,363,000
and $179,277,000, respectively. The Company had working capital of $10,611,000 and $8,905,000 as of March 31, 2022 and 2021,
respectively.
Management believes that the Company has access
to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other
means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms,
if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively
impacted. If the Company is unable to secure additional capital, it may be required to take additional measures to reduce costs in order
to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays
in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and
the future operations of the Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to
continue as a going concern.
COVID – 19
On March 11, 2020 the
World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment
and mitigation measures worldwide. In an effort to mitigate the continued spread of the virus, federal, state and local governments, as
well as certain private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings
and quarantining of people who may have been exposed to the virus. As a result of these restrictions, together with a general fear of
the impact on the global economy and financial markets, there is significant uncertainty surrounding the potential impact on the Company.
As events are rapidly changing, the Company is unable to accurately predict the impact that COVID-19 will have on its business due to
uncertainties including, but not limited to, the duration of quarantines and other travel restrictions within China, the U.S. and other
affected countries, the ultimate geographical spread of the virus, the severity of the disease, the duration of the outbreak and the public’s
response to the outbreak.
NOTE 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies
of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”). Aquamed has no current
operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency for
the Company's wholly-owned subsidiaries incorporated outside the United States (“U.S.”) is denominated in local currency.
All intercompany transactions and balances have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated
financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
("SEC") and are in conformity with U.S. generally accepted accounting principles ("GAAP"). The Company’s fiscal
year end is March 31. Unless otherwise stated, all years and dates refer to the fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents
include cash on hand and all highly liquid investments with an original maturity of three months or less when purchased. The Company’s
cash equivalents are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include
reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating
to the Company’s deferred tax assets, valuation of equity, fair value allocation of assets sold to Invekra, and the estimated amortization
periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Revenue Recognition
On April 1, 2018, the Company adopted Accounting
Standards Update ("ASU"), "Revenue from Contracts with Customers Topic 606” (“Topic 606”) using the modified
retrospective method. There was no material impact to the Company upon the adoption of Topic 606. Revenue is recognized when the Company
transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company expects to receive
in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its
obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services in
the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are
distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration;
(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company derives the majority of its revenue
through sales of its products directly to end users and to distributors. The Company also sells products to a customer base, including
hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company also has entered into agreements to license
its technology and products.
The Company considers customer purchase orders,
which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers
the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction
price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects
to be entitled.
For all of its sales to non-consignment distribution
channels, revenue is recognized when control of the product is transferred to the customer (i.e. when its performance obligation is satisfied),
which typically occurs when title passes to the customer upon shipment but could occur when the customer receives the product based on
the terms of the agreement with the customer. For product sales to its value-added resellers, non-stocking distributors and end-user customers,
the Company grants return privileges to its customers, and because the Company has a long history with its customers, the Company is able
to estimate the amount of product that will be returned. Sales incentives and other programs that the Company may make available
to these customers are considered to be a form of variable consideration, and the Company maintains estimated accruals and allowances
using the expected value method.
The Company has entered into consignment arrangements,
in which goods are left in the possession of another party to sell. As products are sold from the customer to third parties, the Company
recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending on whether a patient is
covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the
Company’s rebate program.
Sales to stocking distributors are made under
terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in
their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods and services
in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its own and is
separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as
other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.
Service revenue from testing contracts is recognized
as tests are completed and a final report is sent to the customer.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents
are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is exposed to credit risk in the
event of default by these financial institutions for amounts in excess of the Federal Deposit Insurance Corporation insured limits. Cash
and cash equivalents held in foreign banks are intentionally kept at minimal levels, and therefore have minimal credit risk associated
with them.
The Company grants credit to its business customers,
which are primarily located in Mexico, Europe and the United States. Collateral is generally not required for trade receivables. The Company
maintains allowances for potential credit losses. At March 31, 2022, one customer represented 20% of our net accounts
receivable balance, one customer represented 15% of our net accounts receivable balance, and one customer represented
14% of our net accounts receivable balance. At March 31, 2021, one customer represented 17% of our net accounts receivable balance, one customer represented 16%
of our net accounts receivable balance, and one customer represented 14% of our net accounts receivable balance. For the year ended March 31, 2022, one customer represented 10%, one customer represented 17%, and one customer represented
21% of net revenues. For the year ended March 31, 2021, one customer represented 32%, and one customer represented 15% of net revenues.
Accounts Receivable
Trade accounts receivable are recorded net of
allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns
are based on analysis of contractual terms and historical trends.
The Company’s policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers
include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis
of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on
government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts represents
probable credit losses at March 31, 2022 and 2021 in the amounts of $0 and $125,000, respectively. Additionally, at March 31, 2022 and
2021, the Company has allowances of $81,000 and $1,488,000, respectively, related to potential discounts, returns, distributor fees and
rebates. The allowances are included in Accounts Receivable, net in the accompanying consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost, cost
being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.
Due to changing market conditions, estimated future
requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand
and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company recorded a provision
to reduce the carrying amounts of inventories to their net realizable value in the amounts of $218,000 and $223,000 at March 31, 2022
and 2021, respectively, which is included in cost of revenues on the Company’s accompanying consolidated statements of comprehensive
(loss) income.
