The accompanying footnotes are an integral
part of these consolidated financial statements.
The accompanying footnotes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – Organization
and Recent Developments
Organization
Sonoma Pharmaceuticals, Inc. (the “Company”)
was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of
Delaware in December 2006. The Company’s principal office was moved to Woodstock, Georgia from Petaluma, California in June
2020. The Company is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”)
products for a wide range of applications, including wound care, animal health care, eye care, oral care and dermatological conditions.
The Company’s products reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective
manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory
properties. The Company’s stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does
not sting or irritate skin and oxygenates the cells in the area treated assisting the body in its natural healing process. The
Company sell its products either directly or via partners in 53 countries worldwide.
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 consolidated financial statements have been retroactively adjusted to reflect a 1-for-9 reverse stock split.
NOTE 2 – Liquidity
and Financial Condition
The Company reported a net loss of $2,946,000
for the year ended March 31, 2020. At March 31, 2020 and March 31, 2019, the Company’s accumulated deficit amounted to $172,246,000
and $169,238,000, respectively. The Company had working capital of $7,518,000 and $8,905,000 as of March 31, 2020 and March 31,
2019, respectively.
Subsequent to the year ended March 31,
2020, the Company received $1,542,000 in cash from the exercise of common stock purchase warrants and options, $1,300,000 under
the Paycheck Protection Program and $609,000 from the sale of its Micromed Laboratories division. (See Note 19 – Subsequent
Events)
In November 2019, the Company entered into
a placement agency agreement with Dawson James Securities, Inc. The public offering price for each unit was $3.50. On November
29, 2019, at closing of the offering, the Company sold 446,577 shares of common stock for gross proceeds of $1,563,000 and net
proceeds of $1,376,000 after deducting placement agent commissions and other offering expenses.
Management believes that the Company has
access to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations
or other means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable
terms, if needed. If the economic climate in the U.S. deteriorates, the Company’s ability to raise additional capital could
be negatively impacted. If the Company is unable to secure additional capital, it may be required to take additional measures to
reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures
could cause significant delays in the Company’s continued efforts to commercialize its products, which is critical to the
realization of its business plan and the future operations of the Company. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that
may be necessary should the Company be unable to continue as a going concern.
COVID – 19
On March 11, 2020
the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment
and mitigation measures worldwide. In an effort to mitigate the continued spread of the virus, federal, state and local governments,
as well as certain private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings
and quarantining of people who may have been exposed to the virus. As a result of these restrictions, together with a general fear
of the impact on the global economy and financial markets, there is significant uncertainty surrounding the potential impact on
the Company. As events are rapidly changing, the Company is unable to accurately predict the impact that the coronavirus will have
on its business due to uncertainties including, but not limited to, the duration of quarantines and other travel restrictions within
China, the U.S. and other affected countries, the ultimate geographical spread of the virus, the severity of the disease, the duration
of the outbreak and the public’s response to the outbreak.
NOTE 3 – Summary of Significant Accounting
Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”),
Oculus Technologies of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”).
Aquamed has no current operations. All significant intercompany accounts and transactions have been eliminated in consolidation.
The functional currency for the Company's wholly-owned subsidiaries incorporated outside the United States (“U.S.”)
is the U.S. dollar. All intercompany transactions and balances have been eliminated in consolidation
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities
at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates. Significant estimates and assumptions include 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, and the estimated
amortization periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts
estimates accordingly.
Revenue Recognition
On April 1, 2018, the Company adopted Accounting
Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers Topic 606” (“Topic 606”)
using the modified retrospective method. There was no impact to the Company upon the adoption of Topic 606. Revenue is recognized
when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company
expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as
the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of
the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price,
including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations;
and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the
five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods
or services it transfers to the customer.
The Company derives the majority of its
revenue through sales of its products to a customer base, including hospitals, medical centers, doctors, pharmacies, distributors
and wholesalers. The Company sells products directly to end users and to distributors. The Company also has entered into agreements
to license its technology and products. The Company also provides regulatory compliance testing and quality assurance services
to medical device and pharmaceutical companies.
The Company considers customer purchase
orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the
Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In
determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net
consideration to which it expects to be entitled.
For all of its sales to non-consignment
distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e. when its performance
obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could occur when the customer
receives the product based on the terms of the agreement with the customer. For product sales to its value-added resellers,
non-stocking distributors and end-user customers, the Company grants return privileges to its customers, and because the Company
has a long history with its customers, the Company is able to estimate the amount of product that will be returned. Sales
incentives and other programs that the Company may make available to these customers are considered to be a form of variable consideration,
and the Company maintains estimated accruals and allowances using the expected value method.
The Company has entered into consignment
arrangements, in which goods are left in the possession of another party to sell. As products are sold from the customer to third
parties, the Company recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending
on whether a patient is covered by insurance or is not covered by insurance. In addition, the Company may incur a revenue deduction
related to the use of the Company’s rebate program.
Sales to stocking distributors are made
under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products
held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods
and services in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from
on its own and is separately identifiable from any other promises within the contract. Given that the distinct service is not substantially
the same as other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance
obligation.
Service revenue from testing contracts
is recognized as tests are completed and a final report is sent to the customer.
Disaggregation of Revenue
The following table presents the Company’s disaggregated
revenues by revenue source:
|
|
Year Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Product
|
|
|
|
|
|
|
Human Care
|
|
$
|
15,686,000
|
|
|
$
|
15,912,000
|
|
Animal Care
|
|
|
2,091,000
|
|
|
|
1,969,000
|
|
|
|
|
17,777,000
|
|
|
|
17,881,000
|
|
Service
|
|
|
1,159,000
|
|
|
|
1,089,000
|
|
Total
|
|
$
|
18,936,000
|
|
|
$
|
18,970,000
|
|
Sales Tax and Value Added Taxes
The Company accounts for sales taxes and
value added taxes imposed on its goods and services on a net basis.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents may be invested
in money market funds, commercial paper, variable rate demand instruments, and certificates of deposits.
Concentration of Credit Risk and
Major Customers
Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash
and cash equivalents are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is
exposed to credit risk in the event of default by these financial institutions for amounts in excess of the Federal Deposit Insurance
Corporation insured limits. Cash and cash equivalents held in foreign banks are intentionally kept at minimal levels, and therefore
have minimal credit risk associated with them.
The Company
grants credit to its business customers, which are primarily located in Mexico, Europe and the United States. Collateral is generally
not required for trade receivables. The Company maintains allowances for potential credit losses. At March 31, 2020 and 2019, no
customers represented more than 10% of net accounts receivable balance, respectively. For the year ended March 31, 2020, one customer
represented 15%, and one customer represented 11% of net revenues. For the year ended March 31, 2019, one customer represented
18%, and one customer represented 10% of net revenues.
Accounts Receivable
Trade accounts receivable are recorded
net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and
sales returns are based on analysis of contractual terms and historical trends.
