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 is located in Petaluma, California. The Company is a specialty
pharmaceutical company dedicated to identifying, developing and commercializing unique, differentiated therapies to patients living
with chronic skin conditions. The Company believes its products, which are sold throughout the United States and internationally,
have improved patient outcomes by treating and reducing certain skin diseases including acne, atopic dermatitis, scarring,
infections, itch, pain and harmful inflammatory responses.
NOTE 2 – Liquidity
and Financial Condition
The Company reported a net loss of $14,328,000
for the year ended March 31, 2018. At March 31, 2018 and March 31, 2017, the Company’s accumulated deficit amounted to $157,440,000
and $143,101,000, respectively. The Company had working capital of $12,993,000 and $19,355,000 as of March 31, 2018 and March
31, 2017, respectively. The Company expects to continue incurring losses for the foreseeable future and may need to raise additional
capital to pursue its product development initiatives, and penetrate markets for the sale of its products.
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, 2018, the Company sold 228,000 shares
of common stock for gross proceeds of $1,034,000 and net proceeds of $968,000 after deducting commissions and other offering expenses.
On March 2, 2018, the Company entered
into a placement agency agreement with Dawson James Securities, Inc. Dawson James Securities, Inc. acted as the lead placement
agent and The Benchmark Company, LLC acted as a co-placement agent in the public offering. On March 6, 2018, the Company sold
1,428,570 shares of its common stock at a public offering price of $3.50 per share, for gross proceeds of $5,000,000 and net proceeds
of $4,500,000 after deducting commissions and other offering expenses.
The Company expects to continue incurring
losses for the foreseeable future and may need to raise additional capital to pursue its product development initiatives, to penetrate
markets for the sale of its products and continue as a going concern. The Company cannot provide any assurances that it will be
able to raise additional capital.
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 take additional
measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These
measures could cause significant delays in the Company’s continued efforts to commercialize its products, which is critical
to the realization of its business plan and the future operations of the Company. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not
include any adjustments that may be necessary should the Company be unable to continue as a going concern.
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.
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 and Accounts
Receivable
The Company generates revenue from 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 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 records revenue when (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectability
of the sale is reasonably assured.
The Company requires all product sales
to be supported by evidence of a sale transaction that clearly indicates the selling price to the customer, shipping terms and
payment terms. Evidence of an arrangement generally consists of a contract or purchase order approved by the customer. The Company
has ongoing relationships with certain customers from which it customarily accepts orders by telephone in lieu of purchase orders.
The Company recognizes revenue at the
time it receives confirmation that the goods were either tendered at their destination, when shipped “FOB destination,”
or transferred to a shipping agent, when shipped “FOB shipping point.” Delivery to the customer is deemed to have
occurred when the customer takes title to the product. Generally, title passes to the customer upon shipment, but could occur
when the customer receives the product based on the terms of the agreement with the customer.
The selling prices of all goods are fixed,
and agreed to with the customer, prior to shipment. Selling prices are generally based on established list prices. The right to
return product is customarily based on the terms of the agreement with the customer. The Company estimates and accrues for potential
returns and records this as a reduction of revenue in the same period the related revenue is recognized. Additionally, distribution
fees are paid to certain wholesale distributors based on contractually determined rates. The Company estimates and accrues the
fee on shipment to the respective wholesale distributors and recognizes the fee as a reduction of revenue in the same period the
related revenue is recognized. The Company also offers cash discounts to certain customers, generally 2% of the sales price, as
an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount
amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized. Additionally,
the Company participates in certain rebate programs which provide discounted prescriptions to qualified patients. The Company
contracts with a third-party to administer the program. The Company estimates and accrues for future rebates based on historical
data for rebate redemption rates and the historical value of redemptions. Rebates are recognized as a reduction of revenue in
the same period the related revenue is recognized. The estimates for future rebates and distribution fees are reported as allowances
in Accounts Receivable, net in the accompanying consolidated balance sheets.
The Company evaluates the creditworthiness
of new customers and monitors the creditworthiness of its existing customers to determine whether an event or changes in their
financial circumstances would raise doubt as to the collectability of a sale at the time in which a sale is made. Payment terms
on sales made in the United States are generally 30 days and are extended up to 90 days for initial product launches, payment
terms internationally generally range from prepaid prior to shipment to 90 days.
In the event a sale is made to a customer
under circumstances in which collectability is not reasonably assured, the Company either requires the customer to remit payment
prior to shipment or defers recognition of the revenue until payment is received. The Company maintains a reserve for amounts
which may not be collectible due to risk of credit losses.
In the event a sale is made to a customer
under circumstances in which returns cannot be estimated, the Company defers recognition of the revenue until sell-through is
confirmed.
Product license revenue is generated through
agreements with strategic partners for the commercialization of Microcyn® products. The terms of the agreements sometimes
include non-refundable upfront fees. The Company analyzes multiple element arrangements to determine whether the elements can
be separated. Analysis is performed at the inception of the arrangement and as each product is delivered. If a product or service
is not separable, the combined deliverables are accounted for as a single unit of accounting and recognized over the performance
obligation period.
When appropriate, the Company defers recognition
of non-refundable upfront fees. If the Company has continuing performance obligations then such up-front fees are deferred and
recognized over the period of continuing involvement.
The Company recognizes royalty revenues
from licensed products upon the sale of the related products.
Revenue from consulting contracts is recognized
as services are provided. Revenue from testing contracts is recognized as tests are completed and a final report is sent to the
customer.
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, 2018, one customer represented 36%, and
one customer represented 18% of the net accounts receivable balance. For the year ended March 31, 2018, one customer represented
22%, one customer represented 19%, one customer represented 13%, and one customer represented 12% of net revenues. At March 31,
2017, one customer represented 26%, one customer represented 12%, and one customer represented 10% of the net accounts receivable
balance. For the year ended March 31, 2017, one customer represented 12% and two customers each 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, 2018 and 2017 in the
amounts of $17,000 and $14,000, respectively. Additionally at March 31, 2018 and 2017, the Company has allowances of $1,275,000
and $672,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included
in Accounts Receivable, net in the accompanying 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 $111,000 and
$61,000 at March 31, 2018 and 2017, 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 accrued expenses 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, 2018 and 2017, 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, 2018
and 2017, the Company had noted no indicators of impairment.
