10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2020

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 001-33216

SONOMA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	68-0423298
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)

645 Molly Lane, Suite 150

Woodstock, GA 30189

(Address of principal executive offices) (Zip Code)

(800) 759-9305

Registrant’s telephone number, including area code

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

Common Stock, $0.0001 par value	SNOA	The Nasdaq Stock Market LLC
(Title of Each Class)	(Trading Symbol(s))	(Name of Each Exchange on Which Registered)

Indicate by checkmark 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. Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  ☒   No  ☐

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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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  ☐   No  ☒

As of November 19, 2020, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 2,043,075.

SONOMA PHARMACEUTICALS, INC.

Index

	Page
PART I - FINANCIAL INFORMATION	3
Item 1. Unaudited Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Statements of Cash Flows	5
Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
PART II - OTHER INFORMATION	34
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Mine Safety Disclosures (Not applicable.)	34
Item 5. Other Information	34
Item 6. Exhibits	35

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

	September 30,			March 31,
	2020			2020
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,320		$	3,691
Accounts receivable, net		5,279			4,062
Inventories, net		3,704			2,192
Prepaid expenses and other current assets		2,770			2,256
Current portion of deferred consideration, net of discount		194			182
Total current assets		16,267			12,383
Operating lease right-of-use assets		634			963
Property and equipment, net		370			365
Deferred consideration, net of discount, less current portion		770			786
Other assets		104			64
Total assets	$	18,145		$	14,561
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,202		$	2,086
Accrued expenses and other current liabilities		932			1,774
Deferred revenue		150			228
Deferred revenue Invekra		48			45
Operating lease liabilities		188			251
Current portion of long-term debt		49			481
Total current liabilities		4,569			4,865
Operating lease liabilities-non-current		469			746
Long-term deferred revenue Invekra		235			245
Long-term debt		1,310			–
Total liabilities		6,583			5,856
Commitments and Contingencies (Note 6)
Stockholders’ Equity
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at September 30, 2020 and March 31, 2020, respectively, 0 and 1.55 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively		–			–
Common stock, $0.0001 par value; 24,000,000 shares authorized at September 30, 2020 and March 31, 2020, 2,041,409 and 1,777,483 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively		2			2
Additional paid-in capital		188,701			186,559
Accumulated deficit		(171,886	)		(172,246	)
Accumulated other comprehensive loss		(5,255	)		(5,610	)
Total stockholders’ equity		11,562			8,705
Total liabilities and stockholders’ equity	$	18,145		$	14,561

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

3

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2020			2019			2020			2019
Revenues	$	5,769		$	4,727		$	11,536		$	9,221
Cost of revenues		3,267			2,552			6,779			4,753
Gross profit		2,502			2,175			4,757			4,468
Operating expenses
Research and development		(85	)		270			391			608
Selling, general and administrative		2,418			3,192			4,862			6,918
Total operating expenses		2,333			3,462			5,253			7,526
Income (loss) from operations		169			(1,287	)		(496	)		(3,058	)
Interest expense		(4	)		(2	)		(6	)		(12	)
Interest income		8			42			10			84
Other (expense) income, net		(77	)		(41	)		(197	)		(100	)
Gain on sale of assets		55			–			132			2,472
Income (loss) from continuing operations		151			(1,288	)		(557	)		(614	)
Income (loss) from discontinued operations (Note 4)		(31	)		85			917			126
Net income (loss)	$	120		$	(1,203	)	$	360		$	(488	)
Net income (loss) per share: basic
Continuing operations	$	0.08		$	(0.98	)	$	(0.29	)	$	(0.47	)
Discontinued operations		(0.02	)		0.06			0.48			0.10
	$	0.06		$	(0.92	)	$	0.19		$	(0.37	)
Net income (loss) per share: diluted
Continuing operations	$	0.07		$	(0.98	)	$	(0.26	)	$	(0.47	)
Discontinued operations		(0.01	)		0.06			0.43			0.10
	$	0.06		$	(0.92	)	$	0.17		$	(0.37	)
Weighted-average number of shares used in per common share calculations: basic		2,008			1,317			1,924			1,317
Weighted-average number of shares used in per common share calculations: diluted		2,159			1,317			2,118			1,317
Other comprehensive income (loss)
Net income (loss)	$	120		$	(1,203	)	$	360		$	(488	)
Foreign currency translation adjustments		188			(163	)		355			(96	)
Comprehensive income (loss)	$	308		$	(1,366	)	$	715		$	(584	)

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

4

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended September 30,
	2020			2019
Cash flows from operating activities
Net income (loss)	$	360		$	(488	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		107			144
Stock-based compensation		223			425
Gain on sale of assets		(770	)		–
Changes in operating assets and liabilities:
Accounts receivable		(705	)		(1,283	)
Inventories		(1,386	)		263
Deferred consideration		65			70
Prepaid expenses and other current assets		(273	)		(358	)
Operating lease right-of-use assets		330			256
Accounts payable		706			1,052
Accrued expenses and other current liabilities		(860	)		(122	)
Operating lease liabilities		(343	)		(267	)
Deferred revenue		(102	)		148
Net cash used in operating activities		(2,648	)		(160	)
Cash flows from investing activities:
Purchases of property and equipment		(97	)		(77	)
Deposits		(38	)		8
Proceeds from sale of assets		610			–
Net cash provided by (used in) investing activities		475			(69	)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		1,919			–
Proceeds from new debt		1,310			–
Principal payments on capital leases		–			(13	)
Principal payments on long-term debt		(432	)		(228	)
Net cash provided by (used in) financing activities		2,797			(241	)
Effect of exchange rate on cash and cash equivalents		5			13
Net increase (decrease) in cash and cash equivalents		629			(457	)
Cash and cash equivalents, beginning of period		3,691			3,689
Cash and cash equivalents, end of period	$	4,320		$	3,232
Supplemental disclosure of cash flow information:
Cash paid for interest	$	4		$	12

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

5

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

	Series C Preferred Stock ($0.0001 par Value)					Common Stock ($0.0001 par Value)				Additional Paid in		Accumulated			Accumulated Other Comprehensive
	Shares			Amount		Shares		Amount		Capital		Deficit			Loss			Total
Balance March 31, 2020		1.55		$	–		1,777,483	$	2	$	186,559	$	(172,246	)	$	(5,610	)	$	8,705
Stock based compensation related to common stock restricted stock grants		–			–		3,086		–		18		–			–			18
Stock based compensation, net of forfeitures		–			–		–		–		45		–						45
Issuance of common stock due to warrant exercises		–			–		169,167		–		1,490		–			–			1,490
Conversion of Series C convertible preferred stock into common stock		(1.55	)		–		17,222		–		–		–			–			–
Foreign currency translation adjustment		–			–		–		–		–		–			167			167
Net income		–			–		–		–		–		240			–			240
Balance, June 30, 2020		–		$	–		1,966,958	$	2	$	188,112	$	(172,006	)	$	(5,443	)	$	10,665
Stock based compensation, net of forfeitures		–			–		–		–		160		–			–			160
Issuance of common stock due to options exercises		–			–		74,451		–		429		–			–			429
Foreign currency translation adjustment		–			–		–		–		–		–			188			188
Net income		–			–		–		–		–		120			–			120
Balance, September 30, 2020		–		$	–		2,041,409	$	2	$	188,701	$	(171,886	)	$	(5,255	)	$	11,562

6

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

	Series C Preferred Stock ($0.0001 par Value)				Common Stock ($0.0001 par Value)				Additional Paid in		Accumulated			Accumulated Other Comprehensive
	Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Total
Balance March 31, 2019		1.55	$	–		1,316,335	$	2	$	184,074	$	(169,238	)	$	(4,349	)	$	10,489
Cumulative effect related to April 1, 2019 adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842)		–		–		–		–		–		(59	)		–			(59	)
Stock based compensation related to common stock restricted stock grants		–		–		835		–		20		–			–			20
Stock based compensation, net of forfeitures		–		–		–		–		272		–						272
Foreign currency translation adjustment		–		–		–		–		–		–			67			67
Net income		–		–		–		–		–		715			–			715
Balance, June 30, 2019		1.55	$	–		1,317,170	$	2	$	184,366	$	(168,582	)	$	(4,282	)	$	11,504
Stock based compensation related to common stock restricted stock grants		–		–		834		–		9		–			–			9
Stock based compensation, net of forfeitures		–		–		–		–		124		–			–			124
Foreign currency translation adjustment		–		–		–		–		–		–			(163	)		(163	)
Net income		–		–		–		–		–		(1,203	)		–			(1,203	)
Balance, September 30, 2019		1.55	$	–		1,318,004	$	2	$	184,499	$	(169,785	)	$	(4,445	)	$	10,271

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

7

SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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, nasal 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 53 countries worldwide.

Impact of Coronavirus

The spread of the coronavirus (“COVID-19”) has affected many segments of the global economy, including the pharmaceutical industry. The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to enact broad precautionary measures, including “stay-at-home” orders, restrictions on the performance of “non-essential” services, public gatherings and travel. Health systems, including key markets where the Company operates, have been, or may be, overwhelmed with high volumes of patients suffering from COVID-19.

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory obsolescence, and supplier agreements. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity.

8

Reverse Stock Split

Effective June 19, 2019, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every nine shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each resulting fractional share of common stock was down to one whole share and each fractional share settled with cash. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 11,972,328 to 1,328,891. The total number of authorized shares of common stock was not proportionally decreased and the par value per share of the common stock continues to be $0.0001.

All common shares and per share amounts contained in the condensed consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect a 1-for-9 reverse stock split.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and for the three and six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of comprehensive income (loss) for the three and six months ended September 30, 2020 and 2019, the cash flows for the six months ended September 30, 2020 and 2019 and the condensed consolidated statement of stockholders’ equity for the three and six months ended September 30, 2020 and 2019 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results for the three and six months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending March 31, 2021 or for any future interim period. The condensed consolidated balance sheet at March 31, 2020 has been derived from audited consolidated financial statements. These unaudited condensed consolidated financial statements of the Company have been prepared 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. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2020, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on July 10, 2020.

Note 2. Liquidity and Financial Condition

The Company reported a net income of $120,000 and $360,000 for the three and six months ended September 30, 2020. At September 30, 2020 and March 31, 2020, the Company’s accumulated deficit amounted to $171,886,000 and $172,246,000, respectively. The Company had working capital of $11,698,000 and $7,518,000 as of September 30, 2020 and March 31, 2020, respectively.

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. 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.

9

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 terminates employees or reduce 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 November 29, 2020. 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. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, it cannot assure that it will be eligible for forgiveness, in whole or in part. Whether any amount will be forgiven has not been determined yet.

During the three months ended September 30, 2020, the Company received proceeds of $429,000 from the exercise of stock options by employees and consultants.

On May 29, June 1 and 2, 2020, the Company received proceeds of $1,490,000 from the exercise of November 2018 common stock purchase warrants by several investors.

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.

Note 3. Summary of Significant Accounting Policies

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

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 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, fair value allocation of assets sold to Invekra, Petagon, Microsafe and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.

10

Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income 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.

	Three Months Ended September 30						Six Months Ended September 30
(In thousands, except per share data)	2020			2019			2020			2019
Numerator:
Income (loss) from continuing operations	$	151		$	(1,288	)	$	(557	)	$	(614	)
Income (loss) from discontinued operations		(31	)		85			917			126
Net income	$	120		$	(1,203	)	$	360		$	(488	)
Denominator:
Weighted-average number of common shares outstanding: basic		2,008			1,317			1,924			1,317
Dilutive effect of stock options		149			–			192			–
Dilutive effect of restricted stock		2			–			2			–
Weighted-average number of common shares outstanding: diluted		2,159			1,317			2,118			1,317
Income (loss) per share from continuing operations	$	0.07		$	(0.98	)	$	(0.26	)	$	(0.47	)
Income (loss) per share from discontinued operations		(0.01	)		0.06			0.43			0.10
Net income per share: basic and diluted	$	0.06		$	(0.92	)	$	0.17		$	(0.37	)

The computation of basic loss per share for the three and six months ended September 30, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
Stock options		65		136		75		136
Restricted stock		2		2		2		2
Warrants		150		446		150		446
Common stock units (1)		46		46		46		46
		263		630		273		630

(1) Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock

11

Revenue Recognition

Revenue is recognized when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity 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 from its distributor relationships. The Company also sells products to a customer base including hospitals, medical centers, doctors, pharmacies, wholesalers and directly to end users. 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 our 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 the Company has a long history with its customers and 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 based on if 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.

Disaggregation of Revenue

The following table presents the Company’s disaggregated revenues by revenue source:

(In thousands)	Three Months Ended September 30,				Six Months Ended September 30
Product	2020		2019		2020		2019
Human Care	$	4,776	$	3,801	$	10,094	$	7,772
Animal Care		951		912		1,388		1,325
Other		42		14		54		124
	$	5,769	$	4,727	$	11,536	$	9,221

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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 of $52,000 and $1,028,000 at September 30, 2020 and March 31, 2020, respectively. Additionally, at September 30, 2020 and March 31, 2020 the Company has allowances of $2,275,000 and $1,230,000, 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.

