Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from _________________ to _________________
Commission File Number: 001-33216
SONOMA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
68-0423298
(I.R.S. Employer Identification No.)
1129 N. McDowell Blvd.
Petaluma, California 94954
(Address of principal executive offices) (Zip Code)
(707) 283-0550
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value
Warrants (expiring January 26, 2020)
(Title of Each Class)
NASDAQ Capital Market
NASDAQ Capital Market
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company x
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on September 30,
2016, was $18,125,593 based on a total of 4,176,404 shares of the registrant’s common stock held by non-affiliates on September 30, 2016,
at the closing price of $4.34 per share, as reported on the NASDAQ Capital Market.
There were 4,300,138 shares of the registrant’s common stock issued and outstanding on June 26, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12, 13 and 14 of Part III will incorporate
by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with
the solicitation of proxies for the registrant’s 2017 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures (Not applicable.)
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART III
ITEM 15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
Page
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15
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46
i
PART I
This report includes “forward-looking statements.” The words “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“plan,” “aim,” “seek,” “should,” “likely,” and similar expressions as they relate to us or our management are intended to identify these
forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating
results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in
these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because
of various risks, including the risks discussed in this report under “Part I — Item 1A — Risk Factors.” Any forward-looking statement
speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances, including unanticipated events, after the date as of which such statement
was made.
ITEM 1. Business
Corporate Information
We incorporated under the laws of the State of California in April 1999 as Micromed Laboratories, Inc. In August 2001, we changed our
name to Oculus Innovative Sciences, Inc. In December 2006, we reincorporated under the laws of the State of Delaware. On December 6,
2016, we changed our name from Oculus Innovative Sciences, Inc. to Sonoma Pharmaceuticals, Inc. Our principal executive offices are
located at 1129 N. McDowell Blvd., Petaluma, California, 94954, and our telephone number is (707) 283-0550. We have two active
wholly-owned subsidiaries: Oculus Technologies of Mexico, S.A. de C.V., organized in Mexico; and Sonoma Pharmaceuticals
Netherlands, B.V., organized in the Netherlands. Our fiscal year end is March 31. Our website is www.sonomapharma.com. We do not
intend for information on our website to be incorporated into this annual report.
Our Business
We are a specialty pharmaceutical company dedicated to identifying, developing and commercializing unique, differentiated therapies to
millions of patients living with chronic skin conditions. We believe our products, which are sold throughout the United States and
internationally, have improved patient outcomes for more than five million patients globally by treating and reducing certain topical skin
diseases including acne, atopic dermatitis, scarring, infections, itch, pain and harmful inflammatory responses.
Our past fiscal year ended March 31, 2017, was the most successful year since we changed our focus to dermatology. Among our many
achievements were:
· Our market capitalization increased by 57% from $19 million on April 1, 2016 to $30 million on March 31, 2017;
· Our product revenue increased by 48% from $8.1 million in fiscal year 2016 to $12.0 million in fiscal year 2017 (see discussion
of discontinued operations in Note 4);
· We sold our Latin America business for $22 million in October 2016;
· Our cash position increased 133% from $7.5 million at April 1, 2016 to $17.5 million at March 31, 2017;
· Our dermatology net revenue increased by 87% from $2.2 million in fiscal year 2016 to $4.1 million in fiscal year 2017;
·
The number of dermatology prescriptions filled increased 86% from 28,188 in fiscal year 2016 to 52,563 in fiscal year 2017;
· We launched four new products, Ceramax™, SebuDerm™, Lasercyn™ Gel and Lasercyn™ Dermal Spray during fiscal year
2017;
· Our animal health care net revenue increased by 134% from $501,000 in fiscal year 2016 to $1.17 million in fiscal year 2017;
and
· We obtained three 510(k) clearances from the FDA during fiscal year 2017.
With the sale of certain assets of our Latin American business during the year ended March 31, 2017, our statement of comprehensive
income (loss) and the balance sheet for fiscal year 2017 and 2016 have been classified as discontinued operations. All numbers in this
annual report reflect the revised reclassified numbers. See the full discussion of our disposition of the Latin America Operations in Note 4.
1
We are focused on the development and commercialization of therapeutic solutions in medical dermatology to treat skin conditions, such as
acne, atopic dermatitis and scarring. These diseases impact millions of patients worldwide and can have significant, multi-dimensional
effects on patients’ quality of life, including their physical, functional and emotional well-being.
Some of our key products in the United States are:
· Celacyn®, a prescription hypochlorous acid based scar management gel clinically proven to soften and flatten raised scars
while reducing redness and discoloration.
· Ceramax™ Skin Barrier Cream helps manage dry itchy skin, minor skin irritations, rashes, and inflammation caused by
various skin conditions.
· Mondoxyne™, a prescription oral tetracycline antibiotic used for the treatment of certain bacterial infections, including acne.
· Alevicyn™, a prescription hypochlorous acid based atopic dermatitis product line clinically proven to reduce pruritus (itch) and
pain associated with various dermatoses.
·
SebuDerm™, a prescription topical gel used as an alternative to corticosteroids for the management of the burning, itching and
scaling experienced with seborrhea and seborrheic dermatitis.
· Microcyn® (sold under a variety of brand names), a line of products based on electrically charged oxychlorine small molecules
designed to target a wide range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains.
Our key product outside the United States is:
· Microcyn® or Microdacyn60® (sold under a variety of brand names), a line of products based on electrically charged
oxychlorine small molecules designed to target a wide range of pathogens including viruses, fungi, spores and bacteria,
including antibiotic-resistant strains.
As of May 30, 2017, we have obtained 16 clearances from the U.S. Food and Drug Administration, or FDA, that permit us to sell our
products as medical devices for Section 510(k) of the Federal Food, Drug and Cosmetic Act in the United States.
Outside the United Sates, we sell products for dermatological and advanced tissue care with a European Conformity marking (known as
Conformité Européenne or CE) covering 25 of our products, and various approvals in China, Southeast Asia, South Korea, India, Australia,
New Zealand, and the Middle East.
On October 27, 2016, we, along with our Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V., closed on
an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of our
Latin America assets. Specifically, we 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 paid for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was
held in escrow until completion of our obligation to deliver certain equipment and paid to us on March 16, 2017. $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 per cent on net sales of certain products in Latin America, excluding Mexico. Since the
$2,500,000 is to be paid in foreign currency, we may receive more or less than $2,500,000 due to currency fluctuations.
2
We believe that the sale of the Latin America assets is in line with our overall strategy to focus on our core dermatology business and
generate cash from our non-core businesses to support the higher margin and higher-growth dermatology business. As a result of the sale
of our Latin America assets, we expect our Latin America revenues will decrease and our total revenues will decrease in the short-term until
our U.S. based dermatology revenues increase longer-term. We believe focusing on higher margin dermatology products, utilizing an
internal sales force, allows us to better control and grow our future results rather than relying on external partners for marketing and sales.
We intend to use the proceeds from the sale of the Latin America assets to increase our direct sales force and grow our product line and
continue to expand our markets and Company.
Our Strategy
Our strategy is to in-license, acquire, develop and commercialize unique, affordable and differentiated therapies that we believe advance the
standard of care for patients with dermatological diseases. The key components of our strategy are to:
·
Expand our Internal U.S. Sales Force: We continue to hire additional experienced sales people who have established
relationships with dermatologists in their territories and we currently have a sales force of 36 sales professionals.
· Develop and Launch New Dermatology Products: We currently sell nine prescription dermatology products in the United
States, and have a strong product pipeline of new products, including an oral antibiotic for severe acne and Ceramax™, which
utilizes a “state of the art” skin repair technology.
·
In-License and Acquire New Product Candidates: Since beginning our turn-around strategy in 2013, we have executed
multiple transactions resulting in adding new products and product candidates to our growing portfolio. In 2015, we acquired
the U.S. marketing rights to Mondoxyne™, an oral antibiotic indicated for severe acne. In 2016, we in-licensed Ceramax™
indicated for various dermatoses, and Loyon indicated as a descaler of various dermatoses and psoriasis.
· Create a Competitive Pricing Strategy: We have and will continue to develop a unique product pricing strategy, which we
believe solves many of the challenges associated with the prescription dermatology market’s current pricing and rebate
programs.
· Develop a Pharmaceutical Line: We plan to acquire or develop pharmaceutical products with affordable clinical trials to
increase our market presence and create innovator patent protection.
Our plan is to evolve into a leading dermatology company, providing innovative and cost-effective solutions to patients, while generating
strong, consistent revenue growth and maximizing long-term shareholder value.
Our Products
In the United States some of our key dermatology products are:
Celacyn® – Prescription Scar Management Gel
Celacyn®, is a prescription hypochlorous acid based scar management gel designed to soften and flatten raised
scars while reducing redness and discoloration. In our studies, Celacyn® has been shown to reduce scar itch
pain and performed better than the market-leading comparable gel brand. In the United States, topical
prescription scar treatment products are usually sold over the counter. By contrast, we actively market
Celacyn® to clinicians.
Scars are a natural part of the healing process and a reaction to skin injury. Scars form when the dermis, or the
lower level of the skin, is damaged and then repaired by a process called granulation, where the body produces
collagen fibers to repair the damage. Celacyn® works on keloid and hypertrophic scars. Keloid scars continue
to grow after the skin has healed which causes the scars to grow beyond the originally damaged area.
Hypertrophic scars are marked by excessive scar tissue in a local area and appear thick, red and lumpy.
Celacyn® scar gel is intended for the management of old and new scars resulting from burns, general surgical
procedures and trauma wounds.
3
Ceramax™ – Skin Barrier Cream
Ceramax™ Skin Barrier Cream helps manage dry itchy skin, minor skin irritations, rashes, and inflammation
caused by various skin conditions based on patented Lipogrid® Technology. Ceramax™ Skin Barrier Cream
can be used to treat a variety of disease states with skin barrier disruption, including eczema and atopic
dermatitis.
According to the National Eczema Association, eczema or atopic dermatitis affects over 10% of the children in
the United States and one out of every three children with eczema or atopic dermatitis have moderate to severe
symptoms. Additionally, 31.6 million people have some form of eczema with approximately 17.8 million of
those having moderate to severe eczema or atopic dermatitis.
Ceramax™ Skin Barrier Cream is intended to be used as a topical skincare preparation to relieve and manage
the burning and itching associated with various skin conditions, including atopic dermatitis, and other dry skin
conditions, by maintaining a moist wound and skin environment. Lipogrid® Technology contains lipids that
blend in with the skin’s natural lipid building blocks to hydrate and restore the natural skin barrier and penetrate
the skin.
Mondoxyne™ – Prescription Oral Antibiotic
Mondoxyne™ is a prescription oral tetracycline antibiotic that contains doxycycline, a broad spectrum
antibacterial synthetically derived from oxytertracycline, used as a treatment for acne vulgaris.
According to the British Association of Dermatologists, acne vulgaris is estimated to affect 660 million people,
or 9.4% of the global population, and it is the eighth most common disease worldwide. Acne is thought to have
multiple contributing factors, including, among other things, excess sebum, or oil, production, which creates an
optimal environment for the proliferation of the bacterium Propionibacterium acnes. The Propionibacterium
acnes bacteria feed on the sebum and secrete enzymes and other byproducts that irritate the skin and result in
the inflammation commonly known as acne.
Mondoxyne™ is an oral antibiotic that can be effective against acne because of its antimicrobial and anti-
inflammatory activity. It is usually prescribed as adjunct therapy for severe inflammatory acne. Mondoxyne™
treats acne by targeting the bacterium Propionibacterium acnes. Patients have rated doxycycline, the active
ingredient in Mondoxyne™, as effective or very effective in 85% of cases, as reported by a 1989 double-blind
study published in the Journal of Dermatological Treatment comparing the effectiveness of doxycycline and
minocycline in the treatment of moderate to moderately severe acne.
Alevicyn™ SG Antipruritic Spray Gel, Dermal Spray and Antipruritic Gel
Alevicyn™ is indicated to manage and relieve the burning, itching and pain experienced with various types of
skin conditions, including radiation dermatitis and atopic dermatitis. It may be also used to relieve the pain of
first- and second-degree burns, and helps to relieve dry waxy skin by maintaining a moist wound and skin
environment, which is beneficial to the healing process. Alevicyn™ Antipruritic Gel is intended for
management of itch and pain associated with dermal irritations and wounds, such as sores, injuries and ulcers of
dermal tissue.
Alevicyn™ Antipruritic Spray gel’s unique formulation is a “spray-on” that does not run or drip after
application and no “rubbing-in” is required on sensitive or difficult-to-access areas of the body. Alevicyn™
dermal spray is intended for the cleansing, irrigation, moistening, debridement and removal of foreign material
including microorganisms and debris from wounds, among others, first- and second-degree bums, abrasions,
minor irritations of the skin, diabetic foot ulcers, and ingrown toe nails.
4
SebuDerm™ Topical Gel
SebuDerm™ Topical Gel is indicated to manage and relieve the burning, stinging, erythema, scaling and pain
experienced with various types of dermatoses, including seborrhea and seborrheic dermatitis. Our studies have
shown that SebuDerm™ improves skin appearance and relieves itching, burning and stinging significantly
without adverse side effects.
SebuDerm™ is based on our own patented Microcyn® Technology, specifically for body areas where
seborrheic dermatitis is present, such as the scalp, beard area, behind the ears, chest or nasal areas.
Seborrheic dermatitis is a chronic or relapsing form of eczema or dermatitis that mainly affects the sebu-rich
areas of the scalp, trunk and face. It affects 1-3% of the general population and 34-83% in immune-
compromised persons. It is more common in men and is typically more severe in cold and dry climates and
during periods of increased stress.
Microcyn® -Advanced Tissue Care Management
Microcyn® is based on electrically charged oxychlorine small molecules designed to target a wide
range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant
strains. Several Microcyn® Technology advanced tissue care products are designed to treat
infections and enhance healing while reducing the need for antibiotics. When a wound is slow to
heal or becomes hard to heal, the costs to treat increase and the quality of life for the patient also
suffers as infected, malodorous wounds prevent them from participating in daily life activities. As
a result of our patented manufacturing process, Microcyn® is a proprietary solution of oxychlorine
compounds that, among other things, interacts with and inactivates surface proteins on cell walls
and membranes of microorganisms. The functions of these proteins are varied and play significant
roles in cell communication, nutrient and waste transport and other required functions for cell
viability.
Once Microcyn® surrounds single cell microorganisms, it damages these proteins, causing the cell membrane to rupture, leading to cell
death, which we believe is caused by increased membrane permeability and induced osmotic pressure imbalance. This destruction of the
cell appears to occur through a fundamentally different process than that which occurs as a result of contact with a bleach-based solution
because experiments have demonstrated that Microcyn® kills bleach-resistant bacteria. However, we believe the solution remains non-
irritating to human tissues because human cells have unique protective mechanisms, are interlocked, and prevent Microcyn® from
targeting and surrounding single cells topically on the body. Laboratory tests suggest that our solution does not penetrate and kill multi-
cellular organisms, and does not damage or affect human DNA.
In laboratory tests, Microcyn® has been shown to destroy certain biofilms. A biofilm is a complex cluster of microorganisms or bacteria
marked by the formation of a protective shell, allowing the bacteria to collect and proliferate. It is estimated that over 65% of microbial
infections in the body involve bacteria growing as a biofilm. Bacteria living in a biofilm typically have significantly different properties
from free-floating bacteria of the same species. One result of this film environment is increased resistance to antibiotics and to the body’s
immune system. In chronic wounds, biofilms interfere with the normal healing process and halt or slow wound closure. Bacteria growing in
biofilms can become up to 1000-fold more resistant to antibiotics and other biocides as compared to their planktonic, or free floating,
counterparts. As a result, biofilm infections cannot be effectively treated with conventional antibiotic therapy. In our laboratory studies,
Microcyn® was shown to destroy two common biofilms after five minutes of exposure.
In published studies, Microcyn® has been shown to significantly increase the dilation of capillaries in wounds as indicated by higher levels
of oxygen at a wound site after the application of our product and also to reduce inflammation by inhibiting certain inflammatory responses
from allergy-producing mast cells. It is widely accepted that reducing chronic inflammation surrounding an injury or wound is beneficial to
wound healing. Our laboratory research suggests that Microcyn®’s interference with these cells is selective to only the inflammatory
response and does not interfere with other functions of these cells. Microcyn® Technology has demonstrated antimicrobial activity against
numerous bacterial, viral and fungal pathogens, including antibiotic-resistant strains, as evidenced by passing results in numerous
standardized laboratory microbiology tests conducted on our 510(k) approved technology by a variety of certified independent testing
laboratories.
Regulatory Approvals and Clearances
To date, we have obtained 16 clearances from the U.S. Food and Drug Administration, or FDA, that permit us to sell our products as
medical devices for Section 510(k) of the Federal Food, Drug and Cosmetic Act in the United States.
Outside the United Sates, we sell products for dermatological and advanced tissue care with a European Conformity marking (known as
Conformité Européenne or CE) covering 25 of our products, and various approvals in Central America, China, Southeast Asia, and the
Middle East.
5
The following table summarizes our material current regulatory approvals and clearances by brand:
Brand
Approval Type
Year of
Approval
Summary Indication
Loyon®
U.S. 510(k)
2017
Intended to manage skin scaling experienced with various types of dermatoses.
Lasercyn™
U.S. 510(k)
EU CE Mark
MucoClyns™
EU CE Mark
Sinudox™
EU CE Mark
SebDerm Gel
U.S. 510(k)
2016
2016
2016
2016
2015
Indicated for the management of post non ablative laser therapy procedures,
post microdermabrasion therapy and following superficial chemical peels; and
to relieve itch and pain from minor skin irritations, lacerations, abrasions and
minor burns.
Indicated for the use in emergencies, safe to use on mucous membranes, cuts,
abrasions, burns and body surfaces for the treatment immediately after an
unexpected exposure to infection risk, and professional medical attention.
Solution intended for nasal irrigation, including the moistening of cuts,
abrasions and lacerations located in the nasal cavity.
Manages and relieves the burning, itching, erythema, scaling, and pain
experienced with seborrhea and seborrheic dermatitis. It also helps to relieve
dry, waxy skin by maintaining a moist wound and skin environment, which is
beneficial to the healing process.
Celacyn®
U.S. 510(k)
2013
As hydrogel for the management of old and new hypertrophic and keloid
scarring resulting from burns, general surgical procedures and trauma wounds.
Alevicyn™
U.S. 510(k)
EU CE Mark
Epicyn™
U.S. 510(k)
EU CE Mark
2011
2013
2011
2013
As a hydrogel, for management and relief of burning, itching and pain
experienced with various types of dermatoses, including atopic dermatitis and
radiation dermatitis.
Manages and relieves itching, burning and pain experienced with various types
of dermatoses, including atopic dermatitis, first- and second-degree burns.
Indicated as an adjuvant in the wound healing process with wounds that can
only heal by secondary intention in maturation phase. Epicyn™ is effective for
the management and reduction of new and existing hypertrophic and keloid
scars.
Microcyn™
Skin and Wound
Care or HydroGel
U.S. 510(k)
2010
As a solution or hydrogel, for debridement and moistening of acute and
chronic wounds, ulcers, cuts, abrasions and burns, including those located in
any human cavity such as the oral, nasal or ear.
Gramaderm®
EU CE Mark
Microcyn™
Skin and Wound
Cleanser
U.S. 510(k)
2013
2009
As a dermatological solution or hydrogel for the topical treatment of mild to
moderate acne.
Debridement of wounds, such as stage I-IV pressure ulcers, diabetic foot
ulcers, post-surgical wounds, first- and second-degree burns, grafted and donor
sites as preservative, which can kill listed bacteria such as MRSA & VRE and
required as a prescription.
Microcyn™ Wound
Gel
Alevicyn™ SG
Antipruritic Gel
Ceramax™ Skin
Barrier Cream
U.S. 510(k)
2009
Manages exuding wounds such as leg ulcers, pressure ulcers, diabetic ulcers
and mechanical or surgical debridement of wounds in a gel form.
As a thin hydrogel, for the management and relief of burning, itching and pain
experienced with various types of dermatoses, including atopic dermatitis and
radiation dermatitis.
Management of dry itchy skin, minor skin irritations, rashes, and inflammation
caused by various skin conditions based on patented Lipogrid® Technology.
6
Domestic Sales and Marketing
Dermatology
In the United States, we sell into dermatology markets through our division, IntraDerm™ Pharmaceuticals, staffed with a seasoned
management and growing sales team. Our dermatology products are primarily purchased by distributors and wholesalers, pharmacies and
dermatologist.
Although specific customer requirements can vary depending on applications, customers generally demand quality, innovation,
affordability and clinically-supported efficacy. We have responded to these customer demands by introducing new products focused on
these requirements in the markets we serve. Specifically, we believe that we introduce new products and applications that are innovative,
address the specific dermatological procedures in demand, and supported by human clinical data. In addition, we provide attractive product
line extensions and pricing to new product families. In the future, to increase market penetration in addition to marketing to our core
dermatologists, we may also market our products to aesthetic dermatologists and plastic surgeons.
We seek to establish strong ongoing relationships with our customers through new products, sales of existing products, ongoing training and
support, and distributing skincare products. We primarily target our marketing efforts to practitioners through office visits, workshops, trade
shows, webinars and trade journals. We also market to potential patients through brochures, workshops and our website. In addition, we
offer clinical forums with recognized expert panelists to promote advanced treatment
Advanced Tissue Care and Animal Health Care
We sell into the advanced tissue care markets with our dedicated in-house sales force and through our call center. We also enter into
strategic partnerships with physicians and surgeons to promote our products. Our tissue care products are primarily purchased by hospitals,
physicians, nurses, and other healthcare practitioners, who are the primary caregivers to patients, both human and animal, being treated for
acute or chronic wounds or undergoing surgical procedures.
For our animal health care products we partner with Manna Pro Products, LLC which distributes products to all farm animal specialty
stores, farm animal veterinarians in the United States and Canada, and distributors to farm animal specialty stores and farm animal
veterinarians in the United States and Canada, and non-prescription animal care products to grocery stores and mass retailers in the United
States and Canada. Our animal health care products are sold in national chain pet and retail stores. Internationally, we partner with
distributors in Europe and Asia for the sale of our animal health care products. We primarily target our marketing efforts to veterinarians
through trade shows, and to customers through social media. We also market to potential patients through brochures, workshops and our
website.
International Sales and Marketing by Our Strategic Business Partners
We sell our products through a worldwide distributor network in over 40 countries. In the international markets, we work with a network of
partners, ranging from country specific distributors to a large pharmaceutical company to a full services sales and marketing company.
International sales are generally made through a worldwide distributor network in over 40 countries. Our international revenue as a
percentage of total revenue represented 67% in FY 2016 and 73% in FY 2015.
Europe
We currently rely on exclusive agreements with country-specific distributors for the sale of Microcyn®-based products in Europe,
including Austria, Belgium, Italy, Luxemburg, the Netherlands, Greece, the Czech Republic, Sweden, Spain, Norway, Switzerland, Poland,
Finland, Denmark and Serbia.
Mexico
In Mexico, we partnered with Laboratorios Sanfer S.A. de C.V., one of the largest independent pharmaceutical companies in Mexico,
operating in nine countries across Latin America. Laboratorios Sanfer manufactures, markets and sells prescription and over the counter
branded medications across five therapeutic areas including gastroenterology, cardiology, anti-infective and dermatology. Pursuant to our
agreement with Laboratorios Sanfer, we granted Laboratorios Sanfer an exclusive license, with the right to sublicense, under certain
conditions and with our consent, to all of our proprietary rights related to certain of our pharmaceutical products for human application that
utilize our Microcyn® technology within Mexico. We also agreed to appoint Laboratorios Sanfer as the exclusive distributor of certain of
our products in Mexico for the term of the agreement, and an exclusive license to certain of our then-held trademarks.
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On October 27, 2016, we, along with our Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V., closed on
an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of our
Latin America assets. Specifically, we 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 paid for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was
held in escrow until completion of our obligation to deliver certain equipment and paid to us on March 16, 2017. $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 per cent on net sales of certain products in Latin America, excluding Mexico. Since the
$2,500,000 is to be paid in foreign currency, we may receive more or less than $2,500,000 due to currency fluctuations.
As a result of the asset purchase agreement and arrangement, we expect our revenues in Latin America will decrease significantly. Pursuant
to the arrangement, going forward we will receive a royalty of 3% on all Latin American net revenues (outside of Mexico), with a
minimum payment of $250,000 per year for the next ten years, to be paid quarterly in Mexican pesos. Due to currency fluctuations, we may
not receive the full $250,000 in U.S. dollars. Additionally, while Invekra sets up their manufacturing, we will continue to supply Invekra
with product at a reduced price.
“Rest of the World”
Through our partner Laboratorios Sanfer, we market and sell certain of our products within the following countries: Antigua & Barbuda,
Argentina, Aruba & Curacao, Bahamas, Barbados, Belize, Bolivia, Bonaire, Brazil, British Guyana, British Islands, Cayman Islands, Chile,
Colombia, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, French Guyana, Grenada, Guadalupe, Guatemala, Haiti,
Honduras, Jamaica, Martinique, Nicaragua, Panama, Paraguay, Peru, St. Bartolome, St. Vincent & Grenades, Surinam, Trinidad & Tobago,
Turks & Caicos Islands, Uruguay, Venezuela and Virgin Islands.
Throughout the rest of the world, we use strategic partners and distributors for the sale of Microcyn®-based products, including
Bangladesh, Pakistan, India, the People’s Republic of China, South Korea, United Arab Emirates, Saudi Arabia, Dubai, Kuwait, Iraq, New
Zealand, Singapore, Indonesia and Malaysia.
Contract Testing
We also operate a microbiology contract testing laboratory division that provides consulting and laboratory services to medical companies
that design and manufacture biomedical devices and drugs, as well as testing of our products and potential products. Our testing laboratory
complies with U.S. Current Good Manufacturing Practices and Quality Systems Regulations.
Manufacturing and Packaging
We manufacture our products at our facilities in Petaluma, California and Zapopan, Mexico. We have developed an automated
manufacturing process and conduct quality assurance testing on each production batch in accordance with current U.S., Mexican and
international Current Good Manufacturing Practices. Our facilities are required to meet and maintain regulatory standards applicable to the
manufacture of pharmaceutical and medical device products. Our United States facilities are certified and comply with U.S. Current Good
Manufacturing Practices, Quality Systems Regulations for medical devices, and International Organization for Standardization, or ISO,
guidelines. Our Mexico facility has been approved by the Ministry of Health and is also ISO certified.
Our machines are subjected to a series of tests, which is part of a validation protocol mandated by U.S., Mexican and international Current
Good Manufacturing Practices, Quality Systems Regulation, and ISO requirements. This validation is designed to ensure that the final
product is consistently manufactured in accordance with product specifications at all manufacturing sites. Certain materials and components
used in manufacturing our machines are proprietary to us.
We believe we have a sufficient number of machines to produce an adequate amount of Microcyn® to meet anticipated future requirements
for at least the next two years. As we expand into new geographic markets, we may establish additional manufacturing facilities to better
serve those new markets.
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Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our product technology and know-how, to
operate without infringing proprietary rights of others, and to prevent others from infringing our proprietary rights. We seek to protect our
proprietary position by, among other methods, filing, when possible, U.S. and foreign patent applications relating to our technology,
inventions and improvements that are important to our business. We also rely on trade secrets, know-how, continuing technological
innovation, and in-licensing opportunities to develop and maintain our proprietary position.
As of June 6, 2017, we own a total of 63 issued patents, consisting of 13 issued U.S. patents and 50 issued foreign patents. We also have 33
pending U.S. and foreign patent applications. All our patent applications as well as the issued patents are directed at our Microcyn®
Technology. The issued U.S. and foreign patents expire in 2022-2029.
In addition to our own patents and applications, we have licensed technology developed in Japan relating to an electrolyzed water solution,
methods of manufacture and electrolytic cell designs. This license includes four issued Japanese patents.
Although we work diligently to protect our technology, we can make no assurances that any patent will be issued from our currently
pending patent applications or from future patent applications. The scope of any patent protection may not exclude competitors or provide
competitive advantages to us, and any of our patents may not be held valid if subsequently challenged, and others may claim rights in or
ownership of our patents and proprietary rights. Furthermore, others may develop products similar to our products and may duplicate any of
our products or design around our patents.
We have also filed for trademark protection for marks used with our Microcyn® products in each of the following regions: United States,
Europe, Canada, certain countries in Central and South America, including Mexico and Brazil, certain countries in the Middle East and
certain countries in Asia, including Japan, China, Hong Kong, the Republic of Korea, India and Australia. In addition to patents and
trademarks, we rely on trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our
intellectual property rights. We believe that in order to have a competitive advantage, we must develop and maintain the proprietary aspects
of our technologies. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their
employment, consulting or advisory relationship with us. We also require our employees, consultants and advisors with whom we expect to
work on our products to agree to disclose and assign to us all inventions made in the course of our working relationship with them, while
using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties
may attempt to copy aspects of our products or to wrongfully obtain or use information that we regard as proprietary.