Research and Development
Research and development expense is charged
to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies. For the
years ended March 31, 2018 and 2017, research and development expense amounted to $1,575,000 and $1,576,000, respectively.
Advertising Costs
Advertising costs are charged to operations
as incurred. Advertising costs amounted to $177,000 and $149,000, for the years ended March 31, 2018 and 2017, 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, 2018 and 2017, the Company recorded revenue
related to shipping and handling costs of $46,000 and $49,000, 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
$203,000 and $324,000 for the years ended March 31, 2018 and 2017, respectively. These amounts were recorded in other comprehensive
(loss) income in the accompanying consolidated statements of comprehensive (loss) income for the years ended March 31, 2018 and
2017.
Foreign currency transaction
gains (losses) relate primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and
SP Europe. These transactions are expected to be settled in the foreseeable future. The Company recorded foreign
currency transaction losses of $208,000, and foreign currency transaction gains of $107,000 and $36,000, for the years ended March
31, 2018 and 2017, respectively. The related amounts were recorded in other (expense) income, net, 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) Income
Other comprehensive (loss) income 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, 2018 and 2017 were $3,975,000 and $4,178,000, respectively.
Net (Loss) Income per Share
The Company computes basic net (loss)
income per share by dividing net (loss) 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. The computation
of basic (loss) income per share for the years ended March 31, 2018 and 2017 excludes the potentially dilutive securities summarized
in the table below because their inclusion would be anti-dilutive.
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Restricted stock units
|
|
|
32,000
|
|
|
|
34,000
|
|
Options to purchase common stock
|
|
|
1,393,000
|
|
|
|
899,000
|
|
Warrants to purchase common stock
|
|
|
1,375,000
|
|
|
|
1,344,000
|
|
|
|
|
2,800,000
|
|
|
|
2,277,000
|
|
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 March 2016 the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update simplifies the accounting
for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax
withholding requirements, as well as classification in the statement of cash flows.
On April 1, 2017,
the Company adopted ASU No. 2016-09. As a result of adopting ASU No. 2016-09, the Company has made an accounting policy
election to account for forfeitures as they occur. This change has been applied on a modified retrospective basis, with no material
impacts on the Company’s consolidated financial statements. The adoption of ASU No. 2016-09 also requires excess tax
benefits and tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest
or are settled and recognize all previously unrecognized excess tax benefits and tax deficiencies upon adoption as a cumulative-effect
adjustment to retained earnings. As of April 1, 2017, the Company recognized excess tax benefit of approximately $533,000 as an
increase to deferred tax assets. However, the entire amount was offset by a full valuation allowance. Accordingly, no cumulative-effect
adjustment to retained earnings was recorded as of March 31, 2018.
Recent Accounting Standards
Financial Instruments
In January 2016, the FASB issued ASU 2016-01
Financial
Instruments-Overall
, which address certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Earlier application is permitted under specific circumstances. The Company has determined there
will not be a material impact on the Company’s consolidated financial position and results of operations upon adoption of
this topic.
Statement of Cash Flows
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic 230)
. This amendment will provide guidance on the presentation and classification
of specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years,
and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company has
determined there will not be a material impact on the Company’s consolidated financial position and results of operations
upon adoption of this topic.
In November 2016, the FASB issued ASU
No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) that changes the presentation of
restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, but early adoption is permissible. The Company has determined there will not be a material
impact on the Company’s consolidated financial position and results of operations upon adoption of this topic.
Leases
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 standard will be effective for annual and interim periods beginning after December 15, 2018, with early
adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated
financial statements and related disclosures.
Revenue
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition
to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial
Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer
of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature,
amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization
and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing
estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments
of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited. Entities
can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In August
2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers
by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods beginning
after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. While
the Company has provided expanded disclosures as a result of ASU No. 2014-09, this standard is not expected to have a material
impact on its results of operations and financial condition. In March 2016, the FASB issued ASU 2016-08
Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)
which finalizes its amendments to the guidance in the new revenue standard
on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity
reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-10
Identifying Performance Obligations and
Licensing
, which finalizes its amendments to the guidance in the new revenue standard regarding the identification of performance
obligations and accounting for the license of intellectual property. In May 2016, the FASB issued ASU 2016-12
Narrow-Scope
Improvements and Practical Expedients
, which finalizes its amendments to the guidance in the new revenue standard on collectability,
noncash consideration, presentation of sales tax, and transition. In December 2016, the FASB issued ASU 2016-20,
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which continues the FASB’s ongoing
project to issue technical corrections and improvements to clarify the codification or correct unintended applications of guidance.
In September 2017, the FASB issued ASU 2017-13,
Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic
606), Leases (Topic 840), and Leases (Topic 842),
which provides additional implementation guidance on the previously issued
ASU 2014-09. The amendments are intended to make the guidance more operable and lead to more consistent application. The amendments
have the same effective date and transition requirements as the new revenue recognition standard. The Company has adopted Topic
606 as of April 1, 2018 and the Company has concluded that it will utilize the modified retrospective method of adoption. The
Company has determined there will not be a material impact on the Company’s consolidated financial position and results
of operations upon adoption of this topic.
Business Combinations
In January 2017, the FASB issued an ASU
2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The amendments in this Update
is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas
of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning
after December 15, 2017, including interim periods within those periods. The Company has determined there will not be a material
impact on the Company’s consolidated financial position and results of operations upon adoption of this topic.
Stock Compensation
In May 2017, the FASB issued ASU No. 2017-09,
Compensation–Stock Compensation
(Topic 718):
Scope of Modification Accounting
, clarifying when a change to
the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification
accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after
a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning
on April 1, 2018, with early adoption permitted. The Company has determined there will not be a material impact on the Company’s
consolidated financial position and results of operations upon adoption of this topic.
Reporting Comprehensive
Income
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 provides financial statement
preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings
in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform (or portion thereof)
is recorded. 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 Company does not believe that the adoption of this guidance
will have a material impact on the Company's consolidated financial statements due the presence of a full valuation allowance.