Financial Assets and Liabilities
Financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable are carried at cost, which management believes approximates fair value due to the
short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts
as a market rate of interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based
on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes
the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of
inputs that may be used to measure fair value:
Level 1 – quoted prices in active
markets for identical assets or liabilities
Level 2 – quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 – inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
Level 3 liabilities are valued using unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements
categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief
Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level
3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department
and are approved by the Chief Financial Officer.
As of March 31, 2022 and 2021, there were no transfers
in or out of Level 3 from other levels in the fair value hierarchy.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the
estimated useful lives of the respective assets. Depreciation of leasehold improvements is computed using the straight-line method over
the lesser of the estimated useful life of the improvement or the remaining term of the lease. Estimated useful asset life by classification
is as follows:
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; |
|
· |
a significant change in the extent or manner in which an asset is used or a significant physical change in an asset; |
|
· |
a significant adverse change in legal factors or in the business climate that affects the value of an asset; |
|
· |
an adverse action or assessment by the U.S. Food and Drug Administration or another regulator; and |
|
· |
an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset; and operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an income-producing 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.
During the years ended March 31, 2022 and 2021,
the Company had noted no indicators of impairment.
Research and Development
Research and development expenses are charged
to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies. For the years ended
March 31, 2022 and 2021, research and development expense amounted to $125,000 and $555,000, respectively.
Advertising Costs
Advertising costs are charged to operations as
incurred. Advertising costs amounted to $86,000 and $41,000, for the years ended March 31, 2022 and 2021, respectively. Advertising costs
are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive (loss) income.
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, 2022 and 2021, the Company recorded revenue related to shipping and
handling costs of $52,000 and $37,000, respectively. These amounts are included in product revenues in the accompanying consolidated statements
of comprehensive (loss) income.
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 $267,000 and $1,031,000 for
the years ended March 31, 2022 and 2021, respectively. These amounts were recorded in other comprehensive loss in the accompanying consolidated
statements of comprehensive loss for the years ended March 31, 2022 and 2021.
Foreign currency transaction gains (losses) relate
primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and SP Europe. These transactions are
expected to be settled in the foreseeable future. The Company recorded foreign currency transaction losses of $579,000 for the year ended
March 31, 2022, and foreign currency transaction losses of $690,000, for the year ended March 31, 2021. The related amounts were recorded
in other expense in the accompanying consolidated statements of comprehensive (loss) income.
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 an 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) income or cash
flows.
Comprehensive Loss
Other comprehensive loss includes all changes
in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statement of changes in stockholders’
equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments. Accumulated other
comprehensive losses at March 31, 2022 and 2021 were $4,312,000, and $4,579,000 respectively.
Net Income 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.
Computation of earnings per share | |
| | | |
| | |
| |
For the Year Ended March 31, | |
(In thousands, except per share data) | |
2022 | | |
2021 | |
| |
| | |
| |
Loss from continuing operations | |
$ | (5,086 | ) | |
$ | (4,615 | ) |
Income from discontinued operations | |
| – | | |
| 665 | |
Net loss | |
$ | (5,086 | ) | |
$ | (3,950 | ) |
| |
| | | |
| | |
Weighted-average shares outstanding: basic and diluted | |
| 2,653 | | |
| 1,996 | |
| |
| | | |
| | |
Loss per share from continuing operations | |
$ | (1.92 | ) | |
$ | (2.31 | ) |
Income per share from discontinued operations | |
| – | | |
| 0.33 | |
Net loss per share: basic and diluted | |
$ | (1.92 | ) | |
$ | (1.97 | ) |
The computation of basic loss per share for the
years ended March 31, 2022 and 2021 excludes the potentially dilutive securities summarized in the table below because their inclusion
would be anti-dilutive.
Schedule of antidilutive shares | |
| | | |
| | |
| |
March 31, | |
(In thousands) | |
2022 | | |
2021 | |
Common stock to be issued upon vesting of restricted stock units | |
| 1 | | |
| 1 | |
Common stock to be issued upon exercise of options | |
| 466 | | |
| 268 | |
Common stock to be issued upon exercise of warrants | |
| 108 | | |
| 119 | |
Common stock to be issued upon conversion of Series C | |
| – | | |
| – | |
Common stock to be issued upon exercise of common stock units (1) | |
| 46 | | |
| 46 | |
| |
| 621 | | |
| 434 | |
|
(1) |
Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock |
Common Stock Purchase Warrants and Other
Derivative Financial Instruments
The Company classifies common stock purchase warrants
and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement
or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).
The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net cash settlement or
settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability.
The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification
between assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants
to purchase common stock, satisfied the criteria for classification as equity instruments, other than certain warrants that contained
reset provisions and certain warrants that required net-cash settlement that the Company classified as derivative liabilities. The company
currently does not have any active derivative financial instruments.
Preferred Stock
The Company applies the accounting standards for
distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject
to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally
redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the
holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity.
At all other times, preferred shares are classified as stockholders' equity.