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 amount of $757,000 and $600,000 at September 30, 2020 and March 31, 2020, respectively, which is included in cost of product revenues on the Company’s accompanying condensed consolidated statements of comprehensive income (loss).

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued. (See Note 13)

Accounting Pronouncements Pending Adoption

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on its Consolidated Financial Statements.

Recent Accounting Standards

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.

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Note 4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc.

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:

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.

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The carrying value of the assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of September 30, 2020 and March 31, 2020 were as follows:

	September 30, 2020		March 31, 2020
Assets
Accounts receivable (net)	$	–	$	89,000
Inventory		–		11,000
Operating lease, right of use		–		604,000
Total current assets of discontinued operations	$	–	$	704,000
Liabilities
Accounts payable	$	–	$	18,000
Operating lease		–		117,000
Total current liabilities of discontinued operations	$	–	$	135,000
Operating lease	$	–	$	511,000
Total Long-term liabilities of discontinued operations	$	–	$	511,000

The operations of the Micromed business included in discontinued operations is summarized as follows:

	Three Months Ended September 30,					Six Months Ended September 30
	2020			2019		2020		2019
Revenues	$	2,000		$	241,000	$	214,000	$	458,000
Cost of revenues		–			122,000		53,000		265,000
Selling general and administrative expenses		33,000			34,000		39,000		67,000
Income (loss) from discontinued operations before tax		(31,000	)		85,000		122,000		126,000
Gain on disposal of discontinued operations before income taxes		–			–		795,000		–
Total income (loss) from discontinued operations, before tax		(31,000	)		85,000		917,000		126,000
Income Tax benefit (expense)		–			–		–		–
Income (loss) from discontinued operations, net of tax	$	(31,000	)	$	85,000	$	917,000	$	126,000

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Note 5. Condensed Consolidated Balance Sheets

Inventories, net

Inventories, net consist of the following:  

	September 30,		March 31,
	2020		2020
Raw materials	$	2,098,000	$	1,128,000
Finished goods		1,606,000		1,064,000
	$	3,704,000	$	2,192,000

The Company reserved $757,000 and $600,000 for obsolescence at September 30, 2020 and March 31, 2020, respectively.

Leases

The Company's operating leases are comprised primarily of operating facility leases. The Company did not have any finance leases as of September 30, 2020 and March 31, 2020. Balance sheet information related to our leases is presented below:

	September 30,		March 31,
	2020		2020
Operating leases:
Operating lease right-of-use assets	$	634,000	$	963,000
Operating lease liabilities – current		188,000		251,000
Operating lease liabilities – non- current		469,000		746,000

Other information related to operating leases is presented below:

As of June 30, 2020, the annual minimum lease payments of our operating lease liabilities were as follows:

	Three Months Ended September 30,				Six Months Ended September 30
	2020		2019		2020		2019
Operating Lease Costs		121,000		148,000		286,000		298,000
Operating cash flows from operating leases						330,000		256,000

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For Years Ending March 31,
2021 (excluding the six months ended September 30, 2020)	$	100,000
2022		213,000
2023		171,000
2024		139,000
2025		85,000
Thereafter		7,000
Total future minimum lease payments, undiscounted		715,000
Less: imputed interest		(58,000	)
Present value of future minimum lease payments	$	657,000
Weighted-average remaining lease term – operating leases (in months)		44
Weighted-average discount rate – operating leases		6.00%

Note 6. Commitments and Contingencies

Legal Matters

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 September 30, 2020, the Company had employment agreements in place with two of its key executives. One of the agreements provide, among other things, for the payment of up to twelve months of severance compensation for terminations under certain circumstances. At September 30, 2020, potential severance payments to key executives would be $250,000, if triggered.

Related Party Transactions

Effective September 25, 2019, 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 three and six months ended September 30, 2020, the Company incurred $51,000 and $114,000, respectively in legal services from Trombly Business Law, PC.

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Note 7. Debt

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 terminates employees or reduce salaries during the applicable period. Whether any amount will be forgiven has not been determined yet.

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 November 29, 2020. The note may be prepaid at any time prior to maturity with no prepayment penalties. The Company used the loan amount for eligible purposes, such as payroll expenses. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, it cannot assure that it will be eligible for forgiveness, in whole or in part.

As of September 30, 2020, the Company was in compliance with all loan covenants.

Note 8. Stockholders’ Equity

Authorized Capital

The Company is authorized to issue up to 24,000,000 shares of common stock with a par value of $0.0001 per share and 714,286 shares of convertible preferred stock with a par value of $0.0001 per share.

Note 9. Stock-Based Compensation

Stock-based compensation expense is as follows:

	Three Months Ended September 30,					Six Months Ended September 30
(In thousands)	2020			2019		2020			2019
Cost of revenues	$	(6	)	$	17	$	(27	)	$	34
Research and development		40			19		26			41
Selling, general and administrative		126			97		224			350
Total stock-based compensation	$	160		$	133	$	223		$	425

At September 30, 2020, there were unrecognized compensation costs of $110,911 related to stock options which is expected to be recognized over a weighted-average amortization period of 0.26 years.

At September 30, 2020, there were unrecognized compensation costs of $11,036 related to restricted stock which is expected to be recognized over a weighted-average amortization period of 0.97 years.

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Stock options award activity is as follows:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Term		Aggregate Intrinsic Value
Outstanding at April 1, 2020		378,000	$	26.55		–		–
Options granted		–		–		–		–
Options exercised		76,951		5.72		–		274,326
Options forfeited		112,697		9.89		–		–
Options expired		22,934		116.99		–		–
Outstanding at September 30, 2020		165,418	$	35.31		7.88	$	433,380
Exercisable at September 30, 2020		106,673	$	51.91		7.16	$	203,062

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 $8.37 per share at September 30, 2020.

Restricted stock award activity is as follows:

	Number of Shares			Weighted Average Award Date Fair Value per Share
Unvested restricted stock awards outstanding at April 1, 2020		1,666		$	13.68
Restricted stock awards granted		5,695			4.79
Restricted stock awards vested		(6,528	)		5.92
Restricted stock awards forfeited		–			–
Unvested restricted stock awards outstanding at September 30, 2020		833		$	13.68

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.

The Company issues new shares of common stock upon exercise of stock-based awards.

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

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Note 10. Income Taxes

The Company only recognizes tax benefits from an uncertain tax position 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 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. To date, the Company has not recognized such tax benefits in its consolidated financial statements.

On March 27, 2020 Congress approved and the President signed the CARES Act. The Cares Act is an emergency economic stimulus package in response to the COVID-19 pandemic, which among other things contains numerous tax provisions. The Company considered the various potential income tax provisions and deemed there were no material impacts to its income tax provision at September 30, 2020.

The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within twelve months of March 31, 2020. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.

Note 11. Segment and Geographic Information

The Company generates revenues from products which are sold into the human and animal healthcare markets.

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

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
United States	$	1,984	$	2,209	$	3,605	$	4,696
Latin America		2,024		948		4,350		1,712
Europe and Rest of the World		1,761		1,570		3,581		2,813
Total	$	5,769	$	4,727	$	11,536	$	9,221

Note 12. Significant Customer Concentrations

For the three months ended September 30, 2020, one customer represented 35%, another customer represented 13% of net revenue. For the six months ended September 30, 2020, one customer represented 37% of net revenue.

For the three months ended September 30, 2019, one customer represented 16% of net revenue and one customer represented 18% of net revenue. For the six months ended September 30, 2019, one customer represented 11% of net revenue and one customer represented 16% of net revenue.

At September 30, 2020 one customer represented 11% of the net accounts receivable balance. At March 31, 2020, no customer represented more than 10% of the net accounts receivable balance. At September 30, 2019, one customer represented 14%, of the net accounts receivable balance.

Note 13. Subsequent Events

During the process of the review of the financial statements for the six months ended September 30, 2020 the Company determined that there were material errors with the financial statements for the three months ended June 30, 2020 and that they could no longer be relied upon by the users of the financial statements. As a result, on November 17, 2020 the Company filed an 8-K disclosing that fact and also filed a 10-Q/A on the same day restating the results for the three months ended June 30, 2020. The numbers for the six months ended September 30, 2020 contained in this filing have been adjusted and the errors have been corrected.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q as of September 30, 2020 and our audited consolidated financial statements for the year ended March 31, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 10, 2020.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “anticipate,” “suggest,” “estimate,” “plan,” “project,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the risks described in our Annual Report on Form 10-K including: the impact of the COVID-19 pandemic on the overall economy and our results of operations; our ability to become profitable; the impact of changes to reimbursement levels from third-party payors or increased pricing pressure due to rebates; the impact of the Invekra transaction on our business and results of operations; our ability to manage our accounts receivable; the impact of seasonality on our sales; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; the progress and timing of clinical trials and physician studies; our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability to gain sufficient reimbursement from third-party payors; our ability to compete with other companies that are developing or selling products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products; the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market and generate attractive margins; the ability to attain specified revenue goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug Administration, or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture sufficient amounts of our products for commercialization activities; our ability to protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability to continue to expand our intellectual property portfolio; the risk we may need to indemnify our distributors or other third parties; risks attendant with conducting a significant portion of our business outside the United States; our ability to comply with complex federal and state fraud and abuse laws, including state and federal anti-kickback laws; risks associated with changes to health care laws; our ability to attract and retain qualified directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our ability to expand to and commercialize products in markets outside the wound care market; our ability to protect our information technology and infrastructure; and the impact of any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law.

Our Business

We are a global healthcare leader for developing and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, animal health care, eye care, nasal care, oral care and dermatological conditions. Our 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. Our 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. We also manufacture disinfectants that are distributed outside of the U.S. and in certain countries we have received regulatory clearance to state the disinfectant kills the coronavirus causing COVID-19. We sell our products either directly or via partners in 53 countries worldwide.

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Some of our key business areas in the United States are:

· U.S. HOCl-based dermatology products: We offer a wide variety of prescription HOCl based products that treat many skin conditions and diseases. These products are based on our proprietary stabilized hypochlorous acid, or HOCl, solutions. These products include:

- Celacyn®, a prescription HOCl-based scar management gel clinically proven to soften and flatten raised scars while reducing redness and discoloration.

- Levicyn^TM, a prescription HOCl-based atopic dermatitis product line clinically proven to reduce pruritus (itch) and pain associated with various dermatoses.

- Epicyn^TM, a prescription topical antimicrobial facial cleanser helps achieve clear skin and provide relief from irritation when used as part of a daily skin care regimen for patients with acute and chronic dermal lesions.

- Sebuderm^TM, a prescription topical gel used as an alternative to corticosteroids for the management of the burning, itching and scaling experienced with seborrhea and seborrheic dermatitis.

· Eye Hygiene: We developed Acuicyn™ Eyelid and Eyelash Hygiene, a HOCl-based topical prescription product indicated to relieve itch and inflammation while helping to keep areas around the eye clean.

· Advanced Tissue Care: We sell Microcyn®, primarily to hospitals, under a variety of brand names, a line of products based on electrically charged oxychlorine small molecules designed to target a wide range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains.

· Animal Health Care: We sell our non-prescription-based HOCl products into the animal health care markets through our partner Manna Products LLC, including national pet-store retail chains, farm animal specialty stores, farm animal veterinarians, grocery stores and mass retailers in the United States and Canada.

Our key products outside the United States are:

· Microcyn® or Microdacyn60® (sold under a variety of brand names, such as Dermacyn, MicrocynAH), a line of products based on electrically charged oxychlorine small molecules designed to target a wide range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains.

· Hard-Surface Disinfectants, sold under a variety of brand names, such as Nanocyn® sold by the Microsafe Group, Dubai and Dermodacyn® Disinfecting solution, a medical grade solution manufactured by us with our HOCl technology and sold by our partner MicroDerm Technologies Limited in Hong Kong. These disinfectants are intended for the sterilization of hard surfaces, submerging of medical devices and fumigation of air spaces. It is non-corrosive, non-toxic and eliminates viruses, fungi and bacteria.

· Eye Hygiene: Ocudox™, is an electrolyzed HOCl-based solution intended to aid in the treatment and symptoms of blepharitis on the eyelid. Ocudox is used for cleansing the lids, lashes, and periocular skin of debris and microorganisms, which can cause irritation, and ocular surface disease.   

To date, we have obtained 21 U.S. Food and Drug Administration, or FDA, clearances permitting the sale of products as medical devices for Section 510(k) of the Federal Food, Drug and Cosmetic Act in the United States.

Outside the United States, we sell products for dermatological and advanced tissue care with a European Conformity marking, Conformité Européenne, or CE. These CEs cover 39 products in 53 countries with various approvals in Brazil, China, Southeast Asia, South Korea, India, Australia, New Zealand, and the Middle East.

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Business Channels

Our core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. Unlike many of our competitors, we have been in business for 20 years and in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms.

Our core U.S. market includes patients who suffer from various skin diseases, including dermatoses, acne, scarring, skin-barrier and scaly skin conditions. Our secondary U.S. market includes eye-hygiene and acute care markets. These conditions impact patients worldwide who have had to live with less than optimal solutions or ones that come with significant side-effects. Skin conditions can have significant, multi-dimensional effects on quality of life, including on patient’s physical, functional and emotional well-being.