However, the Company is in the process of evaluating the impact of this new guidance on the Company's consolidated financial statements
and disclosures.
Accounting standards that have been issued
or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 - Disposition of Latin American Operations
Description of Sale to Invekra
On October 27,
2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V. (“OTM”),
closed on an asset purchase agreement with Invekra, S.A.P.I de C.V. (“Invekra”), an affiliate of Laboratorios Sanfer
S.A. de C.V., for the sale of certain of its Latin America assets. Specifically, the Company agreed to sell certain patents, patent
applications, trademarks and territory rights for Mexico, the Caribbean and South America, excluding the sale of dermatology products
in Brazil, as well as to build and deliver equipment that Invekra will use to produce its own product.
The aggregate purchase price that Invekra
will pay for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was paid on March 16, 2017 upon
the delivery of certain equipment, and $2,500,000 is to be paid in Mexican currency in quarterly installments over a period of
ten years from closing as consideration for the provision of certain services and providing technical assistance, calculated as
three percent on net sales of certain products in Latin America, excluding Mexico. Because the $2,500,000 is to be paid in foreign
currency, the Company may receive more or less than $2,500,000 due to currency fluctuations.
In connection with the asset purchase
agreement, the Company agreed to provide the technology, know-how and assistance to Invekra to enable Invekra to manufacture on
its own the products as currently produced by the Company (“Technical Services Arrangement”), and continue to supply
product to Invekra for a two year transition period from the Sale Date, which was extended to October 27, 2020. During the years
ended March 31, 2018 and 2017, the Company reported $3,007,000 and $1,299,000, respectively, of Latin America product revenue
related to the Supply Agreement with Invekra. During the year ended March 31, 2018, the Company recorded $208,000 of service revenue
related to providing technical assistance and $189,000 of interest income related to a discount on deferred consideration.
The Company will provide product under
the Supply Agreement at a reduced price from its current price list, while Invekra builds its own manufacturing line. At the conclusion
of the transition period, the Company will cease to be a supplier of product to Invekra. The Company is uncertain as to the duration
of the transition period or when Invekra will complete the build out of its manufacturing line. Pursuant to the Supply Agreement,
the Company is subject to a potential penalty for failure to supply the products for a consecutive period of six months. The penalty,
if triggered, will require the Company to make a one-time payment of $2,000,000 to Invekra. The penalty decreases by 12.5% each
quarter of the term of the supply period. The Company does not expect to incur this penalty.
Accounting for the disposition
For accounting purposes, the Company determined
that there were three discrete components of the sale to Invekra. These components were the intellectual property and territory
rights, the services to be provided under the Technical Services Arrangement and the production equipment to be manufactured for
Invekra.
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:
Component of Sale
|
|
Methodology to Estimate Selling Price
|
Services under the Technical Services Arrangement
|
|
Based upon revenues expected from a market participant to provide technical services at
expected service levels
|
Production equipment manufactured
|
|
Based upon an expected selling price derived from costs marked up to selling price at market
participant margins
|
Intellectual property and territory rights
|
|
Based upon a discounted cash flow analysis of the benefit to Invekra of producing rather
than purchasing its product and operating royalty free
|
The Company determined proceeds, net of estimated transaction
costs and net of the discount to adjust for consideration to be received in the future. The total proceeds were as follows:
Cash received on October 27, 2016
|
|
$
|
18,000,000
|
|
Cash received on March 16, 2017
|
|
|
1,500,000
|
|
Face value of variable consideration ($250,000 per year for ten years)
|
|
|
2,500,000
|
|
Total proceeds from sale
|
|
|
22,000,000
|
|
Equipment costs
|
|
|
(305,000
|
)
|
Transaction costs
|
|
|
(556,000
|
)
|
Total proceeds, net of transaction costs
|
|
|
21,139,000
|
|
Discount on variable consideration (using a 7.5% discount rate)
|
|
|
(752,000
|
)
|
Total proceeds, net of discount
|
|
$
|
20,387,000
|
|
Proceeds were allocated to the components of the sale based
upon their relative selling prices are as follows:
Services under the Technical Services Arrangement
|
|
$
|
708,000
|
|
Production equipment manufactured, net
|
|
|
192,000
|
|
Intellectual property and territory rights
|
|
|
19,487,000
|
|
Total proceeds
|
|
$
|
20,387,000
|
|
The proceeds related to the intellectual
property and territory rights were included in gain on sale on the date of the sale. The proceeds allocated to the services under
the Technical Services Agreement were recorded in deferred revenue as of the date of the sale and will be recognized as technical
services are provided. The proceeds related to the production equipment to be manufactured were included in deferred gain and
will be recognized upon delivery of the equipment.
Discontinued operations
As of March 31, 2017, the Company determined
that the sale of its Latin American operations to Invekra 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 consolidated
statement of operations. This includes the direct labor and materials for the product delivered to Invekra, the revenue on the
sales to Invekra and the gain on the sale to Invekra, net of tax.
The operations of its Latin American business
included in discontinued operations is summarized as follows:
|
|
Year Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
3,105,000
|
|
Cost of revenues
|
|
|
–
|
|
|
|
561,000
|
|
Income from discontinued operations before tax
|
|
|
–
|
|
|
|
2,544,000
|
|
Gain on disposal of discontinued operations before income taxes
|
|
|
–
|
|
|
|
19,679,000
|
|
Total income from discontinued operations, before tax
|
|
|
–
|
|
|
|
22,223,000
|
|
Income tax expense
|
|
|
–
|
|
|
|
(4,280,000
|
)
|
Income from discontinued operations, net of tax
|
|
$
|
–
|
|
|
$
|
17,943,000
|
|
NOTE 5 – Accounts Receivable
Accounts receivable, net consists of the
following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
2,829,000
|
|
|
$
|
2,794,000
|
|
Less: allowance for doubtful accounts
|
|
|
(17,000
|
)
|
|
|
(14,000
|
)
|
Less: discounts, rebates, distributor fees and returns
|
|
|
(1,275,000
|
)
|
|
|
(672,000
|
)
|
|
|
$
|
1,537,000
|
|
|
$
|
2,108,000
|
|
NOTE 6 – Inventories
Inventories consist of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
1,619,000
|
|
|
$
|
1,480,000
|
|
Finished goods
|
|
|
1,246,000
|
|
|
|
741,000
|
|
|
|
$
|
2,865,000
|
|
|
$
|
2,221,000
|
|
NOTE 7 – Prepaid Expenses
and Other Current Assets
Prepaid expenses and other current assets
consist of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid insurance
|
|
$
|
440,000
|
|
|
$
|
587,000
|
|
Prepaid rebates
|
|
|
270,000
|
|
|
|
–
|
|
Tax prepaid to Mexican tax authorities
|
|
|
215,000
|
|
|
|
–
|
|
Other prepaid expenses and other current assets
|
|
|
622,000
|
|
|
|
29,000
|
|
|
|
$
|
1,547,000
|
|
|
$
|
616,000
|
|
The long-term portion of the prepayment
to the Mexican tax authorities amounted to $399,000 and is recorded in other assets in the accompanying March 31, 2018 balance
sheet.