Subsequent Events
Management has evaluated subsequent events or
transactions occurring through the date these consolidated financial statements were issued.
Recent Accounting Standards
The Company has evaluated all the recent accounting
standards and determined that none of them are material to it.
NOTE 4 – Sale of Assets –
Discontinued Operations
Sale of Assets to Infinity Labs SD, Inc. and Discontinued Operations
On June 24, 2020, the Company closed on an asset
purchase agreement for the sale of its Micromed Laboratories division and testing facility, including all of Micromed’s assets,
such as testing equipment, certain office furniture and customer list, with Infinity Labs SD Inc. (“Infinity”) for an aggregate
purchase price of $850,000. On the closing date, the Company received $610,000 in cash from this sale which was adjusted for working capital,
a credit of $100,000 for future testing services from Infinity over the next two years in lieu of cash, and $60,000 held in escrow for
one year, subject to adjustment for certain indemnity claims or purchase price adjustments. The Company also retained its accounts receivables
outstanding on the date of closing in the amount of approximately $81,000 and an insignificant amount of liabilities. As part of the transaction,
Infinity also assumed the Petaluma lease for the office and lab space. The Company retained the warehouse space to store inventory and
assets until September 30, 2020.
Accounting for the disposition
For accounting purposes, the Company determined
that there was only one discrete component of the sale to Infinity. This component was the customer base and related services to be provided.
Component of Sale |
Methodology to Estimate Selling Price |
Customer Base |
Based upon revenues expected from a market participant to provide technical services at expected service levels |
The Company determined an arm’s length selling
price for each component of the sale and then allocated the net proceeds received to the components on a relative selling price basis.
The Company estimated the selling prices of each component as described below:
Proceeds were allocated to the components of the sale based upon their
relative selling prices are as follows:
Schedule of allocation of sale price | |
| | |
Customer base | |
$ | 850,000 | |
Less: Funds remaining in escrow | |
| (60,000 | ) |
Less: Services due from buyer | |
| (100,000 | ) |
Less: Working capital adjustment | |
| (80,000 | ) |
Total proceeds | |
$ | 610,000 | |
Discontinued operations
As of June 24, 2020, the Company determined that
the sale of its Micromed division to Infinity qualified 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.
There were no carrying value of the assets and liabilities of discontinued
operations on the consolidated balance sheets as of March 31, 2022 and 2021.
The operations of the Micromed business included in discontinued operations
is summarized as follows:
Assets and liabilities of disposal group | |
| | | |
| | |
| |
Year ended March 31, | |
| |
2022 | | |
2021 | |
Revenues | |
$ | – | | |
$ | 214,000 | |
Cost of revenues | |
| – | | |
| 53,000 | |
Selling general and administrative expenses | |
| – | | |
| 38,000 | |
Income from discontinued operations before tax | |
| – | | |
| 123,000 | |
Gain on disposal of discontinued operations before income taxes | |
| – | | |
| 770,000 | |
Total income from discontinued operations, before tax | |
| – | | |
| 893,000 | |
Income Tax benefit (expense) | |
| – | | |
| (228,000 | ) |
Income from discontinued operations, net of tax | |
$ | – | | |
$ | 665,000 | |
NOTE 5 – Accounts Receivable
Accounts receivable, net consists of the following:
Accounts receivable | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Accounts receivable | |
$ | 2,488,000 | | |
$ | 4,419,000 | |
Less: allowance for doubtful accounts | |
| – | | |
| (125,000 | ) |
Less: discounts, rebates, distributor fees and returns | |
| (81,000 | ) | |
| (1,488,000 | ) |
Accounts receivable, net | |
$ | 2,407,000 | | |
$ | 2,806,000 | |
NOTE 6 – Inventories
Inventories consist of the following:
Schedule of inventories | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
$ | 1,626,000 | | |
$ | 1,670,000 | |
Finished goods | |
| 1,037,000 | | |
| 860,000 | |
Inventories, net | |
$ | 2,663,000 | | |
$ | 2,530,000 | |
NOTE 7 – Prepaid Expenses and
Other Current Assets
Prepaid expenses and other current assets consist
of the following:
Schedule of prepaid expenses and other current assets | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Prepaid insurance | |
$ | 755,000 | | |
$ | 705,000 | |
Tax prepaid to Mexican tax authorities | |
| 2,371,000 | | |
| 1,850,000 | |
Other prepaid expenses and other current assets | |
| 620,000 | | |
| 663,000 | |
Total prepaid expenses and other current assets | |
$ | 3,746,000 | | |
$ | 3,218,000 | |
NOTE 8 – Property and Equipment
Property and equipment consists of the following:
Schedule of property and equipment | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Manufacturing, lab, and other equipment | |
$ | 1,281,000 | | |
$ | 1,170,000 | |
Office equipment | |
| 139,000 | | |
| 109,000 | |
Furniture and fixtures | |
| 108,000 | | |
| 66,000 | |
Leasehold improvements | |
| 503,000 | | |
| 486,000 | |
Property and equipment, gross | |
| 2,031,000 | | |
| 1,831,000 | |
Less: accumulated depreciation and amortization | |
| (1,711,000 | ) | |
| (1,471,000 | ) |
Property and equipment, net | |
$ | 320,000 | | |
$ | 360,000 | |
Depreciation and amortization expense amounted
to $186,000 and $227,000 for the years ended March 31, 2022 and 2021, respectively.