Dermatology

In the United States, we sell our prescription and over-the-counter products into dermatology markets with an in-house sales team supported by a call center that visits or calls dermatologists. We also promote our products at conferences and with individual doctors. Our dermatology products are primarily purchased by distributors, wholesalers, and pharmacies.

Although specific customer requirements can vary depending on applications, customers generally demand quality, innovation, affordability and clinically-supported efficacy. We have responded to these customer demands by introducing products that treat persistent and common dermatological afflictions, as well as promote healing and improve results for patients opting for cosmetic dermatology procedures. We are strategically focused on introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to new product families.

Eye Care and Advanced Tissue Care

Our eye care and advanced tissue care products provide patients similar benefits to those in dermatology. In the United States, we support the eye care and advanced tissue care markets with a dedicated in-house sales force and through an inside call center. We have also entered into strategic partnerships with respected and influential physicians and surgeons to promote our products. Our eye care products include prescription and dispensing solutions prescribed mainly by ophthalmologists and optometrists supported by pharmacies and, in some cases, sold through wholesale networks. Our tissue care products are primarily purchased by hospitals, physicians, nurses, and other healthcare practitioners.

Animal Health Care

Our animal healthcare products provide similar benefits to those in human dermatology. For our animal health products sold in the U.S. and Canada, we partnered with Manna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro distributes non-prescription products to national pet-store retail chains, farm animal specialty stores, farm animal veterinarians, grocery stores and mass retailers in the United States and Canada.

For the Asian and European markets we partner with Petagon, Limited, an international importer and distributor of quality pet food and products. On May 20, 2019, we entered into an agreement with Petagon to supply products to Petagon for five years at agreed upon transfer prices. On August 3, 2020, Petagon received a license from the People’s Republic of China for the import of veterinary drug products manufactured by us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.

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Disinfectants

In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. Recently, a product manufactured by us and sold to MicroSafe Group, Dubai, Nanocyn® Disinfectant & Sanitizer, received approval to be entered into the Australian Register of Therapeutic Goods, or ARTG, as well as in Canada, for use against the coronavirus SARS-CoV-2 (COVID-19). Claims that a disinfectant has a virucidal effect must be expressly permitted by the Australian Therapeutic Goods Administration before being used in consumer advertising or on the label in Australia. Furthermore, a joint study by the University of Hong Kong and Queen Mary Hospital using Dermodacyn® Disinfecting solution, a medical grade solution manufactured by us with our HOCl technology and sold by our partner MicroDerm Technologies Limited in Hong Kong, was just published in the Journal of Hospital Infection. (Journal of Hospital Infection 106 (2020) pages 226-231). The study showed that Dermodacyn® Disinfecting solution drastically reduced the viability of SARS-CoV-2 against other commonly used laboratory and domestic disinfectants.

On July 31, 2020, we partnered with MicroSafe Group to seek regulatory approval in the United States to sell hard surface disinfectants in the United States. To date we have not received any such regulatory approval.

International

We sell products internationally through a worldwide distributor network in 53 countries. In these international markets, we have a network of partners, ranging from country specific distributors to large pharmaceutical companies to full-service sales and marketing companies.

We work with our international partners to create products they can market in their home country or mutually agreed territories. Some products we develop and manufacture are private label while others use branding we have already developed. We have created or co-developed a wide range of products for international markets using our core HOCl technology. These products include consumer targeted products such as wound care, baby wash, eye care and acne treatments. We also manufacture disinfectants for distribution in certain countries.

In Europe, we rely on agreements with country-specific distributors for the sale of advanced tissue care and wound care products into 27 countries, including Austria, Belgium, Croatia, Italy, the Netherlands, Germany, Greece, Hungary, the Czech Republic, Spain, Norway, Switzerland, Poland, Portugal, Slovenia, the Slovak Republic, Finland, Denmark, Montenegro and Serbia.

Through our partner Microsafe Group DMCC, Dubai, we sell hard surface disinfectant products into Europe, the Middle East and Australia. On September 17, 2020, we announced that we have received regulatory clearance to sell disinfectant products in Canada.

On May 19, 2020, we entered into a new license and distribution agreement with our existing partner, Brill International S.L. for our Microdacyn60® Eye Care product based on our patented Microcyn® Technology. Under the new license and distribution agreement, Brill has the right to market and distribute our eye care product under the private label Ocudox™ in Italy, Germany, Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return, Brill will pay us a one-time fee on April 1, 2021 and the agreed upon supply prices. Previously, under the old license and distribution agreement dated August 1, 2018, Brill marketed our eye care product only in Spain and Portugal.

Mexico

On October 27, 2016, we sold certain parts of our Latin American business to Invekra S.A.P.I de C.V., an affiliate of Laboratorios Sanfer, for an aggregate purchase price of U.S. $22 million, with the ability of Invekra to set up its own manufacturing using some of our know-how and technology. The agreement obligated us to provide manufacturing for Invekra at reduced prices. Such agreement ended on October, 27, 2020. We anticipate that we will continue to manufacture for Invekra through December 2020. After that time, we expect Invekra to commence its own manufacturing although we may continue to provide manufacturing support at prices commensurate with the market. As we make this transition, we expect that our overall revenues from Invekra will decrease while our margins will increase.

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Additional Information

Investors and others should note that we announce material financial information using our company website (www.sonomapharma.com), our investor relations website (ir.sonomapharma.com), SEC filings, press releases, public conference calls and webcasts. The information on, or accessible through, our websites is not incorporated by reference in this Quarterly Report on Form 10-Q.

Results of Continuing Operations

Comparison of the Three and Six Months Ended September 30, 2020 and 2019

Revenue 

The following tables shows our consolidated revenue and revenue by geographic region for the three and six months ended September 30, 2020 and 2019:

	Three Months Ended September 30,
(In thousands)	2020		2019		$ Change			% Change
United States	$	1,984	$	2,209	$	(225	)		(10)%
Latin America		2,024		948		1,076			114 %
Europe and Rest of the World		1,761		1,570		191			12 %
Total	$	5,769	$	4,727	$	1,042			22 %

	Six Months Ended September 30,
(In thousands)	2020		2019		$ Change			% Change
United States	$	3,605	$	4,696	$	(1,091	)		(23)%
Latin America		4,350		1,712		2,638			154 %
Europe and Rest of the World		3,581		2,813		768			27 %
Total	$	11,536	$	9,221	$	2,315			25 %

The decrease in United States revenues for the three and six months ended September 30, 2020 compared to the prior year of $225,000 and $1,091,000, respectively, was primarily the result of a decrease in dermatology revenue as the result of COVID-19 effects and due to restructuring of our sales team in response to COVID-19. Acute care products was down slightly in revenue from prior year. For the three months ended September 30, 2020, we saw a slight decline in U.S. animal care revenue versus prior year. For the six months ended September 30, 2020, animal care revenue increased slightly versus the prior year.

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As a result of the asset purchase agreement and arrangement we entered into on October 27, 2016 with Invekra, we were obligated to supply Invekra with product at a reduced price through October 27, 2020. We have orders from Invekra through December 2020 and we expect those orders to decline after that as Invekra transitions to their own manufacturing. We anticipate that we will continue to manufacture for Invekra after December 2020 only in small amounts as overflow manufacturing. However, we will charge market prices for manufacturing after October 27, 2020. The increase in Latin America revenues for the three and six months ended September 30, 2020 compared to the prior year periods was the result of large products orders from Invekra at cost prior to the contract expiration. We expect that once Invekra starts manufacturing on their own that revenues in Latin America will drop significantly in future periods.

The increase in Europe and Rest of the World revenues for the three and six months ended September 30, 2020 compared to the prior year was the result of increases in Europe and the Middle East partially offset by decreases in Asia and New Zealand.

Cost of Revenue and Gross Profit

The cost of revenue and gross profit metrics are as follows:

	Three Months Ended September 30,
(In thousands, except for percentages)	2020		2019		Change		% Change
Cost of Revenue	$	3,267	$	2,552	$	715		28%
Cost of Revenue as a % of Revenue		57%		54%		3%
Gross Profit	$	2,502	$	2,175	$	327		15%
Gross Profit as a % of Revenue		43%		46%		(3)%

	Six Months Ended September 30,
(In thousands, except for percentages)	2020		2019		Change		% Change
Cost of Revenue	$	6,779	$	4,753	$	2,026		42%
Cost of Revenue as a % of Revenue		59%		52%		7%
Gross Profit	$	4,757	$	4,468	$	289		6%
Gross Profit as a % of Revenue		41%		48%		(7)%

For the three months ended September 30, 2020, gross margins decreased by 3% from 2019 as a result of the product mix sold. For the six months ended September 30, 2020, gross margins decreased by 7% as a result of a larger share of low-margin Invekra sales compared to our total sales. We expect profit margins to improve in the future as a result of Invekra starting their own manufacturing in December 2020 combined with higher prices on Invekra sales and due to the closure of our Petaluma facility and moving all manufacturing to our Mexican facility.

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Research and Development Expense

The research and development metrics are as follows:

	Three Months Ended September 30,
(In thousands, except for percentages)	2020			2019		Change			% Change
Research and Development Expense	$	(85	)	$	270	$	(355	)		(131)%
Research and Development Expense as a % of Revenue		(1)%			6%		(7)%

	Six Months Ended September 30,
(In thousands, except for percentages)	2020		2019		Change			% Change
Research and Development Expense	$	391	$	608	$	(217	)		(36)%
Research and Development Expense as a % of Revenue		3%		7%		(4)%

For the three and six months ended September 30, 2020, research and development expenses decreased as a result of the restructuring and closure of our research and development facility in Seattle, Washington to relocate it to our facility in Mexico. The credit balance of research and development expenses is due to true-up of expenses related to moving the Seattle facility.

Selling, General and Administrative Expense

The selling, general and administrative expense metrics are as follows:

	Three Months Ended September 30,
(In thousands, except for percentages)	2020		2019		Change			% Change
Selling, General and Administrative Expense	$	2,418	$	3,192	$	(774	)		(24)%
Selling, General and Administrative Expense as a % of Revenue		42%		68%		(26)%

	Six Months Ended September 30,
(In thousands, except for percentages)	2020		2019		Change			% Change
Selling, General and Administrative Expense	$	4,862	$	6,918	$	(2,056	)		(30)%
Selling, General and Administrative Expense as a % of Revenue		42%		75%		(33)%

The decline in Selling, General and Administrative expense for the three and six months ended September 30, 2020 was the result of restructuring and closing of our Petaluma facility and moving our corporate offices to Woodstock, Georgia.

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Interest Expense

Interest expense for the three and six months ended September 30, 2020 was $4,000 and $6,000, respectively, compared to $2,000 and $12,000, respectively, for the three and six months ended September 30, 2019.

Interest Income

Interest income for the three and six months ended September 30, 2020 was $8,000 and $10,000, respectively, compared to $42,000 and $84,000, respectively, for the three and six months ended September 30, 2019. The decrease is primarily due to interest income reported related to a discount on deferred revenue from our agreement with Invekra.

Other (Expense) Income

Other (expense) income for the three and six months ended September 30, 2020 was $(77,000) and $(197,000) respectively, compared to $(41,000) and $(100,000), respectively, for the three and six months ended September 30, 2019. The increase in other expense relates primarily to fluctuations in foreign exchange.

Gain on Sale of Assets

Gain on the sale of assets for the three and six months ended September 30, 2020 was $55,000 and $132,000 respectively, compared to zero and $2,472,000, respectively, for the three and six months ended September 30, 2019. During the three months ended September 30, 2020, we sold fixed assets no longer needed after closing our Petaluma manufacturing facility and during the six months ended September 30, 2020, we also sold assets to Infinity along with our Micromed division. For the six months ended September 30, 2019 we reported income related to the sale of certain assets to Petagon in the amount of $2,472,000.

Net Income (Loss) from Continuing Operations

Net income (loss) from continuing operations for the three and six months ended September 30, 2020 was $151,000 and $(557,000), respectively, compared to net losses of $1,288,000 and $614,000, respectively, for the three and six months ended September 30, 2019.

Results of Discontinued Operations

Comparison of Three and Six Months Ended September 30, 2020 and 2019

On June 24, 2020, we closed on an asset purchase agreement with Infinity Labs SD, Inc. We decided to divest our Micromed business, resulting in a strategic shift that had a major effect on our operations and financial results. Therefore, the divested Micromed operations meet the criteria to be reported as discontinued operations.

The related assets, liabilities, results of operations and cash flows for our Micromed business are classified as discontinued operations for all periods presented.

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The operations of the Micromed business included in discontinued operations is summarized as follows:

	Three Months Ended September 30,					Six Months Ended September 30
	2020			2019		2020		2019
Revenues	$	2,000		$	241,000	$	214,000	$	458,000
Cost of revenues		–			122,000		53,000		265,000
Selling general and administrative expenses		33,000			34,000		39,000		67,000
Income (loss) from discontinued operations before tax		(31,000	)		85,000		122,000		126,000
Gain on disposal of discontinued operations before income taxes		–			–		795,000		–
Total income (loss) from discontinued operations, before tax		(31,000	)		85,000		917,000		126,000
Income Tax benefit (expense)		–			–		–		–
Income (loss) from discontinued operations, net of tax	$	(31,000	)	$	85,000	$	917,000	$	126,000

Gain on disposal of discontinued operations for the six months ended September 30, 2020, includes $795,000 of gain primarily from the value of the customer base of Micromed.