Competition
Dermatology
The dermatology market is highly competitive. Our dermatology products face competition in the United States from several prescription
products including Novartis’ Elidel® Cream, a prescription medicine used topically on the skin to treat eczema, which is also called atopic
dermatitis, and Astellas’ Protopic®, a prescription ointment used to treat moderate to severe eczema. In addition, topical steroids are
commonly used to treat inflammation and itch on atopic dermatitis patients as the standard of care. Many doctors and patients tend to use
topical steroids for a limited time period to manage flare-ups due to their side effects.
Advanced Tissue Care Markets
Competition in the markets for advanced tissue care is intense. We compete with a number of large, well-established and well-funded
companies that sell a broad range of wound and tissue care products, including topical anti-infectives and antibiotics, as well as some
advanced wound technologies, such as skin substitutes, growth factors and sophisticated delayed release silver-based dressings.
Factors Affecting Our Competitive Position
While many companies are able to produce oxychlorine formulations, their products, unlike ours, typically become unstable after a
relatively short period of time or use very large ranges of effectiveness to improve their shelf lives. We believe Microcyn® is a stable anti-
infective therapeutic available, or soon to be available, throughout many parts of the world that treats infection while also enhancing wound
healing through increased blood flow to the wound bed and reduction of inflammation.
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Some of our competitors in the dermatology, advanced tissue care markets and animal health care enjoy several competitive advantages,
including:
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significantly greater name recognition;
established relationships with healthcare professionals, patients and third-party payors;
established distribution networks;
additional product lines and the ability to offer rebates or bundle products to offer discounts or incentives;
greater experience in conducting research and development, manufacturing, obtaining regulatory approval for products and
marketing; and
greater financial and human resources for product development, sales and marketing and patient support.
Research and Development
Research and development expense consists primarily of personnel expenses, clinical and regulatory services and supplies. For the years
ended March 31, 2017 and 2016, research and development expense amounted to $1,576,000 and $1,806,000, respectively. None of these
expenses were borne by our customers.
Significant Customers
We rely on certain key customers for a significant portion of our revenues. At March 31, 2017, one customer represented 26%, one
customer represented 22%, one customer represented 18%, and one customer represented 17% of the net accounts receivable balance. At
March 31, 2017, one customer represented 12%, one customer represented 11%, and one customer represented 10% of net revenues. At
March 31, 2016, one customer represented 33% of the net accounts receivable balance. At March 31, 2016, one customer represented 40%,
one customer represented 15%, one customer represented 14% and two customers each represented 12% of net revenues.
Our Employees
As of March 31, 2017, we employed a total of 75 employees in the United States and the Netherlands. Additionally, we had 138 employees
in Mexico, all of which were contracted through an employment agency. As of March 31, 2017, we had a U.S. direct sales force of 30
employees, 2 district managers, and 3 senior managers. We are not a party to any collective bargaining agreements. We believe our
relations with our employees are good.
Government Regulation
Government authorities in the United States at the federal, state and local levels and foreign countries extensively regulate, among other
things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and
export of pharmaceutical products, biologics and medical devices. All of our products in development will require regulatory approval or
clearance by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical
and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state,
local and foreign statutes and regulations also govern testing, manufacturing, safety, labeling, storage, distribution and record-keeping
related to such products and their marketing. The process of obtaining these approvals and clearances, and the subsequent process of
maintaining substantial compliance with appropriate federal, state, local, and foreign statutes and regulations, require the expenditure of
substantial time and financial resources. In addition, statutes, rules, regulations and policies may change and new legislation or regulations
may be issued that could delay such approvals.
Medical Device Regulation
To date, we have received sixteen 510(k) clearances for use of our Microcyn® technology products as medical devices in tissue care
management, such as cleaning, debridement, lubricating, moistening and dressing, including for acute and chronic wounds, and in
dermatology applications. Any future product candidates or new applications using Microcyn® that are classified as medical devices will
require clearance by the FDA.
Medical devices, such as Microcyn® Wound Care, are subject to FDA clearance and extensive regulation under the Federal Food Drug and
Cosmetic Act. Under the Federal Food Drug and Cosmetic Act, medical devices are classified into one of three classes: Class I, Class II or
Class III. The classification of a device into one of these three classes generally depends on the degree of risk associated with the medical
device and the extent of control needed to ensure safety and effectiveness. Devices may also be designated unclassified. Unclassified
devices are legally marketed pre-amendment devices for which a classification regulation has yet to be finalized and for which a pre-market
approval is not required.
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Class I devices are devices for which safety and effectiveness can be assured by adherence to a set of general controls. These general
controls include compliance with the applicable portions of the FDA’s Quality System Regulation, which sets forth good manufacturing
practice requirements; facility registration, device listing and product reporting of adverse medical events; truthful and non-misleading
labeling; and promotion of the device only for its cleared or approved intended uses. Class II devices are also subject to these general
controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Review and
clearance by the FDA for these devices is typically accomplished through the 510(k) pre-market notification procedure. When 510(k)
clearance is sought, a sponsor must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a
legally marketed device. If the FDA agrees that the proposed device is substantially equivalent to the predicate device, then 510(k)
clearance to market will be granted. After a device receives 510(k) clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a pre-market
approval.
Clinical trials are almost always required to support a pre-market approval application and are sometimes required for a 510(k) pre-market
notification. These trials generally require submission of an application for an investigational device exemption. An investigational device
exemption must be supported by pre-clinical data, such as animal and laboratory testing results, which show that the device is safe to test in
humans and that the study protocols are scientifically sound. The FDA must approve an investigational device exemption, in advance, for a
specified number of patients, unless the product is deemed a non-significant risk device and is eligible for more abbreviated investigational
device exemption requirements.
Both before and after a medical device is commercially distributed, manufacturers and marketers of the device have ongoing
responsibilities under FDA regulations. The FDA reviews design and manufacturing practices, labeling and record keeping, and
manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical
devices. Device manufacturers are subject to periodic and unannounced inspection by the FDA for compliance with the Quality System
Regulation, which sets forth the Current Good Manufacturing Practice requirements that govern the methods used in, and the facilities and
controls used for, the design, manufacture, packaging, servicing, labeling, storage, installation and distribution of all finished medical
devices intended for human use.
FDA regulations prohibit the advertising and promotion of a medical device for any use outside the scope of a 510(k) clearance or pre-
market approval or for unsupported safety or effectiveness claims. Although the FDA does not regulate physicians’ practice of medicine,
the FDA does regulate manufacturer communications with respect to off-label use.
If the FDA finds that a manufacturer has failed to comply with FDA laws and regulations or that a medical device is ineffective or poses an
unreasonable health risk, it can institute or seek a wide variety of enforcement actions and remedies, ranging from a public warning letter to
more severe actions such as:
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imposing fines, injunctions and civil penalties;
requiring a recall or seizure of products;
implementing operating restrictions, which can include a partial suspension or total shutdown of production;
refusing requests for 510(k) clearance or pre-market approval of new products;
· withdrawing 510(k) clearance or pre-market approval approvals already granted; and
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criminal prosecution.
The FDA also has the authority to require a company to repair, replace, or refund the cost of any medical device.
The FDA also administers certain controls over the export of medical devices from the United States, as international sales of medical
devices that have not received FDA clearance are subject to FDA export requirements. Additionally, each foreign country subjects such
medical devices to its own regulatory requirements. In the European Union, there is a single regulatory approval process and approval is
represented by the presence of a CE Mark.
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Other Regulation in the United States
The Physician Payments Sunshine Act
The Physician Payments Sunshine Act signed into law in 2010 as part of the Affordable Care Act requires manufacturers of medical
devices, drugs, biologicals, and medical supplies to track and report certain payments made to and transfers of value provided to physicians
and teaching hospitals as well as to report certain ownership and investment interests held by physicians and their immediate family
members. These manufacturers must report annually to the Center for Medicare & Medicaid Services any direct or indirect payments and
transfers of value of $10 or more, or annual aggregate of $100 or more, made to physicians or to a third party at the request of or on behalf
of a physician, including dentists. Payment includes: consulting fees, compensation for services other than consulting, honoraria, gifts,
entertainment, food, travel (including the specified destinations), education, research, charitable contribution, royalty or license, current or
prospective ownership or investment interest, direct compensation for serving as faculty or as a speaker for a medical education program,
grants, any other nature of the payment, or other transfer of value. Manufacturers face monetary penalties for non-compliance. Certain
payments related to research must be reported separately. Product samples intended for patient use need not be reported.
Health Care Coverage and Reimbursement by Third-Party Payors
Commercial success in marketing and selling our products depends, in part, on the availability of adequate coverage and reimbursement
from third-party health care payors, such as government and private health insurers and managed care organizations. Third-party payors are
increasingly challenging the pricing of medical products and services. Government and private sector initiatives to limit the growth of
health care costs, including price regulation, competitive pricing, and managed-care arrangements, are continuing in many countries where
we do business, including the United States. These changes are causing the marketplace to be more cost-conscious and focused on the
delivery of more cost-effective medical products. Government programs, including Medicare and Medicaid, private health care insurance
companies, and managed-care plans control costs by limiting coverage and the amount of reimbursement for particular procedures or
treatments. This has created an increasing level of price sensitivity among customers for our products. Some third-party payors also require
that a favorable coverage determination be made for new or innovative medical devices or therapies before they will provide
reimbursement of those medical devices or therapies. Even though a new medical product may have been cleared or approved for
commercial distribution, we may find limited demand for the product until adequate coverage and reimbursement have been obtained from
governmental and other third-party payors.
Fraud and Abuse Laws
In the United States, we are subject to various federal and state laws pertaining to healthcare fraud and abuse, which, among other things,
prohibit the offer or acceptance of remuneration intended to induce or in exchange for the purchase of products or services reimbursed
under a federal healthcare program and the submission of false or fraudulent claims with the government. These laws include the federal
Anti-Kickback Statute, the False Claims Act and comparable state laws. These laws regulate the activities of entities involved in the
healthcare industry, such as us, by limiting the kinds of financial arrangements such entities may have with healthcare providers who use or
recommend the use of medical products, including, for example, sales and marketing programs, advisory boards and research and
educational grants. In addition, in order to ensure that healthcare entities comply with healthcare laws, the Office of Inspector General of
the U.S. Department of Health and Human Services recommends that healthcare entities institute effective compliance programs. To assist
in the development of effective compliance programs, the Office of Inspector General has issued model Compliance Program Guidance,
materials for a variety of healthcare entities which, among other things, identify practices to avoid that may implicate the federal Anti-
Kickback Statute and other relevant laws and describes elements of an effective compliance program. While compliance with the
Compliance Program Guidance materials is voluntary, a California law requires pharmaceutical and devices manufacturers to initiate
compliance programs that incorporate the Compliance Program Guidance and the July 2002 Pharmaceuticals Research and Manufacturers
of America Code on Interactions with Healthcare Professionals.
Due to the scope and breadth of the provisions of some of these laws, it is possible that some of our practices might be challenged by the
government under one or more of these laws in the future. Violations of these laws, which are discussed more fully below, can lead to civil
and criminal penalties, damages, imprisonment, fines, exclusion from participation in Medicare, Medicaid and other federal health care
programs, and the curtailment or restructuring of our operations. Any such violations could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
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Anti-Kickback Laws
Our operations are subject to federal and state anti-kickback laws. The federal Anti-Kickback Statute prohibits persons from knowingly and
willfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual for a
good or service reimbursed under a federal healthcare program, or the furnishing, recommending, or arranging of a good or service, for
which payment may be made under a federal healthcare program, such as Medicare or Medicaid. The definition of “remuneration” has been
broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, waiver of
co-payments, and providing anything at less than its fair market value. Because the Anti-Kickback Statute makes illegal a wide variety of
common, even beneficial, business arrangements, the Office of Inspector General was tasked with issuing regulations, commonly known as
“safe harbors,” that describe arrangements where the risk of illegal remuneration is minimal. As long as all of the requirements of a
particular safe harbor are strictly met, the entity engaging in that activity will not be prosecuted under the federal Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that
prosecution will be pursued. However, business arrangements that do not fully satisfy an applicable safe harbor may result in increased
scrutiny by government enforcement authorities, such as the Office of Inspector General. Our agreements to pay compensation to our
advisory board members and physicians who provide other services for us may be subject to challenge to the extent they do not fall within
relevant safe harbors under state and federal anti-kickback laws. In addition, many states have adopted laws similar to the federal Anti-
Kickback Statute, which apply to the referral of patients for health care services reimbursed by Medicaid, and some have adopted such laws
with respect to private insurance. Violations of the Anti-Kickback Statute are subject to significant fines and penalties and may lead to a
company being excluded from participating in federal health care programs.
False Claims Laws
The federal False Claims Act prohibits knowingly filing a false claim, knowingly causing the filing of a false claim, or knowingly using
false statements to obtain payment from the federal government. Certain violations of the Anti-Kickback Statute constitute per se violations
of the False Claims Act. Under the False Claims Act, such suits are known as “qui tam” actions. Individuals may file suit on behalf of the
government and share in any amounts received by the government pursuant to a settlement. In addition, certain states have enacted laws
modeled after the federal False Claims Act under the Deficit Reduction Act of 2005, where the federal government created financial
incentives for states to enact false claims laws consistent with the federal False Claims Act. As more states enact such laws, we expect the
number of qui tam lawsuits to increase. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare
companies to have to defend false claims actions, pay fines or be excluded from Medicare, Medicaid or other federal or state government
healthcare programs as a result of investigations arising out of such actions.
HIPAA
Two federal crimes were created under the Health Insurance Portability and Accountability Act of 1996, or HIPAA: healthcare fraud and
false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud
any healthcare benefit program, including private payors. The false statements statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery
of or payment for healthcare benefits, items or services.
Health Information Privacy and Security
Individually, identifiable health information is subject to an array of federal and state regulation. Federal rules promulgated pursuant to
HIPAA regulate the use and disclosure of health information by “covered entities.” Covered entities include individual and institutional
health care providers from which we may receive individually identifiable health information. These regulations govern, among other
things, the use and disclosure of health information for research purposes, and require the covered entity to obtain the written authorization
of the individual before using or disclosing health information for research. Failure of the covered entity to obtain such authorization could
subject the covered entity to civil and criminal penalties. We may experience delays and complex negotiations as we deal with each entity’s
differing interpretation of the regulations and what is required for compliance. Also, where our customers or contractors are covered
entities, including hospitals, universities, physicians or clinics, we may be required by the HIPAA regulations to enter into “business
associate” agreements that subject us to certain privacy and security requirements. In addition, many states have laws that apply to the use
and disclosure of health information, and these laws could also affect the manner in which we conduct our research and other aspects of our
business. Such state laws are not preempted by the federal privacy law when such laws afford greater privacy protection to the individual
than the federal law. While activities to assure compliance with health information privacy laws are a routine business practice, we are
unable to predict the extent to which our resources may be diverted in the event of an investigation or enforcement action with respect to
such laws.
Foreign Regulation
Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the applicable regulatory authorities of
foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States typically are administered under a three-phase sequential process similar to
that discussed above for medical devices.
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European Union Regulation
Medical Device Regulation
Our products are classified as medical devices in the European Union. In order to sell our medical device products within the European
Union, we are required to comply with the requirements of the Medical Devices Directive, and its national implementations, including
affixing CE markings on our products. The CE marking indicates a product’s compliance with EU legislation and so enables the sale of
products throughout the European Economic Area, or the EEA, comprising the 28 Member States of the EU and European Free Trade
Association, or EFTA, countries Iceland, Norway, and Liechtenstein. In order to comply with the Medical Devices Directive, we must meet
certain requirements relating to the safety and performance of our products and, prior to marketing our products, we must successfully
undergo verification of our products’ regulatory compliance, or conformity assessment.
On May 26, 2017, the new Medical Devices Directive became effective in the EEA, becoming fully applicable after a transition period of
three years, on May 26, 2020. Under the new Medical Devices Directive, certain devices will be classified in higher classes, new devices
will become classified, and certain new obligations are imposed on manufacturers and distributors. Manufacturers will be required to
engage a medical device expert and carry insurance for possible liability claims. In addition, the pre-market approval and post-market
surveillance requirements were enhanced. The European Database for Medical Devices, or Eudamed, will hold and publish information on
medical devices collected from the European Commission and the national authorities.
Medical devices are divided into three regulatory classes: Class I, Class IIB and Class III. The nature of the conformity assessment
procedures depends on the regulatory class of the product. In order to comply with the examination, we completed, among other things, a
risk analysis and presented clinical data, which demonstrated that our products met the performance specifications claimed by us, provided
sufficient evidence of adequate assessment of unwanted side effects and demonstrated that the benefits to the patient outweigh the risks
associated with the device. We are subject to continued supervision and are required to report any serious adverse incidents to the
appropriate authorities. We are also required to comply with additional national requirements that are beyond the scope of the Medical
Devices Directive.
We received a CE certificate for 25 of our Class IIB medical devices, which allows us to affix CE markings on these products and sell them
in Europe. We may not be able to maintain the requirements established for CE markings for any or all of our products or be able to
produce these products in a timely and profitable manner while complying with the requirements of the Medical Devices Directive and
other regulatory requirements.
Marketing Authorizations for Drugs
In order to obtain marketing approval of any of our drug products in Europe, we must submit for review an application similar to a U.S. new
drug application to the relevant authority. In contrast to the United States, where the FDA is the only authority that administers and
approves new drug applications, in Europe there are multiple authorities that administer and approve these applications. Marketing
Authorizations in Europe expire after five years but may be renewed.
We believe that any drug candidate will be reviewed by the Committee for Medicinal Products for Human Use, on behalf of the European
Medicines Agency. Based upon the review of the Committee for Medicinal Products for Human Use, the European Medicines Agency
provides an opinion to the European Commission on the safety, quality and efficacy of the drug. The decision to grant or refuse an
authorization is made by the European Commission.
Approval of Marketing Applications can take several months to several years, or may be denied. This approval process can be affected by
many of the same factors relating to safety, quality and efficacy as in the approval process for new drug applications in the United States.
As in the United States, European drug regulatory authorities can require us to perform additional non-clinical studies and clinical trials.
The need for such studies or trials, if imposed, may delay marketing approval and involve unanticipated costs. Inspection of clinical
investigation sites by a competent authority may also be required as part of the regulatory approval procedure. In addition, as a condition of
marketing approval, regulatory agencies in Europe may require post-marketing surveillance to monitor for adverse effects, or other
additional studies may be required as deemed appropriate. The terms of any approval, including labeling content, may be more restrictive
than expected and could affect the marketability of a product. In addition, after approval for the initial indication, further clinical studies are
usually necessary to gain approval for any additional indications.
European Good Manufacturing Process
In the European Union, the manufacture of pharmaceutical products and clinical trial supplies is subject to good manufacturing practice as
set forth in the relevant laws and guidelines. Compliance with good manufacturing practice is generally assessed by the competent
regulatory authorities. They may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and
personnel qualifications. In addition to obtaining approval for each product, in many cases each drug manufacturing facility must be
approved. Further inspections may occur over the life of the product.
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Mexican Regulation
The Ministry of Health is the authority in charge of sanitary controls in Mexico. Sanitary controls are a group of practices related to the
orientation, education, testing, verification and application of security measures and sanctions exercised by the Ministry of Health. The
Ministry of Health is responsible for the issuance of Official Mexican Standards and specifications for drugs subject to the provisions of the
General Health Law, which govern the process and specifications of drugs, including the obtaining, preparing, manufacturing, maintaining,
mixing, conditioning, packaging, handling, transporting, distributing, storing and supplying of products to the public at large. In addition, a
medical device is defined as a device that may contain antiseptics or germicides used in surgical practice or in the treatment of continuity
solutions, skin injuries or its attachments.
Under the General Health Law, a business that manufactures drugs is either required to obtain a “Sanitary Authorization” or to file an
“Operating Notice.” Our Mexico subsidiary, Oculus Technologies of Mexico, S.A. de C.V., is considered a business that manufactures
medical devices and therefore is not subject to a Sanitary Authorization, but rather only to file an Operating Notice.
In addition to its Operating Notice, our Mexico subsidiary has obtained a “Good Processing Practices Certificate” issued by Mexican
Federal Commission for the Protection against Sanitary Risks, which demonstrates that the manufacturing of Microcyn® at the facility
located in Zapopan, Mexico, operates in accordance with the applicable official standards.
In addition, regulatory approval of prices is required in most countries other than the United States, which could result in lengthy
negotiations delaying our ability to commercialize our products. We face the risk that the prices which result from the regulatory approval
process would be insufficient to generate an acceptable return.
Available Information
Our website is located at www.sonomapharma.com. We make available on our website, free of charge, copies of our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. Our website and the
information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.
ITEM 1A. Risk Factors
Risks Related to Our Business
We have a history of losses, we expect to continue to incur losses and we may never achieve profitability.
We reported a loss from continuing operations of $8,669,000 and $14,724,000 and for the year ended March 31, 2017 and 2016,
respectively. At March 31, 2017 and 2016, our accumulated deficit amounted to $143,101,000 and $152,375,000, respectively. We had
working capital of $19,355,000 and $9,337,000 as of March 31, 2017 and 2016, respectively. During the year ended March 31, 2017 and
2016, net cash used in operating activities amounted to $8,167,000 and $8,746,000, respectively. As of March 31, 2017, we had cash and
cash equivalents of $17,461,000. We expect to continue incurring losses for the foreseeable future and may never achieve or sustain
profitability.
Because our revenues from the Latin America assets sold to Invekra on October 27, 2016, represented a significant portion of our
reported total consolidated revenues during the fiscal years ended March 31, 2017 and 2016, our business following the sale transaction
may be substantially reduced and less diversified.
Our revenues from our Latin America business that we sold to Invekra on October 27, 2016, or the discontinued operations, were
$3,105,000 and $5,715,000 for the years ended March 31, 2017 and 2016, respectively. The Latin America business related assets,
liabilities, results of operations and cash flows for our Latin American business are classified as discontinued operations for all periods
presented. We will continue to supply products at a reduced price from list prices to Invekra and Sanfer pursuant to our contractual
obligations for a transition period of no more than two years while Invekra builds its own manufacturing lines. However, we expect that our
future revenues from Latin America sales will be substantially reduced which may adversely affect our results of operations and financial
condition. We intend to use the proceeds from the sale of the assets to grow our U.S. dermatology business. However, we may encounter
unanticipated difficulties or challenges as we continue to develop our U.S. dermatology business and internal sales force. We may not be
able to grow our dermatology business fast enough to offset the loss of revenue from Latin American sales, or at all. If we are unable to
increase our dermatology revenues or international sales, our results of operations and financial condition may be adversely affected.
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We will have broad discretion in how we use the proceeds from the Latin America asset sale to Invekra, and we may use the proceeds in
ways in which our stockholders may disagree.
We received an aggregate purchase price that Invekra paid for the assets of $22,000,000, with $18,000,000 paid in cash upon closing,
$1,500,000 was held in escrow until completion of our obligation to deliver certain equipment and paid to us on March 16, 2017, and future
variable consideration representing 3% of net sales of certain products in Latin America, excluding Mexico (with a minimum guaranteed
payment of $2,500,000) to be paid in Mexican currency in quarterly installments over a period of ten years from closing. Because the
$2,500,000 is to be paid in foreign currency, we may receive more or less than $2,500,000 due to such exposures. We intend to use the
proceeds from the sale to grow our U.S. dermatology business, such as among others, to increase our direct sales force, to develop and
launch new products and for general working capital. Our management will have broad discretion in the application of the proceeds from
the asset sale and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common
stock. We cannot guarantee that our efforts to grow our U.S. dermatology business will succeed and result in increased sales or revenues.
The failure by management to apply the proceeds effectively could result in financial losses that could have a material adverse effect on our
business or cause the price of our common stock to decline.
If we are unable to expand our direct domestic sales force, we may not be able to successfully sell our products in the United States.
We currently use a direct sales force to sell our products in the dermatology markets. Expanding our sales force is expensive and time
consuming, and the lack of qualified sales personnel could delay or limit the success of our product launch in the United States. Our
domestic sales force competes with the sales operations of our competitors, which are better funded and more experienced. We may not be
able to expand our domestic sales capacity on a timely basis, or in the markets that we desire, or at all.
Our Petaluma facility is vulnerable to natural disasters and other unexpected events, any of which could result in an interruption in our
business and harm to our operating results.
A disruption or failure of our business and operations because of a major earthquake, weather event, cyber-attack, or other catastrophic
event could disrupt or cause delays in performing critical functions of our business. Our corporate headquarters, a portion of our research
and development activities, substantially all of our U.S. manufacturing, and other essential business operations are in Petaluma, California.
We suffered flooding of our Petaluma facility over 10 years ago, which led to a shutdown of our manufacturing facilities for 12 months.
Also, in late 2016, heavy rain nearly caused flooding of our facility. A catastrophic event that results in the destruction or disruption of any
of our critical business or manufacturing could harm our ability to conduct normal business operations. If any of these events result in
damage to our facilities or systems, we may experience interruptions in our business until the damage is repaired, resulting in the potential
loss of customers and revenues. Additionally, we may incur costs in repairing any damage beyond our applicable insurance coverage.
While we have taken precautions against flooding, we cannot assure that heavy rain will not cause significant disruption to our business.
We have also obtained flood and business interruption insurance, but such insurance may not cover all expenses associated with a natural
disaster or the complete shut-down of our Petaluma facility. We are currently looking to move to new facilities after our lease ends, and are
also considering expanding our manufacturing facilities in Mexico. Moving our manufacturing facility is a lengthy and expensive process
due to getting all necessary FDA approvals.
We do not have the necessary regulatory approvals to market Microcyn ® as a drug in the United States.
We have obtained sixteen 510(k) clearances in the United States that permit us to sell Microcyn®-based and other products as medical
devices. However, before we are permitted to sell Microcyn® as a drug in the United States, we must, among other things, successfully
complete additional preclinical studies and well-controlled clinical trials, submit a new drug application to the FDA and obtain FDA
approval.
The FDA approval process is expensive and uncertain, requires detailed and comprehensive scientific and other data and generally takes
several years. Despite the time and expense exerted, approval is never guaranteed. Even if we obtain FDA approval to sell Microcyn® as a
drug, we may not be able to successfully commercialize Microcyn® as a drug in the United States and may never recover the substantial
costs we have invested in the development of our Microcyn®-based products.
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Delays or adverse results in clinical trials could result in increased costs to us and could delay our ability to generate revenue.
Clinical trials can be long and expensive, and the outcome of clinical trials is uncertain and subject to delays. It may take several years to
complete clinical trials, if at all, and a product candidate may fail at any stage of the clinical trial process. The length of time required varies
substantially according to the type, complexity, novelty and intended use of the product candidate. Interim results of a preclinical study or
clinical trial do not necessarily predict final results, and acceptable results in preclinical studies or early clinical trials may not be repeatable
in later subsequent clinical trials. The commencement or completion of any of our clinical trials may be delayed or halted for a variety of
reasons, including the following:
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insufficient funds to continue our clinical trials;
changes in the FDA requirements for approval, including requirements for testing efficacy and safety;
delays in obtaining or failure to obtain FDA or other regulatory authority approval of a clinical trial protocol;
patients not enrolling in clinical trials at the rate we expect;
delays in reaching agreement on acceptable clinical trial agreement terms with prospective sites;
delays in obtaining institutional review board approval to conduct a study at a prospective site;
third party clinical investigators not performing our clinical trials on our anticipated schedule or performance is not consistent
with the clinical trial protocol and good clinical practices, or the third party organizations not performing data collection and
analysis in a timely or accurate manner; and
changes in governmental regulations or administrative actions.
We do not know whether future clinical trials will demonstrate safety and efficacy sufficiently to result in additional FDA approvals. While
a number of physicians have conducted clinical studies assessing the safety and efficacy of Microcyn® for various indications, the data
from these studies are not sufficient to support approval of Microcyn® as a drug in the United States.
Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results.
The results of preclinical studies and early clinical trials of new drugs do not necessarily predict the results of later-stage clinical trials. The
design of our clinical trials is based on many assumptions about the expected effects of our product candidates, and if those assumptions are
incorrect, the trials may not produce statistically significant results. Preliminary results may not be confirmed upon full analysis of the
detailed results of an early clinical trial. Product candidates in later stages of clinical trials may fail to show safety and efficacy sufficient to
support intended use claims despite having progressed through initial clinical testing. The data collected from clinical trials of our product
candidates may not be sufficient to obtain regulatory approval in the United States or elsewhere. Because of the uncertainties associated
with drug development and regulatory approval, we cannot determine if or when we will have an approved product for commercialization
or achieve sales or profits.
If we fail to obtain, or experience significant delays in obtaining, additional regulatory clearances or approvals to market our current or
future products, we may be unable to commercialize these products.