NOTE 9 – Accrued Expenses and
Other Current Liabilities
Accrued expenses and other current liabilities
consist of the following:
Schedule of accrued expenses and other current liabilities | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Salaries and related costs | |
$ | 1,059,000 | | |
$ | 787,000 | |
Other | |
| 784,000 | | |
| 367,000 | |
Accrued expenses and other current liabilities | |
$ | 1,843,000 | | |
$ | 1,154,000 | |
NOTE 10 – Debt
Financing of Insurance Premiums
On February 1, 2021, the Company entered into
a note agreement for $584,000
with an interest rate of 4.98%
per annum with final payment on October 1, 2021. This instrument was issued in connection with financing insurance premiums. The note
was payable in three quarterly installment payments of principal and interest of $199,000,
with the first installment beginning April 1, 2021. These amounts were paid off during the year ended March 31, 2022.
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.
Paycheck Protection Program Loan
On May 1, 2020, the Company received loan proceeds
in the amount of $1,310,000 under the Paycheck Protection Program (“PPP”), from Coastal States Bank in Atlanta, Georgia. The
PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, “CARES Act”, provides for loans to qualifying
businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest
are forgivable after eight or 24 weeks as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and maintains payroll levels. The amount of loan forgiveness will be reduced if the Company terminated employees or
reduced salaries during the applicable period.
The unsecured loan, which is in the form of a
note dated April 29, 2020, matures on April 29, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on May 1,
2021. The note may be prepaid at any time prior to maturity with no prepayment penalties. The Company has used the loan amount for eligible
purposes, such as payroll expenses. The Company met the conditions for $723,000 in forgiveness of the loan. At March 31, 2022 and 2021 the loan balance amounted to $120,000 and $1,310,000, respectively.
NOTE 11 – Leases
The Company’s operating leases are comprised
primarily of facility leases. Balance sheet information related to the Company’s leases is presented below:
Lease cost information | |
| | | |
| | |
| |
March 31, | | |
March 31, | |
| |
2022 | | |
2021 | |
Operating leases: | |
| | | |
| | |
Operating lease right-of-use assets | |
$ | 559,000 | | |
$ | 769,000 | |
Operating lease liabilities – current | |
| 250,000 | | |
| 240,000 | |
Operating lease liabilities – non-current | |
| 309,000 | | |
| 529,000 | |
Other information related to leases is presented below:
| |
Year ended March 31, 2022 | |
|
Year ended March 31, 2021 |
|
Lease cost | |
| | |
|
|
|
|
Operating lease cost | |
$ | 367,000 | |
|
$ |
435,000 |
|
| |
| | |
|
|
|
|
As of March 31, 2022 | |
| | |
|
|
|
|
Other information: | |
| | |
|
|
|
|
Operating cash flows from operating leases | |
$ | (223,000 | ) |
|
$ |
(215,000 |
) |
Weighted-average remaining lease term – operating leases (in months) | |
| 27.3 | |
|
|
37.7 |
|
Weighted-average discount rate – operating leases | |
| 6.00% | |
|
|
6.00% |
|
As of March 31, 2022, the annual future minimum lease payments of
the Company’s operating lease liabilities were as follows:
Schedule of minimum operating lease liabilities | |
| | |
For Years Ending March 31, | |
| |
| |
| |
2023 | |
| 297,000 | |
2024 | |
| 210,000 | |
2025 | |
| 106,000 | |
Thereafter | |
| 14,000 | |
Total future minimum lease payments, undiscounted | |
| 627,000 | |
Less: imputed interest | |
| (68,000 | ) |
Total lease liability | |
$ | 559,000 | |
NOTE 12 – Commitments and Contingencies
Legal Matters
On occasion, the Company 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.
Employment Agreements
As of March 31, 2022, the Company had employment
agreements in place with three of its key executives. These executive employment agreements provide, among other things, for the payment
of up to twelve months of severance compensation for terminations under certain circumstances. With respect to these agreements, at March
31, 2022, aggregated annual salaries would be $775,000 and potential severance payments to these key executives would be $775,000 if triggered.
Related Party Transactions
Ms. Trombly was appointed the Chief Executive
Officer of the Company. Ms. Trombly is the owner of Trombly Business Law, PC which has been retained by the Company to advise on certain
corporate and securities law matters. During the years ending March 31, 2022 and 2021, the Company received $170,000 and $215,000,
respectively, in legal services from Trombly Business Law, PC.
NOTE 13 – Stockholders’
Equity
Authorized Capital
Effective September 13, 2018, the Company filed
a certificate of amendment to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware
in order to affect an increase of the total number of shares of common stock, $0.0001 par value per share, authorized for issuance from
12,000,000 to a total of 24,000,000. Additionally, the Company is authorized to issue 714,286 shares of convertible preferred stock with
a par value of $0.0001 per share.