NOTE 8 – Property and
Equipment
Property and equipment consists of the
following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Manufacturing, lab, and other equipment
|
|
$
|
3,653,000
|
|
|
$
|
3,319,000
|
|
Office equipment
|
|
|
361,000
|
|
|
|
324,000
|
|
Furniture and fixtures
|
|
|
100,000
|
|
|
|
91,000
|
|
Leasehold improvements
|
|
|
592,000
|
|
|
|
536,000
|
|
|
|
|
4,706,000
|
|
|
|
4,270,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(3,570,000
|
)
|
|
|
(3,031,000
|
)
|
|
|
$
|
1,136,000
|
|
|
$
|
1,239,000
|
|
Depreciation and amortization expense
amounted to $490,000 and $248,000 for the years ended March 31, 2018 and 2017, respectively.
During the year ended March 31, 2018,
the Company did not incur a loss or gain on the disposal of property and equipment. During the year ended March 31, 2017, the
Company realized a loss of $10,000 on the disposal of property and equipment. This amount was recorded within operating expenses
in the accompanying consolidated statements of comprehensive (loss) income.
NOTE 9 – Accrued Expenses
and Other Current Liabilities
Accrued expenses and other current liabilities
consist of the following:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salaries and related costs
|
|
$
|
817,000
|
|
|
$
|
681,000
|
|
Professional fees
|
|
|
206,000
|
|
|
|
79,000
|
|
Other
|
|
|
383,000
|
|
|
|
542,000
|
|
|
|
$
|
1,406,000
|
|
|
$
|
1,302,000
|
|
NOTE 10 – Long-Term
Debt
Financing of Insurance Premiums
On February 1, 2017, the Company entered
into a note agreement for $84,000 with an interest rate of 5.60% per annum with final payment on December 1, 2017. This instrument
was issued in connection with financing insurance premiums. The note is payable in monthly installments of $8,600. During the
year ended March 31, 2017, the Company made principal and interest payments in the amounts of $8,000 and $340, respectively. During
the year ended March 31, 2018, the Company made principal and interest payments in the amounts of $76,000 and $840, respectively.
There is no outstanding balance on this note as of March 31, 2018.
On March 10, 2017, the Company entered
into a note agreement for $36,000 with an interest rate of 5.60% per annum with final payment on December 1, 2017. This instrument
was issued in connection with financing insurance premiums. The note is payable in monthly installments of $4,100. During the
year ended March 31, 2017, the Company did not pay principal or interest on this note. During the year ended March 31, 2018, the
Company made principal and interest payments in the amounts of $36,000 and $400, respectively. There is no outstanding balance
on this note as of March 31, 2018.
On February 1, 2018, the Company entered
into a note agreement for $241,000 with an interest rate of 5.81% per annum with final payment on December 1, 2018. This instrument
was issued in connection with financing insurance premiums. The note is payable in monthly installments of $25,000. During the
year ended March 31, 2018, the Company made principal and interest payments in the amounts of $24,000 and $1,000, respectively.
The remaining balance of $217,000 is included in the current portion of long-term debt in the accompanying consolidated balance
sheet.
Financing of Automobiles
On August 10, 2016, the Company entered
into a note agreement for $26,000 with an interest rate of 2.49% per year, and a monthly payment of $432. This instrument was
issued in connection with the financing of an automobile. During the year ended March 31, 2017, the Company made principal and
interest payments related to this note in the amounts of $4,000 (includes a first installment payment of $2,000) and $336, respectively.
During the year ended March 31, 2018, the Company made principal and interest payments related to this note in the amounts of
$4,000 and $350, respectively. The remaining balance of this note amounted to $18,000 at March 31, 2018, of which $5,000 is included
in the current portion of long-term debt in the accompanying consolidated balance sheet.
On September 27, 2016, the Company entered
into a note agreement for $38,000 with an interest rate of 0%, and monthly payment of $630. This instrument was issued in connection
with the financing of an automobile. During the year ended March 31, 2017, the Company made principal payments related to this
note in the amount of $4,000. During the year ended March 31, 2018, the Company made principal payments related to this note in
the amount of $8,000. The remaining balance of this note amounted to $27,000 at March 31, 2018, of which $8,000 is included in
the current portion of long-term debt in the accompanying consolidated balance sheet.
Principal note payments due in years subsequent
to March 31, 2018 are as follows:
For Years Ending March 31,
|
|
|
|
2019
|
|
$
|
230,000
|
|
2020
|
|
|
13,000
|
|
2021
|
|
|
13,000
|
|
2022
|
|
|
6,000
|
|
Total minimum payments
|
|
$
|
262,000
|
|
Less: current portion
|
|
|
(230,000
|
)
|
Long-term portion
|
|
$
|
32,000
|
|
NOTE 11 – Capital Leases
During March
2017, the Company entered into a fleet capital lease. The Company at various times from March 2017 to March 31, 2018 leased automobiles
through the lease agreement. The aggregate cost of the assets financed is $422,000 and for the year ended March 31, 2018 the Company
recorded depreciation expense of $154,000. The present value of the minimum lease payments was calculated using discount rates
of ranging from 9.7% to 10.9%. Lease payments, including amounts representing interest, amounted to $750 for the year ended March
31, 2017. Lease payments, including amounts representing interest, amounted to $168,000 for the year ended March 31, 2018. During
the year ended March 31, 2018, the Company made principal and interest payments related to capital leases in the amounts of $132,000
and $37,000, respectively. The remaining principal balance on these obligations amounted to $291,000 at March 31, 2018, including
$147,000 included in the current portion of capital lease obligations in the accompanying consolidated balance sheet.