Liquidity and Capital Resources

We reported a net income of $120,000 and $360,000 for the three and six months ended September 30, 2020. We reported a net loss of $1,203,000 and $488,000 for the three and six months ended September 30, 2019. At September 30, 2020 and March 31, 2020, our accumulated deficit amounted to $171,886,000 and $172,246,000, respectively. As of September 30, 2020, we had cash and cash equivalents of $4,320,000 compared to $3,232,000 on September 30, 2019. Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various loans and the sale of certain assets to Invekra, Petagon, Microsafe and Infinity Labs.

Since July 1, 2019, substantially all of our operations have been financed through the following transactions:

· Proceeds of $2,353,000 received from the exercise of stock options and warrants;

· Net proceeds of $1,376,000 received from the sale of common stock through a registered direct offering which closed on November 29, 2019;

· Net proceeds of $2,472,000 received from the sale of assets to Petagon, Ltd. which closed on May 20, 2019;

· Net proceeds of $1,100,000 from the sale of assets to Microsafe Group DMCC which closed on February 21, 2020;

· Loan proceeds of $1,310,000 under the Paycheck Protection Program disbursed on May 1, 2020; and

· Net proceeds of $610,000 from the sale of our Micromed Laboratories division which closed on June 24, 2020.

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The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the six months ended September 30, 2020 and 2019 as well balances of cash and cash equivalents and working capital:

	Six Months Ended September 30,
(In thousands)	2020			2019
Net cash provided by (used in):
Operating activities	$	(2,648	)	$	(160	)
Investing activities		475			(69	)
Financing activities		2,797			(241	)
Effect of exchange rates on cash		5			13
Net change in cash and cash equivalents		629			(457	)
Cash and cash equivalents, beginning of the period	$	3,691		$	3,689
Cash and cash equivalents, end of the period	$	4,320		$	3,232
Working capital (1), end of period	$	11,698		$	8,624

⁽¹⁾ Defined as current assets minus current liabilities

Net cash used by operating activities during the six months ended September 30, 2020 was primarily due to an increase in inventories of $1,386,000, a decrease in accrued expenses of $860,000 and an increase in accounts receivables of $705,000 in the period. These uses were partially offset by net income of $360,000 and an increase in accounts payable of $706,000.

Net cash used by operating activities during the six months ended September 30, 2019 was primarily due to an increase in accounts receivable of $1,283,000 partially offset by an increase in accounts payable in the period.

Net cash provided by investing activities for the six months ended September 30, 2020 was primarily related to the proceeds from the sale of our Micromed division of $610,000 partially offset by the purchase of equipment.

Net cash used in investing activities for the six months ended September 30, 2019 was primarily related to the purchase of equipment.

Net cash provided by financing activities for the six months ended September 30, 2020 was primarily related to proceeds from the exercise of stock options and warrants of $1,919,000, and PPP loans of $1,310,000.

Net cash used in financing activities for the six months ended September 30, 2019 was primarily related principal payments on debt and capital leases.

We expect revenues to fluctuate and may incur losses in the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to penetrate markets for the sale of our products and continue as a going concern. We cannot provide any assurances that we will be able to raise additional capital. We expect our service revenues will be negligible going forward due to the sale of our Micromed laboratories division and the completion of Invekra’s manufacturing facility.

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Management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, we cannot provide any assurance that new financing will be available on commercially acceptable terms, if at all. If the economic climate in the U.S. deteriorates, our ability to raise additional capital could be negatively impacted. If we are unable to secure additional capital, we may be required to take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our continued efforts to commercialize our products, which is critical to the realization of our business plan and our future operations. These matters raise substantial doubt about our ability to continue as a going concern.

Capital Expenditures

We currently forecast capital expenditures in order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures will ultimately be determined by the volume of business.  We currently do not anticipate that a material amount will be purchased for the year ended March 31, 2021. If we purchase capital equipment we expect to pay cash for those expenditures or to finance them through equipment leases. 

Material Trends and Uncertainties

We continue to monitor our U.S. dermatology business. We sell our U.S. dermatology products partially through a direct sales force that meets face to face with prescribers and other customers. During the extended lock-downs and shelter-in-place restrictions ranging from March 2020 through May 2020, our U.S. dermatology sales slowed substantially as doctors closed their offices for face to face meetings. In response to this challenge, we furloughed or laid off certain sales staff to conserve our cash and liquidity. U.S. dermatology revenues stayed at a reduced rate through September 2020 and because of the COVID-19 pandemic and he overall slowing of the economy. We don’t know how the pandemic will impact sales in the future. We continue to explore alternative ways of selling our U.S. dermatology products, including through third party distributors.

Healthcare providers and insurers heavily influence the price patients pay for our products. Generally, insurers cover a lower percentage of our products compared to other medical products making our products seem relatively more expensive than other medical care. As a result, to remain competitive, we offer rebates on our products directly to patients. Most patients use these rebates to make our products more affordable. While we believe these rebates are necessary for many patients to buy our products and without them our revenues would likely decline, the impact of rebates on our bottom line has been significant.

We continue to work with healthcare providers, insurers, third-party payors, pharmacies and others to manage pricing of our products to the consumer and to reduce the impact of rebates on our overall revenue. However, there is no guarantee we will be successful in reducing patient rebate use. Additionally, the legal landscape in healthcare is constantly changing. Adoption of new legislation at the federal or state level could further affect demand for, or pricing of, our products. For example, we face uncertainties due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the Affordable Care Act, or ACA, which could leave more patients without insurance coverage, which, in turn, could reduce the price patients are willing to pay for our products if they must bear the entire cost.

During the three months ended September 30, 2020 and 2019, revenue from sales to our Latin America partner Invekra amounted to approximately 35% and 20% of our revenues, respectively. For the six months ended September 30, 2020 and 2019, respectively these sales to Invekra amounted to approximately 37% and 17% of our revenues, respectively. Our agreement with Invekra obligated us to provide manufacturing for Invekra at reduced prices until October, 27, 2020. We anticipate that we will continue to manufacture for Invekra through December 2020. After that time, we expect Invekra to commence its own manufacturing although we may continue to provide manufacturing support at prices commensurate with the market. As we make this transition, we expect our overall revenues from Invekra will decrease while our margins will increase. However, we expect that our future overall revenues from Latin American sales will be substantially reduced.

Furthermore, our service revenues will decrease substantially due to the sale of our Micromed laboratories division and the completion of Invekra’s manufacturing facility.

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Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance related to our deferred tax assets, valuation of equity and derivative instruments, debt discounts, valuation of investments and the estimated amortization periods of upfront product licensing fees received from customers.

Off-Balance Sheet Transactions

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Accordingly, our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2020. We concluded this because of the errors we found in the Form 10-Q filing from June 30, 2020 that were restated in our 10-Q/A that was filed on November 17, 2020. We have determined that there were inadequate spreadsheet controls, a lack of separation of duties with preparation and review of the reported numbers, and inadequate analysis of revenue reporting among other things.

Notwithstanding the material weaknesses, management believes the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted accounting principles.

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Management’s Remediation Measures

Management, with oversight from the Audit Committee of the Board of Directors of the Company, is actively engaged in remediation efforts to address the material weaknesses identified in the management’s evaluation of internal controls and procedures. Management has taken a number of actions to remediate the material weaknesses described above, including the following:

· Improved monitoring and risk assessment activities to address these control deficiencies.

· Hired a new full time Chief Financial Officer in September 2020 and a new corporate controller in October 2020 to replace the transitionary staff in place while we moved our corporate offices from Petaluma, CA to Woodstock, GA.

· Separated the preparation of the financial reports from review of the financial reports.

· Implemented additional process-level controls over revenue recognition of new contracts.

· Developed and delivered further internal controls training to individuals associated with these control deficiencies and enhance training provided to all personnel who have financial reporting or internal control responsibilities in these areas. The training will include a review of individual roles and responsibilities related to internal controls, proper oversight and reemphasize the importance of completing the control procedures.

These improvements are targeted at strengthening the Company’s internal control over financial reporting and remediating the material weaknesses. We remain committed to an effective internal control environment and management believes that these actions and the improvements management expects to achieve as a result, will effectively remediate the material weaknesses. However, the material weaknesses in the Company’s internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing that these controls operate effectively. As of the date of filing this Form 10-Q, management is in the process of testing and evaluating these additional controls to determine whether they are operating effectively.

Changes in Internal Control over Financial Reporting

Except as described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weaknesses discussed above were subsequently identified and will result in future mitigation activities.

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PART II - OTH.ER INFORMATION

Item 1. Legal Proceedings

On occasion, we may be involved in legal matters arising in the ordinary course of our 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 we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of comprehensive loss.

Item 1A. Risk Factors

There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2020, as filed with the SEC July 10, 2020.

Our U.S. dermatology sales have been and continue to be affected by the COVID-19 pandemic and the resulting strain on the economy.

We sell our U.S. dermatology products partially through a direct sales force that meets face to face with prescribers and other customers. As states began to shut down in March 2020 through May 2020, our U.S. dermatology sales showed substantially as doctors closed their offices for face to face meetings. In response to this challenge, we furloughed or laid off certain sales staff to conserve our cash and liquidity. U.S. dermatology revenues stayed at a reduced rate through April and May 2020, increasing somewhat in June 2020 as states have reopened. However, U.S. dermatology sales through September 30, 2020, are still lower than compared to the same period in 2019. We don’t know how the pandemic will impact sales in we future. We believe this is due to the effect of the COVID-19 pandemic on the overall economy. If we do not increase our U.S. dermatology sales, our ability to generate revenue may be diminished. This could have a material adverse effect on our revenues, financial position, cash flows and results of operations,

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We did not issue any unregistered equity securities during the quarter ended September 30, 2020.

Item 3. Default Upon Senior Securities

We did not default upon any senior securities during the quarter ended September 30, 2020.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During the process of the review of the financial statements for the six months ended September 30, 2020 we determined that there were material errors with the financial statements for the three months ended June 30, 2020 and that they could no longer be relied upon by the users of the financial statements. As a result, on November 17, 2020 we filed an 8-K disclosing that fact and also filed a 10-Q/A on the same day restating the results for the three months ended June 30, 2020. The numbers for the six months ended September 30, 2020 contained in this filing have been adjusted and the errors have been corrected.

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Item 6. Exhibits

Exhibit No.	Description
3.1	Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective January 30, 2006 (included as exhibit 3.1 of the Company’s Annual Report on Form 10-K filed June 20, 2007, and incorporated herein by reference).
3.2	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective October 22, 2008 (included as exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 21, 2008, and incorporated herein by reference).
3.4	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective March 29, 2013 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 22, 2013, and incorporated herein by reference).
3.5	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective December 4, 2014 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 8, 2014, and incorporated herein by reference).
3.6	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective October 22, 2015 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 27, 2015, and incorporated herein by reference).
3.7	Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective June 24, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 28, 2016, and incorporated herein by reference).
3.8	Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective December 6, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 7, 2016, and incorporated herein by reference).
3.9	Amended and Restated Bylaws, as amended, of Sonoma Pharmaceuticals, Inc., effective December 6, 2016 (included as exhibit 3.2 to the Company’s Current Report on Form 8-K filed December 7, 2016, and incorporated herein by reference).
3.10	Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock, filed with the Delaware Secretary of State on April 24, 2012 (included as exhibit 4.2 to the Company’s Current Report on Form 8-K, filed April 25, 2012, and incorporated herein by reference).
3.11	Certificate of Designation of Series B Preferred Stock, effective October 18, 2016 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 21, 2016, and incorporated herein by references).
3.12	Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective June 19, 2019 (included as exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 19, 2019, and incorporated herein by reference).
4.1	Specimen Common Stock Certificate (included as exhibit 4.1 to the Company’s Annual Report on Form 10-K filed June 28, 2017, and incorporated herein by reference).
4.2	Section 382 Rights Agreement, dated as of October 18, 2016, between Oculus Innovative Sciences, Inc. and Computershare Inc., which includes the Form of Certificate of Designation of Series B Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (included as exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 21, 2016, and incorporated herein by reference).
4.3	Form of Placement Agent Warrant granted to Dawson James Securities, Inc. and The Benchmark Company, LLC in connection with the March 2, 2018 public offering, dated March 6, 2018 (included as exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 6, 2018, and incorporated herein by reference).