Description of Common Stock
Each share of common stock has the right to one
vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board of directors.
Description of Series B Preferred Stock
On October 18, 2016, the Company’s board
of directors approved, and the Company entered into, a Section 382 rights agreement, or the Rights Agreement, with Computershare Inc.,
or the Rights Agent. The Rights Agreement provides for a dividend of one preferred stock purchase right, or a Right, for each share of
common stock, par value $0.0001 per share, of the Company outstanding on November 1, 2016, or the Record Date. Each Right entitles the
holder to purchase from the Company one one-thousandth of a share of Series B Preferred Stock, par value $0.0001 per share, or the Preferred
Stock, for a purchase price of $10.00, subject to adjustment as provided in the Rights Agreement. The description and terms of the rights
are set forth in the Rights Agreement.
In connection with the adoption of the Rights
Agreement, the Company’s board of directors adopted a Certificate of Designation of Series B Preferred Stock. The Certificate of
Designation was filed with the Secretary of State of the State of Delaware and became effective on October 18, 2016.
The Company’s board of directors adopted
the Rights Agreement to protect shareholder value by guarding against a potential limitation on the Company’s ability to use its
net operating loss carryforwards, or NOLs, and other tax benefits, which may be used to reduce potential future income tax obligations.
The Company has experienced and continue to experience substantial operating losses, and under the Internal Revenue Code of 1986, as amended,
and rules promulgated thereunder, the Company may “carry forward” these NOLs and other tax benefits in certain circumstances
to offset any current and future earnings and thus reduce our income tax liability, subject to certain requirements and restrictions.
To the extent that the NOLs and other tax benefits do not otherwise become limited, the Company believes that it will be able to carry
forward a significant amount of NOLs and other tax benefits, and therefore these NOLs and other tax benefits could be a substantial asset
to the Company. However, if the Company experiences an “ownership change,” as defined in Section 382 of the Code, its ability
to use its NOLs and other tax benefits will be substantially limited. Generally, an ownership change would occur if our shareholders who
own, or are deemed to own, 5% or more of the Company’s common stock increase their collective ownership in the Company by more than
50% over a rolling three-year period.
Exercise of Series C Preferred Stock Units
During the year ended March 31, 2021, investors
who participated in the November 21, 2018 offering exchanged 1.55 shares of Series C into 17,222 shares of common stock. No further shares
of Series C are outstanding as of March 31, 2021 or 2022, respectively.
NOTE 14 – Stock-Based Compensation
2006 Stock Plan
The board initially adopted the 2006 Stock Incentive
Plan on August 25, 2006. On December 14, 2006, the stockholders approved the 2006 Stock Incentive Plan which became effective at
the close of the Company’s initial public offering. The 2006 Stock Incentive Plan was later amended and restated by a unanimous
board resolution on April 26, 2007, and such amendments were subsequently approved by the stockholders. On September 10, 2009, the
Company’s shareholders approved a subsequent amendment to the 2006 Stock Incentive Plan. The 2006 Stock Incentive Plan, as amended
and restated, is hereafter referred to as the “2006 Plan.”
The 2006 Plan provided for the granting of incentive
stock options to employees and the granting of non-statutory stock options to employees, non-employee directors, advisors and consultants.
The 2006 Plan also provided for grants of restricted stock, stock appreciation rights and stock unit awards to employees, non-employee
directors, advisors and consultants.
In accordance with the 2006 Plan the stated exercise
price may not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs and NSOs, respectively,
as determined by the board of directors at the date of grant. With respect to any 10% stockholder, the exercise price of an ISO or NSO
shall not be less than 110% of the estimated fair market value per share on the date of grant.
Options issued under the 2006 Plan generally have
a ten-year term.
At March 31, 2021, there were no shares available
for future issuance.
2011 Stock Plan
On September 12, 2011, upon recommendation of
the board, the stockholders approved the Company’s 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan is effective
as of June 21, 2012.
The 2011 Plan provides for the grant of incentive
stock options as defined in Section 422 of the Internal Revenue Code to employees, and the grant of non-statutory stock options and stock
purchase rights to employees, non-employee directors, advisors and consultants. The 2011 Plan also permits the grant of stock appreciation
rights, stock units and restricted stock.
The board has initially authorized 9,508 of the
Company’s common stock for issuance under the 2011 Plan, in addition to automatic increases provided for in the 2011 Plan through
April 1, 2021. The number of shares of the Company’s common stock reserved for issuance under the 2011 Plan will automatically increase,
with no further action by the stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 15% of the outstanding
shares of the Company’s common stock on the last day of the immediately preceding year, or (ii) an amount approved by the Company’s
board of directors.
Options issued under the 2011 Plan will generally
have a ten-year term.
In accordance with the 2011 Plan, the stated exercise
price of an employee incentive stock option shall not be less than 100% of the estimated fair market value of a share of common stock
on the date of grant, and the stated exercise price of an non-statutory option shall not be less 85% of the estimated fair market value
of a share of common stock on the date of grant, as determined by the board of directors. An employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company shall not be eligible for the grant of an employee incentive
stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue Code.