The developing, testing, manufacturing, marketing and selling of medical technology products is subject to extensive regulation by
numerous governmental authorities in the United States and other countries. The process of obtaining regulatory clearance and approval of
medical technology products is costly and time consuming. Even though their underlying product formulations may be the same or similar,
our products are subject to different regulations and approval processes depending upon their intended use.
To obtain regulatory approval of our products as drugs in the United States, we must first show that our products are safe and effective for
target indications through preclinical studies consisting of laboratory and animal testing and clinical trials consisting of human testing. The
FDA generally clears marketing of a medical device through the 510(k) pre-market clearance process if it is demonstrated the new product
has the same intended use and the same or similar technological characteristics as another legally marketed Class II device, such as a device
already cleared by the FDA through the 510(k) premarket notification process, and otherwise meets the FDA’s requirements. Product
modifications, including labeling the product for a new intended use, may require the submission of a new 510(k) clearance and FDA
approval before the modified product can be marketed.
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The outcomes of clinical trials are inherently uncertain. In addition, we do not know whether the necessary approvals or clearances will be
granted or delayed for future products. The FDA could request additional information, changes to product formulation(s) or clinical testing
that could adversely affect the time to market and sale of products as drugs. If we do not obtain the requisite regulatory clearances and
approvals, we will be unable to commercialize our products as drugs or devices and may never recover any of the substantial costs we have
invested in the development of Microcyn®.
Distribution of our products outside the United States is subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market; the time required for regulatory review and the sanctions imposed for violations, vary
from country to country. We do not know whether we will obtain regulatory approvals in such countries or that we will not be required to
incur significant costs in obtaining or maintaining these regulatory approvals. In addition, the export by us of certain of our products that
have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Failure to obtain necessary
regulatory approvals, the restriction, suspension or revocation of existing approvals or any other failure to comply with regulatory
requirements would have a material adverse effect on our future business, financial condition, and results of operations.
If our products do not gain market acceptance, our business will suffer because we might not be able to fund future operations.
A number of factors may affect the market acceptance of our products or any other products we develop or acquire, including, among
others:
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the price of our products relative to other products for the same or similar treatments;
the perception by patients, physicians and other members of the healthcare community of the effectiveness and safety of our
products for their indicated applications and treatments;
changes in practice guidelines and the standard of care for the targeted indication;
our ability to fund our sales and marketing efforts; and
the effectiveness of our sales and marketing efforts or our partners’ sales and marketing efforts.
Our ability to effectively promote and sell any approved products will also depend on pricing and cost-effectiveness, including our ability
to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement, if any. In addition,
our efforts to educate the medical community on the benefits of our product candidates may require significant resources, may be
constrained by FDA rules and policies on product promotion, and may never be successful. If our products do not gain market acceptance,
we may not be able to fund future operations, including developing, testing and obtaining regulatory approval for new product candidates
and expanding our sales and marketing efforts for our approved products, which would cause our business to suffer.
If our competitors develop products similar to Microcyn®, we may need to modify or alter our business strategy, which may delay the
achievement of our goals.
Competitors have and may continue to develop products with similar characteristics to Microcyn®. Such similar products marketed by
larger competitors can hinder our efforts to penetrate the market. As a result, we may be forced to modify or alter our business and
regulatory strategy and sales and marketing plans, as a response to changes in the market, competition and technology limitations, among
others. Such modifications may pose additional delays in achieving our goals.
We depend on third parties and intend to continue to license or collaborate with third parties in various potential markets, and events
involving these strategic partners or any future collaboration could delay or prevent us from developing or commercializing products.
Our business strategy and our short- and long-term operating results depend in part on our ability to execute on existing strategic
collaborations and to license or partner with new strategic partners. We believe collaborations allow us to leverage our resources and
technologies and to access markets that are compatible with our own core areas of expertise while avoiding the cost of establishing or
maintaining a direct sales force in each market. We may incur significant costs in the use of third parties to identify and assist in
establishing relationships with potential collaborators. We currently have a direct sales force, which sells our products in the tissue care, and
dermatology markets, and we use distributors for sales in the animal health care markets. We intend to further expand the geographical
coverage of our direct sales force and add more sales representatives.
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To penetrate our target markets, we may need to enter into additional collaborative agreements to assist in the development and
commercialization of products. For example, depending upon our analysis of the time and expense involved in obtaining FDA approval to
sell a product to treat open wounds, we may choose to license our technology to a third party as opposed to pursuing commercialization
ourselves, or in-license technologies that complement our products. Establishing strategic collaborations is difficult and time-consuming.
Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position
and our internal capabilities. Our discussions with potential collaborators may not lead to the establishment of new collaborations on
favorable terms and may have the potential to provide collaborators with access to our key intellectual property filings and next generation
formations. We have limited control over the amount and timing of resources that our current collaborators or any future collaborators
devote to our collaborations or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to
conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop or commercialize
products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale
of these products. By entering into collaboration, we may preclude opportunities to collaborate with other third parties who do not wish to
associate with our existing third party strategic partners. Moreover, in the event of termination of a collaboration agreement, termination
negotiations may result in less favorable terms.
We rely on a number of key customers who may not consistently purchase our products in the future and if we lose any one of these
customers, our revenues may decline.
Although we have a significant number of customers in each of the geographic markets that we operate in, we rely on certain key
customers for a significant portion of our revenues. At March 31, 2017, one customer represented 12%,and two customers each represented
10% of net revenues. At March 31, 2016, one customer represented 40%, one customer represented 15%, one customer represented 14%,
and two customers each represented 12% of net revenues. In the future, a small number of customers may continue to represent a
significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular
rate over any subsequent period. The loss of any of these customers could adversely affect our revenues.
Negative economic conditions increase the risk that we could suffer unrecoverable losses on our customers’ accounts receivable which
would adversely affect our financial results.
We grant credit to our business customers, which are primarily located in Mexico, Europe and the United States. Collateral is generally not
required for trade receivables. We maintain allowances for potential credit losses. At March 31, 2017, one customer represented 26%, one
customer represented 12%, and one customer represented 10% of the net accounts receivable balance. At March 31, 2016, one customer
represented 33% of the net accounts receivable balance. While we believe we have a varied customer base and have experienced strong
collections in the past, if current economic conditions disproportionately impact any one of our key customers, including reductions in their
purchasing commitments to us or their ability to pay their obligations, it could have a material adverse effect on our revenues and liquidity.
We have not purchased insurance on our accounts receivable balances.
If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products
could be subject to restrictions or withdrawal from the market.
Regulatory approvals or clearances that we currently have and that we may receive in the future are subject to limitations on the indicated
uses for which the products may be marketed, and any future approvals could contain requirements for potentially costly post-marketing
follow-up studies. If the FDA determines that our promotional materials or activities constitute promotion of an unapproved use or we
otherwise fail to comply with FDA regulations, we may be subject to regulatory enforcement actions, including warning letters, injunctions,
seizures, civil fines or criminal penalties. In addition, the manufacturing, labeling, packaging, adverse event reporting, storing, advertising,
promoting, distributing and record-keeping for approved products are subject to extensive regulation. We are subject to continued
supervision by European regulatory agencies relating to our CE markings and are required to report any serious adverse incidents to the
appropriate authorities. Our manufacturing facilities, processes and specifications are subject to periodic inspection by the FDA, Mexican
and other regulatory authorities and from time to time, we may receive notices of deficiencies from these agencies as a result of such
inspections. Our failure to continue to meet regulatory standards or to remedy any deficiencies could result in restrictions being imposed on
our products or manufacturing processes, fines, suspension or loss of regulatory approvals or clearances, product recalls, termination of
distribution, product seizures or the need to invest substantial resources to comply with various existing and new requirements. In the more
egregious cases, criminal sanctions, civil penalties, disgorgement of profits or closure of our manufacturing facilities are possible. The
subsequent discovery of previously unknown problems with Microcyn®, including adverse events of unanticipated severity or frequency,
may result in restrictions on the marketing of our products, and could include voluntary or mandatory recall or withdrawal of products from
the market.
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New government regulations may be enacted and changes in FDA policies and regulations and, their interpretation and enforcement, could
prevent or delay regulatory approval of our products. We cannot predict the likelihood, nature or extent of adverse government regulation
that may arise from future legislation or administrative action, either in the United States or abroad. Therefore, we do not know whether we
will be able to continue to comply with any regulations or that the costs of such compliance will not have a material adverse effect on our
future business, financial condition, and results of operations. If we are not able to maintain regulatory compliance, we will not be permitted
to market our products and our business would suffer.
We may experience difficulties in manufacturing Microcyn ®, which could prevent us from commercializing one or more of our
products.
The machines used to manufacture our Microcyn®-based products are complex, use complicated software and must be monitored by highly
trained engineers. Slight deviations anywhere in our manufacturing process, including quality control, labeling and packaging, could lead to
a failure to meet the specifications required by the FDA, the Environmental Protection Agency, European notified bodies, Mexican
regulatory agencies and other foreign regulatory bodies, which may result in lot failures or product recalls. If we are unable to obtain
quality internal and external components, mechanical and electrical parts, if our software contains defects or is corrupted, or if we are
unable to attract and retain qualified technicians to manufacture our products, our manufacturing output of Microcyn®, or any other
product candidate based on our platform that we may develop, could fail to meet required standards, our regulatory approvals could be
delayed, denied or revoked, and commercialization of one or more of our Microcyn®-based products may be delayed or foregone.
Manufacturing processes that are used to produce the smaller quantities of Microcyn® needed for clinical tests and current commercial
sales may not be successfully scaled up to allow production of significant commercial quantities. Any failure to manufacture our products
to required standards on a commercial scale could result in reduced revenues, delays in generating revenue and increased costs.
Our competitive position depends on our ability to protect our intellectual property and our proprietary technologies.
Our ability to compete and to achieve and maintain profitability depends on our ability to protect our intellectual property and proprietary
technologies. We currently rely on a combination of patents, patent applications, trademarks, trade secret laws, confidentiality agreements,
license agreements and invention assignment agreements to protect our intellectual property rights. We also rely upon unpatented know-
how and continuing technological innovation to develop and maintain our competitive position. These measures may not be adequate to
safeguard our Microcyn® Technology. If we do not protect our rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced.
Although we have filed several U.S. and foreign patent applications related to our Microcyn®-based products, the manufacturing
technology for making the products, and their uses, only 13 U.S. patents have been issued from these applications to date.
Our pending patent applications and any patent applications we may file in the future may not result in issued patents, and we do not know
whether any of our in-licensed patents or any additional patents that might ultimately be issued by the U.S. Patent and Trademark Office or
foreign regulatory body will protect our Microcyn® Technology. Any claims that are issued may not be sufficiently broad to prevent third
parties from producing competing substitutes and may be infringed, designed around, or invalidated by third parties. Even issued patents
may later be found to be invalid, or may be modified or revoked in proceedings instituted by third parties before various patent offices or in
courts. For example, our European patent that was initially issued on May 30, 2007 was revoked by the Opposition Division of the
European Patent Office in December 2009 following opposition proceedings instituted by a competitor.
The degree of future protection for our proprietary rights is more uncertain in part because legal means afford only limited protection and
may not adequately protect our rights, and we will not be able to ensure that:
· we were the first to invent the inventions described in patent applications;
· we were the first to file patent applications for inventions;
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others will not independently develop similar or alternative technologies or duplicate our products without infringing our
intellectual property rights;
any patents licensed or issued to us will provide us with any competitive advantages;
· we will develop proprietary technologies that are patentable; or
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the patents of others will not have an adverse effect on our ability to do business.
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The policies we use to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In
addition, confidentiality and invention assignment agreements executed by our employees, consultants and advisors may not be enforceable
or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or
disclosures.
We operate in the State of California. The laws of California prevent us from imposing a delay before an employee who may have access
to trade secret and propriety know-how can commence employment with a competing company. Although we may be able to pursue legal
action against competitive companies improperly using our proprietary information, we may not be aware of any use of our trade secrets
and proprietary know-how until after significant damages has been done to our Company.
We cannot be certain that the steps we have taken will prevent the misappropriation and use of our intellectual property in the United
States, or in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.
We may face intellectual property infringement claims that could be time-consuming, costly to defend and could result in our loss of
significant rights and, in the case of patent infringement claims, the assessment of treble damages.
On occasion, we may receive notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. We may
have disputes regarding intellectual property rights with the parties that have licensed those rights to us. We may also initiate claims to
defend our intellectual property. Intellectual property litigation, regardless of its outcome, is expensive and time-consuming, and could
divert management’s attention from our business and have a material negative effect on our business, operating results or financial
condition. In addition, the outcome of such litigation may be unpredictable. If there is a successful claim of infringement against us, we
may be required to pay substantial damages, including treble damages if we were to be found to have willfully infringed a third party’s
patent, to the party claiming infringement, develop non-infringing technology, stop selling our products or using technology that contains
the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis
could harm our business. In addition, modifying our products to exclude infringing technologies could require us to seek re-approval or
clearance from various regulatory bodies for our products, which would be costly and time consuming. Also, we may be unaware of
pending patent applications that relate to our technology. Parties making infringement claims on future issued patents may be able to obtain
an injunction that would prevent us from selling our products or using technology that contains the allegedly infringing intellectual
property, which could harm our business.
Our ability to generate revenue will be diminished if we are unable to obtain acceptable prices or an adequate level of reimbursement
from third-party payors of health care costs, or if the number of people with insurance were to drop significantly.
The continuing efforts of governmental and other third-party payors, including managed care organizations such as health maintenance
organizations, or HMOs, to contain or reduce costs of health care may affect our future revenue and profitability, and the future revenue
and profitability of our potential customers, suppliers and collaborative or license partners and the availability of capital. For example, in
certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States,
governmental and private payors have limited the growth of health care costs through price regulation or controls, competitive pricing
programs and drug rebate programs. Our ability to commercialize our products successfully will depend in part on the extent to which
appropriate coverage and reimbursement levels for the cost of our Microcyn® products and related treatment are obtained from
governmental authorities, private health insurers and other organizations, such as HMOs.
There is significant uncertainty concerning third-party coverage and reimbursement of newly approved medical products and drugs. Third-
party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed healthcare
in the United States and the concurrent growth of organizations such as HMOs, as well as the “Affordable Care Act,” or any new
healthcare laws may result in lower prices for or rejection of our products. The cost containment measures that health care payors and
providers are instituting and the effect of any healthcare reform or changes to managed healthcare could materially and adversely affect our
ability to generate revenues.
In both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the
health care system in ways that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers
and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new
reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority
for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal
coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and
other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously
harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage
policies and payment limitations in setting their own reimbursement rates, and therefore any reduction in reimbursement that results from
the MMA may result in a similar reduction in payments from private payors.
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In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation
Act, or collectively, the PPACA, became law in the United States. The PPACA, among others, has mandated higher Medicaid rebates,
expanded the rebate to Medicaid managed care utilization, established annual fees and tax fees for certain pharmaceutical companies, and
increased the types of entities eligible for the federal drug discount program. The effects of recently proposed changes to the PPACA are
difficult to predict and could adversely affect our business. However, if the number of insured people were to decrease significantly it could
have a material adverse effect on our sales of products and our business operations.
Additionally, many states have proposed legislation that seeks to regulate pharmaceutical drug pricing by way of public disclosure or by
placing price ceilings on products. If such legislation is passed, it may result in downward pressure on pharmaceutical reimbursement,
which could negatively affect market acceptance of our Microcyn® products.
We expect to experience pricing pressures in connection with the sale of our pharmaceutical products, due to the trend toward managed
health care, the increasing influence of health maintenance organizations and additional legislative proposals. If we fail to successfully
secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving
market acceptance of our products and our business will be harmed.
Our dermatology sales may be subject to seasonal fluctuations.
Sales of our dermatological products depend in part on the type of insurance coverage of patients. With the decrease of managed care plans
and the rise of high-deductible insurance plans, we have experienced slower sales for our dermatological products in the beginning of the
year. This may be the result of insurance deductibles not yet being met and patients deciding to withhold purchases of our products.
Fluctuations may negatively affect our business and results of operations.
We could be required to indemnify third parties for alleged intellectual property infringement, which could cause us to incur significant
costs.
Some of our distribution agreements contain commitments to indemnify our distributors against liability arising from infringement of third
party intellectual property such as patents. We may be required to indemnify our customers for claims made against them or contribute to
license fees they are required to pay. If we are forced to indemnify for claims or to pay license fees, our business and financial condition
could be substantially harmed.
A significant part of our business is conducted outside of the United States, exposing us to additional risks that may not exist in the
United States, which in turn could cause our business and operating results to suffer.
We have material international operations in Mexico and Europe. During the year ended March 31, 2017 and 2016, approximately 45% and
67% of our total product related revenue (including product license fees and royalties), respectively, were generated from sales outside of
the United States. Our business is highly regulated for the use, marketing and manufacturing of our Microcyn®-based products both
domestically and internationally. Our international operations are subject to risks, including:
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local political or economic instability;
changes in governmental regulation;
changes in import/export duties;
trade restrictions;
lack of experience in foreign markets;
difficulties and costs of staffing and managing operations in certain foreign countries;
· work stoppages or other changes in labor conditions;
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difficulties in collecting accounts receivables on a timely basis or at all; and
adverse tax consequences or overlapping tax structures.
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We plan to continue to market and sell our products internationally to respond to customer requirements and market opportunities. We
currently have manufacturing facilities in Mexico and the United States. Establishing operations in any foreign country or region presents
risks such as those described above as well as risks specific to the particular country or region. In addition, until a payment history is
established over time with customers in a new geographic area or region, the likelihood of collecting receivables generated by such
operations could be less than our expectations. As a result, there is a greater risk that the reserves set with respect to the collection of such
receivables may be inadequate. If our operations in any foreign country are unsuccessful, we could incur significant losses and we may not
achieve profitability.
In addition, changes in policies or laws of the United States or foreign governments resulting in, among other things, changes in regulations
and the approval process, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private
enterprises, could reduce the anticipated benefits of our international expansion. If we fail to realize the anticipated revenue growth of our
future international operations, our business and operating results could suffer.
Our international operations are subject to trade policies and trade agreements and unfavorable changes could harm our business.
We have significant international operations in Mexico and Europe, and we manufacture products for export in Mexico. If trade policies or
trade agreements, such as the North American Free Trade Agreement, or NAFTA, were to change unfavorably, or protectionist measures or
tariffs were enacted, our business, financial condition and results of operations could be adversely affected.
Our sales in international markets subject us to foreign currency exchange and other risks and costs which could harm our business.
A substantial portion of our revenues are derived from outside the United States; primarily from Mexico and Europe. We anticipate that
revenues from international customers will continue to represent a substantial portion of our revenues for the foreseeable future. Because
we generate revenues in foreign currencies, we are subject to the effects of exchange rate fluctuations. The functional currency of our
Mexican subsidiary is the Mexican Peso and the functional currency of our Netherlands subsidiary is the Euro. For the preparation of our
consolidated financial statements, the financial results of our foreign subsidiaries are translated into U.S. dollars using average exchange
rates during the applicable period. If the U.S. dollar appreciates against the Mexican Peso or the Euro, as applicable, the revenues we
recognize from sales by our subsidiaries will be adversely impacted. Foreign exchange gains or losses as a result of exchange rate
fluctuations in any given period could harm our operating results and negatively impact our revenues. Additionally, if the effective price of
our products were to increase as a result of fluctuations in foreign currency exchange rates, demand for our products could decline and
adversely affect our results of operations and financial condition.
The loss of key members of our senior management team, any of our directors, or our highly skilled scientists, technicians and
salespeople could adversely affect our business.
Our success depends largely on the skills, experience and performance of key members of our executive management team, including Jim
Schutz, our Chief Executive Officer, Robert Miller, our Chief Financial Officer, Robert Northey, our Executive Vice President of Research
and Development, and Jeffrey Day, head of our IntraDerm™ Pharmaceuticals division. The efforts of these people will be critical to us as
we continue to develop our products and attempt to commercialize products in the tissue and dermatology markets. If we were to lose one or
more of these individuals, we might experience difficulties in competing effectively, developing our technologies and implementing our
business strategies.
Our research and development programs depend on our ability to attract and retain highly skilled scientists and technicians. We may not be
able to attract or retain qualified scientists and technicians in the future due to the intense competition for qualified personnel among
medical technology businesses, particularly in the San Francisco Bay Area. We also face competition from universities and public and
private research institutions in recruiting and retaining highly qualified personnel. In addition, our success depends on our ability to attract
and retain salespeople with extensive experience in dermatology or in the markets we seek, and who have close relationships with the
medical community, including physicians and other medical staff. We may have difficulties locating, recruiting or retaining qualified
salespeople, which could cause a delay or decline in the rate of adoption of our products. If we are not able to attract and retain the
necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to support
our research, development and sales programs.
23
The dermatology, tissue and animal healthcare industries are highly competitive and subject to rapid technological change. If our
competitors are better able to develop and market products that are less expensive or more effective than any products that we may
develop, our commercial opportunity will be reduced or eliminated.
Our success depends, in part, upon our ability to stay at the forefront of technological change and maintain a competitive position. We
compete with large healthcare, pharmaceutical and biotechnology companies, along with smaller or early-stage companies that have
collaborative arrangements with larger pharmaceutical companies, academic institutions, government agencies and other public and private
research organizations. Many of our competitors have significantly greater financial resources and expertise in research and development,
manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do.
Our competitors may:
·
·
·
·
develop and patent processes or products earlier than we will;
develop and commercialize products that are less expensive or more efficient than any products that we may develop;
obtain regulatory approvals for competing products more rapidly than we will; and
improve upon existing technological approaches or develop new or different approaches that render our technology or products
obsolete or non-competitive.
As a result, we may not be able to successfully commercialize any future products.
The success of our research and development efforts may depend on our ability to find suitable collaborators to fully exploit our
capabilities. If we are unable to establish collaborations or if these future collaborations are unsuccessful, our research and
development efforts may be unsuccessful, which could adversely affect our results of operations and financial condition.
An important element of our business strategy is to enter into collaborative or license arrangements under which we license our Microcyn®
Technology to other parties for development and commercialization. We expect to seek collaborators for our drug candidates and for a
number of our potential products because of the expense, effort and expertise required to conduct additional clinical trials and further
develop those potential product candidates. Because collaboration arrangements are complex to negotiate, we may not be successful in our
attempts to establish these arrangements. If we need third party assistance in identifying and negotiating one or more acceptable
arrangements, it might be costly. Also, we may not have products that are desirable to other parties, or we may be unwilling to license a
potential product because the party interested in it is a competitor. The terms of any arrangements that we establish may not be favorable to
us. Alternatively, potential collaborators may decide against entering into an agreement with us because of our financial, regulatory or
intellectual property position or for scientific, commercial or other reasons. If we are not able to establish collaborative agreements, we
may not be able to develop and commercialize new products, which would adversely affect our business and our revenues.
In order for any of these collaboration or license arrangements to be successful, we must first identify potential collaborators or licensees
whose capabilities complement and integrate well with ours. We may rely on these arrangements for not only financial resources, but also
for expertise or economies of scale that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and
for licenses to technology rights. However, it is likely that we will not be able to control the amount and timing or resources that our
collaborators or licensees devote to our programs or potential products. If our collaborators or licensees prove difficult to work with, are
less skilled than we originally expected, or do not devote adequate resources to the program, the relationship will not be successful. If a
business combination involving a collaborator or licensee and a third party were to occur, the effect could be to diminish, terminate or
cause delays in development of a potential product.
If we are unable to comply with broad and complex federal and state fraud and abuse laws, including state and federal anti-kickback
laws, we could face substantial penalties and our products could be excluded from government healthcare programs.
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, which include, among other things, “anti-
kickback” laws that prohibit payments to induce the referral of products and services, and “false claims” statutes that prohibit the fraudulent
billing of federal healthcare programs. Our operations are subject to the Federal Anti-Kickback Statute, a criminal statute that, subject to
certain statutory exceptions, prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration,
directly or indirectly, to induce or reward a person either (i) for referring an individual for the furnishing of items or services for which
payment may be made in whole or in part by a government healthcare program such as Medicare or Medicaid, or (ii) for purchasing,
leasing, ordering or arranging for or recommending the purchasing, leasing or ordering of an item or service for which payment may be
made under a government healthcare program. Because of the breadth of the Federal Anti-Kickback Statute, the Office of Inspector
General of the U.S. Department of Health and Human Services, was authorized to adopt regulations setting forth additional exceptions to
the prohibitions of the statute commonly known as “safe harbors.” If all of the elements of an applicable safe harbor are fully satisfied, an
arrangement will not be subject to prosecution under the Federal Anti-Kickback Statute.
24
In addition, if there is a change in law, regulation or administrative or judicial interpretations of these laws, we may have to change our
business practices or our existing business practices could be challenged as unlawful, which could have a negative effect on our business,
financial condition and results of operations.
Healthcare fraud and abuse laws are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a statute or
regulation has been violated. The frequency of suits to enforce these laws has increased significantly in recent years and has increased the
risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other
federal and state healthcare programs as a result of an investigation arising out of such action. We cannot assure you that we will not
become subject to such litigation. Any violations of these laws, or any action against us for violation of these laws, even if we successfully
defend against it, could harm our reputation, be costly to defend and divert management’s attention from other aspects of our business.
Similarly, if the physicians or other providers or entities with which we do business are found to have violated abuse laws, they may be
subject to sanctions, which could also have a negative impact on us.
Our efforts to discover and develop potential products may not lead to the discovery, development, commercialization or marketing of
actual drug products.
We are currently engaged in a number of different approaches to discover and develop new product applications and product candidates.
Discovery and development of potential drug candidates are expensive and time-consuming, and we do not know if our efforts will lead to
discovery of any drug candidates that can be successfully developed and marketed. If our efforts do not lead to the discovery of a suitable
drug candidate, we may be unable to grow our clinical pipeline or we may be unable to enter into agreements with collaborators who are
willing to develop our drug candidates.
We may not be able to maintain sufficient product liability insurance to cover claims against us.
Product liability insurance for the healthcare industry is generally expensive to the extent it is available at all. We may not be able to
maintain such insurance on acceptable terms or be able to secure increased coverage if the commercialization of our products progresses,
nor can we be sure that existing or future claims against us will be covered by our product liability insurance. Moreover, the existing
coverage of our insurance policy or any rights of indemnification and contribution that we may have may not be sufficient to offset existing
or future claims. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage and not subject to any
indemnification or contribution could have a material adverse effect on our future business, financial condition, and results of operations.
If any of our third-party contractors fail to perform their responsibilities to comply with FDA rules and regulations, the manufacture,
marketing and sales of our products could be delayed, which could decrease our revenues.
Supplying the market with our Microcyn® Technology products requires us to manage relationships with an increasing number of
collaborative partners, suppliers and third-party contractors. As a result, our success depends partially on the success of these third parties
in performing their responsibilities to comply with FDA rules and regulations. Although we pre-qualify our contractors and we believe that
they are fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources
and expertise that they apply to these activities. For example, we and our suppliers are required to comply with the FDA’s quality system
regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging,
storage and shipping of our products. The FDA enforces the quality system regulation through inspections.
If any of our partners or contractors fail to perform their obligations in an adequate and timely manner, or fail to comply with the FDA’s
rules and regulations, including failure to comply with quality systems regulations or a corrective action submitted to the FDA after
notification by the FDA of a deficiency is deemed insufficient, then the manufacture, marketing and sales of our products could be delayed.
Our products could be detained or seized, the FDA could order a recall, or require our partner to replace or offer refunds for our products.
The FDA could also require our partner, and, depending on our agreement with our partner, us, to notify healthcare professionals and others
that the products present unreasonable risks of substantial harm to the public health. If any of these events occur, the manufacture,
marketing and sales of our products could be delayed which could decrease our revenues.
25
If we fail to comply with the FDA’s rules and regulations and are subject to an FDA recall as part of an FDA enforcement action, the
associated costs could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our Company, our products, the manufacturing facilities for our products, the distribution of our products, and our promotion and
marketing materials are subject to strict and continual review and periodic inspection by the FDA and other regulatory agencies for
compliance with pre-approval and post-approval regulatory requirements.
If we fail to comply with the FDA’s rules and regulations, we could be subject to an enforcement action by the FDA. The FDA could
undertake regulatory actions, including seeking a consent decree, recalling or seizing our products, ordering a total or partial shutdown of
production, delaying future marketing clearances or approvals, and withdrawing or suspending certain of our current products from the
market. A product recall, restriction, or withdrawal could result in substantial and unexpected expenditures, destruction of product
inventory, and lost revenues due to the unavailability of one or more of our products for a period of time, which could reduce profitability
and cash flow. In addition, a product recall or withdrawal could divert significant management attention and financial resources. If any of
our products are subject to an FDA recall, we could incur significant costs and suffer economic losses. Production of our products could be
suspended and we could be required to establish inventory reserves to cover estimated inventory losses for all work-in-process and finished
goods related to products we, or our third-party contractors, manufacture. A recall of a material amount of our products could have a
significant, unfavorable impact on our future gross margins.