The Company’s policy is to reserve for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past
due accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company
considers include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances,
an analysis of days sales outstanding by customer and geographic region, and a review of the local economic environment and its
potential impact on government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance
for doubtful accounts represents probable credit losses at March 31, 2020 and 2019 in the amounts of $1,028,000 and $24,000, respectively.
Additionally, at March 31, 2020 and 2019, the Company has allowances of $1,230,000 and $443,000, respectively, related to potential
discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying
consolidated balance sheets.
Inventories
Inventories are stated at the lower of
cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable
value.
Due to changing market conditions, estimated
future requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities
on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company
recorded a provision to reduce the carrying amounts of inventories to their net realizable value in the amounts of $600,000 and
$184,000 at March 31, 2020 and 2019, respectively, which is included in cost of product revenues on the Company’s accompanying
consolidated statements of comprehensive (loss) income.
Financial Assets and Liabilities
Financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and other liabilities are carried at cost, which management believes approximates
fair value due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates
their carrying amounts as a market rate of interest is attached to their repayment. The Company measures the fair value of financial
assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value. The Company uses three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices
in active markets for identical assets or liabilities
Level 2 – quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 – inputs that are
unobservable (for example cash flow modeling inputs based on assumptions)
Level 3 liabilities are valued using unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value
measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who
report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the
unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s
accounting and finance department and are approved by the Chief Financial Officer.
As of March 31, 2020 and 2019, there were
no transfers in or out of Level 3 from other levels in the fair value hierarchy.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method
over the estimated useful lives of the respective assets. Depreciation of leasehold improvements is computed using the straight-line
method over the lesser of the estimated useful life of the improvement or the remaining term of the lease. Estimated useful asset
life by classification is as follows:
|
|
Years
|
|
Office equipment
|
|
|
3
|
|
Manufacturing, lab and other equipment
|
|
|
5
|
|
Furniture and fixtures
|
|
|
7
|
|
Upon retirement or sale, the cost and related
accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations.
Maintenance and repairs are charged to operations as incurred.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying
values of its long-lived assets when events or changes in circumstances would indicate that it is more likely than not that their
carrying values may exceed their realizable values, and records impairment charges when considered necessary. Specific potential
indicators of impairment include, but are not necessarily limited to:
|
·
|
a significant decrease in the fair value of an asset;
|
|
·
|
a significant change in the extent or manner in which an asset is used or a significant physical change in an asset;
|
|
·
|
a significant adverse change in legal factors or in the business climate that affects the value of an asset;
|
|
·
|
an adverse action or assessment by the U.S. Food and Drug Administration or another regulator; and
|
|
·
|
an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset; and operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an income-producing asset.
|
When circumstances indicate that an impairment
may have occurred, the Company tests such assets for recoverability by comparing the estimated undiscounted future cash flows expected
to result from the use of such assets and their eventual disposition to their carrying amounts. In estimating these future cash
flows, assets and liabilities are grouped at the lowest level for which there are identifiable cash flows that are largely independent
of the cash flows generated by other such groups. If the undiscounted future cash flows are less than the carrying amount of the
asset, an impairment loss, measured as the excess of the carrying value of the asset over its estimated fair value, will be recognized.
The cash flow estimates used in such calculations are based on estimates and assumptions, using all available information that
management believes is reasonable.
During the years ended March 31, 2020
and 2019, the Company had noted no indicators of impairment.
Research and Development
Research and development expenses are charged
to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies. For the
years ended March 31, 2020 and 2019, research and development expense amounted to $1,339,000 and $1,518,000, respectively.
Advertising Costs
Advertising costs are charged to operations
as incurred. Advertising costs amounted to $35,000 and $157,000, for the years ended March 31, 2020 and 2019, respectively. Advertising
costs are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive
(loss) income.
Shipping and Handling Costs
The Company classifies amounts billed to
customers related to shipping and handling in sale transactions as product revenues. The corresponding shipping and handling costs
incurred are recorded in cost of product revenues. For the years ended March 31, 2020 and 2019, the Company recorded revenue related
to shipping and handling costs of $57,000 and $55,000, respectively. These amounts are included in product revenues in the accompanying
consolidated statements of comprehensive (loss) income.
Foreign Currency Reporting
The Company’s subsidiary, OTM, uses
the local currency (Mexican Pesos) as its functional currency and its subsidiary, SP Europe, uses the local currency (Euro) as
its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenue
and expense accounts are translated at average exchange rates during the period. Resulting translation adjustments amounted to
$1,261,000 and $374,000 for the years ended March 31, 2020 and 2019, respectively. These amounts were recorded in other comprehensive
loss in the accompanying consolidated statements of comprehensive loss for the years ended March 31, 2020 and 2019.
Foreign currency transaction gains (losses)
relate primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and SP Europe. These
transactions are expected to be settled in the foreseeable future. The Company recorded foreign currency transaction gains of $306,000,
and foreign currency transaction losses of $162,000, for the years ended March 31, 2020 and 2019, respectively. The related amounts
were recorded in other expense in the accompanying consolidated statements of comprehensive (loss) income.
Stock-Based Compensation
The Company accounts for share-based awards
exchanged for employee services at the estimated grant date fair value of the award. The Company estimates the fair value of employee
stock option awards using the Black-Scholes option pricing model. The Company amortizes the fair value of employee stock options
on a straight-line basis over the requisite service period of the awards. Compensation expense includes the impact of an
estimate for forfeitures for all stock options.
The Company accounts for equity instruments
issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation
charges are amortized over the vesting period or as earned.
Income Taxes
Deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss
and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable
income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Tax benefits claimed or expected to be
claimed on a tax return are recorded in the Company’s consolidated financial statements. A tax benefit from an uncertain
tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements
from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s consolidated financial condition, results
of comprehensive (loss) income or cash flows.
Comprehensive Loss
Other comprehensive loss includes all changes
in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statement of changes in
stockholders’ equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments.
Accumulated other comprehensive losses at March 31, 2020 and 2019 were $5,610,000 and $4,349,000, respectively.
Net Loss per Share
The Company computes basic net loss per
share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding
for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would
include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock
using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic loss per
share for the years ended March 31, 2020 and 2019 excludes the potentially dilutive securities summarized in the table below because
their inclusion would be anti-dilutive.
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Common stock to be issued upon vesting of restricted stock units
|
|
|
2,000
|
|
|
|
4,000
|
|
Common stock to be issued upon exercise of options
|
|
|
378,000
|
|
|
|
165,000
|
|
Common stock to be issued upon exercise of warrants
|
|
|
468,000
|
|
|
|
468,000
|
|
Common stock to be issued upon conversion of Series C
|
|
|
17,000
|
|
|
|
17,000
|
|
Common stock to be issued upon exercise of common stock units (1)
|
|
|
46,000
|
|
|
|
46,000
|
|
|
|
|
911,000
|
|
|
|
695,000
|
|
|
(1)
|
Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock
|
Common Stock Purchase Warrants and
Other Derivative Financial Instruments
The Company classifies common stock purchase
warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or
net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement
or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement (including a requirement to
net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty
a choice of net cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions
as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to
determine whether a change in classification between assets and liabilities is required. The Company determined that its freestanding
derivatives, which principally consist of warrants to purchase common stock, satisfied the criteria for classification as equity
instruments, other than certain warrants that contained reset provisions and certain warrants that required net-cash settlement
that the Company classified as derivative liabilities.
Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that
are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company
classifies conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either
within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s
control, as temporary equity. At all other times, preferred shares are classified as stockholders' equity.
Subsequent Events
Management has evaluated subsequent events
or transactions occurring through the date these consolidated financial statements were issued.
Adoption of Recent Accounting Standards
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the
recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify
this guidance and most recently issued ASU 2017-13 Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July
20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The Company
adopted ASU 2016-02 on April 1, 2019. As a result of adopting this guidance, the consolidated balance sheet as of March 31, 2019
was not restated and is not comparative. The adoption of this standard did not have a material impact on the Company’s results
of operations. (Note 12)
In February 2018, the FASB issued ASU No.
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 is effective for fiscal years beginning after December
15, 2018. Early adoption is permitted for any interim period for which financial statements have not been issued. The adoption
of this guidance did not have an impact on the Company's consolidated financial statements due the presence of a full valuation
allowance for deferred tax assets.
Recent Accounting Standards
In June 2016, the Financial
Accounting Standards Board issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on
Financial Instruments (“Update 2016-13”). Update 2016-13 requires companies to measure all expected
credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and
reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of
credit losses on financial assets, including trade receivables. The guidance is effective for fiscal years beginning after
December 15, 2019 and is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the Financial Accounting
Standards Board issued ASU 2018-13, Fair Value Measurement (Topic 820); Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement, ("Update 2018-13"). Update 2018-13 provided an update to the disclosure requirements
for fair value measurements under the scope of ASC 820. The guidance is effective for fiscal years beginning after December 15,
2019 and is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the Financial Accounting
Standards Board issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, (“Update
2018-15”). Update 2018-15 provided guidance for evaluating the accounting for fees paid by a customer in a cloud computing
arrangement that is a service contract. The guidance is effective for fiscal years beginning after December 15, 2019 and is not expected to have a material impact on the Company's consolidated financial statements.
In November 2018, the Financial Accounting
Standards Board issued ASU 2018-18, Collaborative Arrangements (Topic 808), (“Update 2018-18”). Update 2018-18
provided additional guidance regarding the interaction between Topic 808 on Collaborative Arrangements and Topic 606 on Revenue
Recognition. The guidance is effective for fiscal years beginning after December 15, 2019 and is not expected to have a material impact on
the Company's consolidated financial statements.
In April 2019, the Financial Accounting
Standards Board issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic
815, Derivatives and Hedging, and Topic 825, Financial Instruments, (“Update 2019-04”). Update 2019-04 represents
changes to clarify, correct errors in, or improve the codification for these topics. The guidance is effective for fiscal years
beginning after December 15, 2019 and is not expected to have a material impact on the Company's consolidated financial statements.
In December 2019, the Financial Accounting
Standards Board issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update
simplifies the accounting for income taxes through certain targeted improvements to various subtopics within Topic 740. The amendments
in this update are effective for fiscal years and interim periods beginning after December 15, 2020. The Company is currently
evaluating the impact of this guidance on its consolidated financial statements.
NOTE 4 – Sale of Assets
Sale of Assets to Petagon Limited
On May 20, 2019, the Company closed on
an Asset Purchase Agreement for the sale of certain animal health product rights and assets for the Asian and European markets
to Petagon, Limited, (“Petagon”) an international importer and distributor of quality pet food and products. The sales
price for the assets was $2,700,000. The Company agreed that it will continue to supply products to Petagon for five years at certain
agreed upon transfer prices. The sale involves certain Asian patents and trademarks, and the exclusive right to distribute animal
health care products in Asia and Europe.
The Company determined that there were
two separate performance obligations under the Asset Purchase Agreement. These performance obligations were the delivery of production
equipment to Petagon as a security and the transfer of the intellectual property and territory rights.
The Company estimated the value of the
production equipment by determining the cost and applying a mark up to the selling price at a market participant margin. The Company
then applied the residual approach to derive the fair value of the intellectual property and territory rights.
The Company will provide product under
a reduced price from its prior list price. The Company incurred costs of approximately $163,000 to fulfill its obligations to
deliver certain production equipment to Petagon.
The proceeds from the sale were allocated to the components
of the sale utilizing the residual approach as follows:
Total proceeds
|
|
$
|
2,700,000
|
|
Less - Production equipment
|
|
|
(228,000
|
)
|
Residual attributable to the intellectual property and territory rights
|
|
$
|
2,472,000
|
|
The proceeds related to the production
equipment were recognized upon delivery of the equipment in March 2020. The proceeds related to the intellectual property and territory
rights were included in gain on sale on the closing date.
For a certain period after closing, Petagon
shall have first refusal rights to acquire other certain marketing territories.
Sale of
Product Rights to Microsafe Group, DMCC
On February 21, 2020, the Company closed
on an Asset Purchase Agreement for the sale of certain wound care and animal health product rights and assets for the Middle East
and disinfectant rights for the European and Australian markets to Microsafe Group, DMCC (“Microsafe”), an international
distributor. The purchase price for the product rights and assets was $1,100,000.
The Company agreed that it will continue
to supply products to Petagon for five years at certain agreed upon transfer prices. The sale involves certain Asian patents and
trademarks, and the exclusive right to distribute animal health care products in Asia and Europe.
The Company determined that there were
two separate performance obligations under the Asset Purchase Agreement. These performance obligations were the delivery of production
equipment to Petagon as a security and the transfer of the intellectual property and territory rights.
The Company estimated the value of the
production equipment by determining the cost and applying a mark up to the selling price at a market participant margin. The Company
then applied the residual approach to derive the fair value of the intellectual property and territory rights.
The Company will provide product under
a reduced price from its prior list price. The Company will incur costs of approximately $75,000 to fulfill its obligations to
deliver certain production equipment to Microsafe.
The proceeds from the sale were allocated
to the components of the sale utilizing the residual approach as follows:
Total proceeds
|
|
$
|
1,100,000
|
|
Less - Production equipment
|
|
|
(150,000
|
)
|
Residual attributable to the intellectual property and territory rights
|
|
$
|
950,000
|
|
The proceeds related to the production
equipment are included in deferred revenue and will be recognized upon delivery of the equipment. The proceeds related to the intellectual
property and territory rights are included in gain on sale on the closing date.