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4.4	Form of Placement Agent Warrant granted to Dawson James Securities, Inc. in connection with the November 2019 public offering (included as exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 29, 2019, and incorporated herein by reference).
10.1	Form of Indemnification Agreement between Oculus Innovative Sciences, Inc. and its officers and directors (included as exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.2	Office Lease Agreement, dated October 26, 1999, between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P. (included as exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.3	Amendment No. 1 to Office Lease Agreement, dated September 15, 2000, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.4	Amendment No. 2 to Office Lease Agreement, dated July 29, 2005, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.5	Amendment No. 3 to Office Lease Agreement, dated August 23, 2006, between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.6	Office Lease Agreement, dated May 18, 2006, between Oculus Technologies of Mexico, S.A. de C.V. and Antonio Sergio Arturo Fernandez Valenzuela (translated from Spanish) (included as exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.7	Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated from Dutch) (included as exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.8	Form of Director Agreement (included as exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
10.9	Amended and Restated Oculus Innovative Sciences, Inc. 2006 Stock Incentive Plan and related form stock option plan agreements (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 2, 2007, and incorporated herein by reference).
10.10	Amendment No. 4 to Office Lease Agreement, dated September 13, 2007, by and between Oculus Innovative Sciences, Inc. and RNM Lakeville L.P. (included as exhibit 10.43 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and incorporated herein by reference).
10.11	Amendment to Office Lease Agreement, effective February 15, 2008, by and between Oculus Innovative Sciences Netherlands B.V. and Artikona Holding B.V. (translated from Dutch) (included as exhibit 10.44 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and incorporated herein by reference).
10.12	Amendment No. 5 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, LLC, dated May 18, 2009 (included as exhibit 10.54 to the Company’s Annual Report on Form 10-K filed June 11, 2009, and incorporated herein by reference).
10.13	Amendment No. 6 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P., dated April 26, 2011 (included as exhibit 10.52 to the Company’s Annual Report on Form 10-K filed June 3, 2011, and incorporated herein by reference).
10.14	Oculus Innovative Sciences, Inc. 2011 Stock Incentive Plan (included as exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2011, and incorporated herein by reference).
10.15	Amendment No. 7 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and 1125-1137 North McDowell, LLC, dated October 10, 2012 (included as exhibit 10.58 to the Company’s Quarterly Report on Form 10-Q filed November 8, 2012, and incorporated herein by reference).
10.16†	Exclusive Sales and Distribution Agreement, dated November 6, 2015, by and between Oculus Innovative Sciences, Inc. and Manna Pro Products, LLC (included as exhibit 10.1 to the Company’s 8-K filed March 23, 2016 and incorporated herein by reference).
10.17†	Asset Purchase Agreement dated October 27, 2016, between Oculus Innovative Sciences, Inc. and Invekra, S.A.P.I de C.V. (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 31, 2016, and incorporated herein by reference).
10.18†	Amendment Agreement to Acquisition Option dated October 27, 2016, by and between More Pharma Corporation S. de R.L. de C.V. and Oculus Technologies of Mexico, S.A. de C.V. (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 31, 2016, and incorporated herein by reference).

36

10.19	Employment Agreement by and between Oculus Innovative Sciences, Inc. and Bruce Thornton, dated November 30, 2016 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 1, 2016, and incorporated herein by reference).
10.20†	Distribution Agreement by and between Sonoma Pharmaceuticals, Inc. and G. Pohl-Boskamp GmbH & Co. KG, dated April 13, 2016 (included as Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on June 28, 2017, and incorporated herein by reference).
10.21	Amendment No. 8 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and SSCOP Properties LLC, dated June 23, 2016 (included as Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed on June 28, 2017, and incorporated herein by reference).
10.22	2016 Equity Incentive Plan (included as exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2016, and incorporated herein by reference).
10.23	Placement Agency Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and Dawson James Securities, Inc. as representative of the placement agents, dated March 2, 2018 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 6, 2018, and incorporated herein by reference).
10.24	Securities Purchase Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and Montreux Equity Partners V, L.P., dated March 1, 2018 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 6, 2018, and incorporated herein by reference).
10.25†	Exclusive License and Distribution Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and EMS.S.A., dated June 4, 2018 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 5, 2018, and incorporated herein by reference).
10.26	Placement Agency Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and Dawson James Securities, Inc., dated November 16, 2018 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 21, 2018, and incorporated herein by reference).
10.27	Warrant Agency Agreement entered into by and among Sonoma Pharmaceuticals, Inc., Computershare, Inc. and Computershare Trust Company, N.A., dated November 21, 2018 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 21, 2018, and incorporated herein by reference).
10.28⸸+	Asset Purchase Agreement dated May 14, 2019, between Sonoma Pharmaceuticals, Inc. and Petagon, Ltd. (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 22, 2019, and incorporated herein by reference).
10.29	Placement Agency Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and Dawson James Securities, Inc., as representative, dated November 26, 2019 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 29, 2019, and incorporated herein by reference).
10.30	Employment Agreement between Sonoma Pharmaceuticals, Inc. and Amy Trombly, effective December 26, 2019 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 31, 2019, and incorporated herein by reference).
10.31⸸+	Asset Purchase Agreement dated February 21, 2020, between Sonoma Pharmaceuticals, Inc. and Microsafe Group, DMCC (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 27, 2020, and incorporated herein by reference.)
10.32	Consulting Agreement between the Company and TechCXO, LLC effective April 14, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 20, 2020, and incorporated herein by reference.)
10.33	Mutual Separation and Release Agreement between the Company and John Dal Poggetto, dated April 14, 2020 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 20, 2020, and incorporated herein by reference.)
10.34⸸+	License, Distribution and Supply Agreement by and between Sonoma Pharmaceuticals, Inc. and Brill International, S.L. dated May 19, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 26, 2020, and incorporated herein by reference.)
10.35	Separation and Release Agreement between the Company and Dr. Robert Northey, dated May 29, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 4, 2020, and incorporated herein by reference.)
10.36	Consulting Agreement between the Company and Dr. Robert Northey, dated May 30, 2020. (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 4, 2020, and incorporated herein by reference.)
10.37⸸+	Asset Purchase Agreement between the Company and Infinity Labs SD, Inc., dated June 24, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2020, and incorporated herein by reference.)

37

10.38+	Amendment No. 9 to Office Lease Agreement between the Company and SSCOP Properties LLC, dated June 20, 2020 (included as exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on July 10, 2020, and incorporated herein by reference).
10.39+	Woodstock Lease Agreement between the Company and Fowler Crossing Partners, LP, dated October 1, 2018 (included as exhibit 10.41 to the Company’s Annual Report on Form 10-K filed on July 10, 2020, and incorporated herein by reference).
10.40⸸	Licensing Agreement between Sonoma Pharmaceuticals, Inc. and Microsafe Group, effective July 27, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 6, 2020, and incorporated herein by reference).
10.41	Offer letter J. Dvonch dated August 10, 2020 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 11, 2020, and incorporated herein by reference).
10.42	Amendment No. 1 to the Consulting Agreement between the Company and TechCXO, LLC dated September 10, 2020 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 11, 2020, and incorporated herein by reference).
14.1	Code of Business Conduct (included as Exhibit 14.1 to the Company’s Current Report on Form 8-K filed on January 23, 2017, and incorporated herein by reference).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase.
101.LAB*	XBRL Taxonomy Extension Label Linkbase.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase.

*	Filed herewith.
†	Confidential treatment has been granted with respect to certain portions of this agreement.
⸸	Certain portions of the exhibit have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request.
+	The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K.  The Company will furnish copies of any such schedules to the SEC upon request.

Copies of above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee, upon written request to: Chief Financial Officer, Sonoma Pharmaceuticals, Inc., 645 Molly Lane, Suite 150, Woodstock, Georgia 30189.

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 20, 2020	By:	/s/ Amy Trombly
		Amy Trombly President and Chief Executive Officer, (Principal Executive Officer)
Date: November 20, 2020		/s/ Jerome Dvonch
		Jerome Dvonch
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

39

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Amy Trombly, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonoma Pharmaceuticals, Inc. for the quarter ended September 30, 2020;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Amy Trombly
Date: November 20, 2020		Amy Trombly
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Jerome Dvonch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonoma Pharmaceuticals, Inc. for the quarter ended September 30, 2020;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Jerome Dvonch
Date: November 20, 2020		Jerome Dvonch
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officers of Sonoma Pharmaceuticals, Inc., a Delaware corporation (the “Company”), do hereby certify, to such officers’ knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 20, 2020	By:	/s/ Amy Trombly
		Amy Trombly Chief Executive Officer (Principal Executive Officer)
Date: November 20, 2020	By:	/s/ Jerome Dvonch
		Jerome Dvonch Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Sep. 30, 2020	Nov. 19, 2020
Cover [Abstract]
Entity Registrant Name	Sonoma Pharmaceuticals, Inc.
Entity Central Index Key	0001367083
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2020
Current Fiscal Year End Date	--03-31
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		2,043,075
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2021
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive data current	Yes
Entity File Number	001-33216
Entity Incorporation State Country Code	DE
Entity Shell company	false

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2020	Mar. 31, 2020
Current assets:
Cash and cash equivalents	$ 4,320	$ 3,691
Accounts receivable, net	5,279	4,062
Inventories, net	3,704	2,192
Prepaid expenses and other current assets	2,770	2,256
Current portion of deferred consideration, net of discount	194	182
Total current assets	16,267	12,383
Operating lease right-of-use assets	634	963
Property and equipment, net	370	365
Deferred consideration, net of discount, less current portion	770	786
Other assets	104	64
Total assets	18,145	14,561
Current liabilities:
Accounts payable	3,202	2,086
Accrued expenses and other current liabilities	932	1,774
Deferred revenue	150	228
Deferred revenue Invekra	48	45
Operating lease liabilities	188	251
Current portion of long-term debt	49	481
Total current liabilities	4,569	4,865
Operating lease liabilities - non-current	469	746
Long-term deferred revenue Invekra	235	245
Long-term debt	1,310	0
Total liabilities	6,583	5,856
Commitments and Contingencies (Note 6)
Stockholders' Equity
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at September 30, 2020 and March 31, 2020, respectively, 0 and 1.55 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively	0	0
Common stock, $0.0001 par value; 24,000,000 shares authorized at September 30, 2020 and March 31, 2020, 2,041,409 and 1,777,483 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively	2	2
Additional paid-in capital	188,701	186,559
Accumulated deficit	(171,886)	(172,246)
Accumulated other comprehensive loss	(5,255)	(5,610)
Total stockholders' equity	11,562	8,705
Total liabilities and stockholders' equity	$ 18,145	$ 14,561

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Sep. 30, 2020	Mar. 31, 2020
Common stock par value	$ .0001	$ 0.0001
Common stock shares authorized	24,000,000	24,000,000
Common stock shares issued	2,041,409	1,777,483
Common stock shares outstanding	2,041,409	1,777,483
Convertible Preferred Stock [Member]
Preferred stock par value	$ 0.0001	$ 0.0001
Preferred stock shares authorized	714,286	714,286
Preferred stock shares issued	0	1.55
Preferred stock shares outstanding	0	1.55

XML

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Income Statement [Abstract]
Revenues	$ 5,769	$ 4,727	$ 11,536	$ 9,221
Cost of revenues	3,267	2,552	6,779	4,753
Gross profit	2,502	2,175	4,757	4,468
Operating expenses
Research and development	(85)	270	391	608
Selling, general and administrative	2,418	3,192	4,862	6,918
Total operating expenses	2,333	3,462	5,253	7,526
Income (loss) from operations	169	(1,287)	(496)	(3,058)
Interest expense	(4)	(2)	(6)	(12)
Interest income	8	42	10	84
Other (expense) income, net	(77)	(41)	(197)	(100)
Gain on sale of assets	55	0	132	2,472
Income (loss) from continuing operations	151	(1,288)	(557)	(614)
Income (loss) from discontinued operations (Note 4)	(31)	85	917	126
Net income (loss)	$ 120	$ (1,203)	$ 360	$ (488)
Net income (loss) per share: basic
Continuing operations	$ 0.08	$ (0.98)	$ (0.29)	$ (0.47)
Discontinued operations:	(0.02)	0.06	0.48	0.1
Net income per share: basic	0.06	(0.92)	0.19	(0.37)
Net income (loss) per share: diluted
Continuing operations	0.07	(0.98)	(0.26)	(0.47)
Discontinued operations:	(0.01)	0.06	0.43	0.1
Net income per share: diluted	$ 0.06	$ (0.92)	$ 0.17	$ (0.37)
Weighted-average number of shares used in per common share calculations: basic	2,008	1,317	1,924	1,317
Weighted-average number of shares used in per common share calculations: diluted	2,159	1,317	2,118	1,317
Other comprehensive income (loss)
Net income (loss)	$ 120	$ (1,203)	$ 360	$ (488)
Foreign currency translation adjustments	188	(163)	355	(96)
Comprehensive income (loss)	$ 308	$ (1,366)	$ 715	$ (584)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Cash flows from operating activities
Net income (loss)	$ 360	$ (488)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	107	144
Stock-based compensation	223	425
Gain on sale of assets	(770)	0
Changes in operating assets and liabilities:
Accounts receivable	(705)	(1,283)
Inventories	(1,386)	263
Deferred consideration	65	70
Prepaid expenses and other current assets	(273)	(358)
Operating lease right-of-use assets	330	256
Accounts payable	706	1,052
Accrued expenses and other current liabilities	(860)	(122)
Operating lease liabilities	(343)	(267)
Deferred revenue	(102)	148
Net cash used in operating activities	(2,648)	(160)
Cash flows from investing activities:
Purchases of property and equipment	(97)	(77)
Deposits	(38)	8
Proceeds from sale of assets	610	0
Net cash provided by (used in) investing activities	475	(69)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants	1,919	0
Proceeds from new debt	1,310	0
Principal payments on capital leases	0	(13)
Principal payments on long-term debt	(432)	(228)
Net cash provided by (used in) financing activities	2,797	(241)
Effect of exchange rate on cash and cash equivalents	5	13
Net increase (decrease) in cash and cash equivalents	629	(457)
Cash and cash equivalents, beginning of period	3,691	3,689
Cash and cash equivalents, end of period	4,320	3,232
Supplemental disclosure of cash flow information:
Cash paid for interest	$ 4	$ 12