If our products fail to comply with FDA and other governmental regulations, or our products are deemed defective, we may be required
to recall our products and we could suffer adverse public relations that could adversely impact our sales, operating results, and
reputation which would adversely affect our business operations.
We may be exposed to product recalls, including voluntary recalls or withdrawals, and adverse public relations if our products are alleged
to cause injury or illness, or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental
regulations. Governmental authorities can also require product recalls or impose restrictions for product design, manufacturing, labeling,
clearance, or other issues. For the same reasons, we may also voluntarily elect to recall, restrict the use of a product or withdraw products
that we consider below our standards, whether for quality, packaging, appearance or otherwise, in order to protect our brand reputation.
Product recalls, product liability claims, even if unmerited or unsuccessful, or any other events that cause consumers to no longer associate
our brand with high quality and safe products may also result in adverse publicity, hurt the value of our brand, harm our reputation among
our customers and other healthcare professionals who use or recommend the products, lead to a decline in consumer confidence in and
demand for our products, and lead to increased scrutiny by federal and state regulatory agencies of our operations, any of which could have
a material adverse effect on our brand, business, performance, prospects, value, results of operations and financial condition.
Our inability to raise additional capital on acceptable terms in the future may cause us to curtail certain operational activities, including
regulatory trials, sales and marketing, and international operations, in order to reduce costs and sustain the business, and such inability
would have a material adverse effect on our business and financial condition.
We expect capital outlays and operating expenditures to increase over the next several years as we work to expand our sales force, conduct
regulatory trials, commercialize our products and expand our infrastructure. We may need to raise additional capital in order to, among
other things:
·
·
·
·
·
·
·
increase our sales and marketing efforts to drive market adoption and address competitive developments;
sustain commercialization of our current products or new products;
acquire or license technologies;
develop new products;
fund our clinical trials and preclinical studies;
expand our manufacturing capabilities; and
finance capital expenditures and our general and administrative expenses.
26
Our present and future funding requirements will depend on many factors, including:
·
·
·
·
·
·
·
the progress and timing of our clinical trials;
the level of research and development investment required to maintain and improve our technology position;
cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
our efforts to acquire or license complementary technologies or acquire complementary businesses;
changes in product development plans needed to address any difficulties in commercialization;
competing technological and market developments; and
changes in regulatory policies or laws that affect our operations.
If we raise additional funds by issuing equity securities it will result in dilution to our stockholders. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds by issuing debt
securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms
of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations or
licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that
are not favorable to us. A failure to obtain adequate funds may cause us to curtail certain operational activities, including regulatory trials,
sales and marketing, and international operations, in order to reduce costs and sustain our business, and would have a material adverse
effect on our business and financial condition.
Risks Related to Our Common Stock
The market price of our common stock may be volatile, and the value of your investment could decline significantly.
The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock trades
depends upon a number of factors, including our historical and anticipated operating results, our financial situation, announcements of new
products by us or our competitors, our ability or inability to raise the additional capital we may need and the terms on which we raise it,
and general market and economic conditions. Some of these factors are beyond our control. Broad market fluctuations may lower the
market price of our common stock and affect the volume of trading in our stock, regardless of our financial condition, results of operations,
business or prospects. It is impossible to assure you that the market price of our shares of common stock will not fall in the future.
27
Our operating results may fluctuate, which could cause our stock price to decrease.
Fluctuations in our operating results may lead to fluctuations, including declines, in our share price. Our operating results and our share
price may fluctuate from period to period due to a variety of factors, including:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
demand by physicians, other medical staff and patients for our Microcyn®-based products;
reimbursement decisions by third-party payors and announcements of those decisions;
clinical trial results published by others in our industry and publication of results in peer-reviewed journals or the presentation
at medical conferences;
the inclusion or exclusion of our Microcyn®-based products in large clinical trials conducted by others;
actual and anticipated fluctuations in our quarterly financial and operating results;
developments or disputes concerning our intellectual property or other proprietary rights;
issues in manufacturing our product candidates or products;
new or less expensive products and services or new technology introduced or offered by our competitors or by us;
the development and commercialization of product enhancements;
changes in the regulatory environment;
delays in establishing our sales force or new strategic relationships;
costs associated with collaborations and new product candidates;
introduction of technological innovations or new commercial products by us or our competitors;
litigation or public concern about the safety of our product candidates or products;
changes in recommendations of securities analysts or lack of analyst coverage;
failure to meet analyst expectations regarding our operating results;
additions or departures of key personnel; and
general market conditions.
Variations in the timing of our future revenues and expenses could also cause significant fluctuations in our operating results from period to
period and may result in unanticipated earning shortfalls or losses. In addition, The NASDAQ Capital Market, in general, and the market
for life sciences companies, in particular, have experienced significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
28
Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law may make it more difficult for
stockholders to change our management and may also make a takeover difficult.
Our corporate documents and Delaware law contain provisions that limit the ability of stockholders to change our management and may
also enable our management to resist a takeover. These provisions include:
·
·
·
the ability of our Board of Directors to issue and designate, without stockholder approval, the rights of up to 714,286 shares of
convertible preferred stock, which rights could be senior to those of common stock;
limitations on persons authorized to call a special meeting of stockholders; and
advance notice procedures required for stockholders to make nominations of candidates for election as directors or to bring
matters before meetings of stockholders.
We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits “business
combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder
who became a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that
such stockholder became an interested stockholder.
These provisions might discourage, delay or prevent a change of control in our management. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect directors and cause us to take other corporate actions. In
addition, the existence of these provisions, together with Delaware law, might hinder or delay an attempted takeover other than through
negotiations with our Board of Directors.
We currently have significant “equity overhang” which could adversely affect the market price of our common stock and impair our
ability to raise additional capital through the sale of equity securities in the future.
We currently have significant “equity overhang.” The possibility that substantial amounts of our common stock may be issued to and then
sold by investors, or the perception that such issuances and sales could occur, often called “equity overhang,” could adversely affect the
market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future.
The consummation of the exercise of warrants for common stock would significantly increase the number of issued and outstanding shares
of our common stock.
Our stockholders may experience substantial dilution in the value of their investment if we issue additional shares of our capital stock
or other securities convertible into common stock.
Our Restated Certificate of Incorporation, as amended, allows us to issue up to 12,000,000 shares of our common stock and to issue and
designate, without stockholder approval, the rights of up to 714,286 shares of preferred stock. In the event we issue additional shares of our
capital stock, dilution to our stockholders could result. In addition, if we issue and designate a class of convertible preferred stock, these
securities may provide for rights, preferences or privileges senior to those of holders of our common stock. Additionally, if we issue
preferred stock, it may convert into common stock at a ratio of 1:1 or greater because our Restated Certificate of Incorporation, as amended,
allows us to designate a conversion ratio without limitations.
Shares issuable upon the conversion of warrants or the exercise of outstanding options may substantially increase the number of shares
available for sale in the public market and depress the price of our common stock.
As of March 31, 2017, we had outstanding warrants exercisable for an aggregate of 1,344,000 shares of our common stock at a weighted
average exercise price of approximately $7.18 per share. In addition, as of March 31, 2017, options to purchase an aggregate of 899,000
shares of our common stock were outstanding at a weighted average exercise price of approximately $17.87 per share and a weighted
average contractual term of 7.08 years. In addition, 1,170,000 shares of our common stock were available on March 31, 2017 for future
option grants under our 2011 Stock Incentive Plan and 2016 Equity Incentive Plan. To the extent any of these warrants or options are
exercised and any additional options are granted and exercised, there will be further dilution to stockholders and investors. Until the options
and warrants expire, these holders will have an opportunity to profit from any increase in the market price of our common stock without
assuming the risks of ownership. Holders of options and warrants may convert or exercise these securities at a time when we could obtain
additional capital on terms more favorable than those provided by the options or warrants. The exercise of the options and warrants will
dilute the voting interest of the owners of presently outstanding shares by adding a substantial number of additional shares of our common
stock.
We have filed several registration statements with the SEC, so that substantially all of the shares of our common stock which are issuable
upon the exercise of outstanding warrants and options may be sold in the public market. The sale of our common stock issued or issuable
upon the exercise of the warrants and options described above, or the perception that such sales could occur, may adversely affect the
market price of our common stock.
29
ITEM 2. Properties
We currently lease the following material properties:
Location
1129 N. McDowell Blvd., Petaluma, CA 94954, USA USD 11,072
Rent per month Purpose
324 Campus Lane, Suite A, Fairfield, CA 94534, USA USD 4,103
USD 2,700
454 North 34th Street, Seattle, Wash. 98103, USA
USD 2,369
Suite 130, First Floor, 2500 York Road, Jamison, PA
18929, USA
414 Creekstone Ridge, Woodstock, GA 30188, USA
Industria Vidriera 81, Zapopan Industrial Norte,
Zapopan, Jalisco, 45132, Mexico
Industria Maderera 124 & 106 & 815 Zapopan
USD 1,200
MXN 121,395
MXN 124,500
Principal executive office, also used for research and
manufacturing
Office
Shared office and laboratory space
Office
Office
Office, manufacturing, storage
Storage
Industrial Norte, Zapopan, Jalisco, 45132, Mexico
Boven de Wolfskuil 3, C30-C32
6049 LX Herten/Roermond
The Netherlands
USD 1,700
Office
As we expand, we may need to establish manufacturing facilities in other countries. We believe that our properties will be adequate to meet
our needs for at least the next 12 months.
ITEM 3. Legal Proceedings
On occasion, we may be involved in legal matters arising in the ordinary course of our business including matters involving proprietary
technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for
which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of
comprehensive income (loss).
ITEM 4. Mine Safety Disclosures.
Not applicable.
30
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on The NASDAQ Capital Market under the symbol “SNOA”. Previously, it traded under the symbol “OCLS”
until December 6, 2016. Our common stock has been trading since our initial public offering on January 25, 2007. The warrants we issued
in connection with our January 2015 offering are traded on The NASDAQ Capital Market under the symbol “SNOAW” since January 21,
2015.
The following table sets forth the range of high and low sales prices for our common stock for each quarter during the last two fiscal years,
based on the last daily sale in each of the quarters:
Stock price-high
Stock price-low
Stock price-high
Stock price-low
Holders
Year Ended March 31, 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
6.65 $
3.62 $
4.98 $
3.57 $
5.65 $
3.91 $
8.25
5.03
Year Ended March 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
8.80 $
3.50 $
9.15 $
5.25 $
6.50 $
5.50 $
6.85
4.20
As of June 1, 2017, we had approximately 337 holders of record of our common stock. Holders of record include nominees who may hold
shares on behalf of multiple owners.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain all future earnings for
the operation of our business and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity
Compensation Plans,” is incorporated herein by reference. Refer to Item 12 of Part III of this annual report on Form 10-K for additional
information.
Recent Sales of Unregistered Securities
We did not issue unregistered securities during the quarter ended March 31, 2017.
Issuer Purchases of Equity Securities
There were no repurchases made by us or on our behalf, or by any “affiliated purchaser,” of shares of our common stock during the quarter
ended March 31, 2017.
ITEM 6. Selected Financial Data
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing
scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
31
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies
and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and
expenses, and disclosure of commitments and contingencies at the date of the consolidated financial statements.
On an ongoing basis, we evaluate our estimates and judgments. Areas in which we exercise significant judgment include, but are not
necessarily limited to, our valuation of accounts receivable, inventory, income taxes, equity transactions (compensatory and financing) and
contingencies. We have also adopted certain polices with respect to our recognition of revenue that we believe are consistent with the
guidance provided under Securities and Exchange Commission Staff Accounting Bulletin No. 104.
We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry,
current and expected economic conditions, the attributes of our products, the regulatory environment, and in certain cases, the results of
outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach
when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies,
we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment,
actual results could differ from such estimates.
Reclassification due to Sale of Latin America business to Invekra
As of March 31, 2017, we determined that the sale of our Latin American operations to Invekra qualified as a sale of a component of our
business and, as such, all such activity prior to consummation of the sale is required to be included in discontinued operations on our
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. As a result of the sale, certain prior period amounts have been reclassified for
comparative purposes to conform to the fiscal 2017 presentation. These reclassifications have no impact on our previously reported net
loss. See also Note 4.
The carrying value of the assets and liabilities of discontinued operations on our consolidated balance sheets as of March 31, 2017 and
March 31, 2016 were as follows:
Accounts receivable (net)
Inventories
Total current assets of discontinued operations
Assets
Deferred revenue
Total current liabilities of discontinued operations
Liabilities
Deferred revenue, less current portion
Total long-term liabilities of discontinued operations
32
March 31,
2017
March 31,
2016
$
$
$
$
$
$
– $
–
– $
– $
– $
– $
– $
766,000
45,000
811,000
300,000
300,000
112,000
112,000
The operations of our Latin American business included in discontinued operations is summarized as follows:
Revenues
Cost of revenues
Income from discontinued operations before tax
Gain on disposal of discontinued operations before income taxes
Total income from discontinued operations, before tax
Income tax expense
Income from discontinued operations, net of tax
Year Ended
March 31,
2017
2016
$
$
3,105,000 $
561,000
2,544,000
19,679,000
22,223,000
(4,280,000)
17,943,000 $
5,715,000
1,153,000
4,562,000
–
4,562,000
–
4,562,000
For a Summary of Critical Accounting Policies, please refer to Notes to Consolidated Financial Statements, Note 3.
Results of Operations
Comparison of the Year Ended March 31, 2017 and 2016
Results of Continuing Operations
Revenues
Total revenues for the year ended March 31, 2017 of $12,825,000 increased by $3,456,000 or 37%, as compared to $9,369,000 for the year
ended March 31, 2016. Product revenues for the year ended March 31, 2017 of $11,957,000 increased by $3,880,000 or 48% when
compared to the same period in the prior year. This increase was the result of strong growth in the United States, Europe, the Rest of the
World and Latin America. Product licensing fees and royalties decreased $231,000 related to the loss of our former partner Exeltis.
Product revenues in the United States for the year ended March 31, 2017 of $6,580,000, increased by $2,209,000, or 51%, when compared
to the same period in the prior year. This increase was mostly the result of higher sales of our dermatology products, because of new
product launches, and growth in existing products during the period. Additionally, our animal health care products revenues increased by
$673,000 from $501,000 to $1,174,000 during the period. This increase is primarily the result of higher sales of animal health care products
by our partners.
Product revenue in Europe and the Rest of the World for the year ended March 31, 2017 of $4,078,000, increased by $372,000, or 10%, as
compared to the same period in the prior year, with increases in Europe and Asia, partly offset by decreases in India and Middle East.
As a result of the asset purchase agreement and arrangement we entered into on October 27, 2016 with Invekra, going forward, we expect
our revenues in Latin America will decrease significantly. Pursuant to the arrangement, going forward we will receive a royalty of 3% on
all Latin American net revenues (outside of Mexico), with a minimum payment of $250,000 per year for the next ten years, to be paid
quarterly in Mexican pesos. Additionally, while Invekra sets up their manufacturing, we will continue to supply Invekra with product at a
reduced price. During the year ended March 31, 2017, we reported $1,299,000 of Latin America product revenue related to Invekra.
The following table shows our product revenues by geographic region:
United States
Latin America
Europe and Rest of the World
Product License Fees and Royalties
Total
$
Year Ended March 31,
2016
2017
4,371,000 $
6,580,000 $
1,299,000
4,078,000
11,957,000
–
–
3,706,000
8,077,000
231,000
8,308,000 $
$ Change
% Change
2,209,000
1,299,000
372,000
3,880,000
(231,000)
3,649,000
51%
100%
10%
48%
(100)%
44%
$
11,957,000 $
33
In connection with our sale of our Latin American business to Invekra, product revenues and cost of revenues were reclassified from
continuing operations to discontinued operations as follows:
Product revenues
Product license fees and royalties
Total product related revenues
Cost of revenues
Gross profit
Year Ended March 31,
2017
2016
2,693,000 $
412,000
3,105,000
561,000
2,544,000 $
4,965,000
750,000
5,715,000
1,153,000
4,562,000
$
$
In the year ended March 31, 2017, product license fees and royalties revenues declined primarily as a result of a decrease in revenue related
to our former dermatology partner Exeltis.
Service revenues for the year ended March 31, 2017 of $868,000 decreased by $193,000 when compared to $1,061,000 in the prior period.
This decrease was due to a decrease in the number of tests and services provided by our lab services business.
Gross Profit
For the year ended March 31, 2017, we reported total revenues of $12,825,000 and total cost of revenues of $7,157,000, resulting in total
gross profit of $5,668,000 or 44% of total revenues, compared to a gross profit of $2,648,000 or 28% of total revenues, for the same period
in the prior year. The increase in gross profit was primarily due to the reclassification, in the prior period, of Latin America product and
license revenue and related variable cost of goods sold from continuing operations to discontinued operations. Additionally. As our stronger
margin dermatology revenue increases we expect our margins to improve.
For the year ended March 31, 2017, we reported product revenues of $11,957,000 and cost of product revenues of $6,419,000, resulting in
product gross profit of $5,538,000, or 46% of product revenues, compared to product gross profit of $2,237,000, or 28% of product
revenues, for the same period in the prior year. The increase in gross profit was primarily due to the reclassification, in the prior period, of
Latin America product and related variable cost of goods sold from continuing operations to discontinued operations. Additionally, as
dermatology product revenues increased as an overall percentage of our product revenues, we expect our margins will improve due to
higher gross margins associated with our dermatology products.
For the year ended March 31, 2017, we reported service revenues of $868,000 and cost of service revenues of $738,000, resulting in
service gross profit of $130,000, or 15% of service revenues, compared to service gross profit of $180,000, or 17% of service revenues, for
the same period in the prior year. The decrease in service gross profit was primarily related to lower service revenue in the current period
and the mix of tests and services performed.
Research and Development Expense
We reported research and development expenses of $1,576,000 for the year ended March 31, 2017, a decrease of $230,000, or 13%, when
compared to the same period in the prior year. The decrease is largely due to a decrease in development milestone payments and license
fees related to a dermatology product from the prior period.
Selling, General and Administrative Expense
We reported selling, general and administrative expenses of $17,066,000 for the year ended March 31, 2017, an increase of $1,510,000, or
10%, when compared to the same period in the prior year. The increase for the year ended March 31, 2017 was primarily due to higher
sales expenses related to our growing dermatology division.
We expect selling, general and administrative expenses to increase as we add territories and people to our direct sales force.
Interest Expense
Interest expense was negligible for the years ended March 31, 2017 and 2016.
34
Interest Income
Interest income was $22,000 and $2,000, respectively, for the years ended March 31, 2017 and 2016.
Gain due to Change in Fair Value of Derivative Liabilities
In connection with our December 9, 2013 and February 26, 2014 registered direct offerings we issued a series of common stock purchase
warrants, which contained cash settlement provisions. During the year ended March 31, 2016, we recorded a gain due to a decrease in the
fair value of our derivative liabilities of $11,000, primarily due to a decrease in our common stock price, offset by the expiration of
warrants and the decreasing contractual term of outstanding warrants. During the year ended March 31, 2017, the remaining warrants
outstanding at March 31, 2016 expired.
Other Income, net
Other income, net of $18,000 for the year ended March 31, 2017, increased $38,000, from $20,000 of other expense, net for the same
period in the prior year. The increase in other income, net for the year ended March 31, 2017 was primarily related to foreign exchange
gains during the period.
Net Loss from Continuing Operations
Net loss from continuing operations for the year ended March 31, 2017 was $8,669,000 compared to a net loss of $14,724,000, for the
same period in the prior year. The decrease in net loss from continuing operations of $6,055,000 is primarily the result of a tax benefit
recorded during the current period of $4,268,000 and the reclassification of Latin America to discontinued operations of $2,544,000 in the
current period and $4,562,000 in the prior period.
Discontinued Operations, net of Tax
During the year ended March 31, 2017, we divested certain assets related to our Latin American business. On October 27, 2016, we closed
on an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of our
Latin America assets. We decided to divest our Latin American business, to focus on our U.S. dermatology business, resulting in a strategic
shift that had a major effect on our operations and financial results. Therefore, the divested Latin American operations meet the criteria to be
reported as discontinued operations.
The related assets, liabilities, results of operations and cash flows for our Latin American business are classified as discontinued operations
for all periods presented.
Income from discontinued operations for the years ended March 31, 2017 and 2016 includes $2,544,000 and $4,562,000, respectively, of
gross profit reclassified from continuing operations to discontinued operations during the periods.
Gain on disposal of discontinued operations for the year ended March 31, 2017, includes $19,679,000 of gain from the gain on the sale of
intellectual property assets and equipment of our discontinued Latin American business.
Additionally, for the year ended March 31, 2017, we recorded income tax expense related to the transaction in the amount of $4,280,000.
In addition, for the year ended March 31, 2017, we recorded a $4,268,000 tax benefit resulting in tax expense of $12,000.
The following summarizes operations of our Latin American business included in discontinued operations:
Revenues
Cost of revenues
Income from discontinued operations before tax
Gain on disposal of discontinued operations before income taxes
Total income from discontinued operations, before tax
Income tax expense
Income from discontinued operations, net of tax
35
Year Ended
March 31,
2017
2016
$
$
3,105,000 $
561,000
2,544,000
19,679,000
22,223,000
(4,280,000)
17,943,000 $
5,715,000
1,153,000
4,562,000
–
4,562,000
–
4,562,000
Liquidity and Capital Resources
We reported a net income of $9,274,000 for the year ended March 31, 2017, and for the year ended March 31, 2016, a net loss of
$10,162,000. At March 31, 2017 and March 31, 2016, our accumulated deficit amounted to $143,101,000 and $152,375,000, respectively.
At March 31, 2017 and March 31, 2016, our working capital amounted to $19,355,000 and $9,337,000, respectively.
We currently anticipate that our cash and cash equivalents, including the proceeds from the sale to Invekra, will be sufficient to meet our
working capital requirements to continue our sales and marketing and research and development efforts for at least 12 months from the date
of filing this annual report.
Sources of Liquidity
As of March 31, 2017, we had cash and cash equivalents of $17,461,000. Since our inception, substantially all of our operations have been
financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, as well as various
loans and the sale of certain Latin American assets to Invekra.
Since April 1, 2015, substantially all of our operations have been financed through the following transactions:
·
·
·
·
·
proceeds of $112,000 received from the exercise of common stock purchase warrants and options;
net proceeds of $4,538,000 received from the sale of Ruthigen common stock;
net proceeds of $2,994,000 received from an underwritten public offering on March 18, 2016;
net proceeds of $3,150,000 received from the sale of common stock through our At the Market Issuance Sales Agreement as of
March 31, 2017; and
net proceeds of $18,639,000 received from the sale of certain Latin America assets to Invekra on October 27, 2016.
On October 27, 2016, we, along with our Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V., closed on
an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of our
Latin America assets for an aggregate purchase price of $22,000,000, with $18,000,000 paid in cash upon closing, $1,500,000 paid on
March 16, 2017 upon delivery of certain equipment and technology, and $2,500,000 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 per cent on net sales of certain products in Latin America, excluding Mexico. Since the $2,500,000 is paid in foreign
currency, we may receive more or less than $2,500,000 due to currency fluctuations.
Cash Flows
As of March 31, 2017, we had cash and cash equivalents of $17,461,000, compared to $7,469,000 as of March 31, 2016.
Net cash used in operating activities during the year ended March 31, 2017 was $8,167,000, primarily due to our net income in the period
of $9,274,000 which was offset by adjustments to net income related to our gain on sale of our Latin American assets, net of tax, of
$15,399,000 and the income tax benefit realized of $4,268,000. Additionally, we recorded stock compensation related expenses of
$2,243,000.
Net cash used in operating activities during the year ended March 31, 2016 was $8,746,000, primarily due to our net loss of $10,162,000,
offset by non-cash transactions during the year ended March 31, 2016, including $2,341,000 of stock-based compensation expenses.
36
Net cash provided by investing activities was $18,224,000 for the year ended March 31, 2017, consisting of primarily proceeds from the
sale of our Latin American assets, net of costs, of $18,639,000, offset by $394,000 related to equipment purchases and $21,000 related to
changes in long-term deposits.
Net cash provided by investing activities was $4,191,000 for the year ended March 31, 2016, consisting of $345,000 related to equipment
purchases offset by $4,538,000 received from the sale of 1,650,000 of our shares of Ruthigen common stock.
Net cash used in financing activities was $32,000 for the year ended March 31, 2017, primarily related to $130,000 principal payments on
debt offset by cash received from the exercise of stock options and stock purchase warrants of $98,000.
Net cash provided by financing activities was $6,039,000 for the year ended March 31, 2016. During the period ended March 31, 2016, we
received net proceeds from the March 18, 2016 underwritten offering of common stock and common stock purchase warrants of
$2,994,000 and net proceeds of $3,150,000 from an At the Market Issuance of common stock. The offering proceeds were offset by
principal payments on the debt in the amount of $119,000.
Contractual Obligations
As of March 31, 2017, we had contractual obligations as follows (long-term debt and capital lease amounts include principal
payments only):
Long-term debt
Capital leases
Operating leases
Total
Total
168,000 $
242,000
713,000
1,123,000 $
$
$
Payments Due by Period
Less Than
1 Year
1-3
Years
After
3 Years
123,000 $
74,000
371,000
568,000 $
45,000 $
168,000
342,000
555,000 $
–
–
–
Operating Capital and Capital Expenditure Requirements
We reported a net income of $9,274,000 for the year ended March 31, 2017. At March 31, 2017 and March 31, 2016, our accumulated
deficit amounted to $143,101,000 and $152,375,000, respectively. At March 31, 2017 and March 31, 2016, our working capital amounted
to $19,355,000 and $9,337,000, respectively.
On October 27, 2016, we, along with our Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V., closed on
an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of our
Latin America assets for an aggregate purchase price of $22,000,000, with $18,000,000 paid in cash upon closing, $1,500,000 paid on
March 16, 2017 upon delivery of certain equipment and technology, and $2,500,000 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 per cent on net sales of certain products in Latin America, excluding Mexico. Since the $2,500,000 is to be paid in
foreign currency, we may receive more or less than $2,500,000 due to currency fluctuations.
We may need to raise additional capital from external sources in order to continue the longer term efforts contemplated under our business
plan. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue our product
development initiatives and to penetrate markets for the sale of our products.