NOTE 5 – Accounts Receivable
Accounts receivable, net consists of the
following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable
|
|
$
|
6,320,000
|
|
|
$
|
3,948,000
|
|
Less: allowance for doubtful accounts
|
|
|
(1,028,000
|
)
|
|
|
(24,000
|
)
|
Less: discounts, rebates, distributor fees and returns
|
|
|
(1,230,000
|
)
|
|
|
(443,000
|
)
|
|
|
$
|
4,062,000
|
|
|
$
|
3,841,000
|
|
NOTE 6 – Inventories
Inventories consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
1,128,000
|
|
|
$
|
1,766,000
|
|
Finished goods
|
|
|
1,064,000
|
|
|
|
1,643,000
|
|
|
|
$
|
2,192,000
|
|
|
$
|
3,409,000
|
|
NOTE 7 – Prepaid Expenses
and Other Current Assets
Prepaid expenses and other current assets
consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid insurance
|
|
$
|
523,000
|
|
|
$
|
354,000
|
|
Prepaid rebates
|
|
|
–
|
|
|
|
78,000
|
|
Tax prepaid to Mexican tax authorities
|
|
|
1,305,000
|
|
|
|
963,000
|
|
Other prepaid expenses and other current assets
|
|
|
428,000
|
|
|
|
299,000
|
|
|
|
$
|
2,256,000
|
|
|
$
|
1,694,000
|
|
NOTE 8 – Property and
Equipment
Property and equipment consists of the
following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Manufacturing, lab, and other equipment
|
|
$
|
3,008,000
|
|
|
$
|
3,575,000
|
|
Office equipment
|
|
|
376,000
|
|
|
|
380,000
|
|
Furniture and fixtures
|
|
|
102,000
|
|
|
|
110,000
|
|
Leasehold improvements
|
|
|
481,000
|
|
|
|
576,000
|
|
|
|
|
3,967,000
|
|
|
|
4,641,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(3,602,000
|
)
|
|
|
(3,914,000
|
)
|
|
|
$
|
365,000
|
|
|
$
|
727,000
|
|
Depreciation and amortization expense amounted
to $312,000 and $453,000 for the years ended March 31, 2020 and 2019, respectively.
For the year ended March 31, 2019, the
Company incurred a loss of $21,000 on the disposal of property and equipment. For the year ended March 31, 2020, the Company
incurred a loss of $18,000 on the disposal of property and equipment.
NOTE 9 – Accrued Expenses
and Other Current Liabilities
Accrued expenses and other current liabilities
consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Salaries and related costs
|
|
$
|
1,078,000
|
|
|
$
|
957,000
|
|
Professional fees
|
|
|
234,000
|
|
|
|
279,000
|
|
Other
|
|
|
462,000
|
|
|
|
265,000
|
|
|
|
$
|
1,774,000
|
|
|
$
|
1,501,000
|
|
NOTE 10 –
Common Stock Liability
On October 4, 2018, the Company sold 12,556
shares of common stock, at a price of $21.51 per share, through its At Market Issuance Sales Agreement with B. Riley FBR, Inc.
for gross proceeds of $270,000 and net proceeds of $262,000 after deducting commissions and other offering expenses. This sale
exceeded the aggregate market value of the Company’s securities sold during the period of twelve calendar months prior to
the sale of one-third of the aggregate market value of its common stock held by non-affiliates, and thus, the 12,556 shares of
common stock were unregistered. The Company could be liable in the event claims or suits for rescission are brought and successfully
concluded for failure to register these securities or for acts or omissions constituting offenses under the Securities Act, the
Securities Exchange Act of 1934, or applicable state securities laws. The Company could be liable for damages and penalties assessed
by the SEC and state securities regulators. Accordingly, at March 31, 2019, the Company recorded a $270,000 liability in the accompanying
consolidated balance sheet. The statute of limitations expired in October 2019, and as a result the liability was released and
was reclassified to equity on the Company’s consolidated balance sheet at March 31, 2020.
NOTE 11 – Long-Term
Debt
Financing of Insurance Premiums
On February 1, 2019, the Company entered
into a note agreement for $349,000 with an interest rate of 6.06% per annum with final payment on December 1, 2019. This instrument
was issued in connection with financing insurance premiums. The note is payable in monthly installments of $36,000. During the
year ended March 31, 2020, the Company made principal and interest payments in the amounts of $316,000 and $8,000, respectively.
During the year ended March 31, 2019, the Company made principal and interest payments in the amounts of $34,000 and $2,000, respectively.
There is no outstanding balance on this note as of March 31, 2020.
On February 1, 2020, the Company entered
into a note agreement for $534,000 with an interest rate of 5.48% per annum with final payment on December 1, 2019. This instrument
was issued in connection with financing insurance premiums. The note is payable in monthly installments of $53,000. During the
year ended March 31, 2020, the Company made principal and interest payments in the amounts of $53,000 and $2,000, respectively.
NOTE 12 – Leases
The Company has entered into operating
and finance leases as the lessee for office space, manufacturing facilities, R&D laboratories, warehouses, vehicles and equipment.
On April 1, 2019 (“Effective Date”), the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842,
Leases (“ASC 842”), which increases transparency and comparability by recognizing a lessee’s rights and obligations
resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance requires the
recognition of the right-of-use (“ROU”) assets and related operating and finance lease liabilities on the balance sheet.
The Company adopted the new guidance using the modified retrospective approach with a cumulative-effect adjustment recorded on
April 1, 2019. As a result, the consolidated balance sheet as of March 31, 2019 was not restated and is not comparative.
The adoption of ASC 842 resulted in the
recognition of ROU assets of $1,442,000, lease liabilities for operating leases of $1,502,000 on the Company's consolidated balance
sheet as of April 1, 2019, and a cumulative-effect adjustment of $61,000 to the Company’s accumulated deficit, with no material
impact to its consolidated statements of operations. The difference between the ROU assets and the operating lease liability represents
the effect of previously unrecognized deferred rent balances. The Company's accounting for finance leases remained substantially
unchanged from its accounting for capital leases in prior periods. Finance leases are not material to the Company’s consolidated
statements of comprehensive loss, consolidated balance sheets, or consolidated statement of cash flows.
The Company elected the package of practical
expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii)
classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs.
Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets
and the expedient to allow the Company to not have to separate lease and non-lease components. The Company has also elected the
short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset for any lease that
at the commencement date has a lease term of twelve months or less and does not include a purchase option that Sonoma is more than
reasonably certain to exercise.
For contracts entered into on or after
the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company's
assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained
the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company
has the right to direct the use of the asset. Leases entered into prior to April 1, 2019, which were accounted for under ASC 840,
were not reassessed for classification.
For operating leases, the lease liability
is initially and subsequently measured at the present value of the unpaid lease payments. For finance leases, the lease liability
is initially measured in the same manner and date as for operating leases, and is subsequently presented at amortized cost using
the effective interest method. The Company generally uses its incremental borrowing rate as the discount rate for leases, unless
an interest rate is implicitly stated in the lease. The present value of the lease payments is calculated using the incremental
borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest
that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The lease
term for all of the Company’s leases includes the noncancelable period of the lease plus any additional periods covered by
either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease
controlled by the lessor. All ROU assets are reviewed for impairment.