Shares subject to awards that expire unexercised
or are forfeited or terminated for any other reason will again become available for issuance under the 2011 Plan. No participant in the
2011 Plan can receive option grants, stock appreciation rights, restricted shares, or stock units for more than 2,381 shares in the aggregate
in any calendar year. As provided under the 2011 Plan, the aggregate number of shares authorized for issuance as awards under the 2011
Plan automatically increases on April 1 of each year by in an amount equal to the lesser of (i) 15% of the outstanding shares on the last
day of the immediately preceding year, or (ii) an amount determined by the board. During the year ended March 31, 2019, the board of directors
approved an increase of 102,863 shares authorized for issuance. During the year ended March 31, 2020, the board of directors approved
an increase of 197,450 shares authorized for issuance.
The plan expired on September 12, 2021 in accordance
with its term.
At March 31, 2022, there were no shares available
for future issuance.
2016 Stock Plan
On September 2, 2016, upon recommendation of the
board, the stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan is effective
as of September 2, 2016.
The 2016 Plan provides for the grant of options,
including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation rights, restricted
awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.
Options issued under the 2016 Plan will generally
have a ten-year term.
In accordance with the 2016 Plan, the stated exercise
price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated fair market value
of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes
of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies
the requirements of Section 422(c)(5) of the Internal Revenue Code.
Shares subject to awards that expire unexercised
or are forfeited or terminated for any other reason will again become available for issuance under the 2016 Plan. No participant in the
2016 Plan can receive more than 11,112 option grants, or other awards with respect to more than 13,334 shares in the aggregate in any
calendar year.
The board has authorized 44,445 of the Company’s
common stock for issuance under the 2016 Plan, in addition to automatic increases provided for in the 2016 Plan through April 1, 2026.
The number of shares of the Company’s common stock reserved for issuance under the 2016 Plan will automatically increase, with no
further action by the stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 8% of the outstanding
shares of the Company’s common stock on the last day of the immediately preceding year, or (ii) an amount determined by the Company’s
board of directors. During the year ended March 31, 2019, the board of directors approved an increase of 4,860 shares authorized for issuance.
During the year ended March 31, 2020, the board of directors approved an increase of 105,306 shares authorized for issuance. During the
year ended March 31, 2022, the board of directors approved an increase of 167,432 shares authorized for issuance.
At March 31, 2022 there were 112,106 shares available
for future issuance.
2021 Stock Plan
On September 21, 2021, upon recommendation of
the board, the stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan is effective
as of September 21, 2021.
The 2021 Plan provides for the grant of options,
including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation rights, restricted
awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.
Options issued under the 2021 Plan will generally
have a ten-year term.
In accordance with the 2021 Plan, the stated exercise
price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated fair market value
of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes
of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies
the requirements of Section 422(c)(5) of the Internal Revenue Code.
Shares subject to awards that expire unexercised
or are forfeited or terminated for any other reason will again become available for issuance under the 2021 Plan.
The board has authorized 1,000,000 shares of the
Company’s common stock for issuance under the 2021 Plan.
At March 31, 2022, there were 869,999 shares available
for future issuance.
Stock-Based Compensation
The Company issues service, performance and market-based
stock options to employees and non-employees. The Company estimates the fair value of service and performance stock option awards using
the Black-Scholes option pricing model. The Company estimates the fair value of market-based stock option awards using a Monte-Carlo simulation.
Compensation expense for stock option awards is amortized on a straight-line basis over the awards’ vesting period. Compensation
expense includes the impact of forfeitures as they are incurred.
The expected term of the stock options represents
the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach
prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla”
options. The expected stock price volatility for the Company’s stock options was determined by using an average of the historical
volatilities of the Company and its industry peers. The Company will continue to analyze the stock price volatility and expected term
assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption
is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected
dividend assumption is based on the Company’s history and expectation of dividend payouts.
The Company estimated the fair value of employee
and non-employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized
on a straight-line basis over the requisite service periods of the respective awards. The fair value of employee stock options was estimated
using the following weighted-average assumptions:
Weighted-average assumptions of fair value of employee stock options | |
| | | |
| | |
| |
Year Ended March 31, | |
| |
2022 | | |
2021 | |
Fair value of the Company’s common stock on date of grant | |
$ | 4.60 | | |
$ | 8.03 | |
Expected term | |
| 6.00 yrs | | |
| 6.00 yrs | |
Risk-free interest rate | |
| 1.60% | | |
| 0.5800% | |
Dividend yield | |
| 0.00% | | |
| 0.00% | |
Volatility | |
| 123.27% | | |
| 80.7% | |
Fair value of options granted | |
$ | 4.03 | | |
$ | 5.48 | |
Share-based awards compensation expense is as follows:
Employee stock-based compensation expense | |
| | | |
| | |
| |
Year Ended March 31, | |
| |
2022 | | |
2021 | |
Cost of revenues | |
$ | – | | |
$ | (27,000 | ) |
Research and development | |
| – | | |
| 26,000 | |
Selling, general and administrative | |
| 382,000 | | |
| 372,000 | |
Total stock-based compensation | |
$ | 382,000 | | |
$ | 371,000 | |
At March 31, 2022, there were unrecognized compensation
costs of $1,325,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 2.14 years.