The Company recorded
interest expense in connection with these lease agreements in the amount of $36,000 for the year ended March 31, 2018.
Minimum capital lease payments due
in years subsequent to March 31, 2018 are as follows:
For Years Ending March 31,
|
|
|
|
2019
|
|
$
|
170,000
|
|
2020
|
|
|
149,000
|
|
Total minimum lease payments
|
|
$
|
319,000
|
|
Less: amounts representing interest
|
|
|
(28,000
|
)
|
Present value of minimum lease payments
|
|
|
291,000
|
|
Less: current portion
|
|
|
(147,000
|
)
|
Long-term portion
|
|
$
|
144,000
|
|
NOTE 12 – Commitments
and Contingencies
Lease Commitments
On June 23, 2016, the Company entered
into Amendment No. 8 to its property lease agreement, extending the lease on its Petaluma, California facility to September 30,
2024. The lease contains an early termination right for the Company effective October 31, 2019, if the landlord is unable to accommodate
the Company’s growth. Pursuant to the amendment, the Company agreed to increase the lease payment from $11,072 to $11,764
per month, commencing on October 1, 2017, with annual increases thereafter through the lease term.
The Company also shares certain office
and laboratory space, as well as certain laboratory equipment, in a building located at 454 North 34th Street, Seattle, Washington.
The space is rented for $2,700 per month and requires a ninety-day notice for cancellation.
The Company currently rents approximately
800 square feet of sales office space in Herten, the Netherlands. The office space is rented on a month to month basis at $1,700
per month and requires a sixty-day notice for cancellation.
On May 12, 2016, the Company entered
into a property lease agreement, on its Woodstock, Georgia sales office space. The initial term of the agreement was from
June 1, 2016 expiring on May 31, 2019, with an option to extend for a one-year period. On May 1, 2018, the Company amended
the lease term to run from June 1, 2018 to August 31, 2018. The payment is $1,300 per month.
On August 1, 2016, the Company entered
into Amendment No. 1 to its property lease agreement in Jamison, Pennsylvania. Pursuant to the amendment, the Company extended
the term of the lease to July 31, 2019. Additionally, the Company agreed to lease payments of $2,369 per month for year one, $2,431
per month for year two and $2,493 per month for year three.
On June 15, 2017, the Company entered
into its property lease agreement, on its Fairfield, California office space. The initial term of the agreement is from June 15,
2017 expiring on October 31, 2019. The payment is $4,103 per month.
Minimum lease payments for non-cancelable
operating leases are as follows:
For Years Ending March 31,
|
|
|
|
2019
|
|
$
|
438,000
|
|
2020
|
|
|
245,000
|
|
2021
|
|
|
7,000
|
|
Total minimum lease payments
|
|
$
|
690,000
|
|
Rental expense amounted to $507,000 and
$429,000 for the years ended March 31, 2018 and 2017, respectively.
Legal Matters
On March 17, 2017, the Company filed a
lawsuit against Collidion, Inc. and several of its former employees, officers and directors, for the misappropriation of our confidential,
proprietary and trade secret information as well as breach of fiduciary duties in the United States District Court for the Northern
District of California, San Francisco Division. The Company is primarily seeking injunctive relief and damages in an amount yet
to be proven at trial. No countersuit has been filed to date. The Company plans to vigorously defend its intellectual property
by pursuing this lawsuit.
Aside from the lawsuit described above, on occasion, may be involved in legal matters arising in the ordinary course of business including matters involving
proprietary technology. While management believes that such matters are currently insignificant, matters arising in the
ordinary course of business for which the Company is or could become involved in litigation may have a material adverse
effect on its business and financial condition of comprehensive (loss) income.
Employment Agreements
On July 26, 2016, the Company entered
into a new employment agreement with Jim Schutz, its President and Chief Executive Officer to update his agreements and responsibilities.
The terms of the new employment agreement provide for a continued annual base salary of $250,000 or such other amount as the Board
of Directors may set. In addition, Mr. Schutz is eligible to receive an annual bonus, the payment, type and amount of which is
in the sole discretion of the Compensation Committee. Mr. Schutz also receives certain benefits, such as participation in the
Company’s health and welfare plans, vacation and reimbursement of expenses.
As of March 31, 2018, the Company had
employment agreements in place with five of its key executives. The agreements provide, among other things, for the payment of
nine to twenty-four months of severance compensation for terminations under certain circumstances. With respect to these agreements,
at March 31, 2018, aggregated annual salaries would be $1,167,000 and potential severance payments to these key executives would
be $1,417,000 if triggered.
NOTE 13 – Stockholders’
Equity
Authorized Capital
The Company is authorized to issue up
to 12,000,000 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.
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.
To date no Series B Preferred Stock has
been issued.
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, 2018, the Company sold 228,000 shares
of common stock for gross proceeds of $1,034,000 and net proceeds of $968,000 after deducting commissions and other offering expenses.
Registered Direct Offering
On March 2, 2018, the Company entered
into a placement agency agreement with Dawson James Securities, Inc. Dawson James Securities, Inc. acted as the lead placement
agent and The Benchmark Company, LLC acted as a co-placement agent in the public offering. On March 6, 2018, the Company sold
1,428,570 shares of its common stock at a public offering price of $3.50 per share, for gross proceeds of $5,000,000 and net proceeds
of $4,500,000 after deducting commissions and other offering expenses. Additionally, pursuant to the placement agency agreement,
the Company agreed to pay the placement agents a cash fee equal to 8% of the aggregate gross proceeds raised in the public offering,
excluding any proceeds from the sale of shares to Montreux Equity Partners. The Company also issued the placement agents warrants
to purchase up to 42,857 shares of its common stock. The placement agent warrants will be exercisable beginning on August 28,
2018 and ending on March 1, 2023 and have an exercise price of $4.375 per share. The Company also agreed to pay certain expenses
of the placement agents, including legal and diligence fees, in any case not to exceed $65,000.