Lease expense for operating leases consists
of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Lease expense
for finance leases consists of the amortization of the asset on a straight-line basis over the shorter of the lease term or its
useful life and interest expense determined on an amortized cost basis, with the lease payments allocated between a reduction of
the lease liability and interest expense.
The Company's operating leases are comprised
primarily of facility leases. Finance leases are comprised primarily of vehicle leases. Balance sheet information related to our
leases is presented below:
|
|
March 31,
|
|
|
April 1,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
963,000
|
|
|
$
|
1,442,000
|
|
|
$
|
–
|
|
Operating lease liabilities – current
|
|
|
251,000
|
|
|
|
497,000
|
|
|
|
–
|
|
Operating lease liabilities – non-current
|
|
|
746,000
|
|
|
|
1,005,000
|
|
|
|
–
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
–
|
|
|
|
95,000
|
|
|
|
95,000
|
|
Current portion of financing leases
|
|
|
–
|
|
|
|
141,000
|
|
|
|
141,000
|
|
Other information related to leases is presented below:
|
|
Twelve Months Ended March 31, 2020
|
|
Lease cost
|
|
|
|
|
Operating lease cost
|
|
$
|
661,000
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
Other information:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
681,000
|
|
Weighted-average remaining lease term – operating leases (in months)
|
|
|
48.6
|
|
Weighted-average discount rate – operating leases
|
|
|
6.00%
|
|
As of March 31, 2020, the annual minimum lease payments of our
operating lease liabilities were as follows:
For Years Ending March 31,
|
|
|
|
|
|
|
|
2021
|
|
$
|
302,000
|
|
2022
|
|
|
270,000
|
|
2023
|
|
|
247,000
|
|
2024
|
|
|
223,000
|
|
Thereafter
|
|
|
89,000
|
|
Total future minimum lease payments, undiscounted
|
|
|
1,131,000
|
|
Less: imputed interest
|
|
|
(134,000
|
)
|
Present value of future minimum lease payments
|
|
$
|
997,000
|
|
NOTE 13 – Commitments
and Contingencies
Legal Matters
On occasion, the Company may be involved
in legal matters arising in the ordinary course of business including matters involving proprietary technology. While management
believes that such matters are currently insignificant, matters arising in the ordinary course of business for which the Company
is or could become involved in litigation may have a material adverse effect on its business and financial condition of comprehensive
loss.
Employment Agreements
As of March 31, 2020, the Company had employment
agreements in place with four of its key executives. Three of the executive employment agreements provide, among other things,
for the payment of up to twelve months of severance compensation for terminations under certain circumstances. With respect to
these agreements, at March 31, 2020, aggregated annual salaries would be $984,000 and potential severance payments to these key
executives would be $684,000 if triggered.
Subsequent to year end, the Company severed
relationships with two of the key executives. The Company made severance payments totaling $254,000 in the first fiscal quarter
of fiscal year 2021.
Effective on December 26, 2019, the Company
entered into a new employment agreement with its Chief Executive Officer, Amy Trombly, after her prior agreement expired on December
25, 2019 pursuant to its terms. The employment agreement is effective as of December 26, 2019, and has a term until December 31,
2020, subject to mutual extension by three-month increments.
The Company agreed to continue to pay Ms.
Trombly a base salary of $25,000 per month, and to provide standard medical, dental and vacation benefits. Ms. Trombly will be
eligible for a bonus of up to $150,000 per year upon the completion of certain agreed-upon goals based on the sole discretion of
the Compensation Committee. As was the case with her old agreement, certain legal services not provided by Ms. Trombly will continue
to be billed by Trombly Business Law, PC. The Board also agreed that during her time as Chief Executive Officer, Ms. Trombly may
continue to represent other clients in her role as attorney. The employment agreement may be terminated by the Company or Ms. Trombly
upon sixty days’ written notice at any time and for any reason.
Upon termination of the agreement Ms. Trombly
agreed to resign from any and all directorships and every other position held by the executive with the Company or any of its subsidiaries,
and to return to the Company of all property she received from or on account of the Company.
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 years ending March 31, 2020, the Company received
$255,000 in legal services from Trombly Business Law, PC.
Other Matters
Nasdaq Listing
On January 4,
2019, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market LLC, notifying the Company
that, for the previous 30 consecutive business days, the Company failed to comply with Nasdaq Listing Rule 5550(a)(2), which requires
the Company to maintain a minimum bid price of $1.00 per share for its common stock.
In accordance
with Listing Rule 5810(c)(3)(C), Nasdaq has granted the Company a period of 180 calendar days, or until July 3, 2019, to regain
compliance with the Rule. The Company may regain compliance with the Rule at any time during this compliance period if the
minimum bid price for its common stock is at least $1.00 for a minimum of ten consecutive business days.
The Company effected
a 1-for-9 reverse stock split of its outstanding common stock effective June 19, 2019, in order to regain compliance
with the Rule. On July 5, 2019, Nasdaq informed the Company that it regained compliance with the Listing Rule and that the matter
was closed.
NOTE 14 – Stockholders’
Equity
Authorized Capital
Effective September 13, 2018, the Company
filed a certificate of amendment to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State
of Delaware in order to effect an increase of the total number of shares of common stock, $0.0001 par value per share, authorized
for issuance from 12,000,000 to a total of 24,000,000. Additionally, the Company is authorized to issue 714,286 shares of convertible
preferred stock with a par value of $0.0001 per share.
Description of Common Stock
Each share of common stock has the right
to one vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board
of directors.
Description of Series B Preferred
Stock
On October 18, 2016, the Company’s
board of directors approved, and the Company entered into, a Section 382 rights agreement, or the Rights Agreement, with Computershare
Inc., or the Rights Agent. The Rights Agreement provides for a dividend of one preferred stock purchase right, or a Right, for
each share of common stock, par value $0.0001 per share, of the Company outstanding on November 1, 2016, or the Record Date. Each
Right entitles the holder to purchase from the Company one one-thousandth of a share of Series B Preferred Stock, par value $0.0001
per share, or the Preferred Stock, for a purchase price of $10.00, subject to adjustment as provided in the Rights Agreement. The
description and terms of the rights are set forth in the Rights Agreement.
In connection with the adoption of the
Rights Agreement, the Company’s board of directors adopted a Certificate of Designation of Series B Preferred Stock. The
Certificate of Designation was filed with the Secretary of State of the State of Delaware and became effective on October 18, 2016.