37
Our future funding requirements will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
our current and future revenues;
the scope, rate of progress and cost of our research and development activities;
future clinical trial results;
the terms and timing of any collaborative, licensing and other arrangements that we may establish;
the cost and timing of regulatory approvals;
the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products;
the cost and timing of establishing sales, marketing and distribution capabilities;
the effect of competing technological and market developments;
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
the extent to which we acquire or invest in businesses, products and technologies.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing
scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
38
ITEM 8. Consolidated Financial Statements and Supplementary Data
Sonoma Pharmaceuticals, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended March 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended March 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of Sonoma Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sonoma Pharmaceuticals, Inc. and Subsidiaries, formerly known as
Oculus Innovative Sciences, Inc. (the “Company”) as of March 31, 2017 and 2016, and the related consolidated statements of
comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Sonoma Pharmaceuticals, Inc. and Subsidiaries, formerly known as Oculus Innovative Sciences, Inc., as of March 31, 2017 and 2016, and
the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Marcum LLP
Marcum LLP
New York, NY
June 28, 2017
F-1
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred consideration, net of discount
Current assets of discontinued operations (Note 4)
Total current assets
Property and equipment, net
Deferred consideration, net of discount, less current portion
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Deferred revenue Invekra (Note 4)
Current portion of long-term debt
Current portion of capital leases
Taxes payable
Current liabilities of discontinued operations (Note 4)
Total current liabilities
Long-term deferred revenue Invekra (Note 4)
Long-term debt, less current portion
Long-term capital leases, less current portion
Long-term liabilities of discontinued operations (Note 4)
Total liabilities
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized, none issued
and outstanding at March 31, 2017 and March 31, 2016, respectively
Common stock, $0.0001 par value; 12,000,000 shares authorized at March 31, 2017 and
March 31, 2016, 4,289,322 and 4,196,873 shares issued and outstanding at March 31,
2017 and March 31, 2016, respectively (Note 13)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
March 31
2017
2016
17,461 $
2,108
2,221
616
237
–
22,643
1,239
1,497
80
25,459 $
1,255 $
1,302
345
176
123
74
13
–
3,288
527
45
168
–
4,028
7,469
1,508
1,595
1,505
–
811
12,888
850
–
65
13,803
1,337
1,526
274
–
114
–
–
300
3,551
–
–
–
112
3,663
–
–
1
168,709
(143,101)
(4,178)
21,431
25,459 $
1
166,368
(152,375)
(3,854)
10,140
13,803
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-2
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Revenues
Product
Product licensing fees and royalties
Service
Total revenues
Cost of revenues
Product
Service
Total cost of revenues
Gross profit
Operating expenses
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Interest expense
Interest income
Gain due to change in fair value of derivative liabilities
Other income (expense), net
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations
Income from discontinued operations (net of tax) (Note 4)
Net income (loss)
Net income (loss) per share: basic and diluted
Continuing operations
Discontinued operations
Weighted-average number of shares used in per share calculations: basic and diluted
Other comprehensive income (loss)
Net income (loss)
Foreign currency translation adjustments
Comprehensive income (loss)
Year Ended
March 31,
2017
2016
11,957 $
–
868
12,825
6,419
738
7,157
5,668
1,576
17,066
18,642
(12,974)
(3)
22
–
18
(12,937)
4,268
(8,669)
17,943
9,274 $
(2.05) $
4.25
2.20 $
4,224
9,274 $
(324)
8,950 $
8,077
231
1,061
9,369
5,840
881
6,721
2,648
1,806
15,556
17,362
(14,714)
(3)
2
11
(20)
(14,724)
–
(14,724)
4,562
(10,162)
(4.48)
1.39
(3.09)
3,289
(10,162)
(347)
(10,509)
$
$
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-3
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended March 31, 2017 and 2016
(In thousands, except share amounts)
Common Stock
($0.0001 par Value)
Shares
3,009,017
Amount
Additional
Paid in
Capital
Accumulated
Other
Accumulated
Comprehensive
Deficit
Loss
Total
1
157,773
(142,213)
(3,507)
12,054
450,919
–
3,150
–
–
3,150
Balance, March 31, 2015
Issuance of common stock in
connection with At-the-Market
issuances of common stock, net of
commissions, expenses and other
offering costs
Issuance of common stock and
common stock purchase warrants
in connection with March 23, 2016
closing of offering, net of
commissions, expenses and other
offering costs
Issuance of common stock upon
exercise of common stock
purchase warrants
Issuance of common stock for
settlement of service fees
Issuance of common stock purchase
warrants for payment of service
fees
Stock based compensation related to
issuance of common stock
restricted stock grants
Stock based compensation, net of
forfeitures
Foreign currency translation
adjustment
Net loss
Balance, March 31, 2016
Adjustment due to 5:1 reverse stock-
split on June 24, 2016
Issuance of common stock upon
exercise of common stock
purchase warrants
Issuance of common stock upon
680,000
2,220
41,704
–
13,013
–
–
–
4,196,873
$
(214)
18,232
exercise of common stock options
1,250
Issuance of common stock for
settlement of service fees
Stock based compensation related to
issuance of common stock
restricted stock grants
Stock based compensation, net of
forfeitures
Foreign currency translation
adjustment
Net income
Balance, March 31, 2017
20,801
52,380
–
–
–
4,289,322
$
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
1
$
$
2,994
14
286
128
64
1,959
–
–
–
–
–
–
–
–
–
–
–
–
–
–
166,368
$
–
(10,162)
(152,375)
$
(347)
–
(3,854)
$
–
91
7
98
302
1,843
–
–
–
–
–
–
–
–
–
–
–
–
–
168,709
$
–
9,274
(143,101)
$
(324)
–
(4,178)
$
2,994
14
286
128
64
1,959
(347)
(10,162)
10,140
–
91
7
98
302
1,843
(324)
9,274
21,431
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss from continuing operations
Net income from discontinued operations, net of tax
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Change in provision for doubtful accounts
Change in provision for discounts, rebates, distributor fees and returns
Change in provision for obsolete inventory
Gain on sale of Latin American assets, net of tax
Income tax benefit
Stock-based compensation
Service provider expenses settled with common stock
Gain due to change in fair value of derivative liabilities
Foreign currency transaction gains
Loss on disposal of property and equipment
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of long-term investment
Proceeds from sale of Latin American assets, net of costs
Deposits
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs
Proceeds from exercise of common stock options
Proceeds from exercise of common stock purchase warrants
Principal payments on long-term debt
Net cash (used in) provided by financing activities
Effect of exchange rate on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Non-cash operating and financing activities:
Service provider expenses settled with common stock
Insurance premiums financed
Automobiles financed using long-term debt
Automobiles financed using capital leases
Sale of Latin American assets to Invekra:
Assets sold and liabilities transferred:
Deferred consideration – current, net
Deferred consideration – long-term, net
Taxes payable
Deferred revenue – current
Deferred revenue – long-term
Year Ended March 31,
2017
2016
$
(8,669) $
17,943
9,274
(14,724)
4,562
(10,162)
248
(1)
19
–
(15,399)
(4,268)
2,145
98
–
(36)
10
34
(675)
979
(58)
(298)
(239)
(8,167)
(394)
–
18,639
(21)
18,224
–
7
91
(130)
(32)
(33)
9,992
7,469
17,461 $
3 $
98 $
120
64
242
237
1,497
(13)
(176)
(527)
1,018 $
244
(5)
470
77
–
–
2,151
190
(11)
(38)
–
(1,282)
(382)
(751)
429
919
(595)
(8,746)
(345)
4,538
–
(2)
4,191
6,144
–
14
(119)
6,039
(151)
1,333
6,136
7,469
3
96
146
–
–
–
–
–
–
–
–
$
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Organization and Recent Developments
Organization
Sonoma Pharmaceuticals, Inc., formerly known as Oculus Innovative Sciences, 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 that develops and markets
solutions for the treatment of dermatological conditions and advanced tissue care. The Company’s products, which are sold throughout the
United States and 39 countries around the world, have improved patient outcomes for more than five million patients globally by reducing
infections, itch, pain, scarring, odor and harmful inflammatory responses.
Effective December 6, 2016, the Company changed its name from Oculus Innovative Sciences, Inc. to Sonoma Pharmaceuticals, Inc.
Reverse Stock Split
Effective June 24, 2016, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every 5 shares of
common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse
stock split. Instead, stockholders entitled to receive fractional shares received cash in the amount equal to the closing price per share of the
Company’s common stock as reported on the NASDAQ Capital Market as of 5:00 p.m. Eastern Time on June 24, 2016, multiplied by the
fraction of one share owned by the stockholder. The reverse stock split reduced the number of shares of the Company’s common stock
outstanding from 21,004,857 to 4,200,756. The total number of authorized shares of common stock was also proportionally decreased by a
ratio of 1:5 and the par value per share of the common stock continued to be $0.0001.
All common shares and per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect a 1
for 5 reverse stock split.
NOTE 2 – Liquidity and Financial Condition
The Company reported a net income of $9,274,000 for the year ended March 31, 2017. At March 31, 2017 and March 31, 2016, the
Company’s accumulated deficit amounted to $143,101,000 and $152,375,000, respectively. The Company had working capital of
$19,355,000 and $9,337,000 as of March 31, 2017 and March 31, 2016, 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, penetrate markets for the sale
of its products.
On October 27, 2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V.,
closed on an asset purchase agreement with Invekra, S.A.P.I de C.V., an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain
of its Latin America assets for an aggregate purchase price of $22,000,000, with $18,000,000 paid in cash upon closing, $1,500,000 paid on
March 16, 2017 upon delivery of certain equipment and technology, and $2,500,000 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 per cent on net sales of certain products in Latin America, excluding Mexico. Since the $2,500,000 will be paid in
foreign currency, the Company may receive more or less than $2,500,000 due to currency fluctuations.
The Company currently anticipates that its cash and cash equivalents will be sufficient to meet its working capital requirements to continue
its sales and marketing and research and development efforts for at least 12 months from the date of filing this annual report.
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”), formerly known as Oculus Innovative Sciences, B.V. Aquamed has no current operations. All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-6
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.
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2017 presentation. These
reclassifications have no impact on the Company’s previously reported net loss.
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 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.
F-7
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.
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, 2017, one
customer represented 26%, one customer represented 12%, and one customer represented 10% of the net accounts receivable balance. At
March 31, 2017, one customer represented 12% and two customers each represented 10% of net revenues. At March 31, 2016, one
customer represented 33% of the net accounts receivable balance. At March 31, 2016, one customer represented 40%, one customer
represented 15%, one customer represented 14% and two customers each represented 12% 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.
F-8
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, 2017 and 2016 in the amounts of $14,000 and
$15,000, respectively. Additionally at March 31, 2017 and 2016 the Company has allowances of $672,000 and $653,000, 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 market.
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 reserves to reduce the carrying amounts of inventories to their net realizable value in
the amounts of $61,000 and $164,000 at March 31, 2017 and 2016, respectively, which is included in cost of product revenues on the
Company’s accompanying consolidated statements of comprehensive income (loss).
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, 2017 and 2016, 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:
Office equipment
Manufacturing, lab and other equipment
Furniture and fixtures
Years
3
5
7
F-9
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, 2017 and 2016, 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, 2017 and 2016, research and development expense amounted to $1,576,000
and $1,806,000, respectively.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs amounted to $149,000 and $175,000, for the years ended March
31, 2017 and 2016 respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying
consolidated statements of comprehensive income (loss).
Shipping and Handling Costs
The Company classifies amounts billed to customers related to shipping and handling in sale transactions as product revenues. Shipping
and handling costs incurred are recorded in cost of product revenues. For the years ended March 31, 2017 and 2016, the Company recorded
revenue related to shipping and handling costs of $49,000 and $59,000, respectively.
F-10
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 $324,000 and $347,000 for the years ended March 31, 2017 and 2016, respectively, and were recorded in other comprehensive income
(loss) in the accompanying consolidated statements of comprehensive income (loss).
Foreign currency transaction gains (losses) relate primarily to trade payables and receivables between subsidiaries OTM and SP Europe.
These transactions are expected to be settled in the foreseeable future. The Company recorded foreign currency transaction gains of
$36,000 and $38,000 for the years ended March 31, 2017 and 2016, respectively. The related were recorded in other income (expense), net,
in the accompanying consolidated statements of comprehensive income (loss).
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 income (loss) or cash flows.
Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in stockholders’ equity during a period from non-owner sources and is reported in
the consolidated statement of changes in stockholders’ equity. To date, other comprehensive loss consists of changes in accumulated
foreign currency translation adjustments. Accumulated other comprehensive losses at March 31, 2017 and 2016 were $4,178,000 and
$3,854,000, respectively.
Net Income (Loss) per Share
The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the
weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic
income (loss) per share for the years ended March 31, 2017 and 2016 excludes the potentially dilutive securities summarized in the table
below because their inclusion would be anti-dilutive.
Restricted stock units
Options to purchase common stock
Warrants to purchase common stock
March 31,
2017
2016
34,000
899,000
1,344,000
2,277,000
–
753,000
1,485,000
2,238,000
F-11
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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue
from Contracts with Customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires
entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU
2015-14, which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual
periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15,
2016. In March 2016, the FASB issued ASU 2016-08 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-
1 0 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. The amendments are intended to make the guidance more operable and lead to more consistent application. The amendments
have the same effective date and transition requirements as the new revenue recognition standard. The Company will adopt the new
standard on April 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship
and bill and, on that primary revenue stream, the Company does not expect significant differences. However, the Company’s analysis is
preliminary and subject to change. The Company has not completed its assessment of multiple element arrangements and certain discount
and trade promotion programs.
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 not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and
results of operations.
F-12
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 not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and
results of operations.
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 not yet determined the effect of the
adoption of this standard on the Company’s consolidated financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. For public companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim
periods within those periods. The Company has not yet determined the effect of the adoption of this standard on the Company’s
consolidated financial position and results of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting.
This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. For public
companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The
Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of
operations.
Accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“FASB”), SEC and/or other
standards-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, subject to mutual extension (“Supply
Agreement”). During the year ended March 31, 2017, the Company reported $1,299,000 of Latin America product revenue related to the
Supply Agreement with Invekra.
The Company will provide product under the Supply Agreement at a reduced price from its current price list, while Invekra builds its own
manufacturing line. At the conclusion of the transition period, the Company will cease to be a supplier of product to Invekra. The
Company is uncertain as to the duration of the transition period or when Invekra will complete the build out of its manufacturing line.
Pursuant to the Supply Agreement, the Company is subject to a potential penalty for failure to supply the products for a consecutive period
of 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.
F-13
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
Services under the Technical Services
Arrangement
Production equipment manufactured
Intellectual property and territory rights
Methodology to Estimate Selling Price
Based upon revenues expected from a market participant to provide technical services at
expected service levels
Based upon an expected selling price derived from costs marked up to selling price at market
participant margins
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
Cash received on March 16, 2017
Face value of variable consideration ($250,000 per year for ten years)
Total proceeds from sale
Equipment costs
Transaction costs
Total proceeds, net of transaction costs
Discount on variable consideration (using a 7.5% discount rate)
Total proceeds, net of discount
Proceeds were allocated to the components of the sale based upon their relative selling prices are as follows:
Services under the Technical Services Arrangement
Production equipment manufactured, net
Intellectual property and territory rights
Total proceeds
$
$
$
$
18,000,000
1,500,000
2,500,000
22,000,000
(305,000)
(556,000)
21,139,000
(752,000)
20,387,000
708,000
192,000
19,487,000
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 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.
F-14
The carrying value of the assets and liabilities of discontinued operations on the consolidated balance sheets as of March 31, 2017 and
March 31, 2016 were as follows:
Accounts receivable (net)
Inventories
Total current assets of discontinued operations
Assets
Deferred revenue
Total current liabilities of discontinued operations
Liabilities
Deferred revenue, less current portion
Total long-term liabilities of discontinued operations
March 31,
2017
March 31,
2016
$
$
$
$
$
$
– $
–
– $
– $
– $
– $
– $
766,000
45,000
811,000
300,000
300,000
112,000
112,000
The operations of its Latin American business included in discontinued operations is summarized as follows:
Revenues
Cost of revenues
Income from discontinued operations before tax
Gain on disposal of discontinued operations before income taxes
Total income from discontinued operations, before tax
Income tax expense
Income from discontinued operations, net of tax
NOTE 5 – Accounts Receivable
Accounts receivable, net consists of the following:
Accounts receivable
Less: allowance for doubtful accounts
Less: discounts, rebates, distributor fees and returns
NOTE 6 – Inventories
Inventories, net consist of the following:
Raw materials
Finished goods
F-15
Year Ended
March 31,
2017
2016
3,105,000 $
561,000
2,544,000
19,679,000
22,223,000
(4,280,000)
17,943,000 $
5,715,000
1,153,000
4,562,000
–
4,562,000
–
4,562,000
March 31,
2017
2016
2,794,000 $
(14,000)
(672,000)
2,108,000 $
2,176,000
(15,000)
(653,000)
1,508,000
$
$
$
$
March 31,
2017
2016
$
$
1,480,000 $
741,000
2,221,000 $
1,059,000
536,000
1,595,000
NOTE 7 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
Prepaid insurance
Prepaid rebates
Other prepaid expenses and other current assets
NOTE 8 – Property and Equipment
Property and equipment consists of the following:
Manufacturing, lab, and other equipment
Office equipment
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
March 31,
2017
2016
587,000 $
–
29,000
616,000 $
405,000
378,000
722,000
1,505,000
March 31,
2017
2016
3,319,000 $
324,000
91,000
536,000
4,270,000
(3,031,000)
1,239,000 $
3,075,000
298,000
83,000
307,000
3,763,000
(2,913,000)
850,000
$
$
$
$
Depreciation and amortization expense amounted to $248,000 and $244,000 for the years ended March 31, 2017 and 2016, respectively.
During the year ended March 31, 2017 and 2016, 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 income (loss).
NOTE 9 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
Salaries and related costs
Professional fees
Other
March 31,
2017
2016
681,000 $
79,000
542,000
1,302,000 $
693,000
557,000
276,000
1,526,000
$
$
F-16
NOTE 10 – Long-Term Debt
Financing of Insurance Premiums
On January 25, 2016, the Company entered into a note agreement for $146,000 with an interest rate of 6.25% per annum. This instrument
was issued in connection with financing insurance premiums. The note was payable in monthly installments of $17,000. During the year
ended March 31, 2016, the Company made principal and interest payments of $32,000 and $1,000, respectively. During the year ended
March 31, 2017, the Company made principal and interest payments in the amounts of 114,000 and $1,000, respectively.
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. The remaining balance of $76,000 is included in the current portion of long-term debt in the accompanying
consolidated balance sheet.
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. The remaining
balance of $36,000 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. The remaining balance of this note amounted to $22,000 at March 31, 2017, 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. The remaining balance of this note amounted to $34,000 at March 31,
2017, of which $6,000 is included in the current portion of long-term debt in the accompanying consolidated balance sheet.
Minimum note payments due in years subsequent to March 31, 2017 are as follows:
For Years Ending March 31,
2018
2019
2020
2021
2022
Total minimum payments
Less: amounts representing interest
Present value of payments
Less: current portion
Long-term portion
F-17
$
$
$
127,000
13,000
13,000
13,000
6,000
172,000
(4,000)
168,000
(123,000)
45,000
NOTE 11 – Capital Leases
During March 2017, the Company entered into a fleet capital lease under which the aggregate present value of the minimum lease
payments amounted to $280,000. The present value of the minimum lease payments was calculated using discount rates of ranging from
9.7% to 10.6%. Lease payments, including amounts representing interest, amounted to $750 for the year ended March 31, 2017. The
remaining principal balance on these obligations amounted to $242,000 at March 31, 2007, including $74,000 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 $115 for the years ended March 31,
2017.
Minimum capital lease payments due in years subsequent to March 31, 2017 are as follows:
For Years Ending March 31,
2018
2019
2020
Total minimum lease payments
Less: amounts representing interest
Present value of minimum lease payments
Less: current portion
Long-term portion
NOTE 12 – Commitments and Contingencies
Lease Commitments
$
$
$
102,000
98,000
80,000
280,000
(38,000)
242,000
(74,000)
168,000
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 its 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, 2017, with an option to extend for a one year period. The Company gave notice
to extend the lease to May 31, 2018. The payment is $1,200 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.
Minimum lease payments for non-cancelable operating leases are as follows:
For Years Ending March 31,
2018
2019
2020
Total minimum lease payments
$
$
371,000
253,000
89,000
713,000
F-18
Rental expense amounted to $429,000 and $442,000 for the years ended March 31, 2017 and 2016, respectively and is recorded in the
accompanying consolidated statement of comprehensive income (loss).
Legal Matters
The Company, on occasion, may be involved in legal matters arising in the ordinary course of business including matters involving
proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of
business for which the Company is or could become involved in litigation may have a material adverse effect on its business and financial
condition of comprehensive income (loss).
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 our health and welfare plans, vacation and reimbursement of expenses.
As of March 31, 2017, 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, 2017, 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.
Reverse Stock Split
Effective June 24, 2016, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every 5 shares of
common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse
stock split. Instead, stockholders entitled to receive fractional shares received cash in the amount equal to the closing price per share of the
Company’s common stock as reported on the NASDAQ Capital Market as of 5:00 p.m. Eastern Time on June 24, 2016, multiplied by the
fraction of one share owned by the stockholder. The reverse stock split reduced the number of shares of the Company’s common stock
outstanding from 21,004,857 to 4,200,756. The total number of authorized shares of common stock was also proportionally decreased by a
ratio of 1:5 and the par value per share of the common stock continued to be $0.0001.
All common shares and per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect a 1
for 5 reverse stock split.
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.
F-19
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.
April 2014 At-the-Market Offering
On April 2, 2014, the Company entered into an At-the-Market Issuance Sales Agreement with MLV & Co. LLC under which the Company
can issue and sell shares of its common stock having an aggregate offering price of up to $9,159,000 from time to time through MLV acting
as its sales agent. To date, the Company has raised an aggregate $4,706,000 in connection with this agreement. The Company will pay
MLV a commission rate equal to 3.0% of the gross proceeds from the sale of any shares of common stock sold through MLV as agent
under the Sales Agreement. For the year ended March 31, 2016, the Company sold 450,919 shares for gross proceeds of $3,263,000 and
net proceeds of $3,150,000 after deducting commissions and other offering expenses. No shares were sold during the year ended March 31,
2017.
March 2016 Underwritten Public Offering
On March 18, 2016, the Company entered into an underwriting agreement with Dawson James Securities, Inc. with respect to the issuance
and sale of an aggregate of 680,000 units, each unit consisting of one share of common stock, par value $0.0001 per share, together with
one quarter (0.25) of one warrant to purchase one share of common stock at an exercise price equal to $5.00 per share, in an underwritten
public offering. The public offering price for each unit, consisting of one share of common stock together with one quarter (0.25) of one
warrant, was $5.00. Because the Company is prohibited from issuing fractional shares, the warrants can only be exercised in lots of four,
which means that each holder must exercise four March 2016 Warrants to receive one share of common stock, or a total of 170,000 shares.
The warrants have an initial exercise price of $5.00 per share and have a term of three years. Pursuant to the underwriting agreement, the
Company paid Dawson James Securities, Inc. a cash fee equal to 8% of the aggregate gross proceeds raised in this offering and also paid
$50,000 in legal fees and expenses of the underwriter’s legal counsel. The gross proceeds from the sale of the shares of common stock and
the warrants was $3,400,000, and net proceeds of $2,994,000 after deducting underwriting commissions and other estimated offering
expenses.
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. During the year
ended March 31, 2016, the Company issued 41,704 shares of common stock, with a fair market value of $203,000, in connection with this
agreement. The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the
services rendered. During the year ended March 31, 2016, the Company recorded $107,000 of expense related to stock issued pursuant to
this agreement and settled $96,000 of fees accrued in prior periods. The expense was recorded as selling, general and administrative
expense in the accompanying consolidated statement of comprehensive income (loss) for the year ended March 31, 2016. 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 income (loss) 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 income (loss).
F-20
Common Stock Purchase Warrants
On March 31, 2016, the Company issued Dawson James Securities, Inc. a warrant to purchase 50,000 shares of the Company’s common
stock at an exercise price of $5.00 per share in connection with a service agreement. The warrants were non-forfeitable at date of issuance.
The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: Fair value of the underlying
stock $4.75; risk-free interest rate 0.01%; contractual life of 3 years; dividend yield of 0%; and volatility of 87%. The fair value of the
warrants amounted to $128,000 and was recorded as selling, general and administrative expense in the accompanying consolidated
statement of comprehensive income (loss) for the year ended March 31, 2017.
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.
F-21
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.
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.
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.
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.
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, 2017.
Stock-Based Compensation
The Company issues service, performance and market-based stock options to employees and non-employees. The Company estimates the
fair value of service and performance stock option awards using the Black-Scholes option pricing model. The Company estimates the fair
value of market-based stock option awards using a Monte-Carlo simulation. Compensation expense for stock option awards is amortized on
a straight-line basis over the awards’ vesting period. Compensation expense includes the impact of an estimate for forfeitures for all stock
options.
F-22
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
estimates forfeitures based on historical experience and reduces compensation expense accordingly. The estimated forfeiture rates used
during the year ended March 31, 2017 ranged from 5.24% to 8.17%. The estimated forfeiture rates used during the year ended March 31,
2016 ranged from 1.18% to 4.71%.
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:
Fair value of the Company’s common stock on date of grant
Expected term
Risk-free interest rate
Dividend yield
Volatility
Fair value of options granted
Share-based awards compensation expense is as follows:
Year Ended March 31,
2017
2016
$
4.87 $
5.73 yrs
1.91%
0.00%
126.0%
$
4.12 $
5.90
6.39 yrs
1.63%
0.00%
93.0%
4.45
Cost of revenues
Research and development
Selling, general and administrative
Total stock-based compensation
$
$
248,000 $
245,000
1,652,000
2,145,000 $
Stock-based
Compensation
for the Year Ended
March 31, 2017
Stock-based
Compensation
for the Year Ended
March 31, 2016
364,000
339,000
1,320,000
2,023,000
At March 31, 2017, there were unrecognized compensation costs of $624,000 related to stock options which is expected to be recognized
over a weighted-average amortization period of 2.03 years.
At March 31, 2017, there were unrecognized compensation costs of $219,000 related to restricted stock which is expected to be recognized
over a weighted-average amortization period of 1.59 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, 2017 under the various plans are as follows:
Plan
2006 Plan
2011 Plan
2016 Plan
Stock-based awards available for grant as of March 31, 2017
F-23
Stock Options
Restricted Stock
–
34,000
–
34,000
170,000
573,000
156,000
899,000
Total
170,000
607,000
156,000
933,000
1,170,000
Stock options award activity is as follows:
Outstanding at April 1, 2016
Options granted
Options exercised
Options forfeited
Options expired
Outstanding at March 31, 2017
Exercisable at March 31, 2017
Number of
Shares
Weighted-
Average
Exercise Price
20.91
4.87
5.80
7.10
19.85
17.87
21.05
753,000 $
190,000
(1,000)
(19,000)
(24,000)
899,000 $
711,000 $
Weighted-
Average
Contractual
Term
Aggregate
Intrinsic
Value
7.46 $
7.08 $
459,000
459,000
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 $7.17 per share at March 31, 2017.
Restricted stock award activity is as follows:
Unvested restricted stock awards outstanding at April 1, 2016
Restricted stock awards granted
Restricted stock awards vested
Restricted stock awards forfeited
Unvested restricted stock awards outstanding at March 31, 2017
Number of
Shares
– $
86,000
(52,000)
–
34,000 $
Weighted
Average Award
Date Fair Value
per Share
–
6.05
5.27
–
7.27
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:
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credit carryforwards
Stock-based compensation
Reserves and accruals
Other deferred tax assets
State income taxes
Basis difference in assets
Total deferred tax assets
Net deferred tax asset
Valuation allowance
Net deferred tax asset
F-24
March 31,
2017
2016
33,394,000 $
1,746,000
5,439,000
1,232,000
240,000
4,000
1,000
42,056,000 $
36,454,000
1,710,000
5,083,000
1,111,000
241,000
(1,000)
8,000
44,606,000
42,056,000
(42,056,000)
44,606,000
(44,606,000)
– $
–
$
$
$
The Company’s income tax expense/(benefits) consist of the following:
Current:
State
Deferred:
Federal
State
Foreign
Years Ended March 31,
2017
2016
$
6,000 $
2,000
(3,272,000)
(158,000)
(844,000)
(4,268,000) $
$
–
–
–
2,000
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for continuing operations is as follows:
Expected federal statutory rate
State income taxes, net of federal benefit
Research and development credit
Foreign earnings taxed at different rates
Effect of state net operating loss expiration
Effect of permanent differences
Impact of foreign exchange rate fluctuations on foreign deferred income taxes
Impact of change in foreign net operating loss
Cancellation of stock options and other true-ups
True-up of state deferred assets
Change in valuation allowance
Totals
Years Ended March 31,
2017
2016
34.0%
1.2%
0.3%
(1.0%)
(2.3%)
0.0%
0.0%
0.0%
0.0%
(7.4%)
24.8%
8.2%
33.0%
34.0%
1.8%
0.4%
(0.7%)
(5.5%)
3.3%
(8.5%)
(6.3%)
0.0%
(11.4%)
7.1%
(7.1%)
0.0%
As of March 31, 2017, the Company had net operating loss carryforwards for Federal, California and Foreign income tax purposes of
approximately $87,000,000, $31,000,000 and $4,000,000, respectively, which will begin to expire in the years 2020, 2018 and 2017,
respectively, if not utilized. The state and foreign 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, 2017, federal and state research credit carryforwards of
approximately $905,000 and $790,000, respectively. The federal credits will expire, if not utilized at various dates, beginning in the fiscal
year ending March 31, 2024, and the state credits do not expire. The Company also had, at March 31, 2017 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, 2017. 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 income for both financial reporting and income tax purposes for the year ended March 31, 2017, solely as a result of the gain
on disposal of discontinued operations. Without such disposal, the Company has incurred losses for both financial reporting and income
tax purposes. Accordingly, the Company is continuing to fully reserve for its deferred tax assets. The Company will continue to evaluate its
deferred tax assets to determine whether any changes in circumstances could affect the realization of 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.
As a result of certain realization requirements of Accounting Standards Codification Topic 718, the table of deferred tax assets and
liabilities shown above does not include certain deferred tax assets at March 31, 2017 that arose directly from tax deductions related to
equity compensation in excess of compensation recognized for financial reporting purposes. Equity will be increased by approximately
$533,000 if and when such deferred tax assets are ultimately realized.
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.
F-25
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, 2017. Generally, the Company is subject to audit for the years ended March 31, 2016,
2015 and 2014, and may be subject to audit for amounts relating to net operating loss carryforwards generated in periods prior to March 31,
2015. 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.
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, 2017. 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 $196,000 and
$158,000 for the years ended March 31, 2017 and 2016, 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:
United States
Latin America
Europe and Rest of the World
Product License Fees and Royalties
Total
$
Year Ended March 31,
2016
2017
6,580,000 $
4,371,000 $
1,299,000
4,078,000
11,957,000
–
–
3,706,000
8,077,000
231,000
8,308,000 $
$
11,957,000 $
$ Change
% Change
2,209,000
1,299,000
372,000
3,880,000
(231,000)
3,649,000
51%
100%
10%
48%
(100)%
44%
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:
Product revenues
Product license fees and royalties
Total product related revenues
Year Ended March 31,
2017
2016
$
$
2,693,000 $
412,000
3,105,000 $
4,965,000
750,000
5,715,000
The Company’s service revenues amounted to $868,000 and $1,061,000 for the years ended March 31, 2017 and 2016, respectively.