A tax benefit of $54,000 has been recognized relating
to stock-based compensation as a result of non-qualified stock options and restricted stock exercised during the year ending March 31,
2022. In addition, the stock-based compensation deferred tax asset has been reduced by $309,000 primarily related to the expiration of
stock compensation grants.
Stock-Based Award Activity
Stock-based awards outstanding at March 31, 2022
under the various plans are as follows:
Schedule of stock-based awards outstanding by plan | |
| | | |
| | | |
| | |
| |
| | |
Unvested | | |
| |
Plan | |
Stock Options | | |
Restricted Stock | | |
Total | |
2006 Plan | |
| 2,787 | | |
| – | | |
| 2,787 | |
2011 Plan | |
| 111,949 | | |
| – | | |
| 111,949 | |
2016 Plan | |
| 221,497 | | |
| – | | |
| 221,497 | |
2021 Plan | |
| 130,001 | | |
| – | | |
| 130,001 | |
| |
| 466,234 | | |
| – | | |
| 466,234 | |
Stock-based awards available for grant as of March 31, 2022 | |
| | | |
| | | |
| 982,105 | |
Stock options award activity is as follows:
Schedule of option activity | |
| | | |
| | | |
| | | |
| | |
| |
Number of Shares | | |
Weighted- Average Exercise Price | | |
Weighted- Average Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at April 1, 2021 | |
| 267,569 | | |
$ | 25.16 | | |
| | | |
| | |
Options granted | |
| 272,958 | | |
| 4.60 | | |
| | | |
| | |
Options exercised | |
| (44,042 | ) | |
| 4.38 | | |
| | | |
| | |
Options forfeited | |
| (5,250 | ) | |
| 6.89 | | |
| | | |
| | |
Options expired | |
| (25,001 | ) | |
| 84.83 | | |
| | | |
| | |
Outstanding at March 31, 2022 | |
| 466,234 | | |
$ | 12.09 | | |
| 8.89 | | |
$ | 0 | |
Exercisable at March 31, 2022 | |
| 115,144 | | |
$ | 32.56 | | |
| 6.85 | | |
$ | 0 | |
The aggregate intrinsic value of stock
options 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 $4.01
and $7.43 per share at March 31, 2022 and 2021, respectively.
Restricted stock award activity is as follows:
Schedule of unvested restricted stock activity | |
| | | |
| | |
| |
Number of Shares | | |
Weighted Average Award Date Fair Value per Share | |
Unvested restricted stock awards outstanding at April 1, 2021 | |
| 833 | | |
$ | 13.68 | |
Restricted stock awards granted | |
| 1,596 | | |
| 3.05 | |
Restricted stock awards vested | |
| (2,429 | ) | |
| 6.70 | |
Unvested restricted stock awards outstanding at March 31, 2022 | |
| – | | |
$ | – | |
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 stock awards.
NOTE 15 – Income Taxes
The Company has the following net deferred tax
assets:
Schedule of deferred tax assets | |
| | | |
| | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 28,224,000 | | |
$ | 25,687,000 | |
Research and development tax credit carryforwards | |
| 1,850,000 | | |
| 1,850,000 | |
Stock-based compensation | |
| 309,000 | | |
| 3,120,000 | |
Allowances and accruals | |
| 1,336,000 | | |
| 659,000 | |
Other deferred tax assets | |
| – | | |
| 398,000 | |
Lease liability | |
| 63,000 | | |
| 78,000 | |
Gross deferred tax assets | |
$ | 31,782,000 | | |
$ | 31,792,000 | |
| |
| | | |
| | |
Less valuation allowance | |
| (30,613,000 | ) | |
| (31,528,000 | ) |
| |
| | | |
| | |
Total deferred tax assets | |
$ | 1,169,000 | | |
$ | 264,000 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Fixed assets | |
| (17,000 | ) | |
| (3,000 | ) |
Prepaid expenses | |
| (260,000 | ) | |
| (186,000 | ) |
Right of Use asset | |
| (63,000 | ) | |
| (75,000 | ) |
Gross deferred tax liabilities | |
| (340,000 | ) | |
| (264,000 | ) |
Net deferred tax assets | |
$ | 829,000 | | |
$ | – | |
The income tax provision (benefit) is based on
the following loss before income taxes, which are from domestic sources and foreign loss before income taxes:
Income tax provision domestic and foreign |
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Domestic |
|
$ |
(3,516,000) |
|
|
$ |
(2,052,000) |
|
Foreign |
|
|
(1,883,000) |
|
|
|
(1,467,000) |
|
|
|
$ |
(5,399,000) |
|
|
$ |
(3,519,000) |
|
The Company’s income tax expense/(benefits)
consist of the following:
Schedule of income tax expense |
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Current: |
|
|
|
|
|
|
State |
|
$ |
8,000 |
|
|
$ |
1,000 |
|
Foreign |
|
|
469,000 |
|
|
|
941,000 |
|
Current Income Tax Expense |
|
|
477,000 |
|
|
|
942,000 |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
– |
|
|
|
– |
|
State |
|
|
– |
|
|
|
– |
|
Foreign |
|
|
(809,000) |
|
|
|
– |
|
Total deferred income tax |
|
$ |
(332,000) |
|
|
$ |
942,000 |
|
A reconciliation of the statutory federal income
tax rate to the Company’s effective tax rate for continuing operations is as follows:
Reconciliation of federal income tax rate to effective rate |
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Expected federal statutory rate |
|
|
21.0% |
|
|
|
21.0% |