The Company’s board of directors
adopted the Rights Agreement to protect shareholder value by guarding against a potential limitation on the Company’s ability
to use its net operating loss carryforwards, or NOLs, and other tax benefits, which may be used to reduce potential future income
tax obligations. The Company has experienced and continue to experience substantial operating losses, and under the Internal Revenue
Code of 1986, as amended, and rules promulgated thereunder, the Company may “carry forward” these NOLs and other tax
benefits in certain circumstances to offset any current and future earnings and thus reduce our income tax liability, subject to
certain requirements and restrictions. To the extent that the NOLs and other tax benefits do not otherwise become limited, the
Company believes that it will be able to carry forward a significant amount of NOLs and other tax benefits, and therefore these
NOLs and other tax benefits could be a substantial asset to the Company. However, if the Company experiences an “ownership
change,” as defined in Section 382 of the Code, its ability to use its NOLs and other tax benefits will be substantially
limited. Generally, an ownership change would occur if our shareholders who own, or are deemed to own, 5% or more of the Company’s
common stock increase their collective ownership in the Company by more than 50% over a rolling three-year period.
Sale of Common and Series C Preferred
Stock Units
On November 26, 2019,
the Company entered into a placement agency agreement with Dawson James Securities, Inc., with respect to the issuance and sale
of an aggregate of up to 448,949 shares of its common stock, par value $0.0001 per share, in a public offering. The offering closed
on November 29, 2019 and the final number of shares sold in the offering was 446,577. The public offering price for each share
was $3.50. The Company recorded gross proceeds from the sale of the shares of common stock of $1,563,000, and net proceeds from
the sale of the shares of common stock of $1,376,000, after deducting placement agent commissions and other offering expenses.
On November 16, 2018, the Company entered
into a placement agency agreement with Dawson James Securities, Inc. with respect to the issuance and sale of units, each unit
consisting of one share of common stock, par value $0.0001 per share or, in lieu of common stock, if purchasing common stock would
result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of the outstanding
common stock, shares of Series C convertible into shares of common stock, together with warrants to purchase one share of common
stock at an exercise price equal to $9.00 per whole share, in a public offering. The public offering price for each unit was $9.00.
The warrants offered in the public offering are Series C warrants and will terminate on the fifth anniversary of the date of issuance.
Each full warrant will entitle the holder to purchase one share of common stock at an initial exercise price of $9.00 per share.
The closing of the offering occurred on
November 21, 2018 and at such closing the Company sold 507,156 shares of common stock, 9.65 shares of Series C (convertible into
107,222 shares of common stock) and warrants to purchase up to 307,188 shares of common stock for gross proceeds of $5,530,000.
The net proceeds to the Company from the sale of the shares of common stock, or preferred stock, and the warrants was $4,743,000,
after deducting placement agent commissions and other estimated offering expenses payable by the Company.
Pursuant to the placement agency agreement,
the Company agreed to pay Dawson James Securities, Inc. a cash fee equal to 8% of the aggregate gross proceeds raised in this offering.
The Company also agreed to pay fees and expenses of the placement agent, not to exceed $167,500, and to issue to Dawson James Securities,
Inc., on the closing date, a unit purchase option for the purchase of up to 276,470 units to purchase up to 46,000 shares of common
stock, equal to 5% of the aggregate number of units sold in the public offering, with an exercise price of $11.25, or 125% of the
price per unit. The Benchmark Company, LLC provided certain financial advisory services. As compensation for services provided,
the Company made a cash payment of $74,000 and on November 16, 2018 issued common stock purchase warrants to purchase up to 7,639
shares of common stock. The common stock purchase warrants have an exercise price of $9.00 per share, become exercisable on the
180th day after the date of issuance and expire on November 16, 2023.
During the year ended March 31, 2019, investors
who participated in the transaction converted 8.10 shares of Series C into 90,000 shares of common stock.
At-the-Market Offering
On December 8, 2017, the Company entered
into an At Market Issuance Sales Agreement, with B. Riley FBR, Inc. (“B. Riley”) under which the Company may issue
and sell shares of its common stock having an aggregate offering price of up to $5,000,000 from time to time through B. Riley
acting as its sales agent. The Company will pay B. Riley a commission rate equal to 3.0% of the gross proceeds from the sale of
any shares of common stock sold through B. Riley as agent. For the year ended March 31, 2019, the Company sold 29,710 shares of
common stock for gross proceeds of $999,000 and net proceeds of $957,000 after deducting commissions and other offering expenses.
The At Market Issuance Sales Agreement was terminated on December 20, 2019.
NOTE 15 – Stock-Based Compensation
2006 Stock Plan
The board initially adopted the 2006 Stock
Incentive Plan on August 25, 2006. On December 14, 2006, the stockholders approved the 2006 Stock Incentive Plan which became
effective at the close of the Company’s initial public offering. The 2006 Stock Incentive Plan was later amended and restated
by a unanimous board resolution on April 26, 2007, and such amendments were subsequently approved by the stockholders. On
September 10, 2009, the Company’s shareholders approved a subsequent amendment to the 2006 Stock Incentive Plan. The 2006
Stock Incentive Plan, as amended and restated, is hereafter referred to as the “2006 Plan.”
The 2006 Plan provided for the granting
of incentive stock options to employees and the granting of non-statutory stock options to employees, non-employee directors, advisors
and consultants. The 2006 Plan also provided for grants of restricted stock, stock appreciation rights and stock unit awards to
employees, non-employee directors, advisors and consultants.
In accordance with the 2006 Plan the stated
exercise price may not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs
and NSOs, respectively, as determined by the board of directors at the date of grant. With respect to any 10% stockholder, the
exercise price of an ISO or NSO shall not be less than 110% of the estimated fair market value per share on the date of grant.
Options issued under the 2006 Plan generally
have a ten-year term.
2011 Stock Plan
On September 12, 2011, upon recommendation
of the board, the stockholders approved the Company’s 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan
is effective as of June 21, 2012.
The 2011 Plan provides for the grant of
incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, and the grant of non-statutory stock
options and stock purchase rights to employees, non-employee directors, advisors and consultants. The 2011 Plan also permits the
grant of stock appreciation rights, stock units and restricted stock.
The board has initially authorized 9,508
of the Company’s common stock for issuance under the 2011 Plan, in addition to automatic increases provided for in the 2011
Plan through April 1, 2021. The number of shares of the Company’s common stock reserved for issuance under the 2011 Plan
will automatically increase, with no further action by the stockholders, at the beginning of each fiscal year by an amount equal
to the lesser of (i) 15% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding
year, or (ii) an amount approved by the Company’s board of directors.
Options issued under the 2011 Plan will
generally have a ten-year term.
In accordance with the 2011 Plan, the stated
exercise price of an employee incentive stock option shall not be less than 100% of the estimated fair market value of a share
of common stock on the date of grant, and the stated exercise price of an non-statutory option shall not be less 85% of the estimated
fair market value of a share of common stock on the date of grant, as determined by the board of directors. An employee who owns
more than 10% of the total combined voting power of all classes of outstanding stock of the Company shall not be eligible for the
grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue
Code.