F-26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of our most recent fiscal year. Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in the Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective
as of March 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2017 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated by reference to the definitive proxy statement for our 2017 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended March 31,
2017 (the “2017 Proxy Statement”).
Item 405 of Regulation S-K requires the disclosure of, based upon our review of the forms submitted to us during and with respect to our
most recent fiscal year, any known failure by any director, officer, or beneficial owner of more than ten percent of any class of our
securities, or any other person subject to Section 16 of the Exchange Act (“reporting person”) to file timely a report required by Section
16(a) of the Exchange Act. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance”
in the 2017 Proxy Statement.
Code of Business Conduct
We have adopted a Code of Business Conduct that applies to all of our officers, directors, and employees, including our Chief Executive
Officer, Chief Financial Officer, and other employees who perform financial or accounting functions. The Code of Business Conduct sets
forth the basic principles that guide the business conduct of our employees. On January 17, 2017, our board of directors adopted changes to
our Code of Business Conduct. The changes to the Code of Business Conduct were made to update the code to current best practices. In
addition to some clerical changes, the Code of Business Conduct now explicitly requires employees, directors and officers to act honestly
and ethically in dealing with customers, business partners and others. Furthermore, the Code of Business Conduct now explicitly extends
the confidentiality and conflicts of interest requirements to directors and prohibits company loans. The Code of Business Conduct also
updated the disclosure, reporting and enforcement provisions. We filed our Code of Business Conduct with the Securities and Exchange
Commission as exhibit 14.1 to the current report on Form 8-K on January 23, 2017, and it is also available on our website at
http://www.ir.sonomapharma.com/governance-documents. We will provide any person, without charge, copies of our Code of Business
Conduct and Ethics upon request. Such requests should be in writing and addressed to: Sonoma Pharmaceuticals, Inc., Attention: Chief
Financial Officer, 1129 N. McDowell Blvd., Petaluma, California 94954.
To date, there have been no waivers under our Code of Business Conduct. We intend to disclose future amendments to certain provisions
of our Code of Business Conduct or any waivers, if and when granted, of our Code of Business Conduct on our website at
http://www.sonomapharma.com within four business days following the date of such amendment or waiver.
40
Procedures for Nominating Directors
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors. The
Board of Directors will consider candidates for director positions that are recommended by any of our stockholders. Any such
recommendation for a director nomination should be provided to our Secretary. The recommended candidate should be submitted to us in
writing and addressed to Sonoma Pharmaceuticals, Inc., Attention: Secretary, 1129 N. McDowell Blvd., Petaluma, California 94954. The
recommendation should include the following information: name of candidate; address, phone and fax number of candidate; a statement
signed by the candidate certifying that the candidate wishes to be considered for nomination to our Board of Directors and stating why the
candidate believes that he or she would be a valuable addition to our Board of Directors; a summary of the candidate’s work experience for
the prior five years and the number of shares of our stock beneficially owned by the candidate. The Board will evaluate the recommended
candidate and shall determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to
change our procedures at any time to comply with the requirements of applicable laws.
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to the 2017 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to the 2017 Proxy Statement.
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity
Compensation Plans,” appears under the caption “Equity Compensation Plan Information” in the 2017 Proxy Statement and such
information is incorporated by reference into this report.
ITEM 13. Certain Relationships, Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to the 2017 Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the 2017 Proxy Statement.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Sonoma Pharmaceuticals, Inc. under Item 8 of Part II hereof.
(2) Financial Statement Schedules
Financial statement schedules have been omitted that are not applicable or not required or because the information is included elsewhere in
the Consolidated Financial Statements or the Notes thereto.
41
(b) Exhibits
Exhibit No. Description
Exhibit Index
3.1
3.2
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
4.1*
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective January 30, 2006 (included as Exhibit 3.1
of the Company’s Annual Report on Form 10-K filed June 20, 2007, and incorporated herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., effective October 22,
2008 (included as Exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 21, 2008, and
incorporated herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective
March 29, 2013 (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 22, 2013, and
incorporated herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective
December 4, 2014 (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 8, 2014, and
incorporated herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective
October 22, 2015 (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 27, 2015, and
incorporated herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Oculus Innovative Sciences, Inc., as amended, effective
June 24, 2016 (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 28, 2016, and incorporated
herein by reference).
Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective
December 6, 2016 (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 7, 2016, and
incorporated herein by reference).
Amended and Restated Bylaws, as amended, of Sonoma Pharmaceuticals, Inc., effective December 6, 2016 (included as
Exhibit 3.2 to the Company’s Current Report on Form 8-K filed December 7, 2016, and incorporated herein by reference).
Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock, filed with the
Delaware Secretary of State on April 24, 2012 (included as Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed
April 25, 2012, and incorporated herein by reference).
Certificate of Designation of Series B Preferred Stock, effective October 18, 2016 (included as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed October 21, 2016, and incorporated herein by references).
Specimen Common Stock Certificate.
Form of Underwriters Warrant to be issued to the Underwriters in connection with the March 2013 Offering (included as
Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed March 7, 2013, and incorporated herein by reference).
Warrant issued to Dawson James Securities, Inc., dated December 9, 2013 (included as exhibit 4.14 to the Company’s 10-Q
filed February 14, 2014 and incorporated herein by reference).
Form of Series A Common Stock Purchase Warrant for February 2014 offering (included as exhibit 4.1 to the Company’s
Current Report on Form 8-K filed February 26, 2014 and incorporated herein by reference).
Form of Series B Common Stock Purchase Warrant for February 2014 offering (included as exhibit 4.2 to the Company’s
Current Report on Form 8-K filed February 26, 2014 and incorporated herein by reference).
Warrant issued to Dawson James Securities, Inc., dated February 26, 2014 (included as exhibit 4.3 to the Company’s Current
Report on Form 8-K filed February 26, 2014 and incorporated herein by reference).
Warrant Agreement, including Form of Warrant entered into by and between Oculus Innovative Sciences, Inc. and
Computershare, Inc. and Computershare Trust Company, N.A., dated January 20, 2015 (included as exhibit 4.1 to the
Company’s Current Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Underwriters Warrant issued to Maxim Partners LLC on January 26, 2015 (included as exhibit 4.2 to the Company’s Current
Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Underwriters Warrant issued to Robert D. Keyser, Jr. on January 26, 2015 (included as exhibit 4.3 to the Company’s Current
Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Underwriters Warrant issued to R. Douglas Armstrong on January 26, 2015 (included as exhibit 4.4 to the Company’s Current
Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Underwriters Warrant issued to Dawson James Securities, Inc. on January 26, 2015 (included as exhibit 4.5 to the Company’s
Current Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
42
4.12
4.13
4.14
4.15
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14†
Underwriters Warrant issued to Dawson James Securities, Inc. on January 26, 2015 (included as exhibit 4.6 to the Company’s
Current Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Warrant Agreement, including Form of Warrant entered into by and between Oculus Innovative Sciences, Inc. and
Computershare, Inc. and Computershare Trust Company, N.A., dated March 18, 2016 (included as exhibit 4.1 to the
Company’s Current Report on Form 8-K filed March 18, 2016 and incorporated herein by reference).
Form of Warrant issued to Dawson James Securities, Inc. on March 31, 2016 (included as exhibit 4.25 to the Company’s
Annual Report on Form 10-K filed June 21, 2016, and incorporated herein by reference).
Section 382 Rights Agreement, dated as of October 18, 2016, between Oculus Innovative Sciences, Inc. and Computershare
Inc., which includes the Form of Certificate of Designation of Series B Preferred Stock as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (included as exhibit 4.1 to the
Company’s Current Report on Form 8-K filed October 21, 2016, and incorporated herein by reference).
Form of Indemnification Agreement between Oculus Innovative Sciences, Inc. and its officers and directors (included as
exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared effective on
January 24, 2007, and incorporated herein by reference).
Office Lease Agreement, dated October 26, 1999, between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P.
(included as exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as amended, declared
effective on January 24, 2007, and incorporated herein by reference).
Amendment No. 1 to Office Lease Agreement, dated September 15, 2000, between Oculus Innovative Sciences, Inc. and RNM
Lakeville L.P. (included as exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as
amended, declared effective on January 24, 2007, and incorporated herein by reference).
Amendment No. 2 to Office Lease Agreement, dated July 29, 2005, between Oculus Innovative Sciences, Inc. and RNM
Lakeville L.P. (included as exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as
amended, declared effective on January 24, 2007, and incorporated herein by reference).
Amendment No. 3 to Office Lease Agreement, dated August 23, 2006, between Oculus Innovative Sciences, Inc. and RNM
Lakeville L.P. (included as exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as
amended, declared effective on January 24, 2007, and incorporated herein by reference).
Office Lease Agreement, dated May 18, 2006, between Oculus Technologies of Mexico, S.A. de C.V. and Antonio Sergio
Arturo Fernandez Valenzuela (translated from Spanish) (included as exhibit 10.10 to the Company’s Registration Statement
on Form S-1 (File No. 333-135584), as amended, declared effective on January 24, 2007, and incorporated herein by
reference).
Office Lease Agreement, dated July 2003, between Oculus Innovative Sciences, B.V. and Artikona Holding B.V. (translated
from Dutch) (included as exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-135584), as
amended, declared effective on January 24, 2007, and incorporated herein by reference).
Form of Director Agreement (included as exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-
135584), as amended, declared effective on January 24, 2007, and incorporated herein by reference).
Amended and Restated Oculus Innovative Sciences, Inc. 2006 Stock Incentive Plan and related form stock option plan
agreements (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 2, 2007, and incorporated
herein by reference).
Amendment No. 4 to Office Lease Agreement, dated September 13, 2007, by and between Oculus Innovative Sciences, Inc.
and RNM Lakeville L.P. (included as exhibit 10.43 to the Company’s Annual Report on Form 10-K filed June 13, 2008, and
incorporated herein by reference).
Amendment to Office Lease Agreement, effective February 15, 2008, by and between Oculus Innovative Sciences Netherlands
B.V. and Artikona Holding B.V. (translated from Dutch) (included as exhibit 10.44 to the Company’s Annual Report on Form
10-K filed June 13, 2008, and incorporated herein by reference).
Amendment No. 5 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, LLC,
dated May 18, 2009 (included as exhibit 10.54 to the Company’s Annual Report on Form 10-K filed June 11, 2009, and
incorporated herein by reference).
Amendment No. 6 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and RNM Lakeville, L.P.,
dated April 26, 2011 (included as exhibit 10.52 to the Company’s Annual Report on Form 10-K filed June 3, 2011, and
incorporated herein by reference).
Oculus Innovative Sciences, Inc. 2011 Stock Incentive Plan (included as exhibit A in the Company’s Definitive Proxy
Statement on Schedule 14A filed July 29, 2011, and incorporated herein by reference).
43
10.15
10.16
10.17
10.18
10.19
10.20†
10.21†
10.22
10.23†
10.24
10.25†
10.26†
10.27
10.28
10.29
10.30
10.31
Amendment No. 7 to Office Lease Agreement by and between Oculus Innovative Sciences, Inc. and 1125-1137 North
McDowell, LLC, dated October 10, 2012 (included as exhibit 10.58 to the Company’s Quarterly Report on Form 10-Q filed
November 8, 2012, and incorporated herein by reference).
Form of Securities Purchase Agreement by and between Oculus Innovative Sciences, Inc. and the Purchasers, dated February
21, 2014 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 26, 2014 and incorporated
herein by reference).
At-the-Market Issuance Sales Agreement, dated April 2, 2014, by and between Oculus Innovative Sciences, Inc. and MLV &
Co. LLC (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 2, 2014 and incorporated herein
by reference).
Lease Agreement by and between Oculus Innovative Sciences, Inc. and 2500 York, L.P., dated July 9, 2014 (included as
exhibit 10.82 to the Company’s Current Report on Form 10-Q filed August 12, 2014, and incorporated herein by reference).
Underwriting Agreement entered into by and between Oculus Innovative Sciences, Inc. and Maxim Group LLC as
representative of the underwriters named on Schedule A thereto, dated January 20, 2015 (included as exhibit 1.1 to the
Company’s Current Report on Form 8-K filed January 26, 2015 and incorporated herein by reference).
Sales Representation Contract, dated February 1, 2015, by and between Oculus Innovative Sciences, Inc. and SLA Brands, Inc.
(included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 2, 2015 and incorporated herein by
reference).
Amendment No. 1 to Sales Representation Contract, dated November 6, 2015, by and between Oculus Innovative Sciences,
Inc. and SLA Brands, Inc. (included as exhibit 10.88 to the Company’s 10-Q filed February 16, 2016 and incorporated herein
by reference).
Underwriting Agreement entered into by and between Oculus Innovative Sciences, Inc. and Dawson James Securities, Inc. as
representative of the underwriters named on Schedule 1 thereto, dated March 18, 2016 (included as exhibit 1.1 to the
Company’s Current Report on Form 8-K filed March 18, 2016 and incorporated herein by reference).
Exclusive Sales and Distribution Agreement, dated November 6, 2015, by and between Oculus Innovative Sciences, Inc. and
Manna Pro Products, LLC (included as exhibit 10.1 to the Company’s 8-K filed March 23, 2016 and incorporated herein by
reference).
Employment Agreement by and between Oculus Innovative Sciences, Inc. and Jim Schutz, dated July 26, 2016 (included as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 29, 2016, and incorporated herein by reference).
Asset Purchase Agreement dated October 27, 2016, between Oculus Innovative Sciences, Inc. and Invekra, S.A.P.I de C.V.
(included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 31, 2016, and incorporated herein by
reference).
Amendment Agreement to Acquisition Option dated October 27, 2016, by and between More Pharma Corporation S. de R.L.
de C.V. and Oculus Technologies of Mexico, S.A. de C.V. (included as Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed October 31, 2016, and incorporated herein by reference).
Employment Agreement by and between Oculus Innovative Sciences, Inc. and Robert Miller, dated November 30, 2016
(included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 1, 2016, and incorporated herein by
reference).
Employment Agreement by and between Oculus Innovative Sciences, Inc. and Bruce Thornton, dated November 30, 2016
(included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 1, 2016, and incorporated herein by
reference).
Employment Agreement by and between Oculus Innovative Sciences, Inc. and Robert Northey, dated November 30, 2016
(included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 1, 2016, and incorporated herein by
reference).
Employment Agreement by and between Oculus Innovative Sciences, Inc. and Jeffrey Day, dated November 30, 2016
(included as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed December 1, 2016, and incorporated herein by
reference).
Employment Agreement by and between Sonoma Pharmaceuticals, Inc. and Marc Umscheid, dated December 31, 2016
(included as Exhibit 10.97 to the Company’s quarterly report on Form 10-Q filed February 17, 2017, and incorporated herein
by reference).
10.32* Master Vendor Agreement by and between Sonoma Pharmaceuticals, Inc. and PetSmart Home Office, Inc., dated November
21, 2016.
10.33*# Distribution Agreement by and between Sonoma Pharmaceuticals, Inc. and G. Pohl-Boskamp GmbH & Co. KG, dated April
10.34*
13, 2016.
Amendment No. 8 to Office Lease Agreement by the between Oculus Innovative Sciences, Inc. and SSCOP Properties LLC,
dated June 23, 2016.
44
21.1*
23.1*
31.1*
31.2*
32.1*
List of Subsidiaries.
Consent of Marcum LLP, independent registered public accounting firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase.
101.DEF* XBRL Taxonomy Extension Definition Linkbase.
101.LAB* XBRL Taxonomy Extension Label Linkbase.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase.
*
†
#
Filed herewith.
Confidential treatment has been granted with respect to certain portions of this agreement.
Confidential treatment is being sought for portions of this agreement.
Copies of above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee, upon written
request to: Chief Financial Officer, Sonoma Pharmaceuticals, Inc., 1129 N. McDowell Blvd., Petaluma, California 94954.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SONOMA PHARMACEUTICALS, INC.
Date: June 28, 2017
By:
/s/ Jim Schutz
Jim Schutz
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Jim Schutz
Jim Schutz
/s/ Robert E. Miller
Robert E. Miller
/s/ Sharon Barbari
Sharon Barbari
/s/ Jay Edward Birnbaum
Jay Edward Birnbaum
/s/ Russell Harrison
Russell Harrison
/s/ Jerry McLaughlin
Jerry McLaughlin
Title
President, Chief Executive Officer and
Director (Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer, and
Principal Accounting Officer)
Director
Director
Director
Director
46
Date
June 28, 2017
June 28, 2017
June 28, 2017
June 28, 2017
June 28, 2017
June 28, 2017
Exhibit 4.1
Exhibit 10.32
MASTER VENDOR AGREEMENT (goods for resale)
THIS MASTER VENDOR AGREEMENT (“Agreement”) is effective as of the ___ day of 20__ (“Effective Date”), by and
between PetSmart Home Office, Inc., a Delaware corporation, located at 19601 North 27th Avenue, Phoenix, Arizona 85027 (“PetSmart”)
and Oculus Innovative Sciences, Inc., a California company/corporation, located at 1129 N. McDowell Blvd, Petaluma, CA, and its
affiliates, agents and subcontractors (collectively, “Vendor”). PetSmart and Vendor are sometimes collectively referred to in this
Agreement as the “Parties”' and individually as a “Party.”
WHEREAS, Vendor is in the business of sourcing and selling Products (as defined below), and PetSmart may desire to purchase
Products from Vendor for sale to consumers from time to time; and
WHEREAS, Vendor is ready willing and able to furnish the Products to PetSmart; and
WHEREAS, PetSmart and Vendor desire to enter into this Agreement to establish the terms and conditions under which PetSmart
may place one or more “Purchase Orders” or “'P.O.” (as defined herein) with Vendor for the procurement of Products.
NOW, THEREFORE, in consideration of the premises, promises and covenants set forth below and other valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Terms of Purchase. Vendor shall supply and sell to PetSmart the Products in accordance with (i) this Agreement, (ii) the P.O., (iii)
the P.O. Terms and Conditions set forth on Exhibit B (the “P.O. Terms”), (iv) all Applicable Laws, and (v) PetSmart' s requirements and
standards related to the Products and their production (e.g., social compliance requirements, supplier code of conduct, quality standards,
FDA/FSMA and food related requirements, etc.) as may be communicated by PetSmart to Vendor from time to time (collectively the
“'PetSmart Standards”), which include without limitation the documents listed on the attached Exhibit A, PetSmart Standards, and the
documents available at www.petsmart.com/compliance, or such other website or portal that is communicate by PetSmart to Vendor from
time to time. Vendor acknowledges it has received and reviewed the current versions of the PetSmart Standards. The terms, conditions and
requirements set forth in this Agreement, the P.O., the P.O. Terms, the PetSmart Standards, and Applicable Laws are collectively referred
to as the "PetSmart Requirements." Vendor acknowledges that it will be subject to penalties or chargebacks, as specified in the PetSmart
Requirements, if it fails to comply with the PetSmart Requirements. In the event of any inconsistency between this Agreement and the
PetSmart Requirements (other than Applicable Laws), this Agreement shall govern. Any additional or different terms or conditions
proposed by Vendor in any quotation, acknowledgment or other document are hereby deemed to be material alterations of this Agreement
and notice of objection is hereby given, and any such proposed terms or conditions shall be void ab initio.
2. Services. Vendor acknowledges that certain actions and services are inherent and required in supplying and selling the Products to
PetSmart, and Vendor will provide all such services, including without limitation the testing, packaging, maintenance, warehousing and
transportation as necessary to deliver the Products in accordance with the PetSmart Requirements (collectively referred to as the
"Services"). If any of Vendor's employees, agents, representatives or other third parties are present in any of PetSmart's retail stores,
distribution centers, or offices, Vendor shall ensure that such employee, agent, representative or third party complies with all of PetSmart's
scheduling, login, tracking, and similar requirements.
1
3 . ORDERS. The term '”Purchase Order” or “P.O.” means a purchase order or purchase form and all related communications
regarding the procurement of Products (e.g., order characteristics such as amount, size, costs, fees, specifications and country of delivery)
provided by PetSmart to Vendor through any means agreed to between PetSmart and Vendor, such as e-mail, EDI or other electronic
exchanges. Each P.O. is subject to certain commercial terms as agreed to in writing by the Parties and set forth on a "Commercial Terms of
Purchase" (an example of which is attached hereto as Exhibit C) or similar document, which may be amended from time to time by the
written agreement of the Parties. PetSmart has no obligation whatsoever to place any P.0. with Vendor or purchase Products from Vendor.
If any forecasts or projections are provided by PetSmart to Vendor or otherwise discussed between the Parties, they are purely for
Vendor’s convenience and shall not be binding on either Party. No proposal by Vendor shall be accepted or deemed accepted by PetSmart
unless and until PetSmart accepts the proposal in a written P.O., which PetSmart is not obligated to accept. The P.O. shall be deemed placed
with Vendor upon being confirmed by PetSmart in writing in the manner P.O.s are typically communicated between PetSmart and Vendor
in their normal course of dealings. The P.O. shall be deemed accepted by Vendor when approved or otherwise accepted by Vendor,
including via email, EDI or other electronic exchange. PetSmart may amend or cancel a P.O. by written or electronic notice to Vendor. If
PetSmart amends or cancels a P.O., Vendor shall use reasonable endeavors to mitigate any loss it may suffer in connection with such
cancellation or amendment, but in compliance with this Agreement.
4 . DELIVERY. Vendor shall deliver the Products purchased under each P.O. by the delivery date set out in the P.O., but such
Products shall not be delivered more than five (5) business days (or such shorter period of time as set forth in the PetSmart Requirements)
in advance of the delivery date without the prior written consent of PetSmart. Vendor shall deliver all Products covered by a single P.O. in a
single delivery unless PetSmart requests delivery in installments, or as otherwise required under the PetSmart Requirements. PetSmart's
acceptance of a delivery containing less than the required quantity shall not relieve Vendor of its obligation to deliver the balance of the
ordered Products.
If the Products are not delivered by Vendor as specified in the P.O. or they are Non-Conforming Products (as defined in Section 5
below), then, without limiting any other right or remedy PetSmart may have, PetSmart may: (i) refuse to take any attempted delivery of
Products under the P.O.; (ii) require Vendor to air freight the Products covered by the P.O. at Vendor’s sole cost and expense; (iii) obtain
substitute products from another vendor and recover from Vendor any costs and expenses reasonably incurred by PetSmart in obtaining
such substitute products, which Vendor shall reimburse within thirty (30) days; and (iv) claim damages for any other costs, expenses or
losses directly or indirectly resulting from Vendor's failure to deliver the Product pursuant to the P.O. or the PetSmart Requirements.
Vendor shall deliver testing samples of the Products in accordance with PetSmart’s instructions, or the instructions of a third party
designated by PetSmart.
5. ACCEPTANCE AND NON-CONFORMING PRODUCTS. A “Non-Conforming Product” means any Product that (i) fails to
conform with any PetSmart Requirement in any respect whatsoever, including without limitation quantities, styles, sizes, quality, materials,
components, fit, colors, workmanship, stitching (or adhesion or other joinery method), odor, design, product quality standards or
requirements, or any other requirement, term or condition; (ii) fails to pass any third- party test assessing conformity with the PetSmart
Requirements; (iii) fails to conform to the confirmation sample approved by PetSmart; (iv) is not as represented, warranted, or presented to
and approved by PetSmart; (v) is shipped or delivered to PetSmart in violation of Section 4; or (vi) is the subject of a Recall (as defined in
Section 9).
PetSmart may, at Vendor's sole risk and expense, hold or return to Vendor any Non-Confirming Product, and may charge Vendor for
the cost of shipping, unpacking, examining, re-packing, warehousing, reshipping, duties, fees and other internal and external related
expenses (including but not limited to the internal cost of labor) in relation to the Non- Conforming Product. If PetSmart does not offset
such charges against amounts owed to Vendor, Vendor shall pay to PetSmart the entire amount of such charges within ten (10) business
days after being notified by PetSmart as to the amount of such charges. If the Non-Conforming Products are to be returned to Vendor,
Vendor shall take full title and risk of loss for such Non-Conforming Products as designated by PetSmart (and if not designated by
PetSmart then FOB PetSmart’s distribution center or retail store from which Products are being shipped). Vendor shall not dispose of such
Non-Conforming Products other than as permitted under this Agreement or any other directions provided by PetSmart in writing. Unless
the P.O. or Commercial Terms of Purchase specify otherwise, a damage allowance (deduction) of one and one-half percent (1.5%) for
Products classified by PetSmart as “consumables”, two percent (2.0%) for Products classified by PetSmart as “hard-goods” and two and
one-half percent (2.5%) for Products classified by PetSmart as “specialty” shall be applied to each P.O., and Vendor shall be responsible for
reimbursing PetSmart for Products that are unsalable (as determined by PetSmart) or have a damage rate in excess of these default damage
allowance rates.
2
For purposes of establishing Non-Conformity, PetSmart shall not be deemed to have accepted any Products unless and until it has had
a reasonable time after the Products have been made available to it to inspect for Non-Conformity. Such inspection period shall be extended
if, in PetSmart's judgment, the complexity of the Products, the quantity received, or any other circumstances makes such extension
reasonable to afford PetSmart an adequate opportunity to inspect the Products. Any unpacking or handling of the Products incident to
PetSmart's inspection shall not indicate PetSmart's acceptance of the Products. PetSmart's inspection of the Products shall not relieve
Vendor of its obligations hereunder or of any liability for any latent or other defects in the Products. At PetSmart's discretion, such
inspection may include preliminary, final, and/or random inspections. PetSmart reserves the right to revoke acceptance of the Products
whenever it discovers an instance of Non-Conformity, even if the time for inspection of the Products has passed. In no event will payment
of the Product Fee or any other amount by PetSmart to Vendor constitute acceptance of a Non-Conforming Product.
PetSmart reserves the right to cancel without cost or penalty all or any part of the undelivered portion of a P.O., or to refuse to accept
delivery of the Products if Vendor breaches any of the PetSmart Requirements. PetSmart also reserves the right to cancel without cost or
penalty any P.O. that is delayed as a result of a Force Majeure Event. If PetSmart cancels a P.O. or any portion of a P.O. for any reason, or
returns Products covered by a P.O. to Vendor pursuant to rejection or refusal to accept, Vendor shall not sell Products that have been
labeled, packaged or tagged with PetSmart's or its affiliate’s Intellectual Property without first obtaining PetSmart's written permission.
Vendor shall also comply with any instructions provided by PetSmart regarding the disposal of such Products. In any event, Vendor shall
not sell such Products (including any related packaging) until it removes or obliterates any mark, tag, Intellectual Property, or label
identifying it with PetSmart or its affiliates to PetSmart’s satisfaction.
6. TITLE AND RISK OF LOSS. Except as otherwise specified by PetSmart in the P.O., title and risk of loss for the Products shall
pass to PetSmart as follows:
a.
b.
c.
Products for which PetSmart is the importer of record, (i) risk of loss shall pass from Vendor to PetSmart F.O.B. vessel port of
export, and (ii) title to the Products shall pass from Vendor to PetSmart upon customs clearance of the Products at the port of
entry in the country of final destination (“Customs Clearance”). For Products that are customs cleared prior to arrival at their
port of entry, Customs Clearance shall be deemed to be the time that such Products are unloaded from the carrying vessel at
the port of entry.
Products for which PetSmart is not the importer of record, title and risk of loss shall transfer to PetSmart Delivered Duty Paid
(D.D.P. - Incoterms 2010) to a destination specified in the P.O. and, if the destination is not specified in the P.O., such
destination shall be deemed to be the PetSmart distribution center or retail store where such Products are to be delivered.
If Vendor is shipping Products directly to consumers (e.g., fulfilling website or mobile sales), then title and risk of loss shall
not transfer to PetSmart and the same shall be between Vendor and the consumer.
For certain orders, PetSmart may direct that title to the Products shall pass from Vendor to PetSmart at a specific transfer point rather
than at Customs Clearance, and in such cases PetSmart will specify in the applicable P.O. that the designated Products shall be delivered
“F.O.B. transfer point.” The terms for transfer of title set forth herein shall be irrevocable in all instances, and in no event will Vendor
retain or assert any security interest, lien or other claim in or against the Products or the title thereto, regardless of whether the invoice for
such Products has been paid or not, and whether arising under common law, statute or under any agreement, financing statement, or other
document containing any terms inconsistent with or in addition to the terms and conditions set forth in this Agreement.
7. PRODUCT FEE. The P.O. shall list the price Vendor is charging PetSmart for the Products (the “Product Fee”). The Product Fee
may be modified by the Parties’ mutual written agreement, but in no event may the Product Fee be increased after the commercial
documents associated with any particular Product have been tendered to the consolidator designated by PetSmart. Unless otherwise
specified in the P.O., the Product Fee will include all costs for packaging, transportation, and all applicable taxes and other governmental
charges (including, without limitation, value-added taxes, customs duties, customs brokerage fees, and similar charges).