Common Stock Issued to Services Providers
On April 24, 2009, the Company entered
into an agreement with Advocos LLC, a contract sales organization that served as part of the Company’s sales force, for
the sale of the Company’s wound care products in the United States. Pursuant to the agreement, the Company agreed to pay
the contract sales organization a monthly fee and potential bonuses that was based on achievement of certain levels of sales.
The Company agreed to issue the contract sales organization cash or shares of common stock to settle fees for its services. The
Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services
rendered. This agreement was terminated on September 28, 2016. Pursuant to the termination agreement the Company paid outstanding
fees of $111,000, issued 14,390 shares of common stock with a fair value of $69,000, and transferred certain assets valued at
$62,000 related to a product line the Company deemed to be non-core and immaterial to its operations. The expense was recorded
as selling, general and administrative expense in the accompanying consolidated statement of comprehensive (loss) income for the
year ended March 31, 2017.
On August 1, 2016, the Company entered
into an agreement with CorProminence, LLC for financial advisory services. Pursuant to the agreement, the Company agreed to pay
CorProminence, LLC common stock as compensation for services provided. The Company determined that the fair value of the common
stock was more readily determinable than the fair value of the services rendered. Accordingly, the Company recorded the fair market
value of the stock as expense. During the year ended March 31, 2017, the Company issued 6,411 shares of common stock in connection
with this agreement. During the year ended March 31, 2017, the Company recorded $29,000 of expense related to this agreement.
The expense was recorded as selling, general and administrative expense in the accompanying consolidated statements of comprehensive
(loss) income.
During the year ended March 31, 2018,
the Company entered into an agreement with Actual, Inc., a firm that provides marketing and branding consulting services. On July
27, 2017, the Company issued 2,570 shares of restricted common stock valued at $6.74 per share and on August 22, 2017, the Company
issued 3,133 shares of restricted common stock valued at $5.53 per share. The aggregate fair market value of the common stock
issued in July 2017 and August 2017 was $35,000. On December 1, 2017, the Company issued 5,479 shares of restricted common stock
valued at $5.02 per share. On January 2, 2018, the Company issued 4,734 shares of restricted common stock valued at $5.81 per
share. The aggregate fair market value of the 15,916 shares of common stock issued during the year ended March 31, 2018 was $90,000.
The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services
rendered. Accordingly, during year ended March 31, 2018, the Company recorded $90,000 of expense related to common stock issued.
The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of
comprehensive (loss) income for year ended March 31, 2018.
NOTE 14 – Stock-Based Compensation
2006 Stock Plan
The board initially adopted the 2006
Stock Incentive Plan on August 25, 2006. On December 14, 2006, the stockholders approved the 2006 Stock Incentive Plan
which became effective at the close of the Company’s initial public offering. The 2006 Stock Incentive Plan was later
amended and restated by a unanimous board resolution on April 26, 2007, and such amendments were subsequently approved
by the stockholders. On September 10, 2009, the Company’s shareholders approved a subsequent amendment to the 2006
Stock Incentive Plan. The 2006 Stock Incentive Plan, as amended and restated, is hereafter referred to as the “2006
Plan.”
The 2006 Plan provided for the granting
of incentive stock options to employees and the granting of non-statutory stock options to employees, non-employee directors,
advisors and consultants. The 2006 Plan also provided for grants of restricted stock, stock appreciation rights and stock unit
awards to employees, non-employee directors, advisors and consultants.
In accordance with the 2006 Plan the stated
exercise price may not be less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs
and NSOs, respectively, as determined by the board of directors at the date of grant. With respect to any 10% stockholder, the
exercise price of an ISO or NSO shall not be less than 110% of the estimated fair market value per share on the date of grant.
Options issued under the 2006 Plan generally
have a ten-year term.
During the year ended March 31, 2017,
the 2006 Plan expired. No additional equity will be granted from the 2006 Plan. All outstanding options will remain outstanding
until exercised or expired.
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 85,572
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 21,428
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, 2016, the board of directors approved an increase of 451,352 shares authorized for issuance. During the year
ended March 31, 2017, the board of directors approved an increase of 629,504 shares authorized for issuance. During the year ended
March 31, 2018, the board of directors approved an increase of 643,383 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 100,000 option grants, or other awards with respect to more than 120,000 shares in the
aggregate in any calendar year.
The board has authorized 400,000 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, 2018, the board
of directors approved an increase of 343,137 shares authorized for issuance.
Performance Based Awards Program
The Company’s Compensation Committee
approved a short-term performance-based bonus program for fiscal year 2016 with predetermined objectives related to revenue and
expense targets. In the event the fiscal year 2016 objectives were met, eighty-percent of the options would have vested on June
30, 2016. On August 21, 2015, certain executives and senior managers were granted an aggregate of 75,500 stock options in connection
with this program. The stock options have an exercise price of $5.80 and expire ten years from the date of grant. At March 31,
2016, it was determined targets were met related to 50,400 stock options which vested on June 30, 2016. At March 31, 2016, 10,000
stock options expired due to targets that were not met. The vesting of the remaining 15,100 stock options was at the discretion
of the Company’s Compensation Committee. The Company’s Compensation Committee determined 14,772 of the 15,100 discretionary
stock options vested at June 30, 2016 and 228 of the discretionary stock options expired unvested.
The Company also approved a long-term
market-based stock option bonus program for senior managers. Vesting of the stock options granted as part of this program is contingent
upon the achievement of four separate target stock prices. The market-based options vest based on the 30-trading day trailing
average of the stock price of the Company’s common stock with options vesting in 25% increments at each of the target stock
prices. On the last day of each quarter, the chief executive officer and/or chief financial officer will determine if any of the
target stock prices have been met by evaluating the period between the quarter end date and the grant date of the option. In the
event that a target stock price has been met, the senior manager will be notified that such options have vested. At the end of
five years from the date of the grant, if the stock target prices have not been met, then the unvested portion of the option will
expire. On August 21, 2015, certain senior managers were granted an aggregate of 23,750 stock options in connection with this
program. The stock options have an exercise price of $5.80 and if they vest will expire ten years from the date of grant. None
of these options vested as of March 31, 2018.