Shares subject to awards that expire unexercised
or are forfeited or terminated for any other reason will again become available for issuance under the 2011 Plan. No participant
in the 2011 Plan can receive option grants, stock appreciation rights, restricted shares, or stock units for more than 2,381 shares
in the aggregate in any calendar year. As provided under the 2011 Plan, the aggregate number of shares authorized for issuance
as awards under the 2011 Plan automatically increases on April 1 of each year by in an amount equal to the lesser of (i) 15% of
the outstanding shares on the last day of the immediately preceding year, or (ii) an amount determined by the board. During the
year ended March 31, 2019, the board of directors approved an increase of 102,863 shares authorized for issuance. During the year
ended March 31, 2020, the board of directors approved an increase of 197,450 shares authorized for issuance.
2016 Stock Plan
On September 2, 2016, upon recommendation
of the board, the stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016
Plan is effective as of September 2, 2016.
The 2016 Plan provides for the grant of
options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation
rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors
and consultants.
Options issued under the 2016 Plan will
generally have a ten-year term.
In accordance with the 2016 Plan, the stated
exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated
fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting
power of all classes of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option
unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue Code.
Shares subject to awards that expire unexercised
or are forfeited or terminated for any other reason will again become available for issuance under the 2016 Plan. No participant
in the 2016 Plan can receive more than 11,112 option grants, or other awards with respect to more than 13,334 shares in the aggregate
in any calendar year.
The board has authorized 44,445 of the
Company’s common stock for issuance under the 2016 Plan, in addition to automatic increases provided for in the 2016 Plan
through April 1, 2026. The number of shares of the Company’s common stock reserved for issuance under the 2016 Plan will
automatically increase, with no further action by the stockholders, at the beginning of each fiscal year by an amount equal to
the lesser of (i) 8% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding
year, or (ii) an amount determined by the Company’s board of directors. During the year ended March 31, 2019, the board of
directors approved an increase of 4,860 shares authorized for issuance. During the year ended March 31, 2020, the board of directors
approved an increase of 105,306 shares authorized for issuance.
Stock-Based Compensation
The Company issues service, performance
and market-based stock options to employees and non-employees. The Company estimates the fair value of service and performance
stock option awards using the Black-Scholes option pricing model. The Company estimates the fair value of market-based stock option
awards using a Monte-Carlo simulation. Compensation expense for stock option awards is amortized on a straight-line basis over
the awards’ vesting period. Compensation expense includes the impact of an estimate for forfeitures for all stock options.
The expected term of the stock options
represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated
using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for
“plain vanilla” options. The expected stock price volatility for the Company’s stock options was determined by
using an average of the historical volatilities of the Company and its industry peers. The Company will continue to analyze the
stock price volatility and expected term assumptions as more data for the Company’s common stock and exercise patterns become
available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the
expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and
expectation of dividend payouts.
The Company estimated the fair value of
employee and non-employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options
is being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair value of employee
stock options was estimated using the following weighted-average assumptions:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Fair value of the Company’s common stock on date of grant
|
|
$
|
4.36
|
|
|
$
|
10.71
|
|
Expected term
|
|
|
5.30 yrs
|
|
|
|
5.38 yrs
|
|
Risk-free interest rate
|
|
|
1.6993%
|
|
|
|
2.61%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Volatility
|
|
|
122.4%
|
|
|
|
121.5%
|
|
Fair value of options granted
|
|
$
|
3.69
|
|
|
$
|
9.00
|
|
Share-based awards compensation expense is as follows:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cost of revenues
|
|
$
|
94,000
|
|
|
$
|
90,000
|
|
Research and development
|
|
|
102,000
|
|
|
|
107,000
|
|
Selling, general and administrative
|
|
|
643,000
|
|
|
|
1,379,000
|
|
Total stock-based compensation
|
|
$
|
839,000
|
|
|
$
|
1,576,000
|
|
At March 31, 2020, there were unrecognized
compensation costs of $690,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 0.7 years.
At March 31, 2020, there were unrecognized
compensation costs of $17,000 related to restricted stock which is expected to be recognized over a weighted-average amortization
period of 1.5 years.
No income tax benefit has been recognized
relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.
Stock-Based Award Activity
Stock-based awards outstanding at March
31, 2020 under the various plans are as follows:
|
|
|
|
|
Unvested
|
|
|
|
|
Plan
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Total
|
|
2006 Plan
|
|
|
7,000
|
|
|
|
–
|
|
|
|
7,000
|
|
2011 Plan
|
|
|
170,000
|
|
|
|
–
|
|
|
|
170,000
|
|
2016 Plan
|
|
|
157,000
|
|
|
|
2,000
|
|
|
|
159,000
|
|
Granted outside shareholder approved plans
|
|
|
44,000
|
|
|
|
–
|
|
|
|
44,000
|
|
|
|
|
378,000
|
|
|
|
2,000
|
|
|
|
380,000
|
|
Stock-based awards available for grant as of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
442,000
|
|
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, 2019
|
|
|
165,000
|
|
|
$
|
72.81
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
278,000
|
|
|
|
4.37
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(45,000
|
)
|
|
|
9.53
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(20,000
|
)
|
|
|
140.00
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
378,000
|
|
|
$
|
26.55
|
|
|
|
7.54
|
|
|
$
|
128,000
|
|
Exercisable at March 31, 2020
|
|
|
126,000
|
|
|
$
|
66.04
|
|
|
|
3.38
|
|
|
$
|
–
|
|
The aggregate intrinsic value of stock options is calculated
as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock,
or $4.90 per share at March 31, 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, 2019
|
|
|
4,000
|
|
|
$
|
27.99
|
|
Restricted stock awards granted
|
|
|
–
|
|
|
|
–
|
|
Restricted stock awards vested
|
|
|
(2,000
|
)
|
|
|
39.02
|
|
Restricted stock awards forfeited
|
|
|
–
|
|
|
|
48.15
|
|
Unvested restricted stock awards outstanding at March 31, 2020
|
|
|
2,000
|
|
|
$
|
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.