XML

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Series C Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Accumulated Other Comprehensive Income / Loss	Total
Beginning balance, shares at Mar. 31, 2019	2	1,316,335
Beginning balance, value at Mar. 31, 2019		$ 2	$ 184,074	$ (169,238)	$ (4,349)	$ 10,489
Cumulative adjustment resulting from adoption of ASU				(59)		(59)
Stock based compensation related to common stock restricted stock grants, shares		835
Stock based compensation related to common stock restricted stock grants, value			20			20
Stock-based compensation expense, net of forfeitures			272			272
Foreign currency translation adjustment					67	67
Net income				715		715
Ending balance, shares at Jun. 30, 2019	2	1,317,170
Ending balance, value at Jun. 30, 2019		$ 2	184,366	(168,582)	(4,282)	11,504
Stock based compensation related to common stock restricted stock grants, shares		834
Stock based compensation related to common stock restricted stock grants, value			9			9
Stock-based compensation expense, net of forfeitures			124			124
Foreign currency translation adjustment					(163)	(163)
Net income				(1,203)		(1,203)
Ending balance, shares at Sep. 30, 2019	2	1,318,004
Ending balance, value at Sep. 30, 2019		$ 2	184,499	(169,785)	(4,445)	10,271
Beginning balance, shares at Mar. 31, 2020	2	1,777,483
Beginning balance, value at Mar. 31, 2020		$ 2	186,559	(172,246)	(5,610)	8,705
Stock based compensation related to common stock restricted stock grants, shares		3,086
Stock based compensation related to common stock restricted stock grants, value			18			18
Stock-based compensation expense, net of forfeitures			45			45
Issuance of common stock due to warrant exercises, shares		169,167
Issuance of common stock due to warrant exercises, value			1,490			1,490
Conversion of Series C convertible preferred stock into common stock, shares	(2)	17,222
Conversion of Series C convertible preferred stock into common stock, value
Foreign currency translation adjustment					167	167
Net income				240		240
Ending balance, shares at Jun. 30, 2020		1,966,958
Ending balance, value at Jun. 30, 2020		$ 2	188,112	(172,006)	(5,443)	10,665
Stock-based compensation expense, net of forfeitures			160			160
Issuance of common stock due to options exercises, shares		74,451
Issuance of common stock due to options exercises, value			429			429
Foreign currency translation adjustment					188	188
Net income				120		120
Ending balance, shares at Sep. 30, 2020		2,041,409
Ending balance, value at Sep. 30, 2020		$ 2	$ 188,701	$ (171,886)	$ (5,255)	$ 11,562

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1. Organization and Recent Developments

6 Months Ended

Sep. 30, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Recent Developments

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, nasal 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 53 countries worldwide.

Impact of Coronavirus

The spread of the coronavirus (“COVID-19”) has affected many segments of the global economy, including the pharmaceutical industry. The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, has prompted governments and regulatory bodies throughout the world to enact broad precautionary measures, including “stay-at-home” orders, restrictions on the performance of “non-essential” services, public gatherings and travel. Health systems, including key markets where the Company operates, have been, or may be, overwhelmed with high volumes of patients suffering from COVID-19.

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory obsolescence, and supplier agreements. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.

Despite the Company’s efforts, the ultimate impact of COVID-19 depends on factors beyond the Company’s knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, the Company is unable to estimate the extent to which COVID-19 will negatively impact its financial results or liquidity.

Reverse Stock Split

Effective June 19, 2019, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every nine shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each resulting fractional share of common stock was down to one whole share and each fractional share settled with cash. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 11,972,328 to 1,328,891. The total number of authorized shares of common stock was not proportionally decreased and the par value per share of the common stock continues to be $0.0001.

All common shares and per share amounts contained in the condensed consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect a 1-for-9 reverse stock split.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and for the three and six months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of comprehensive income (loss) for the three and six months ended September 30, 2020 and 2019, the cash flows for the six months ended September 30, 2020 and 2019 and the condensed consolidated statement of stockholders’ equity for the three and six months ended September 30, 2020 and 2019 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results for the three and six months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending March 31, 2021 or for any future interim period. The condensed consolidated balance sheet at March 31, 2020 has been derived from audited consolidated financial statements. These unaudited condensed consolidated financial statements of the Company have been prepared 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. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2020, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on July 10, 2020.

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2. Liquidity and Financial Condition

6 Months Ended

Sep. 30, 2020

Liquidity And Financial Condition

Liquidity and Financial Condition

Note 2. Liquidity and Financial Condition

The Company reported a net income of $120,000 and $360,000 for the three and six months ended September 30, 2020. At September 30, 2020 and March 31, 2020, the Company’s accumulated deficit amounted to $171,886,000 and $172,246,000, respectively. The Company had working capital of $11,698,000 and $7,518,000 as of September 30, 2020 and March 31, 2020, respectively.

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. 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.

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 terminates employees or reduce 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 November 29, 2020. 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. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, it cannot assure that it will be eligible for forgiveness, in whole or in part. Whether any amount will be forgiven has not been determined yet.

During the three months ended September 30, 2020, the Company received proceeds of $429,000 from the exercise of stock options by employees and consultants.

On May 29, June 1 and 2, 2020, the Company received proceeds of $1,490,000 from the exercise of November 2018 common stock purchase warrants by several investors.

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.

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3. Summary of Significant Accounting Policies

6 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 3. Summary of Significant Accounting Policies

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

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 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, fair value allocation of assets sold to Invekra, Petagon, Microsafe and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.

Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income 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.

	Three Months Ended September 30						Six Months Ended September 30
(In thousands, except per share data)	2020			2019			2020			2019
Numerator:
Income (loss) from continuing operations	$	151		$	(1,288	)	$	(557	)	$	(614	)
Income (loss) from discontinued operations		(31	)		85			917			126
Net income	$	120		$	(1,203	)	$	360		$	(488	)
Denominator:
Weighted-average number of common shares outstanding: basic		2,008			1,317			1,924			1,317
Dilutive effect of stock options		149			–			192			–
Dilutive effect of restricted stock		2			–			2			–
Weighted-average number of common shares outstanding: diluted		2,159			1,317			2,118			1,317
Income (loss) per share from continuing operations	$	0.07		$	(0.98	)	$	(0.26	)	$	(0.47	)
Income (loss) per share from discontinued operations		(0.01	)		0.06			0.43			0.10
Net income per share: basic and diluted	$	0.06		$	(0.92	)	$	0.17		$	(0.37	)

The computation of basic loss per share for the three and six months ended September 30, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
Stock options		65		136		75		136
Restricted stock		2		2		2		2
Warrants		150		446		150		446
Common stock units (1)		46		46		46		46
		263		630		273		630

(1) Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock

Revenue Recognition

Revenue is recognized when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity 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 from its distributor relationships. The Company also sells products to a customer base including hospitals, medical centers, doctors, pharmacies, wholesalers and directly to end users. 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 our 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 the Company has a long history with its customers and 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 based on if 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.

Disaggregation of Revenue

The following table presents the Company’s disaggregated revenues by revenue source:

(In thousands)	Three Months Ended September 30,				Six Months Ended September 30
Product	2020		2019		2020		2019
Human Care	$	4,776	$	3,801	$	10,094	$	7,772
Animal Care		951		912		1,388		1,325
Other		42		14		54		124
	$	5,769	$	4,727	$	11,536	$	9,221

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 of $52,000 and $1,028,000 at September 30, 2020 and March 31, 2020, respectively. Additionally, at September 30, 2020 and March 31, 2020 the Company has allowances of $2,275,000 and $1,230,000, 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.

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 amount of $757,000 and $600,000 at September 30, 2020 and March 31, 2020, respectively, which is included in cost of product revenues on the Company’s accompanying condensed consolidated statements of comprehensive income (loss).

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued. (See Note 13)

Accounting Pronouncements Pending Adoption

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on its Consolidated Financial Statements.

Recent Accounting Standards

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.

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4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc.

6 Months Ended

Sep. 30, 2020

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc.

Note 4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc.

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:

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.

The carrying value of the assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of September 30, 2020 and March 31, 2020 were as follows:

	September 30, 2020		March 31, 2020
Assets
Accounts receivable (net)	$	–	$	89,000
Inventory		–		11,000
Operating lease, right of use		–		604,000
Total current assets of discontinued operations	$	–	$	704,000
Liabilities
Accounts payable	$	–	$	18,000
Operating lease		–		117,000
Total current liabilities of discontinued operations	$	–	$	135,000
Operating lease	$	–	$	511,000
Total Long-term liabilities of discontinued operations	$	–	$	511,000

The operations of the Micromed business included in discontinued operations is summarized as follows:

	Three Months Ended September 30,					Six Months Ended September 30
	2020			2019		2020		2019
Revenues	$	2,000		$	241,000	$	214,000	$	458,000
Cost of revenues		–			122,000		53,000		265,000
Selling general and administrative expenses		33,000			34,000		39,000		67,000
Income (loss) from discontinued operations before tax		(31,000	)		85,000		122,000		126,000
Gain on disposal of discontinued operations before income taxes		–			–		795,000		–
Total income (loss) from discontinued operations, before tax		(31,000	)		85,000		917,000		126,000
Income Tax benefit (expense)		–			–		–		–
Income (loss) from discontinued operations, net of tax	$	(31,000	)	$	85,000	$	917,000	$	126,000

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5. Condensed Consolidated Balance Sheets

6 Months Ended

Sep. 30, 2020

Disclosure Text Block Supplement [Abstract]

Condensed Consolidated Balance Sheets

Note 5. Condensed Consolidated Balance Sheets

Inventories, net

Inventories, net consist of the following:  

	September 30,		March 31,
	2020		2020
Raw materials	$	2,098,000	$	1,128,000
Finished goods		1,606,000		1,064,000
	$	3,704,000	$	2,192,000

The Company reserved $757,000 and $600,000 for obsolescence at September 30, 2020 and March 31, 2020, respectively.

Leases

The Company's operating leases are comprised primarily of operating facility leases. The Company did not have any finance leases as of September 30, 2020 and March 31, 2020. Balance sheet information related to our leases is presented below:

	September 30,		March 31,
	2020		2020
Operating leases:
Operating lease right-of-use assets	$	634,000	$	963,000
Operating lease liabilities – current		188,000		251,000
Operating lease liabilities – non- current		469,000		746,000

Other information related to operating leases is presented below:

As of June 30, 2020, the annual minimum lease payments of our operating lease liabilities were as follows:

	Three Months Ended September 30,				Six Months Ended September 30
	2020		2019		2020		2019
Operating Lease Costs		121,000		148,000		286,000		298,000
Operating cash flows from operating leases						330,000		256,000

For Years Ending March 31,
2021 (excluding the six months ended September 30, 2020)	$	100,000
2022		213,000
2023		171,000
2024		139,000
2025		85,000
Thereafter		7,000
Total future minimum lease payments, undiscounted		715,000
Less: imputed interest		(58,000	)
Present value of future minimum lease payments	$	657,000
Weighted-average remaining lease term – operating leases (in months)		44
Weighted-average discount rate – operating leases		6.00%

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6. Commitments and Contingencies

6 Months Ended

Sep. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 6. Commitments and Contingencies

Legal Matters

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 September 30, 2020, the Company had employment agreements in place with two of its key executives. One of the agreements provide, among other things, for the payment of up to twelve months of severance compensation for terminations under certain circumstances. At September 30, 2020, potential severance payments to key executives would be $250,000, if triggered.

Related Party Transactions

Effective September 25, 2019, 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 three and six months ended September 30, 2020, the Company incurred $51,000 and $114,000, respectively in legal services from Trombly Business Law, PC.

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7. Debt

6 Months Ended

Sep. 30, 2020

Debt Disclosure [Abstract]

Debt

Note 7. Debt

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 terminates employees or reduce salaries during the applicable period. Whether any amount will be forgiven has not been determined yet.

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 November 29, 2020. The note may be prepaid at any time prior to maturity with no prepayment penalties. The Company used the loan amount for eligible purposes, such as payroll expenses. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, it cannot assure that it will be eligible for forgiveness, in whole or in part.

As of September 30, 2020, the Company was in compliance with all loan covenants.

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8. Stockholders' Equity

6 Months Ended

Sep. 30, 2020

Stockholders' Equity

Stockholders' Equity

Note 8. Stockholders’ Equity

Authorized Capital

The Company is authorized to issue up to 24,000,000 shares of common stock with a par value of $0.0001 per share and 714,286 shares of convertible preferred stock with a par value of $0.0001 per share.