Stock-Based Compensation
On April 1, 2017, the Company adopted
ASU 2016-09 and, as a result, made a Company-wide accounting policy change with respect to accounting for forfeitures. The Company
applied a modified retrospective approach for adoption of the new policy and accordingly recorded an $11,000 increase to opening
accumulated deficit at April 1, 2017. In accordance with the adoption of the accounting policy, the Company no longer estimates
forfeitures based on historical experience and no longer reduces compensation expense based on the expected forfeitures. Beginning
April 1, 2017, the Company will record forfeitures as they occur and will reduce compensation cost at the time of forfeiture.
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,
|
|
|
|
2018
|
|
|
2017
|
|
Fair value of the Company’s common stock on date of grant
|
|
$
|
6.78
|
|
|
$
|
4.87
|
|
Expected term
|
|
|
6.42 yrs
|
|
|
|
5.73 yrs
|
|
Risk-free interest rate
|
|
|
2.04%
|
|
|
|
1.91%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Volatility
|
|
|
120.8%
|
|
|
|
126.0%
|
|
Fair value of options granted
|
|
$
|
5.97
|
|
|
$
|
4.12
|
|
Share-based awards compensation expense is as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
169,000
|
|
|
$
|
248,000
|
|
Research and development
|
|
|
159,000
|
|
|
|
245,000
|
|
Selling, general and administrative
|
|
|
2,082,000
|
|
|
|
1,652,000
|
|
Total stock-based compensation
|
|
$
|
2,410,000
|
|
|
$
|
2,145,000
|
|
At March 31, 2018, there were unrecognized
compensation costs of $2,253,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 1.99 years.
At March 31, 2018, there were unrecognized
compensation costs of $150,000 related to restricted stock which is expected to be recognized over a weighted-average amortization
period of 1.41 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,
2018 under the various plans are as follows:
|
|
|
|
|
Unvested
|
|
|
|
|
Plan
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Total
|
|
2006 Plan
|
|
|
163,000
|
|
|
|
–
|
|
|
|
163,000
|
|
2011 Plan
|
|
|
1,000,000
|
|
|
|
9,000
|
|
|
|
1,009,000
|
|
2016 Plan
|
|
|
230,000
|
|
|
|
23,000
|
|
|
|
253,000
|
|
|
|
|
1,393,000
|
|
|
|
32,000
|
|
|
|
1,425,000
|
|
Stock-based awards available for grant as of March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
1,455,000
|
|
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, 2017
|
|
|
899,000
|
|
|
$
|
17.87
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
554,000
|
|
|
|
6.78
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(1,000
|
)
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(51,000
|
)
|
|
|
6.78
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(8,000
|
)
|
|
|
222.37
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
1,393,000
|
|
|
$
|
12.70
|
|
|
|
7.45
|
|
|
$
|
–
|
|
Exercisable at March 31, 2018
|
|
|
796,000
|
|
|
$
|
17.32
|
|
|
|
6.35
|
|
|
$
|
–
|
|
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 $3.68 per share at March 31, 2018.
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, 2017
|
|
|
34,000
|
|
|
$
|
7.27
|
|
Restricted stock awards granted
|
|
|
199,000
|
|
|
|
5.58
|
|
Restricted stock awards vested
|
|
|
(201,000
|
)
|
|
|
5.72
|
|
Restricted stock awards forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested restricted stock awards outstanding at March 31, 2018
|
|
|
32,000
|
|
|
$
|
6.46
|
|
The Company did not capitalize any cost associated with stock-based
compensation.
The Company issues new shares of common
stock upon exercise of stock options or release of restricted stock awards.
NOTE 15 – Income Taxes
The Company has the following net deferred
tax assets:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
25,487,000
|
|
|
$
|
33,394,000
|
|
Research and development tax credit carryforwards
|
|
|
1,789,000
|
|
|
|
1,746,000
|
|
Stock-based compensation
|
|
|
3,697,000
|
|
|
|
5,439,000
|
|
Allowances and accruals
|
|
|
1,118,000
|
|
|
|
1,232,000
|
|
Other deferred tax assets
|
|
|
284,000
|
|
|
|
240,000
|
|
State income taxes
|
|
|
1,000
|
|
|
|
4,000
|
|
Basis difference in assets
|
|
|
(3,000
|
)
|
|
|
1,000
|
|
Total deferred tax assets
|
|
$
|
32,373,000
|
|
|
$
|
42,056,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
32,373,000
|
|
|
|
42,056,000
|
|
Valuation allowance
|
|
|
(32,373,000
|
)
|
|
|
(42,056,000
|
)
|
Deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company’s income tax expense/(benefits)
consist of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
State
|
|
$
|
37,000
|
|
|
$
|
6,000
|
|
Foreign
|
|
|
13,000
|
|
|
|
–
|
|
|
|
|
50,000
|
|
|
|
6,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
–
|
|
|
|
(3,272,000
|
)
|
State
|
|
|
–
|
|
|
|
(158,000
|
)
|
Foreign
|
|
|
–
|
|
|
|
(844,000
|
)
|
|
|
$
|
50,000
|
|
|
$
|
(4,268,000
|
)
|
For the year ended March 31, 2018, $50,000
of income tax expenses was reported in other (expense) income in the accompanying consolidated statement of comprehensive (loss)
income.