3
Vendor represents and warrants that (i) the terms of each P.O. will be equal to or more favorable than the terms of purchase between
Vendor and its other customers for similar quantities of like Products and (ii) the Product Fee is not in excess of the price charged to
Vendor’s other customers for similar quantities of like Products. If Vendor sells any product that is identical or substantially similar either
in appearance, functionality or quality to the Products for less than the Product Fee charged to PetSmart, Vendor shall reduce the Product
Fee to match the lower price for so long as the lower price is available and shall refund PetSmart the difference between the Product Fee
and the lower price it charged for such identical or similar products after Vendor began charging the lower price.
8. TERMS OF PAYMENT. Vendor shall submit invoices to PetSmart as required in the PetSmart Requirements. PetSmart will pay
Vendor according to the terms set forth in the P.O., which will be subject to discounts and other adjustments in accordance with the
PetSmart Requirements or the Commercial Terms of Purchase. If the P.O. does not specify the due date for payment, the invoice shall be
payable within forty (40) days from the later of (i) the date the Products ordered under the P.O. are delivered to destination set for in the
P.O. (and if no destination is set forth in the P.O., PetSmart distribution center or retail store), or (ii) the date on which PetSmart receives a
properly submitted invoice from Vendor.
If PetSmart disputes any portion of an invoice, PetSmart will notify Vendor in writing and if the Parties are not able to resolve the
dispute within ninety (90) days the dispute shall be resolved in accordance with Section 24 below. Vendor must notify PetSmart of any
invoice or payment disputes within thirty (30) days of payment. If Vendor does not notify PetSmart of a dispute within such thirty (30) days
it shall have waived its right to dispute such invoice or payment. Vendor's obligations to supply the Products shall not be affected by any
payment disputes. PetSmart shall be entitled to set off any amounts owed from Vendor to PetSmart against any amounts owed from
PetSmart to under this Agreement or any other agreement between the Parties. Any payments owing from Vendor to PetSmart that are not
timely paid shall be subject to interest at a rate of five percent (5.0%) A.P.R. (or, if lower, the maximum amount permitted by law).
9. PRODUCT RECALL. PetSmart will have the sole right to negotiate and enter into a settlement(s) with any governmental agency
or official with respect to any potential fine, penalty, issue, or liability related to a Non-Conforming Product or any allegation that the
Product fails to comply with Applicable Laws or industry standards. Vendor may request that any Non-Conforming Products be returned to
Vendor for examination at Vendor's sole cost and expense. Such return by PetSmart will not be deemed a waiver of any right or remedy
that PetSmart may have as a result of or in connection with such Non-Conforming Products. Vendor shall not sell or otherwise dispose of
the any such Non- Conforming Products or parts and components without the written consent of PetSmart.
Vendor shall immediately give PetSmart written notice of (i) all quality control test results and data for any Product that do not satisfy
the PetSmart Requirements; (ii) any known or suspected deviation in standard manufacturing processes that results in a Non-Conforming
Product; (iii) any Product that fails or is alleged to have failed to comply with any consumer product safety requirement contained in the
specifications, industry standards, or standards promulgated by a governmental agency or Applicable Laws; or (iv) any defect, issue or
design regarding a Product that could create a risk of injury to an individual or animal. If Vendor receives notice of a recall, harmful
ingredients, or defects in the Product, Vendor shall notify PetSmart immediately.
Vendor shall promptly furnish to PetSmart all documentation, information and data regarding the Product necessary or helpful to
PetSmart, as determined in PetSmart’s sole discretion, to aid PetSmart to comply with its legal obligations or to mitigate any safety hazard
posed by a Product.
If PetSmart is required or chooses, in its sole discretion, to recall, give public notice of hazard or defect associated with, withdraw from
its proposed chain of resale, remove from its shelves, return to Vendor, or otherwise dispose of or render unusable (a "Recall") any Product
purchased from Vendor for any reason, and whether or not such Product otherwise complies with the PetSmart Requirements, Vendor will
reimburse PetSmart for all amounts paid or incurred by it in connection with such Recall within thirty (30) Business Days after receipt of
PetSmart's invoice.
In addition to any other right provided in this Agreement or by law, PetSmart may, at its sole discretion, immediately cancel any or all
P.O.s, suspend all deliveries of Products, or terminate this Agreement if: (i) Vendor fails to promptly begin remedying an alleged non-
compliance, risk or defect of the types referred to above; (ii) a governmental agency concludes that any Product fails to comply with any
consumer product safety laws, requirements, rules, specifications, or standards in any jurisdiction where the Products are sold; or (iii)
Vendor fails to promptly and fully cooperate with PetSmart in the investigation of any product safety hazard or Non-Conforming Product.
4
10. WARRANTIES AND REPRESENTATIONS. Vendor represents and warrants to PetSmart that the Products, components, parts,
designs, and/or concepts designed, developed or manufactured by Vendor, its employees, agents, and any process for the manufacturing of
the Products, together with packaging, labeling, documentation, transportation, and/or anything else furnished by Vendor, shall: (i) be free
from defects in design, workmanship, materials, and hazards to life, animal, or property; (ii) be merchantable, suitable, and fit for their
intended purposes and conform to any warranty, description, or sample provided to PetSmart; (iii) be in conformance with the PetSmart
Requirements, and any data, drawings, representations, specifications, and documentation relating to the Product; (iv) do not violate, use or
infringe any existing or pending third-party intellectual property rights; (v) do not breach any agreement between Vendor and any third-
party; (vi) be supported by proper evidence and documentation (which shall be supplied to PetSmart upon request), such as test results, for
any efficacy, performance or similar claims made on or about the Product or its packaging or labeling; and (vii) be in compliance with
Applicable Laws.
In addition, Vendor represents and warrants that: (i) this Agreement has been validly executed and delivered and constitutes a legal,
valid, and binding obligation enforceable against Vendor; (ii) the person executing the Agreement on behalf of Vendor has the requisite
capacity and authority to enter into this Agreement; (iii) Vendor has the legal right to sell the Product; (iv) no consent of any other person,
political body, board of directors, or entity is necessary for Vendor to enter into and fully perform this Agreement; (v) all information,
invoices, and documents provided to PetSmart by Vendor are true, complete, and accurate; (vi) Vendor shall, upon request, promptly
provide any and all records and/or documentation, and provide other reasonable assistance as may be necessary or desirable for purposes of
PetSmart’s compliance with Applicable Laws; (vii) Vendor shall perform its obligations under this Agreement in compliance with all
Applicable Laws; (viii) Vendor or its staff, employees, agents, sub-contractors and/or representatives did not and will not offer, solicit,
accept or provide any commissions, payments, gifts, advantages, kickbacks, lavish or extensive entertainment or other things of value,
directly or indirectly, to any employees, members of any employee’s family, or any agent of PetSmart or any governmental authorities
where such payments would constitute a bribe or any illegal payment under Applicable Laws or the PetSmart Requirements; (ix) Vendor
will cooperate with PetSmart in any and all governmental agency or department inquiries or investigations related to the Product, or third-
party litigation related to the Product; (x) Vendor shall ensure that all personnel hired and working for Vendor on this Agreement are
authorized to work in the United States; and (xi) if the Products bear any third-party Intellectual Property Vendor hereby grants and
sublicenses to PetSmart all rights necessary for PetSmart to distribute, market, advertise and sell the Products at retail.
The foregoing warranties are in addition to all warranties implied by law and shall survive delivery, inspection, acceptance, and
payment. All warranties will survive delivery of the Product and will not be deemed waived, terminated, or merged by PetSmart upon
acceptance of or payment for the Product. Vendor is not relying on any warranties, representations, assurances, or inducements that are not
expressly set forth in this Agreement (and PetSmart hereby expressly disclaims the same).
“Applicable Laws” means all United States, state, Canadian, international, provincial, and local laws, enactments, orders, ordinances,
directives, rules, regulations and regulatory requirements, including without limitation those listed below and/or relating to: (i) the
manufacture, packing, packaging, marking, storage, handling and delivery of the Product; (ii) testing specifications for the Products or
warnings with respect to the Product, its labeling, or its contents; (ii) product safety, environment protection, human health, labor, industry,
disposal, restriction and sale of the Product; (iii) the handling, storage, data privacy and security of personal information; (iv) advertising
claims substantiation; (iv) country of origin, import and export laws; and (v) including without limitation, the Foreign Corrupt Practices
Act, the Bribery Act 2010, Anti-Unfair Competition Law of PRC, the Criminal Law of PRC, the Prevention of Bribery Ordinance (POBO)
of Hong Kong, the Federal Trade Commission Act, the Robinson-Patman Act, the Hazardous Substances Act, the Food, Drug, and
Cosmetic Act, The Food Safety Modernization Act, the Consumer Products Safety Act, the Fair Packaging and Labeling Act, the Toxic
Substances Control Act, the Fair Labor Standards Act, the Flammable Fabrics Act, the Fur Products Labeling Act, the Textile Fiber
Labeling Act, the United States Department of Transportation regulations, the Insecticide, Fungicide and Rodenticide Act, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly
referred to as Proposition 65), the Canada Stuffed Article Act, the United States Environmental Protection Agency regulations, the
California Air Resources Board (CARB) regulations and measures, and OSHA regulations.
5
To the extent Vendor provides any equipment or fixtures in connection with the Products (“Vendor Equipment”) or to the extent
Vendor's delivery, stocking, maintenance, promotion or removal of the Products require Vendor to enter an of PetSmart's premises, the
following additional terms and provisions shall apply: (i) Vendor agrees that the warranties set forth herein apply to all Vendor Equipment
and related Services and the same will be provided in a good and workmanlike manner; (ii) Vendor shall, at its expense, obtain all licenses
and permits and shall pay all inspection fees necessary in connection with the maintenance or installation of Vendor Equipment and
performance of any related Services; (iii) Vendor agrees that the indemnification and defense provisions set forth in this Agreement shall
apply to any claim that any person or entity may make against PetSmart or any of its subsidiaries or affiliates arising out of or otherwise
relating to the Vendor Equipment or related Services; (iv) the insurance required to be obtained and maintained by Vendor under this
Agreement shall provide coverage with respect to the Vendor Equipment and related Services; and (v) PetSmart has no obligation to
maintain any Vendor Equipment or to provide notice to Vendor of any failure of or damage to any Vendor Equipment.
11. AUDIT RIGHT. PetSmart shall have the right to inspect and audit the manufacture, quality, transport, handling, and storage of
Products both before and after shipment. PetSmart and/or its agents or representatives may enter Vendor's premises, factories or facilities
during Vendor's customary business hours to inspect, audit and test any Products, Vendor's processes, and any materials, components, or
work-in-progress to be used in the manufacture of any Products, whether such entrance is announced or unannounced. Vendor shall co-
operate with, and provide reasonable assistance to PetSmart or its authorized representative(s) in the conduct of any such audit and ensure
that such persons shall have access to the premises at which the Products are being manufactured.
12. INTELLECTUAL PROPERTY. “Intellectual Property” means any patents, utility models, rights to inventions, copyright and
neighboring and related rights, trademarks, service marks, business names and domain names, rights in get- up and trade dress, unique or
distinctive elements of the Product or Product designs, goodwill and the right to sue for passing off or unfair competition, rights in designs,
database rights, rights to use, and protect the confidentiality of, Confidential Information, and all other intellectual property rights, in each
case whether registered or unregistered and including all applications and rights to apply for and be granted, renewals or extensions of, and
rights to claim priority from, such rights and all similar or equivalent rights or forms of protection which subsist or will subsist now or in
the future in any part of the world. If the Products bear any Intellectual Property that are owned or authorized by PetSmart, Vendor shall (a)
only affix the Intellectual Property to the Products strictly in accordance with PetSmart’s instructions, (b) not alter the Intellectual Property
in any way whatsoever, (c) not affix the Intellectual Property or similar marks to any other products made by Vendor, and (d) not use any
Intellectual Property in any manner or in connection with any products or the publication of any materials (including in connection with any
third-party's products, trade mark, trade name, symbol or copyright material) other than in accordance with this Agreement and the
PetSmart Requirements. PetSmart shall at all times own and have exclusive right, title and interest in and to all of its Confidential
Information and Intellectual Property, and PetSmart shall retain the exclusive right to license, sell, transfer and otherwise use and dispose of
the same.
Vendor shall not (a) acquire any interest or claim in any of PetSmart’s Intellectual Property on account of or related to this Agreement
or the manufacture of the Products, or (b) apply for any patent or other Intellectual Property rights right therefore. Vendor hereby
acknowledges that the ownership of all Intellectual Property is and shall at all times remain PetSmart’s sole property, and that any use
thereof or goodwill associated thereto in relation to the Products shall inure to the exclusive benefit of PetSmart and its affiliates, and that
nothing in this Agreement will confer on Vendor any right, title or interest in, to or under any of PetSmart’s Intellectual Property. Vendor,
its employees and agents shall not contest or assist a third-party in contesting the validity of PetSmart's Intellectual Property worldwide. In
the event Vendor at any time obtains or claims any rights in or to the Intellectual Property, Vendor shall promptly notify PetSmart of such
event and immediately transfer such rights to PetSmart or its affiliates, as directed by PetSmart, and provide all required assistance and
documentation related to such transfer. For such purposes, Vendor hereby appoints PetSmart as its attorney-in-fact for the transfer of such
rights.
Vendor agrees that any new invention, enhancement, specification, drawing, formula, improvement, or other data or information of a
secret, proprietary, or confidential nature that is developed or acquired by Vendor or any of its employees or agents in connection with the
manufacture of any Products bearing a PetSmart Intellectual Property or utilizing and PetSmart Intellectual Property shall be fully and
immediately disclosed, and shall belong exclusively to PetSmart. The Parties acknowledge that all work performed by Vendor for PetSmart
or any affiliate related to such Products shall be deemed a “work made for hire.” Vendor hereby assigns to PetSmart any right, title, and
interest in and to all creations and Inventions that Vendor may have without additional consideration. Vendor agrees to execute and deliver
any documents and do all other things (including the giving of testimony) requested by PetSmart in order to vest more fully in PetSmart or
any affiliate all ownership rights in the creations and inventions (including obtaining patent, copyright or trademark protection therefore in
the United States and/or foreign countries).
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13. INSURANCE. During the Term and for a period of five (5) years afterwards, Vendor shall maintain in force the following
insurance policies with reputable insurance companies authorized by law to conduct business in the United States and Canada with the
financial rating of at least A-VII status, as rated in the most recent edition of Best's Insurance Reports: (i) a commercial general liability
insurance policy with full limits, achieved either by primary or excess/umbrella insurance, for bodily injury and property damage for not
less than Two Million Dollars ($2,000,000.00 USD) per occurrence, with an aggregate limit of Four Million Dollars ($4,000,000.00 USD),
such policies to include products liability and contractual liability; (ii) automobile liability insurance policy with limits not less than Three
Million Dollars ($3,000,000.00 USD) combined single limit; (iii) workers’ compensation in compliance with local legislation and
employer’s liability with a One Million Dollars ($1,000,000.00 USD) limit per, and (iv) if services are provided under the P.O. or in
connection with Products sold under a P.O., a professional liability or errors and omissions policy with limits not less than Two Million
Dollars ($2,000,000 USD) per occurrence and Five Million Dollars ($5,000,000 USD) aggregate; provided, however, PetSmart retains the
right to require Vendor to provide increased levels of commercial general liability insurance if it provides certain types of Products, such as
Products with electronic components, glass, etc.
Vendor’s insurance policies shall name “PetSmart Home Office, Inc.,” and “PetSmart, Inc.” (including their parents, subsidiaries,
affiliates, officers, directors, employees, agents, and other representatives) as additional insureds. Vendor’s insurance policy must also
include: (i) separation of insureds (otherwise known as a cross-liability clause); (ii) a waiver of subrogation in the favor of PetSmart, Inc.,
and PetSmart Home Office, Inc. (including their parents, subsidiaries, affiliates, officers, directors, employees, agents, and other
representatives); and (iii) for general liability policy, cover for PetSmart’s property that is in the care, custody or control of Vendor.
Vendor shall: (i) not do anything to invalidate any insurance policy or to prejudice PetSmart's entitlement under it; and (ii) notify
PetSmart if any policy is (or will be) cancelled or its terms are (or will be) subject to any material change. On taking out and on renewing
each policy, Vendor shall promptly send a copy of the receipt reflecting payment of the premium to PetSmart. On PetSmart's written
request, Vendor shall, within ten (10) days of said request, provide PetSmart with copies of the insurance policy certificates and details of
the cover provided, in a form and manner acceptable to PetSmart. Vendor's liabilities under this Agreement shall not be deemed to be
released or limited by Vendor taking out the insurance policies referred to in this Section 13.
14. INDEMNITY. Vendor shall defend, indemnify and hold PetSmart (including its parents, subsidiaries, affiliates, officers, directors,
employees, agents, and other representatives) harmless from and against any and all liabilities, costs, expenses, damages and losses
(including, without limitation, any direct, indirect, special, or consequential losses, loss of reputation and all interest, penalties and legal and
other professional costs and expenses, including, without limitation, the cost of internal resources) suffered or incurred by PetSmart arising
out of or in connection with: (i) any breach by Vendor of any representations or warranties contained in this Agreement; (ii) any actual or
alleged defect in any Product (latent or patent) including without limitation Non-Conforming Products; (iii) breach of any PetSmart
Requirement, or any provision of this Agreement; (iv) violation of any Applicable Laws (including costs, additional expenses, customs
duties, or assessments, fines, citations, penalties, or Vendor's failure to comply with any request by PetSmart for any import or export
documentation); (v) any claim made against PetSmart for actual or alleged infringement of a third-party's Intellectual Property rights
arising out of, or in connection with, the manufacturing, supply, sale or use of the Products; (vi) any claim made against PetSmart by a
third-party arising out of, or in connection with, the manufacturing, sale or supply of the Products, to the extent that such claim arises out of
the breach, negligent performance or failure or delay in performance of this Agreement by Vendor, its employees, agents or subcontractors;
and (vii) any claim made against PetSmart by a third-party for death, personal injury or damage to property arising out of, or in connection
with the Products.
15. LIMITATION OF LIABILITY. Nothing in this Agreement shall limit or exclude Vendor’s liability for: (i) death or personal
injury resulting from negligence; (ii) fraud or fraudulent misrepresentation; (iii) breach of any express or implied terms of this Agreement;
(iv) its indemnification obligations under this Agreement; or (v) the willful default or willful misconduct of Vendor, its employees, agents
or Sub-Contractors. PetSmart shall not be liable to Vendor, whether in contract, tort (including negligence) or restitution, or for breach of
statutory duty or misrepresentation, or otherwise, for any: (i) loss of profit; (ii) loss of business; or (iii) indirect, special, punitive, or
consequential damages suffered by Vendor that arises under or in connection with this Agreement, and PetSmart's total liability arising
under or in connection with this Agreement shall be limited to the amount of an unpaid invoice in the case of payment disputes, and to
amounts covered by PetSmart’s insurance in all other matters.
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16. CONFIDENTIALITY AND DATA PROTECTION. Vendor agrees that it shall not at any time during the Term and for a
period of five (5) years thereafter disclose to any person any confidential information not known or available to the public, concerning the
business, affairs, customer, clients or vendors of PetSmart, including information relating to the operations, processes, plans, pricing,
product information, know-how, designs, trade secrets, Intellectual Property, software, market opportunities, customers, P.O.s, and the
PetSmart Requirements (the “Confidential Information”), except as permitted by this Section 16. Confidential Information does not
include: (i) publicly available information or materials (obtained through no wrongful act of the receiving Party), (ii) information already
known or independently developed by the receiving Party, or (iii) information received by receiving Party from a third party who was free
to disclose it.
Each Party may disclose the other Party's Confidential Information (i) to its employees, officers, agents, consultants or subcontractors
("Representatives") who need to know such information for the purposes of carrying out the Party's obligations under this Agreement,
provided that the disclosing Party takes all reasonable steps to ensure that its Representatives comply with the confidentiality obligations
contained herein, and the disclosing Party shall be responsible for its Representatives' compliance with the confidentiality obligations set
out in this section, and (ii) as may be required by law, a court of competent jurisdiction or any governmental or regulatory authority or by a
recognized stock exchange having authority over it or a substantial part of its assets.
Vendor shall establish and maintain data security procedures and other safeguards against the destruction, corruption, loss or alteration
of PetSmart’s Confidential Information, and to prevent access, intrusion, alteration or other interference by any unauthorized third parties
of the same, that are no less rigorous than (i) those maintained by Vendor for its own information or the information of its customers of a
similar nature, or, if more rigorous, and (ii) accepted industry practices, and that are in compliance with all Applicable Laws. If PetSmart, in
its sole discretion, requests or requires Vendor to access any electronic database or online portal system owned and/or operated by
PetSmart, Vendor hereby agrees it shall submit to, and successfully complete PetSmart’s screening and/or testing requirements regarding
the protection of online or electronic data.
1 7 . CUSTOMS-TRADE PARTNERSHIP AGAINST TERRORISM. Vendor acknowledges that United States Customs and
Border Protection has established an initiative called the Customs Trade Partnership Against Terrorism (C-TPAT), and PetSmart
participates in C-TPAT. Vendor hereby agrees to use its best efforts to support PetSmart's support of C-TPAT, and agrees to (i) fully
comply with any reasonable request of PetSmart to ensure that all Products sold to PetSmart are as safe from terroristic acts as possible; (ii)
comply with all United States Customs and Border Protection Agency security recommendations; (iii) use commercially reasonable efforts
to become a certified and validated member of C-TPAT, if available to Vendor; (iv) immediately notify PetSmart if Vendor becomes
suspicious or aware of any attempt, potential attempt, or commission of any act of terrorism with respect to the Products; and (v) promptly
notify PetSmart of any breach or suspected breach in the security and safeguard of the Products while within Vendor's custody or control,
or in the event it otherwise has information regarding any suspected or known breach of security pertaining to the Products. Further, upon
request of PetSmart, Vendor will promptly provide written certification that it is compliant with C-TPAT. If Vendor at any time becomes
aware that it is not compliant with C-TPAT, it will immediately notify PetSmart.
If Vendor will be physically present at any of PetSmart's facility or has access to PetSmart's systems, it will conduct a background
check on each such employee or subcontractor that includes a criminal background check covering the past seven (7) years for all locations
in which the individual has resided (both at the state/provincial and country/federal level), job history and employment verification. Vendor
will only place or allow access to those individuals who have no criminal convictions and whose background checks otherwise comport
with information provided by the individual.
Vendor warrants and represents, on behalf of itself and its affiliates, that it is not acting, directly or indirectly, for or on behalf of any
individual or entity that: (i) appears on the Specially Designated Nationals and Blocked Person List, as maintained by the Office of Foreign
Assets Control (OFAC) of the US Department of the Treasury, or (ii) is otherwise subject to OFAC sanctions.
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18. TERM AND TERMINATION. This Agreement shall commence on the Effective Date and continue for a period of one (1) year
thereafter (the “Initial Term”) and will automatically renew for successive one (1) year periods (each a “Renewal Term”) unless a Party
provides at least ninety (90) days notice prior to the end of the Initial Term or Renewal Term of its desire to terminate this Agreement. The
Initial Term and Renewal are referred to as the “Term.” Without affecting any other right or remedy available to it, PetSmart may terminate
this Agreement and any P.O. for undelivered Products (whether manufactured or not) with immediate effect by giving written notice to
Vendor if:
a. Vendor commits a material breach of any term of this Agreement or the PetSmart Requirements, including without limitation
the misuse of PetSmart’s Intellectual Property;
b. Vendor commits a non-material breach of this Agreement or the PetSmart Requirements that is not capable of being remedied
or, if such breach is capable of being remedied, fails to remedy the breach within a period of thirty (30) days after being
notified in writing of it existence;
c. Vendor repeatedly breaches any of the terms of this Agreement or the PetSmart Requirements;
d. Vendor suspends, or threatens to suspend, payment of its debts or is unable to pay its debts as they fall due or admits inability
to pay its debts or is deemed unable to pay its debts;
e. Vendor ceases or threatens to cease to carry on business, enters into administration or liquidation, or files for winding up or
f.
bankruptcy; or
any Force Majeure Event prevents Vendor from performing its obligations under this Agreement for any continuous period of
ninety (90) days.
Upon termination or expiry of this Agreement, each Party shall promptly: (i) return to the other Party all equipment, materials and
property belonging to the other Party; (ii) return to the other Party all documents and materials (and any copies) containing the other Party's
Confidential Information; and (iii) on request, certify in writing to the other Party that it has complied with the requirements of this Section.
Upon termination of this Agreement, PetSmart shall have the right in its sole discretion to terminate any P.O. or portion thereof that has not
been delivered to PetSmart or its designated representative set forth in the applicable P.O., regardless of the production status of such
Products and whether Vendor procured materials for the manufacture of such Products. The terms and conditions of this Agreement shall
continue in full force and effect until all P.O.s have been fulfilled by Vendor or cancelled by PetSmart. Vendor shall, in good faith,
undertake reasonable measures to mitigate the costs of termination. Vendor shall provide such assistance to PetSmart as PetSmart may
reasonably request in writing in connection with the transition of production of the Products and related matters.
Notwithstanding the termination or expiration of this Agreement, certain sections are intended to survive termination and expiration,
including without limitation the following sections, and remain in full force and effect until barred by Applicable Law: Section 9 (Product
Recall), 10 (Warranties and Representations), Section 11 (Audit Rights), Section 12 (Intellectual Property), Section 13 (Insurance), Section
14 (Indemnity), Section 15 (Limitation of Liability), Section 16 (Confidentiality and Data Protection), Section 18 (Term and Termination),
Section 23 (Governing Law and Venue), and Section 24 (Dispute Resolution).
Termination of this Agreement shall not affect any rights, remedies, obligations or liabilities of the Parties that have accrued up to the
date of termination or expiry, including the right to claim damages in respect of any breach of the Agreement which existed at or before the
date of termination.
19. NO AGENCY. The Parties are independent contractors, and nothing in this Agreement (nor the performance of any of the
provisions hereof) will create any partnership, joint venture, agency, franchise, sales representative, or employment relationship between
them. Neither Party is the agent or legal representative of the other and neither Party will have the power to obligate or bind the other Party.
Personnel supplied by each Party will work exclusively for that Party, and will not, for any purpose, be considered employees or agents of
the other Party. Each Party assumes full responsibility for the acts of personnel supplied by it while performing services hereunder and is
solely responsible for their supervision, direction and control, compensation, benefits, and taxes. Vendor agrees to conduct itself in a
manner that shall support and positively enhance PetSmart's goodwill, image, reputation, and contribute to a positive impact overall in the
specialty pet retail market.
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20. FORCE MAJEURE. For purpose of this Agreement, a "Force Majeure Event" means any circumstance not within a Party's
reasonable control including, without limitation: (i) acts of God, such as flood, drought, earthquake or other natural disaster; (ii) terrorist
attack, civil war, war, armed conflict, imposition of sanctions, or embargo; and (iii) strikes or lockouts (other than those involving the
employees of the Party affected by such event, or its agents, subcontractors or employees). If a Party is prevented from or delayed in
performing any of its obligations under this Agreement due to a Force Majeure Event ("Affected Party"), the Affected Party shall, as soon
as reasonably practicable after the start of the Force Majeure Event but no later than five (5) Business Days from its start, notify the other
Party in writing of the Force Majeure Event, the date on which it started, its likely or potential duration, and the effect of the Force Majeure
Event on its ability to perform any of its obligations under the Agreement. The Affected Party shall use all reasonable endeavors to mitigate
the effect of the Force Majeure Event.
21. WAIVER. A waiver of any right or remedy under this Agreement or by law is only effective if given in writing and shall not be
deemed a waiver of any subsequent breach or default. A failure or delay by a Party to exercise any right or remedy provided under this
Agreement or by law shall not constitute a waiver of that or any other right or remedy, nor shall it prevent or restrict any further exercise of
that or any other right or remedy. No single or partial exercise of any right or remedy provided under this Agreement or by law shall
prevent or restrict the further exercise of that or any other right or remedy.
22. NOTICES. Any notice or request given under this Agreement shall be in writing addressed to the other Party at (i) for Vendor, at
the address listed on the first page of this Agreement and (ii) for PetSmart Attn: General Counsel, 19601 N. 27th Avenue, Phoenix, Arizona
U.S.A. 85027. Any notice shall be deemed to have been received (i) if sent by certified or registered mail, postage prepaid, return receipt
requested, the fifth (5th) business day after posting; (ii) if sent by a major US or international document courier, the second (2nd) business
day after posting or at the delivery time recorded by the courier service, whichever is later; or (iii) if sent by electronic mail or by a
facsimile machine, the next business day after receipt of confirmation following transmission.
23. GOVERNING LAW AND VENUE. This Agreement will be governed and construed in accordance with the laws of the State of
Arizona as such laws apply to contracts between Arizona residents performed entirely within Arizona without giving effect to principles of
conflicts of laws. Vendor hereby agrees that any action or proceeding arising out of or related to this Agreement shall be brought solely in a
court of competent jurisdiction in Maricopa County, State of Arizona. Vendor hereby irrevocably consents to the jurisdiction of any such
court in Marciopa County, State of Arizona. The Parties hereby specifically exclude the application of the United Nations Convention on
Contracts for the International Sale.