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9. Stock-Based Compensation

6 Months Ended

Sep. 30, 2020

Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]

Stock-Based Compensation

Note 9. Stock-Based Compensation

Stock-based compensation expense is as follows:

	Three Months Ended September 30,					Six Months Ended September 30
(In thousands)	2020			2019		2020			2019
Cost of revenues	$	(6	)	$	17	$	(27	)	$	34
Research and development		40			19		26			41
Selling, general and administrative		126			97		224			350
Total stock-based compensation	$	160		$	133	$	223		$	425

At September 30, 2020, there were unrecognized compensation costs of $110,911 related to stock options which is expected to be recognized over a weighted-average amortization period of 0.26 years.

At September 30, 2020, there were unrecognized compensation costs of $11,036 related to restricted stock which is expected to be recognized over a weighted-average amortization period of 0.97 years.

Stock options award activity is as follows:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Term		Aggregate Intrinsic Value
Outstanding at April 1, 2020		378,000	$	26.55		–		–
Options granted		–		–		–		–
Options exercised		76,951		5.72		–		274,326
Options forfeited		112,697		9.89		–		–
Options expired		22,934		116.99		–		–
Outstanding at September 30, 2020		165,418	$	35.31		7.88	$	433,380
Exercisable at September 30, 2020		106,673	$	51.91		7.16	$	203,062

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 $8.37 per share at September 30, 2020.

Restricted stock award activity is as follows:

	Number of Shares			Weighted Average Award Date Fair Value per Share
Unvested restricted stock awards outstanding at April 1, 2020		1,666		$	13.68
Restricted stock awards granted		5,695			4.79
Restricted stock awards vested		(6,528	)		5.92
Restricted stock awards forfeited		–			–
Unvested restricted stock awards outstanding at September 30, 2020		833		$	13.68

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.

The Company issues new shares of common stock upon exercise of stock-based awards.

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

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10. Income Taxes

6 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 10. Income Taxes

The Company only recognizes tax benefits from an uncertain tax position 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 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. To date, the Company has not recognized such tax benefits in its consolidated financial statements.

On March 27, 2020 Congress approved and the President signed the CARES Act. The Cares Act is an emergency economic stimulus package in response to the COVID-19 pandemic, which among other things contains numerous tax provisions. The Company considered the various potential income tax provisions and deemed there were no material impacts to its income tax provision at September 30, 2020.

The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within twelve months of March 31, 2020. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.

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11. Segment and Geographic Information

6 Months Ended

Sep. 30, 2020

Segment Reporting [Abstract]

Segment and Geographic Information

Note 11. Segment and Geographic Information

The Company generates revenues from products which are sold into the human and animal healthcare markets.

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

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
United States	$	1,984	$	2,209	$	3,605	$	4,696
Latin America		2,024		948		4,350		1,712
Europe and Rest of the World		1,761		1,570		3,581		2,813
Total	$	5,769	$	4,727	$	11,536	$	9,221

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12. Significant Customer Concentrations

6 Months Ended

Sep. 30, 2020

Risks and Uncertainties [Abstract]

Significant Customer Concentrations

Note 12. Significant Customer Concentrations

For the three months ended September 30, 2020, one customer represented 35%, another customer represented 13% of net revenue. For the six months ended September 30, 2020, one customer represented 37% of net revenue.

For the three months ended September 30, 2019, one customer represented 16% of net revenue and one customer represented 18% of net revenue. For the six months ended September 30, 2019, one customer represented 11% of net revenue and one customer represented 16% of net revenue.

At September 30, 2020 one customer represented 11% of the net accounts receivable balance. At March 31, 2020, no customer represented more than 10% of the net accounts receivable balance. At September 30, 2019, one customer represented 14%, of the net accounts receivable balance.

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13. Subsequent Events

6 Months Ended

Sep. 30, 2020

Subsequent Events [Abstract]

Subsequent Events

Note 13. Subsequent Events

During the process of the review of the financial statements for the six months ended September 30, 2020 the Company determined that there were material errors with the financial statements for the three months ended June 30, 2020 and that they could no longer be relied upon by the users of the financial statements. As a result, on November 17, 2020 the Company filed an 8-K disclosing that fact and also filed a 10-Q/A on the same day restating the results for the three months ended June 30, 2020. The numbers for the six months ended September 30, 2020 contained in this filing have been adjusted and the errors have been corrected.

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3. Summary of Significant Accounting Policies (Policies)

6 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Reclassification

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

Use of Estimates

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 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, fair value allocation of assets sold to Invekra, Petagon, Microsafe and the estimated amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.

Net Income (Loss) per Share

Net Income (Loss) per Share

The Company computes basic net income (loss) per share by dividing net income 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.

	Three Months Ended September 30						Six Months Ended September 30
(In thousands, except per share data)	2020			2019			2020			2019
Numerator:
Income (loss) from continuing operations	$	151		$	(1,288	)	$	(557	)	$	(614	)
Income (loss) from discontinued operations		(31	)		85			917			126
Net income	$	120		$	(1,203	)	$	360		$	(488	)
Denominator:
Weighted-average number of common shares outstanding: basic		2,008			1,317			1,924			1,317
Dilutive effect of stock options		149			–			192			–
Dilutive effect of restricted stock		2			–			2			–
Weighted-average number of common shares outstanding: diluted		2,159			1,317			2,118			1,317
Income (loss) per share from continuing operations	$	0.07		$	(0.98	)	$	(0.26	)	$	(0.47	)
Income (loss) per share from discontinued operations		(0.01	)		0.06			0.43			0.10
Net income per share: basic and diluted	$	0.06		$	(0.92	)	$	0.17		$	(0.37	)

The computation of basic loss per share for the three and six months ended September 30, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
Stock options		65		136		75		136
Restricted stock		2		2		2		2
Warrants		150		446		150		446
Common stock units (1)		46		46		46		46
		263		630		273		630

(1) Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock

Revenue Recognition

Revenue Recognition

Revenue is recognized when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity 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 from its distributor relationships. The Company also sells products to a customer base including hospitals, medical centers, doctors, pharmacies, wholesalers and directly to end users. 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 our 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 the Company has a long history with its customers and 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 based on if 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.

Disaggregation of Revenue

The following table presents the Company’s disaggregated revenues by revenue source:

(In thousands)	Three Months Ended September 30,				Six Months Ended September 30
Product	2020		2019		2020		2019
Human Care	$	4,776	$	3,801	$	10,094	$	7,772
Animal Care		951		912		1,388		1,325
Other		42		14		54		124
	$	5,769	$	4,727	$	11,536	$	9,221

Accounts Receivable

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 of $52,000 and $1,028,000 at September 30, 2020 and March 31, 2020, respectively. Additionally, at September 30, 2020 and March 31, 2020 the Company has allowances of $2,275,000 and $1,230,000, 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.

Inventories

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 amount of $757,000 and $600,000 at September 30, 2020 and March 31, 2020, respectively, which is included in cost of product revenues on the Company’s accompanying condensed consolidated statements of comprehensive income (loss).

Subsequent Events

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued. (See Note 13)

Accounting Pronouncements Pending Adoption

Accounting Pronouncements Pending Adoption

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on its Consolidated Financial Statements.

Recent Accounting Standards

Recent Accounting Standards

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.

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3. Summary of Significant Accounting Policies (Tables)

6 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Computation of earnings per share

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.

	Three Months Ended September 30						Six Months Ended September 30
(In thousands, except per share data)	2020			2019			2020			2019
Numerator:
Income (loss) from continuing operations	$	151		$	(1,288	)	$	(557	)	$	(614	)
Income (loss) from discontinued operations		(31	)		85			917			126
Net income	$	120		$	(1,203	)	$	360		$	(488	)
Denominator:
Weighted-average number of common shares outstanding: basic		2,008			1,317			1,924			1,317
Dilutive effect of stock options		149			–			192			–
Dilutive effect of restricted stock		2			–			2			–
Weighted-average number of common shares outstanding: diluted		2,159			1,317			2,118			1,317
Income (loss) per share from continuing operations	$	0.07		$	(0.98	)	$	(0.26	)	$	(0.47	)
Income (loss) per share from discontinued operations		(0.01	)		0.06			0.43			0.10
Net income per share: basic and diluted	$	0.06		$	(0.92	)	$	0.17		$	(0.37	)

Schedule of antidilutive shares

The computation of basic loss per share for the three and six months ended September 30, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
Stock options		65		136		75		136
Restricted stock		2		2		2		2
Warrants		150		446		150		446
Common stock units (1)		46		46		46		46
		263		630		273		630

Disaggregated Revenue by Source

The following table presents the Company’s disaggregated revenues by revenue source:

(In thousands)	Three Months Ended September 30,				Six Months Ended September 30
Product	2020		2019		2020		2019
Human Care	$	4,776	$	3,801	$	10,094	$	7,772
Animal Care		951		912		1,388		1,325
Other		42		14		54		124
	$	5,769	$	4,727	$	11,536	$	9,221

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4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc. (Tables)

6 Months Ended

Sep. 30, 2020

Discontinued Operations and Disposal Groups [Abstract]

Schedule of allocation of sale price

Proceeds were allocated to the components of the sale based upon their relative selling prices are as follows:

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

Assets and liabilities of disposal group

The carrying value of the assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of September 30, 2020 and March 31, 2020 were as follows:

	September 30, 2020		March 31, 2020
Assets
Accounts receivable (net)	$	–	$	89,000
Inventory		–		11,000
Operating lease, right of use		–		604,000
Total current assets of discontinued operations	$	–	$	704,000
Liabilities
Accounts payable	$	–	$	18,000
Operating lease		–		117,000
Total current liabilities of discontinued operations	$	–	$	135,000
Operating lease	$	–	$	511,000
Total Long-term liabilities of discontinued operations	$	–	$	511,000

The operations of the Micromed business included in discontinued operations is summarized as follows:

	Three Months Ended September 30,					Six Months Ended September 30
	2020			2019		2020		2019
Revenues	$	2,000		$	241,000	$	214,000	$	458,000
Cost of revenues		–			122,000		53,000		265,000
Selling general and administrative expenses		33,000			34,000		39,000		67,000
Income (loss) from discontinued operations before tax		(31,000	)		85,000		122,000		126,000
Gain on disposal of discontinued operations before income taxes		–			–		795,000		–
Total income (loss) from discontinued operations, before tax		(31,000	)		85,000		917,000		126,000
Income Tax benefit (expense)		–			–		–		–
Income (loss) from discontinued operations, net of tax	$	(31,000	)	$	85,000	$	917,000	$	126,000

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5. Condensed Consolidated Balance Sheets (Tables)

6 Months Ended

Sep. 30, 2020

Disclosure Text Block Supplement [Abstract]

Schedule of inventories

Inventories, net consist of the following:  

	September 30,		March 31,
	2020		2020
Raw materials	$	2,098,000	$	1,128,000
Finished goods		1,606,000		1,064,000
	$	3,704,000	$	2,192,000

Schedule of leases

Balance sheet information related to our leases is presented below:

	September 30,		March 31,
	2020		2020
Operating leases:
Operating lease right-of-use assets	$	634,000	$	963,000
Operating lease liabilities – current		188,000		251,000
Operating lease liabilities – non- current		469,000		746,000

As of June 30, 2020, the annual minimum lease payments of our operating lease liabilities were as follows:

	Three Months Ended September 30,				Six Months Ended September 30
	2020		2019		2020		2019
Operating Lease Costs		121,000		148,000		286,000		298,000
Operating cash flows from operating leases						330,000		256,000

Schedule of annual minimum lease payments

For Years Ending March 31,
2021 (excluding the six months ended September 30, 2020)	$	100,000
2022		213,000
2023		171,000
2024		139,000
2025		85,000
Thereafter		7,000
Total future minimum lease payments, undiscounted		715,000
Less: imputed interest		(58,000	)
Present value of future minimum lease payments	$	657,000
Weighted-average remaining lease term – operating leases (in months)		44
Weighted-average discount rate – operating leases		6.00%

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9. Stock-Based Compensation (Tables)

6 Months Ended

Sep. 30, 2020

Share-based Compensation Arrangement by Share-based Payment Award, Additional General Disclosures [Abstract]

Share-based compensation expense

Stock-based compensation expense is as follows:

	Three Months Ended September 30,					Six Months Ended September 30
(In thousands)	2020			2019		2020			2019
Cost of revenues	$	(6	)	$	17	$	(27	)	$	34
Research and development		40			19		26			41
Selling, general and administrative		126			97		224			350
Total stock-based compensation	$	160		$	133	$	223		$	425

Schedule of option activity

Stock options award activity is as follows:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Term		Aggregate Intrinsic Value
Outstanding at April 1, 2020		378,000	$	26.55		–		–
Options granted		–		–		–		–
Options exercised		76,951		5.72		–		274,326
Options forfeited		112,697		9.89		–		–
Options expired		22,934		116.99		–		–
Outstanding at September 30, 2020		165,418	$	35.31		7.88	$	433,380
Exercisable at September 30, 2020		106,673	$	51.91		7.16	$	203,062