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,
|
|
|
|
2018
|
|
|
2017
|
|
Expected federal statutory rate
|
|
|
30.8%
|
|
|
|
34.0%
|
|
State income taxes, net of federal benefit
|
|
|
0.5%
|
|
|
|
1.2%
|
|
Research and development credit
|
|
|
0.3%
|
|
|
|
0.3%
|
|
Foreign earnings taxed at different rates
|
|
|
(0.3%
|
)
|
|
|
(1.0%
|
)
|
Effect of state net operating loss expiration
|
|
|
(0.9%
|
)
|
|
|
(2.3%
|
)
|
Effect of permanent differences
|
|
|
(4.2%
|
)
|
|
|
0.0%
|
|
True-up of state deferred assets
|
|
|
7.7%
|
|
|
|
(7.4%
|
)
|
Tax cuts and Jobs Act impact
|
|
|
(103.7%
|
)
|
|
|
(0.0%
|
)
|
|
|
|
(69.8%
|
)
|
|
|
24.8%
|
|
Change in valuation allowance
|
|
|
68.5%
|
|
|
|
8.2%
|
|
Totals
|
|
|
(1.3%
|
)
|
|
|
33.0%
|
|
As of March 31, 2018, the Company had
net operating loss carryforwards for Federal, California and Foreign income tax purposes of approximately $100,050,000, $35,765,000
and $3,435,000, respectively, which will begin to expire in the years 2021, 2028 and 2028, respectively, if not utilized. The
remaining states net operating loss carryforwards will expire at various dates, if not utilized, beginning in the fiscal year
ending March 31, 2018. The Company also had, at March 31, 2018, federal and state research credit carryforwards of approximately
$948,000 and $790,000, respectively. The federal credits will expire, if not utilized at various dates, beginning in the fiscal
year ending March 31, 2025, and the state credits do not expire. The Company also had, at March 31, 2018 foreign tax credits carryforwards
of approximately $50,000. The foreign credits will expire, if not utilized at various dates, beginning in the fiscal year ending
March 31, 2023.
The Company has completed a study to assess
whether a change in control has occurred or whether there have been multiple changes of control since the Company’s formation
through March 31, 2018. The Company determined, based on the results of the study, no change in control occurred for purposes
of Internal Revenue Code section 382. The Company, after considering all available evidence, fully reserved for these and its
other deferred tax assets since it is more likely than not such benefits will not be realized in future periods. The Company has
incurred losses for both financial reporting and income tax purposes for the year ended March 31, 2018. 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 their future benefit. If it is determined in future periods
that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will
be reduced accordingly.
On April 1, 2017,
the Company adopted ASU No. 2016-09. As a result of adopting ASU No. 2016-09, the Company has made an accounting policy
election to account for forfeitures as they occur. This change has been applied on a modified retrospective basis, with no material
impacts on the Company’s financial statements. The adoption of ASU No. 2016-09 also requires excess tax benefits and
tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled
and recognize all previously unrecognized excess tax benefits and tax deficiencies upon adoption as a cumulative-effect adjustment
to retained earnings. As of April 1, 2017, the Company recognized excess tax benefit of approximately $533,000 as an increase
to deferred tax assets. However, the entire amount was offset by a full valuation allowance. Accordingly, an $11,000 cumulative-effect
adjustment to retained earnings was recorded as of March 31, 2018.
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, 2018. Generally, the Company is subject to audit for the years ended March 31, 2017, 2016 and 2015, and may
be subject to audit for amounts relating to net operating loss carryforwards generated in periods prior to March 31, 2017. 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.
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act
reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018, which the Company expects will positively
impact its future effective tax rate and after-tax earnings in the United States. The Company recognized a decrease related to
its federal deferred tax assets and deferred tax liabilities, before the valuation allowance. As change in the valuation allowance
completely offsets the change in deferred taxes, therefore there was no impact on the consolidated financial statements related
to the rate change.
The Company may also be affected by certain
other aspects of the Tax Act including, without limitation, provisions regarding repatriation of accumulated foreign earnings
and deductibility of capital expenditures. However, these assessments are based on preliminary review and analysis of the Tax
Act and are subject to change as the Company continues to evaluate these highly complex rules as additional interpretive guidance
is issued. The Company is also in the process of determining the impacts of the new Global Intangibles Low-Taxed Income (“GILTI”)
tax law and has not yet included any potential GILTI tax or elected any related accounting policy. The Company will continue to
analyze the effects of the Tax Act and any additional impacts of the Tax Act will be recorded as they are identified during the
measurement period.
Also on December 22, 2017, the SEC staff
issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”),
which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, both of the tax benefits recorded
by us for the fiscal year ended March 31, 2018 represent provisional amounts based on our current best estimates. Any adjustments
made to those provisional amounts will be included in income from operations and recorded as an adjustment to tax expense through
the fiscal year ending March 31, 2019.The recorded, provisional amounts reflect assumptions made based upon our current interpretation
of the Tax Act, and may change as we receive additional clarification and guidance in the form of technical corrections to the
Tax Act or regulations issued by the U.S. Treasury.
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, 2018. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary
course of business.
NOTE 16 – Employee
Benefit Plan
The Company has a program to contribute
and administer a qualified 401(k) plan. Under the 401(k) plan, the Company matches employee contributions to the plan up to 4%
of the employee’s salary. Company contributions to the plan amounted to an aggregate of $281,000 and $196,000 for the years
ended March 31, 2018 and 2017, respectively.
NOTE 17 – 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,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
8,372,000
|
|
|
$
|
6,580,000
|
|
Latin America
|
|
|
3,007,000
|
|
|
|
1,299,000
|
|
Europe and Rest of the World
|
|
|
4,284,000
|
|
|
|
4,078,000
|
|
Total
|
|
$
|
15,663,000
|
|
|
$
|
11,957,000
|
|
In connection with the Company’s
sale of its Latin American business to Invekra, product revenues were reclassified from continuing operations to discontinued
operations as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Product revenues
|
|
$
|
–
|
|
|
$
|
2,693,000
|
|
Product license fees and royalties
|
|
|
–
|
|
|
|
412,000
|
|
Total product related revenues
|
|
$
|
–
|
|
|
$
|
3,105,000
|
|
The Company’s service revenues amounted
to $995,000 and $868,000 for the years ended March 31, 2018 and 2017, respectively.
NOTE 18 – Subsequent
Events
At Market Sales Issuance
On December 8, 2017, the Company entered
into an At Market Issuance Sales Agreement, with B. Riley FBR, Inc. under which the Company may issue and sell shares of 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. From April 1, 2018 through June 11, 2018, the Company sold 245,132 shares of common stock for gross
proceeds of $946,000 and net proceeds of $916,000 after deducting commissions and other offering expenses.