NOTE 16 – Income Taxes
The Company has the following net deferred
tax assets:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
27,948,000
|
|
|
$
|
28,118,000
|
|
Research and development tax credit carryforwards
|
|
|
1,850,000
|
|
|
|
1,850,000
|
|
Stock-based compensation
|
|
|
3,803,000
|
|
|
|
3,795,000
|
|
Allowances and accruals
|
|
|
1,099,000
|
|
|
|
1,142,000
|
|
Other deferred tax assets
|
|
|
731,000
|
|
|
|
252,000
|
|
State income taxes
|
|
|
1,000
|
|
|
|
1,000
|
|
Basis difference in assets
|
|
|
6,000
|
|
|
|
14,000
|
|
Lease liability
|
|
|
226,000
|
|
|
|
–
|
|
Gross deferred tax assets
|
|
$
|
35,664,000
|
|
|
$
|
35,172,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(35,297,000
|
)
|
|
|
(35,172,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
367,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(5,000
|
)
|
|
|
–
|
|
Prepaid expenses
|
|
|
(143,000
|
)
|
|
|
–
|
|
Right of Use asset
|
|
|
(219,000
|
)
|
|
|
–
|
|
Gross deferred tax liabilities
|
|
|
(367,000
|
)
|
|
|
–
|
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
The income tax provision (benefit) is based
on the following loss before income taxes, which are from domestic sources and foreign loss before income taxes:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
1,425,000
|
|
|
$
|
10,088,000
|
|
Foreign
|
|
|
227,000
|
|
|
|
1,252,000
|
|
|
|
$
|
1,652,000
|
|
|
$
|
11,340,000
|
|
The Company’s income tax expense/(benefits)
consist of the following:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
State
|
|
$
|
3,000
|
|
|
$
|
2,000
|
|
Foreign
|
|
|
118,000
|
|
|
|
456,000
|
|
|
|
|
121,000
|
|
|
|
458,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
–
|
|
|
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
Foreign
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
121,000
|
|
|
$
|
458,000
|
|
A reconciliation of the statutory federal
income tax rate to the Company’s effective tax rate for continuing operations is as follows:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected federal statutory rate
|
|
|
21.0%
|
|
|
|
21.08%
|
|
State income taxes, net of federal benefit
|
|
|
11.0%
|
|
|
|
4.5%
|
|
Research and development credit
|
|
|
0.0%
|
|
|
|
0.6%
|
|
Foreign earnings taxed at different rates
|
|
|
0.6%
|
|
|
|
1.3%
|
|
Effect of state net operating loss expiration
|
|
|
(0.1%
|
)
|
|
|
(3.0%
|
)
|
Effect of permanent differences
|
|
|
(14.0%
|
)
|
|
|
(4.3%
|
)
|
Effect of other foreign permanent differences
|
|
|
5.6%
|
|
|
|
(4.0%)
|
|
True-up of state deferred assets
|
|
|
(19.9%
|
)
|
|
|
1.5%
|
|
GILTI income
|
|
|
(1.4%
|
)
|
|
|
–
|
|
|
|
|
2.8%
|
|
|
|
17.6%
|
|
Change in valuation allowance
|
|
|
(10.1%
|
)
|
|
|
21.6%
|
|
Totals
|
|
|
(7.3%
|
)
|
|
|
(4.0%
|
)
|
As of March 31, 2020, the Company had net
operating loss carryforwards for Federal, California and Foreign income tax purposes of approximately $106,400,000, $42,300,000
and $3,100,000, respectively. Due to the Tax Cuts and Job Act, Federal net operating losses generated after March 31, 2018 have
an indefinite life. Federal net operating loss generated on and before March 31, 2017 will begin to expire in 2024, if not utilized.
State and Foreign net operating losses will begin to expire in the year 2029 and 2028, respectively, if not fully utilized. As
of March 31, 2020, the Company had Federal and California research credit carryforward of approximately $1,000,000 and $790,000,
respectively. The Federal research credits will begin to expire in 2024 while the California research credits have no expiration
date. In addition, the Company has foreign tax credit of $50,000, which begin to expire in the fiscal year ending March 31, 2023
if not utilized.
Section 382 of the Internal Revenue Code
limits the use of the Federal net operating losses in certain situations where changes occur in stock ownership of a company. If
the Company should have an ownership change of more than 50% of the value of the Company’s capital stock, utilization of
the carryforwards could be restricted. The Company is not aware of any changes in ownership that would result in a change in control
under Internal Revenue Code Section 382. The Company, after considering all available evidence, fully reserved against all deferred
tax assets since it is more likely than not such benefit will not be realized in future periods. The Company has incurred losses
for financial reporting for the year ended March 31, 2020. However, for income tax purposes, the Company is in an income position.
In the current year, there are certain non-recurring sales and significant temporary adjustments that will reverse in future years
which contributed to the taxable loss. The Company anticipates losses in the future for both financial accounting and tax purposes.
Accordingly, the Company is continuing to fully reserve for its deferred tax assets. The Company will continue to evaluate its
deferred tax assets to determine whether any changes in circumstances could affect the realization of its future benefit. If it
is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards,
the valuation allowance will be reduced accordingly.
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.
The Company has identified its federal
tax return and its state tax return in California as major tax jurisdictions. The Company also filed tax returns in foreign jurisdictions,
principally Mexico and The Netherlands. The Company’s evaluation of uncertain tax matters was performed for tax years ended
through March 31, 2020. Generally, the Company is subject to audit for the years ended March 31, 2019, 2018 and 2017 and may be
subject to audit for amounts relating to net operating loss carryforwards generated in periods prior to March 31, 2019. The Company
has elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income
taxes, and continues to reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of
its income tax provision or benefit as well as its outstanding income tax assets and liabilities. The Company believes that its
income tax positions and deductions would be sustained on audit and does not anticipate any adjustments, other than those identified
above that would result in a material change to its financial position.
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 12 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.
On March 27, 2020 Congress approved and
the President signed the Coronavirus Aid Relief, and Economic Security (“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 that there were no material impacts to the income tax
provision as of the year ended March 31, 2020.
NOTE 17 – Employee Benefit
Plan
The Company has a program to contribute
and administer a qualified 401(k) plan. Under the 401(k) plan, the Company matches employee contributions to the plan up to 4%
of the employee’s salary. Company contributions to the plan amounted to an aggregate of $155,000 and $275,000 for the years
ended March 31, 2020 and 2019, respectively.
NOTE 18 – Geographic Information
The Company generates product revenues
from products which are sold into the human and animal healthcare markets, and the Company generates service revenues from laboratory
testing services which are provided to medical device manufacturers.
The following table shows the Company’s
product revenues by geographic region:
|
|
Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
6,633,000
|
|
|
$
|
9,040,000
|
|
Latin America
|
|
|
3,684,000
|
|
|
|
3,962,000
|
|
Europe and Rest of the World
|
|
|
7,460,000
|
|
|
|
4,879,000
|
|
Total
|
|
$
|
17,777,000
|
|
|
$
|
17,881,000
|
|
The Company’s service revenues amounted
to $1,159,000 and $1,089,000 for the years ended March 31, 2020 and 2019, respectively.
NOTE 19 – Subsequent
Events
Sale
of Micromed Laboratories Division
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, $100,000 for future testing services we obtain from Infinity Labs over the next
two years, and $60,000 is 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
a small amount of liabilities. As part of the transaction, Infinity Labs also assumed the Petaluma lease for the office and lab
space. The Company retained the warehouse space to store inventory and assets until it completes its move.
Paycheck
Protection Plan Loan
On May 1, 2020, the Company received loan
proceeds in the amount of $1,300,000 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 eight- or 24-week 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. We intend to use 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.
Change
in Chief Financial Officer
Effective on April
14, 2020, the Board of Directors appointed Grant Edwards as Chief Financial Officer.
Proceeds from the Exercise of Warrants
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.
On May 29, 2020, the Company issued 3,602
shares of common stock upon the cashless exercise of a common stock purchase warrant from the November 2018 placement.
Exercise of Series C
On June 2, 2020, investors who participated
in the November 2018 placement converted 1.55 shares of Series C into 17,222 shares of common stock. There are no further shares
of Series C outstanding after June 2, 2020.