Restricted Stock Award Activity

Restricted stock award activity is as follows:

	Number of Shares			Weighted Average Award Date Fair Value per Share
Unvested restricted stock awards outstanding at April 1, 2020		1,666		$	13.68
Restricted stock awards granted		5,695			4.79
Restricted stock awards vested		(6,528	)		5.92
Restricted stock awards forfeited		–			–
Unvested restricted stock awards outstanding at September 30, 2020		833		$	13.68

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11. Segment and Geographic Information (Tables)

6 Months Ended

Sep. 30, 2020

Segment Reporting [Abstract]

Segment and Geographic Information

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

	Three Months Ended September 30,				Six Months Ended September 30
(In thousands)	2020		2019		2020		2019
United States	$	1,984	$	2,209	$	3,605	$	4,696
Latin America		2,024		948		4,350		1,712
Europe and Rest of the World		1,761		1,570		3,581		2,813
Total	$	5,769	$	4,727	$	11,536	$	9,221

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1. Organization and Recent Developments (Details Narrative)	3 Months Ended
	Jun. 19, 2019 shares	Sep. 30, 2020 shares	Mar. 31, 2020 shares	Jun. 18, 2019 shares
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Reverse stock split	Effective June 19, 2019, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every nine shares of common stock were reclassified and combined into one share of common stock
Common stock outstanding	1,328,891	2,041,409	1,777,483	11,972,328
Reverse stock split	.1111111111

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2. Liquidity and Financial Condition (Details Narrative) - USD ($)	1 Months Ended		3 Months Ended			6 Months Ended
	Jun. 24, 2020	May 02, 2020	Sep. 30, 2020	Jun. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Mar. 31, 2020
Net income			$ 120,000		$ (1,203,000)	$ 360,000	$ (488,000)
Accumulated deficit			(171,886,000)			(171,886,000)		$ (172,246,000)
Working capital			11,698,000			11,698,000		$ 7,518,000
Cash received from sale of Micromed						610,000
Several Investors [Member]
Proceeds from exercise of warrants				$ 1,490,000
Employees and Consultants [Member]
Proceeds from exercise of stock options			$ 429,000
Asset Purchase Agreement [Member]
Aggregate sale price of Micromed division	$ 850,000
Cash received from sale of Micromed	610,000
Credit received for future testing services from sale of Micromed	100,000
Sale of assets, amount held in escrow	60,000
Accounts receivable remaining from sale of asset	$ 81,000
Paycheck Protection Program [Member] | States Bank in Atlanta [Member]
Proceeds from loan		$ 1,310,000				$ 1,310,000
Loan interest rate		1.00%				1.00%
Loan maturity date		Apr. 29, 2022				Apr. 29, 2022

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3. Summary of Significant Accounting Policies (Details - Earnings per share) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Numerator:
Income (loss) from continuing operations	$ 151	$ (1,288)	$ (557)	$ (614)
Income (loss) from discontinued operations	(31)	85	917	126
Net income	$ 120	$ (1,203)	$ 360	$ (488)
Denominator:
Weighted-average number of common shares outstanding: basic	2,008	1,317	1,924	1,317
Dilutive effect of stock options	149	0	192	0
Dilutive effect of restricted stock	2	0	2	0
Weighted-average number of common shares outstanding: diluted	2,159	1,317	2,118	1,317
Income (loss) per share from continuing operations	$ 0.07	$ (0.98)	$ (0.26)	$ (0.47)
Income (loss) per share from discontinued operations	(0.01)	0.06	0.43	0.1
Net income per share: basic and diluted	$ 0.06	$ (0.92)	$ 0.17	$ (0.37)

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3. Summary of Significant Accounting Policies (Details - Antidilutive shares) - shares shares in Thousands	3 Months Ended				6 Months Ended
	Sep. 30, 2020		Sep. 30, 2019		Sep. 30, 2020		Sep. 30, 2019
Antidilutive shares	263		630		273		630
Stock Options [Member]
Antidilutive shares	65		136		75		136
Restricted Stock Units (RSUs) [Member]
Antidilutive shares	2		2		2		2
Warrants [Member]
Antidilutive shares	150		446	[1]	150		446
Common Stock Unit [Member]
Antidilutive shares	46	[1]	46		46	[1]	46	[1]

[1] Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock

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3. Summary of Significant Accounting Policies (Details - Disaggregated Revenues) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Revenues	$ 5,769	$ 4,727	$ 11,536	$ 9,221
Human Care [Member]
Revenues	4,776	3,801	10,094	7,772
Animal Care [Member]
Revenues	951	912	1,388	1,325
Other Sales [Member]
Revenues	$ 42	$ 14	$ 54	$ 124

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3. Summary of Significant Accounting Policies (Details Narrative) - USD ($)	Sep. 30, 2020	Mar. 31, 2020
Accounting Policies [Abstract]
Allowance for doubtful accounts	$ 52,000	$ 1,028,000
Allowance for potential discounts, returns, distributor fees and rebates	2,275,000	1,230,000
Inventory reserves	$ 757,000	$ 600,000

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4. Discontinued Operations: Sale of Assets (Details - Allocation of sale price) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 24, 2020	Sep. 30, 2020	Sep. 30, 2019
Proceeds from sale of business		$ 610,000	$ 0
Micromed Laboratories [Member]
Customer base	$ 850,000
Less: Funds remaining in escrow	(60,000)
Less: Services due from buyer	(100,000)
Less: Working capital adjustment	(80,000)
Proceeds from sale of business	$ 610,000

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4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc. (Details - Assets and Liabilities) - Micromed Laboratories [Member] - USD ($)	Sep. 30, 2020	Mar. 31, 2020
Assets
Accounts receivable (net)	$ 0	$ 89,000
Inventory	0	11,000
Operating lease, right of use	0	604,000
Total current assets of discontinued operations	0	704,000
Liabilities
Accounts payable	0	18,000
Operating lease	0	117,000
Total current liabilities of discontinued operations	0	135,000
Operating lease	0	511,000
Total Long-term liabilities of discontinued operations	$ 0	$ 511,000

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4. Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc. (Details - Discontinued Operations) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Income from discontinued operations, net of tax	$ (31,000)	$ 85,000	$ 917,000	$ 126,000
Micromed Laboratories [Member]
Revenues	2,000	241,000	214,000	458,000
Cost of Revenues	0	122,000	53,000	265,000
Selling, general and administrative expenses	33,000	34,000	39,000	67,000
Income from discontinued operations before tax	(31,000)	85,000	122,000	126,000
Gain on disposal of discontinued operations before income taxes	0	0	795,000	0
Total income from discontinued operations, before tax	(31,000)	85,000	917,000	126,000
Income Tax benefit (expense)	0	0	0	0
Income from discontinued operations, net of tax	$ (31,000)	$ 85,000	$ 917,000	$ 126,000

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5. Condensed Consolidated Balance Sheets (Details - Inventories) - USD ($)	Sep. 30, 2020	Mar. 31, 2020
Inventories Details
Raw materials, net	$ 2,098,000	$ 1,128,000
Finished goods, net	1,606,000	1,064,000
Inventories, net	$ 3,704,000	$ 2,192,000

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5. Condensed Consolidated Balance Sheets (Details - Operating lease information) - USD ($) $ in Thousands	Sep. 30, 2020	Mar. 31, 2020
Inventory Disclosure [Abstract]
Operating lease right-of-use assets	$ 634	$ 963
Operating lease liabilities - current	188	251
Operating lease liabilities - non- current	$ 469	$ 746

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5. Condensed Consolidated Balance Sheets (Details - Other lease information) - USD ($)	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Inventories Details
Operating lease cost	$ 121,000	$ 148,000	$ 286,000	$ 298,000
Operating cash flows from operating leases	$ 0	$ 0	$ 330,000	$ 256,000

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5. Condensed Consolidated Balance Sheets (Details - Minimum lease payments)	Sep. 30, 2020 USD ($)
Inventory Disclosure [Abstract]
2021 (excluding the six months ended September 30, 2020)	$ 100,000
2022	213,000
2023	171,000
2024	139,000
2025	85,000
Thereafter	7,000
Total future minimum lease payments, undiscounted	715,000
Less imputed interest	(58,000)
Present value of future minimum lease payments	$ 657,000
Weighted-average remaining lease term - operating leases (in months)	44 months
Weighted-average discount rate - operating leases	6.00%

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5. Condensed Consolidated Balance Sheets (Details Narrative) - USD ($)	Sep. 30, 2020	Mar. 31, 2020
Disclosure Text Block Supplement [Abstract]
Inventory reserved for obsolescence	$ 757,000	$ 600,000

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6. Commitments and Contingencies (Details Narrative)	3 Months Ended	6 Months Ended
	Sep. 30, 2020 USD ($)	Sep. 30, 2020 USD ($)
Potential severerance payments	$ 250,000	$ 250,000
Trombly Business Law [Member]
Legal fees	$ 51,000	$ 114,000

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7. Debt (Details Narrative) - Paycheck Protection Program [Member] - States Bank in Atlanta [Member] - USD ($)	1 Months Ended	6 Months Ended
	May 02, 2020	Sep. 30, 2020
Proceeds from loan	$ 1,310,000	$ 1,310,000
Interst rate	1.00%	1.00%
Debt maturity date	Apr. 29, 2022	Apr. 29, 2022

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8. Stockholders' Equity (Details Narrative) - $ / shares	Sep. 30, 2020	Mar. 31, 2020
Common stock par value	$ .0001	$ 0.0001
Common stock, shares authorized	24,000,000	24,000,000
Convertible Preferred Stock [Member]
Preferred stock, shares authorized	714,286	714,286
Preferred stock par value	$ 0.0001	$ 0.0001

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9. Stock-Based Compensation (Details-Stock-based compensation) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Total stock-based compensation	$ 160	$ 133	$ 223	$ 425
Cost of revenues [Member]
Total stock-based compensation	(6)	17	(27)	34
Research and development [Member]
Total stock-based compensation	40	19	26	41
Selling, general and administrative [Member]
Total stock-based compensation	$ 126	$ 97	$ 224	$ 350

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9. Stock-Based Compensation (Details-Option activity)	6 Months Ended
	Sep. 30, 2020 USD ($) $ / shares shares
Options
Outstanding at beginning of period | shares	378,000
Granted | shares	0
Exercised | shares	76,951
Forfeited | shares	112,697
Expired | shares	22,934
Outstanding at end of period | shares	165,418
Exercisable at end of period | shares	106,673
Weighted Average Exercise Price
Outstanding at beginning of period | $ / shares	$ 26.55
Granted | $ / shares	0.00
Exercised | $ / shares	5.72
Forfeited | $ / shares	9.89
Expired | $ / shares	116.99
Outstanding at end of period | $ / shares	35.31
Exercisable at end of period | $ / shares	$ 51.91
Weighted Average Contractual Term
Outstanding at end of period	7 years 10 months 17 days
Exercisable at end of period	7 years 1 month 27 days
Aggregate Intrinsic Value
Exercised | $	$ 274,326
Outstanding at end of period | $	433,380
Exercisable at end of period | $	$ 203,062

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9. Stock-Based Compensation (Details-Restricted stock activity)	6 Months Ended
	Sep. 30, 2020 $ / shares shares
Restricted stock award activity
Unvested restricted stock awards, beginning balance | shares	1,666
Restricted stock awards granted | shares	5,695
Restricted stock awards vested | shares	(6,528)
Restricted stock awards forfeited | shares	0
Unvested restricted stock awards, ending balance | shares	833
Weighted average award date fair value per share, outstanding beginning balance | $ / shares	$ 13.68
Weighted average award date fair value per share, granted | $ / shares	4.79
Weighted average award date fair value per share, vested | $ / shares	5.92
Weighted average award date fair value per share, forfeited | $ / shares	0.0
Weighted average award date fair value per share, outstanding ending balance | $ / shares	$ 13.68

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9. Stock-Based Compensation (Details Narrative)	6 Months Ended
	Sep. 30, 2020 USD ($) $ / shares
Restricted Stock [Member]
Unrecognized compensation costs - Options	$ 110,911
Weighted average amortization period	3 months 4 days
Stock Options [Member]
Unrecognized compensation costs - Options	$ 11,036
Weighted average amortization period	11 months 19 days
Aggregate intrinsic value per share | $ / shares	$ 8.37

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11. Segment and Geographic Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Revenues	$ 5,769	$ 4,727	$ 11,536	$ 9,221
Product [Member] | UNITED STATES
Revenues	1,984	2,209	3,605	4,696
Product [Member] | Latin America [Member]
Revenues	2,024	948	4,350	1,712
Product [Member] | Europe and Rest of the World [Member]
Revenues	$ 1,761	$ 1,570	$ 3,581	$ 2,813

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12. Significant Customer Concentrations (Details Narrative)	3 Months Ended		6 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Revenues [Member] | One Customer [Member]
Concentration risk percentage	35.00%	16.00%	37.00%	11.00%
Revenues [Member] | Another Customer [Member]
Concentration risk percentage	13.00%
Revenues [Member] | Two Customer [Member]
Concentration risk percentage		18.00%		16.00%
Accounts Receivable [Member] | One Customer [Member]
Concentration risk percentage			11.00%	14.00%