|
State income taxes |
|
|
5.7% |
|
|
|
2.1% |
|
Foreign earnings taxed at different rates |
|
|
3.7% |
|
|
|
3.6% |
|
Foreign tax true-up |
|
|
– |
|
|
|
(12.4% |
) |
Effect of permanent differences |
|
|
(3.0% |
) |
|
|
(9.5% |
) |
Effect of intercompany interest permanent differences |
|
|
(12.3% |
) |
|
|
(17.9% |
) |
True-up of state deferred assets |
|
|
(25.6% |
) |
|
|
(120.7% |
) |
Total effective rate |
|
|
(10.5% |
) |
|
|
(133.8% |
) |
Change in valuation allowance |
|
|
16.7% |
|
|
|
107.1% |
|
Totals |
|
|
(6.2% |
) |
|
|
(26.7% |
) |
As of March 31, 2022, the Company had net
operating loss carryforwards for Federal, State and Foreign income tax purposes of approximately $115.3
million, $44
million and $541,000,
respectively. Due to the Tax Cuts and Job Act, Federal NOLs generated after March 31, 2018 have an indefinite life. Federal NOL
generated on and before March 31, 2017 will begin to expire 2024, if not utilized. State and Foreign NOLs will begin to expire in
the year 2029 and 2024, respectively, if not utilized.
As of March 31, 2022, the Company had
Federal and California research credit carryforwards of approximately $1
million and $790,000,
respectively. The Federal research credits will begin to expire in 2024 while the California research credits have no expiration
date. In addition, the Company has foreign tax credits of $50,000,
which begin to expire in the year 2023 if not utilized.
Section 382 of the Internal Revenue Code limits
the use of the Federal net operating losses in certain situations where changes occur in stock ownership of a company. If the Company
should have an ownership change of more than 50% of the value of the Company's capital stock, utilization of the carryforwards could be
restricted. The Company is not aware of any changes in ownership that would result in a change in control under Internal Revenue Code
section 382.
The Company released the valuation allowance recorded
against its Mexico deferred tax assets as of March 31, 2022. Given its recent history of earnings, current earnings and anticipated future
earnings, the Company concluded that there is sufficient positive evidence available to reach a conclusion that the valuation allowance
is no longer needed in Mexico. The release of the valuation allowance resulted in the recognition of deferred tax assets of $829,000.
The Company, after considering all available evidence, fully reserved against all deferred tax assets in the U.S. and Netherlands since
it is more likely than not such benefits will not be realized in future periods. 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.
The Company has filed tax returns for federal,
state and foreign jurisdictions. The Company’s evaluation of uncertain tax matters was performed for tax years ended through March
31, 2022. Generally, the Company is subject to audit for the years ended March 31, 2021, 2020 and 2019. The Company has elected to retain
its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes and continues to reflect
interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit as
well as its outstanding income tax assets and liabilities. The Company believes that its income tax positions and deductions would be
sustained on audit and does not anticipate any adjustments to result in a material change to its financial position.
NOTE 16 – Employee Benefit
Plan
The Company has a program to contribute and administer
a qualified 401(k) plan. Under the 401(k) plan, the Company matches employee contributions to the plan up to 4% of the employee’s
salary. Company contributions to the plan amounted to an aggregate of $50,600 and $89,000 for the years ended March 31, 2022 and 2021,
respectively.
NOTE 17 – Revenue Disaggregation
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.
The following table presents the Company’s disaggregated revenues
by source:
Disaggregated Revenue by Source | |
| | | |
| | |
| |
Year Ended March 31, | |
| |
2022 | | |
2021 | |
Product | |
| | |
| |
Human Care | |
$ | 9,010,000 | | |
$ | 15,317,000 | |
Animal Care | |
| 3,169,000 | | |
| 3,200,000 | |
Total Product Revenue | |
| 12,179,000 | | |
| 18,517,000 | |
Service/Royalty | |
| 449,000 | | |
| 112,000 | |
Total | |
$ | 12,628,000 | | |
$ | 18,629,000 | |
The following table shows the Company’s
revenues by geographic region:
Schedule of geographic sales | |
| | | |
| | |
| |
Year Ended March 31, | |
| |
2022 | | |
2021 | |
United States | |
$ | 3,807,000 | | |
$ | 5,419,000 | |
Latin America | |
| 2,095,000 | | |
| 5,976,000 | |
Europe and Rest of the World | |
| 6,726,000 | | |
| 7,234,000 | |
Total | |
$ | 12,628,000 | | |
$ | 18,629,000 | |
The Company’s service revenues in Latin
America amounted to $349,000 and $112,000 for the years ended March 31, 2022 and 2021, respectively.