24. DISPUTE RESOLUTION. PetSmart and Vendor shall work together to amicably resolve any dispute, controversy or claim,
whether based on contract, tort or otherwise, arising out of or relating to this Agreement or the relationship of the Parties, including without
limitation, any dispute as to the existence, validity, construction, interpretation, negotiation, performance, breach, termination or
enforceability of this Agreement (each a ''Dispute"). If the Parties cannot agree to a resolution to the Dispute within thirty (30) days after
one Party notifies the other Party of the Dispute, it shall be settled through final and binding arbitration to be conducted in Phoenix, Arizona
(USA) in accordance with the rules of the American Arbitration Association. The arbitration shall be conducted and finally settled by three
arbitrators, with each Party selecting one arbitrator and the two arbitrators selected by the Parties selecting a third arbitrator. Judgment
upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the matter or the Parties. All costs, attorney
and other professional fees, and expenses relating to the arbitration will be allocated among the Parties in accordance with the
determination made by the arbitrator.
Nothing in this Section prevents either Party from seeking preliminary or interim injunctive relief or measures from any court of
competent jurisdiction, and any such request will not be incompatible with the agreement to arbitrate under this Section or a waiver of the
right to arbitrate. The arbitral tribunal will have the authority and power to grant interim measures, including injunctive relief, whether in
the form of an award or in another form. In addition to the rights and remedies provided in this Agreement, each Party has all of the rights
and remedies available to it under the Uniform Commercial Code as adopted in the State of Arizona. The exercise of any right or remedy
provided for in this Agreement will be without prejudice to the right of PetSmart to exercise any other right or remedy provided in this
Agreement or at law or in equity.
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25. OTHER MATTERS. This Agreement constitutes the entire agreement between the Parties in relation to its subject matter. It replaces
and extinguishes all prior agreements, draft agreements, arrangements, collateral warranties, statements, assurances, representations and
undertakings of any nature made by or on behalf of the Parties, whether oral or written, in relation to the subject matter hereof. No
variation or amendment of this Agreement shall be effective unless it is in writing and signed by both Parties. Except as expressly provided
in this Agreement, a person who is not a party to this Agreement shall not have any rights to enforce any term of this Agreement. This
Agreement may be executed in any number of counterparts, each of which when executed and delivered shall constitute a duplicate
original, but all the counterparts shall together constitute the one agreement. Vendor shall not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of PetSmart. PetSmart may assign or transfer any or all of its rights and
obligations under this Agreement to any of its affiliates.
If any provision of this Agreement is or becomes invalid, illegal or unenforceable, it shall be deemed modified to the minimum extent
necessary to make it valid, legal and enforceable. If such modification is not possible, the relevant provision or part-provision shall be
deemed deleted. Any modification to or deletion of a provision or part-provision under this section shall not affect the validity and
enforceability of the rest of this Agreement. At its own expense, each Party shall, and shall use all reasonable endeavors to procure that any
necessary third-party shall, promptly execute and deliver such documents and perform such acts as may reasonably be required for the
purpose of giving full effect to this Agreement. If required by Applicable Law or requested by PetSmart, Vendor shall complete and submit
to PetSmart IRS form W-9 (or other IRS forms that may be required from time to time).
IN WITNESS WHEREOF, the Parties have executed this Agreement through their duly authorized representatives as of the date
stated at the beginning of it:
PetSmart Home Office, Inc.
By: _____________________________
Its: _____________________________
Print Name: ______________________
Date: ___________________________
Vendor’s Legal Name: Oculus Innovative Science, Inc.
By: /s/ Dan McFadden
Its: VP of Animal Wellness
Print Name: Dan McFadden
Date: Nov. 4, 2016
Address: 1129 N. McDowell Blvd.
Petaluma, CA 94954
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EXHIBIT A
PETSMART STANDARDS
PetSmart Supplier Code of Conduct
PetSmart Summary Supplier Code of Conduct
PetSmart Vendor Performance Standards
PetSmart Product Integrity Manual
PetSmart Restricted Substances List
PetSmart Social Responsibility Manual
PetSmart Defect Classification List
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EXHIBIT B
P.O. TERMS AND CONDITIONS
1 . Definitions. “Agreement” means a written agreement, if any, signed by PetSmart and Vendor regarding the purchase of
Products. “Business Terms” means the Agreement and the PO, collectively and individually, as the context requires. “PetSmart” means
PetSmart, Inc. or its affiliates or wholly owned subsidiaries. “PetSmart Documents” means the Business Terms and any related policies or
documentation that PetSmart provides Vendor from time to time or that is available to Vendor on PetSmart’s website. “PO” means a
purchase order for Products, which includes these Terms and Conditions for Purchase Orders and any schedules attached to such PO.
“Product(s)” means the goods or services, collectively and individually, as the context requires, provided by Vendor under a PO, together
with related packaging, labeling, documentation, transportation and anything else furnished by Vendor with respect to such goods, and any
and all deliverables provided by Vendor under a PO with respect to such services. “Vendor” means the person or entity to which the PO has
been issued, and its related entities, affiliates, agents, representatives and subcontractors.
2. Agreement for Purchase of Products. All purchases of Products by PetSmart will be governed by the Business Terms. In the
event of a conflict between the PO and an Agreement, the Agreement will control. (For clarity, if the PO does not conflict with the
Agreement but does contain additional or more specific terms or provisions than the Agreement, such additional or more specific terms and
provisions will continue to apply to Vendor.) If the parties have not executed an Agreement, the PO will control. The Business Terms
constitute the complete and final written agreement between PetSmart and Vendor with respect to the Products and supersede all other
agreements and understandings between the parties regarding the Products. No waiver, modification, or amendment of the Business Terms
will be valid unless in writing and signed by authorized representatives of both parties, subject to Section 9. All terms of any purchase order
or similar document provided by Vendor, including, but not limited to, any pre- printed terms thereon or any terms that appear on or are
accessible through Vendor’s websites or apps, that are inconsistent, add to, or conflict with the Business Terms, will be null and void and of
no legal force or effect. In addition, neither acceptance by nor delivery to PetSmart of all or part of the Products ordered, nor payment
therefor, will constitute acceptance by PetSmart of any such different or additional terms and conditions that may be contained in Vendor’s
acknowledgment, acceptance, confirmation, invoice, or other writing, regardless of whether Vendor's acceptance of the PO is conditioned
upon PetSmart's assent to such terms and conditions. Any written indication of acceptance of the Business Terms, commencement of any
work or the performance or shipment of conforming or non-conforming Products under a PO will constitute acceptance by Vendor of the
PO and all the Business Terms.
3. No Purchase Requirement. Except as may be set forth in the description of Products purchased on the PO, PetSmart does not
commit or guaranty the purchase of any Products from Vendor, including any minimum quantity or volume.
4. Delivery and Force Majeure; Inspection; Title and Risk of Loss. Vendor will deliver the Product in accordance with the
PetSmart Documents. For Products for which PetSmart is the importer of record, (i) risk of loss shall pass from Vendor to PetSmart F.O.B.
vessel port of export, and (ii) title to the Products shall pass from Vendor to PetSmart upon customs clearance of the Products at the port of
entry in the country of final destination (“Customs Clearance”). For Product for which PetSmart is not the importer of record, title and risk
of loss shall transfer to PetSmart Delivered Duty Paid (D.D.P. - Incoterms 2010) to a destination specified in the P.O. and, if the destination
is not specified in the P.O., such destination shall be deemed to be the PetSmart distribution centre or retail store where such Products are to
be delivered. Notwithstanding the foregoing, PetSmart may at its own option take delivery of all or any part of the Products at Vendor’s
facility. Time of delivery or performance is of the essence, and PetSmart’s stated delivery or performance date cannot be extended for any
reason, including delays in manufacture or shipment that Vendor cannot control. Vendor will not, however, be liable for any non-
performance or delay in performance caused solely by a strike, lockout, riot, war, insurrection, act of God or public enemy, if Vendor
immediately notifies PetSmart of the event and gives PetSmart a detailed description of the non-performance or delay that will be caused
by such event. PetSmart will then have the right to terminate the Business Terms, without liability to Vendor. PetSmart will have the right
to inspect the Product upon receipt, notwithstanding any payments or acceptance of previously shipped Products, and will, within a
reasonable time, notify Vendor of any claim relating to condition, quality, shortages, non-conformance or grade of the Product. PetSmart’s
inspection or failure to inspect the Product will not relieve Vendor of any claim related thereto. Unless otherwise agreed in writing, title and
risk of loss of all Products will pass to PetSmart only upon delivery to the specified destination. Vendor will reimburse PetSmart for any
costs, damage or expense incurred by PetSmart arising or relating from the sale by PetSmart of any Product that does not conform to
Vendor’s warranties and the PetSmart Documents.
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5. Price and Payments. Unless otherwise expressly stated in the Business Terms, the price specified in the PO includes (i) all taxes and
duties of any kind that Vendor is required to pay with respect to the Products (including applicable customs duties), and (ii) all charges for
packaging, transportation, storage and insurance. Vendor will submit an invoice to PetSmart for Products delivered to PetSmart upon
delivery or otherwise in accordance with the PetSmart Documents. Such invoice will reference the applicable PO. Vendor warrants that the
prices set forth in the PO are not higher than the lowest prices charged by Vendor to any other customer for the Products. Except as
provided in an applicable PO, PetSmart will not be required to pay any late charge, interest, finance charge or similar charge. PetSmart's
payment of the purchase price does not indicate its acceptance of the Products. Unless otherwise agreed to in writing by PetSmart payment
terms, including discount periods, will be 40 days from the latest of (i) the scheduled date for delivery or performance; (ii) the actual date
of performance or delivery of conforming Products; and (iii) the date of Vendor's invoice. Vendor waives all invoices not delivered to
PetSmart within 180 days of such date. Unless the P.O. specifies otherwise, a damage allowance (deduction) of two percent (2.0%) for
Products classified by PetSmart as “hard-goods,” two and one-half percent (2.5%) for Products classified by PetSmart as “specialty,” and
one and one-half percent (1.5%) for Products classified by PetSmart as “Consumables” shall be applied to each P.O.
6. Excess, Installment, and Early Deliveries. If Vendor delivers more Products than PetSmart ordered, then, unless PetSmart agrees
otherwise in writing, PetSmart will not have to pay for the excess. Unless PetSmart agrees otherwise in writing, Vendor will deliver all of
the Products in a single delivery and not in installments. PetSmart's acceptance of a delivery containing less than the required quantity of
Products will not relieve Vendor of its obligation to deliver the balance of the ordered Products at the price and on the other terms specified
in the PO. If Vendor delivers the Products before the scheduled delivery date, PetSmart may, at Vendor’s expense and risk, either store
them or return them to Vendor. PetSmart’s acceptance of an early delivery will not change the payment terms.
7 . Representations and Warranties about Vendor. Vendor represents and warrants to PetSmart that (i) Vendor has all necessary
experience, personnel, qualifications, expertise, authority, licenses and permits to enable it to perform its obligations under the Business
Terms, (ii) the Business Terms are the valid and binding obligations of Vendor, enforceable against Vendor in accordance with their terms,
(iii) Vendor is a solvent, going concern, and (iv) Vendor has not offered or given, will not offer or give, and will not solicit or accept, any
gratuity or thing of value to or from any PetSmart employee, agent or representative.
8. Representations and Warranties about the Products. Vendor represents and warrants that the Products will: (a) comply with all
applicable federal, state, provincial and local laws, rules and regulations or judicial or administrative orders, judgments or decrees
governing the Products, including without limitation, their manufacture, packaging, pricing, labeling, sale, use, transportation, importation
or exportation, including, without limitation, California’s Proposition 65 and other similar laws, rules, regulations, standards, orders and
directives, and the Fair Labor Standards Act of 1938 and the Occupational Safety and Health Act of 1970, as amended; (b) be free from
defects in design, workmanship, materials and hazards to life, animal or property; (c) conform to any warranty, description, sample, data,
drawing, representation, specification or documentation provided to PetSmart or set forth in the PetSmart Documents; (d) be suitable and fit
for their intended purpose; (e) not infringe or encroach upon any other party’s personal, contractual or property rights, including without
limitation, patents, trademarks, trade names, copyrights, rights of privacy, trade secrets and/or other intellectual property rights. Further,
Vendor represents and warrants that it is not subject to or bound by any agreement that will or may be violated by the provision of the
Products as provided in the applicable PO. In addition to the representations and warranties herein, Vendor assigns to PetSmart any
manufacturer’s indemnities and warranties (both express and implied). Upon PetSmart’s request, Vendor will give PetSmart certificates of
compliance with applicable laws, rules, regulations, standards, orders or directives. Vendor’s warranties extend to future performance under
a PO with respect to the Products and will survive inspection, tests, acceptance, and payment. Vendor will adhere to PetSmart’s Supplier
Code of Conduct in connection with Product delivery or performance under a PO, which Supplier Code of Conduct is available at
www.petsmart.com/compliance.
9. Changes. Notwithstanding Section 2 herein, PetSmart may at any time, by written notice to Vendor, change the PO as to (i) designs or
drawings of, or specifications for, the Products, (ii) time or place of delivery or performance, (iii) method of packing or shipment, or (iv)
the quantity or extent of the Products. If this causes a change in Vendor's cost or time of performance, PetSmart will consider an equitable
adjustment in the price or time for delivery or performance, or both, if Vendor gives PetSmart a written request justifying an adjustment
within 20 days after PetSmart notifies Vendor of the change. If an adjustment is not agreed upon, PetSmart may withdraw the change to the
PO or Vendor may decline to provide the Products subject to the change.
14
10. PetSmart’s Rights. Without limiting other rights and remedies available to it, PetSmart may, at its option, (i) return nonconforming
Products to Vendor, at Vendor’s risk and expense, and require Vendor either to give PetSmart full credit against the price, or promptly to
repair or replace the Products at Vendor's risk and expense; (ii) retain the Products and set off losses against any amount due Vendor; or
(iii) repair or replace the Products and charge Vendor with the expense. In addition to PetSmart's rights set out in the Business Terms,
PetSmart has all of the other rights and remedies that the law gives to buyers, including the right to recover incidental and consequential
damages resulting from any breach by Vendor. PetSmart will not lose any right just because it does not exercise it. PetSmart will have the
full statutory period of limitations to bring any action arising out of PetSmart's agreement with Vendor. A reasonable time for PetSmart to
notify Vendor of any breach is not less than two years from when PetSmart discovers the breach.
11. Work on Premises. If the PO includes the performance of services or delivery or installation of Products by Vendor, and involves
operations by Vendor’s employees or subcontractors on PetSmart’s premises or the premises of a PetSmart customer, Vendor will: (i) at all
times enforce strict discipline and maintain good order among all persons engaged in the activity on such premises and will cause Vendor’s
employees and subcontractors to comply with all fire prevention and safety rules and regulations in force at the premises and required by
law; (ii) keep such premises free from accumulation of waste materials and rubbish caused by its employees or subcontractors and upon
completion promptly remove all of Vendor's equipment and surplus materials; and (iii) reimburse PetSmart for all reasonable costs and
expenses incurred by PetSmart for repairs completed by PetSmart or its designee if Vendor damages any equipment or property of
PetSmart or its customer, or causes any damage to any portion of PetSmart’s or its customers’ premises, either during or resulting from the
delivery or performance of the Products by Vendor. Under no circumstances will Vendor conduct or permit any hazardous activity or
handling any hazardous materials at PetSmart’s or its customers’ premises without first coordinating the details of such activity or handling
with PetSmart.
12. Services. If the PO includes the performance of services, (i) Vendor is an independent contractor, and neither Vendor nor any of
Vendor's employees or agents will be considered agents or employees of PetSmart; and (ii) Vendor will furnish, at Vendor’s expense, all
labor, materials, equipment, transportation, facilities and other items necessary to perform such services. Vendor represents and warrants
that any of its employees or agents (including subcontractors) deployed in performing any such services will at all times be lawfully
engaged under applicable US immigration laws and regulations.
13. Ownership of Work. For purposes of this Agreement, “Works” shall mean any and all original creations, designs, materials, product
developments, artwork, graphic designs, sketches, programs, code, software, specifications, drafts, advice, ideas, suggestions and any other
pertinent data, including any derivatives thereof, in whatever form or media, prepared, made, expressed, developed, solely or jointly with
others, in connection with Vendor’s services performed for PetSmart. Vendor and its licensors will retain ownership of all works developed
or acquired by Vendor prior to the Effective Date or developed independently of any agreement with PetSmart, together with all related
Intellectual Property Rights (“Vendors’ Works”), and no right or license, implied or otherwise, is granted to PetSmart with respect to any of
Vendor’s Works, provided however, Vendor grants PetSmart a license to any and all Vendors’ Works embedded in or required for
PetSmart’s full use and enjoyment of the Products. Vendor agrees that all Works shall be solely owned by PetSmart. Vendor agrees that
the aforementioned Works are works made for hire, under the federal Copyright Act of 1976, as amended, and all intellectual property
rights shall vest in and be owned by PetSmart. Vendor irrevocably and exclusively assigns all rights, title and interest in the Works to
PetSmart. Vendor hereby gives, transfers and assigns to PetSmart all right, title and interest, together with the goodwill, if any, associated
therewith, in the Works not otherwise owned by PetSmart (as a work for hire or otherwise), effective as of the moment such Works are
created, including all rights in the nature of patent, trademark, trade secret, or other intellectual property or proprietary rights and all rights
of Vendor under copyright, whether such Works were generated solely by Vendor, or jointly with PetSmart. Vendor agrees to execute and
deliver such additional documents and take such additional reasonable actions as PetSmart deems necessary to perfect or evidence
PetSmart’s ownership of the Works or to enable PetSmart to record this Agreement and/or secure rights of trademark, copyright and/or
letters patent in its name.
14. Customs-Trade Partnership Against Terrorism. PetSmart participates in the US Customs-Trade Partnership Against Terrorism (C-
TPAT) and is committed to engaging providers, vendors and consultants who have policies and procedures ensuring supply chain security.
PetSmart requires that all its providers, vendors and consultants make reasonable efforts to have a security program that is in accordance
with C-TPAT’s minimum security requirements.
15
15. Indemnity. Vendor will indemnify, defend and hold harmless PetSmart, its directors, officers, employees, shareholders, agents,
subsidiaries, affiliates and representatives (“Indemnitees”) from and against any and all threatened or actual claims, losses, liabilities,
damages, costs or expenses (including attorneys’ and experts, fees and costs through all appeals) of any nature whatsoever and whether
arising prior to, or after the commencement or termination of the Business Terms (“Losses”), arising out of or related to: (a) the Products,
including, but not limited to, their manufacturing, packaging, pricing, labeling, sale or use, or any infringement by the Products of third-
party intellectual property rights; (b) Vendor’s breach of any provision of any of the PetSmart Documents; (c) any claim or threatened
claim for personal injury, death or property damage or loss of any nature whatsoever arising from or related to any Product; (d) Vendor’s
violation of any applicable laws or regulations; or (e) any breach by Vendor of any of its obligations or warranties in favor of PetSmart.
Vendor will defend, at its sole cost and expense, the Indemnitees in any action or proceeding arising out of any such Losses by counsel
reasonably acceptable to Indemnitees and will promptly pay all costs and expenses arising in connection with such defense including
attorneys’ fees and expert witnesses’ fees through all appeals.
16. Insurance. Vendor will maintain, at its sole cost and expense, during the term of the Business Terms and for at least five years
thereafter (or if no such term is specified for at least three years after the date of the PO), the following types and amounts of insurance,
with insurers with an A.M. Best rating of at least A- (Excellent), FSC VII, and authorized to conduct business in the United States and
Canada:
(a)
a commercial general liability insurance policy with full limits, achieved either by primary or excess/umbrella insurance, for bodily
injury and property damage for not less than Two Million Dollars ($2,000,000.00 USD) per occurrence, with an aggregate limit of
Four Million Dollars ($4,000,000.00 USD), such policies to include products liability and contractual liability;
(b) an automobile liability policy with limits not less than $3,000,000 combined single limit;
(c) workers’ compensation insurance in the benefit amounts required by applicable law and an employer’s liability policy with limits
(d)
not less than $1,000,000 per accident or occurrence; and
if services are provided under the PO or in connection with goods sold under a PO, a professional liability or errors and omissions
policy with limits not less than $2,000,000 per occurrence and $5,000,000 aggregate.
Notwithstanding the foregoing, PetSmart may require Vendor to acquire additional or different insurance types or coverage amounts to
the extent commercially reasonable in order to protect both PetSmart and Vendor from any and all claims and liabilities arising from or
related to the PO and the goods or services provided under a PO. Such polices shall be issued by insurers that are reasonably satisfactory to
PetSmart. Vendor’s policies will provide a waiver of subrogation in favor of PetSmart. Upon PetSmart’s written request, Vendor will name
PetSmart as an additional insured on the policies on a primary and noncontributory basis. Vendor’s policies will provide a waiver of
subrogation in favor of PetSmart. Within 10 days after such request, Vendor will provide PetSmart with certificates of insurance for the
policies required hereunder and send such certificates to certificates@petsmart.com. The insurance coverage provided for herein will not
act to limit Vendor's liability under the Business Terms.
1 7 . Confidentiality. As a result of its dealings with PetSmart, Vendor may have access to PetSmart’s Confidential Information.
“Confidential Information” is non-public information that, by its nature, ought to be treated as proprietary and confidential or that a
reasonable person would conclude is confidential, which is disclosed by PetSmart, or its subcontractors or agents, to Vendor, orally,
electronically or in tangible form. Vendor will not, without the written consent of PetSmart, its successors or assignees, disclose any
Confidential Information to any person, firm, corporation, or other entity for any purpose whatsoever or use such information for any
purpose not provided for in the PetSmart Documents, for a period of two years after it is disclosed. If there is a breach of this Section
(either actual or threatened) by Vendor, PetSmart's remedies at law will be inadequate. Therefore PetSmart will have the right of specific
performance or injunctive relief, or both, in addition to any and all other remedies and rights at law or in equity, and PetSmart's rights and
remedies will be cumulative.
18. Publicity/Use of PetSmart Name. Vendor will acquire no right to use, and will not use, the name “PetSmart” (either alone or in
conjunction with or as part of any other word or name) or any other name, mark, logo, design, product designations or other intellectual
property of PetSmart or any of its related, affiliated or subsidiary companies: (i) in any advertising, publicity or promotion; (ii) to express or
to imply any endorsement by PetSmart of Vendor’s products, services or business; or (iii) in any other manner whatsoever (whether or not
similar to uses prohibited by [i] and [ii] above) without PetSmart’s express prior written consent, which may be withheld in its sole
discretion. The terms of this paragraph will survive the expiration or termination of the Business Terms.
16
19. Remedies; Set-Off. In addition to the rights and remedies provided in the Business Terms, each party has all of the rights and remedies
available to it under the Uniform Commercial Code as adopted in the State of Arizona; provided, however, that Vendor waives against
PetSmart all rights to claim or collect punitive or exemplary, indirect, incidental, special or consequential damages, lost profits or loss of
opportunity damages. The exercise of any rights or remedy provided for in the Business Terms will be without prejudice to the right of
PetSmart to exercise any other right or remedy provided in the Business Terms or at law or in equity. All payments to be made by PetSmart
to Vendor pursuant to the Business Terms are subject to set-off, deduction or offset by PetSmart of all sums due and owing PetSmart by
Vendor.
20. Governing Law/Venue/Jury Trial Waiver. The PetSmart Documents will be governed and construed in accordance with the laws of
the State of Arizona without regard to principles of conflicts of laws. In any action or proceeding between any of the parties arising out of
or relating to the PetSmart Documents (or any of the transactions contemplated thereby), each of the parties: (a) irrevocably and
unconditionally consents and submits to the exclusive jurisdiction and venue of the state and federal courts located in Maricopa County,
Arizona; and (b) agrees that all claims in respect of such action or proceeding will be exclusively heard by such courts. EACH PARTY
HEREBY WAIVES, IRREVOCABLY AND UNCONDITIONALLY, ANY RIGHT TO TRIAL BY JURY REGARDING ANY
SUCH CLAIM.
21. Data Security. (a) Vendor will comply with all applicable laws, regulations, and codes of practice in connection with the collection,
processing, use and storage of data provided by PetSmart or PetSmart affiliates, customers, donors, vendors, or other third parties
providing data to Vendor under the Business Terms (collectively, “PetSmart Data”). Vendor will implement and maintain reasonable
physical, technical and organizational measures and safeguards in order to preserve the security and confidentiality of PetSmart Data
against unlawful or unauthorized destruction, processing, disclosure, processing or access to, or accidental damage or loss of PetSmart
Data. Without limiting the generality of the foregoing, where appropriate, and in accordance with industry standards and best practices,
Vendor will implement and/or use network management and maintenance applications and tools, and fraud prevention, intrusion detection,
and encryption technologies. At a minimum, all PetSmart data will be encrypted while in transit and will be transmitted using a secure
transfer method (e.g. SFTP). PetSmart has the right to request an SSAE 16 SOC 2 service auditor’s report, if applicable, at any time during
performance under a PO or the term of an Agreement.
(b) If Vendor or any third party assisting Vendor (i) deliberately or inadvertently collects, uses, or discloses PetSmart Data in breach of this
Section, or (ii) discovers, is notified of, or has reasonable awareness that an unauthorized access, acquisition, theft, disclosure or use of
PetSmart Data has occurred or is likely to occur (each such event, an “Information Security Breach”), then Vendor will immediately notify
PetSmart of such Information Security Breach and, at its own expense, investigate, remediate, and mitigate the effects of the Information
Security Breach.
(c) Upon either the written request of PetSmart, at its discretion, or the expiration or termination of the Business Terms, Vendor will render
unreadable or return to PetSmart, or any third party designated by PetSmart, within fifteen (15) business days, all copies, duplicates,
summaries, abstracts or other representations of any PetSmart Data, without charge to PetSmart. For electronic media, “render unreadable”
could include, but is not limited to, degaussing or using a FIPS compliant military-grade wipe program, and for hard-copy material “render
unreadable” could include, but is not limited to, cross-cut shredding or incineration.
17
EXHIBIT C
COMMERCIAL TERMS
18
Exhibit 10.33
between
and
D I S T R I B U T I O N A G R E E M E N T
Execution Copy
G. Pohl-Boskamp GmbH & Co. KG
Kieler Strasse 11
25551 Hohenlockstedt
Germany
IntraDerm Pharmaceuticals,
A Division of Oculus Innovative Sciences, Inc.
1129 North McDowell Blvd.
Petaluma, California 94954
United States of America
- Hereinafter referred to as “Pohl-Boskamp”-
- Hereinafter referred to as “IntraDerm ” –
- Pohl-Boskamp and IntraDerm referred to as “Party”-
Preamble
Subject to the terms and conditions of this Distribution Agreement (the “Agreement”), Pohl-Boskamp intends to appoint a new distributor
for the Territory as defined in § 3 hereinafter.
IntraDerm is willing to become a distributor for Pohl-Boskamp, like both Parties have stipulated already in the corresponding Term sheet
from 12th November, resp. 2nd December 2015.
Now, therefore, the Parties agree upon the following terms and conditions:
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 1 of 30
§ 1
Object of the Agreement
1.1
Pohl-Boskamp hereby appoints IntraDerm, and IntraDerm hereby accepts the appointment, as Pohl-Boskamp´s exclusive distributor
to import, register, label, promote, market, offer for sale, sell and otherwise distribute the Products as defined in § 2 in the Territory
as defined in § 3. IntraDerm shall not actively market the Products anywhere elsewhere than in the Territory.
1.2
IntraDerm shall seek to secure one or more Marketing Authorisations and/or register new products in the Territory for use as
provided under this Agreement. IntraDerm agrees to buy the Products which are destined for distribution in the Territory exclusively
and directly from Pohl-Boskamp on the terms and subject to the conditions set forth herein.
1.3
Pohl-Boskamp shall label and supply and IntraDerm shall import and buy the Products as defined in § 2 in its own name and for its
own account. IntraDerm shall sell such Products in the Territory, subject to obtaining appropriate Marketing Authorisation.
IntraDerm acknowledges that it has no authority to act for or on behalf of Pohl-Boskamp unless specifically set forth in this
Agreement or certified separately in written form.
1.4
IntraDerm is not entitled to entrust third parties with any rights or claims deriving from this Agreement without obtaining the prior
written consent of Pohl-Boskamp. An affiliate of IntraDerm is not regarded as a third party. Affiliate means any corporation or other
business entity controlling, controlled by or under common control with IntraDerm. Control for this purpose shall mean the direct or
indirect ownership of at least fifty percent of the voting interest in such corporation or entity.
1.5
As an independent contractor, IntraDerm shall incur all expenses and costs related to the fulfilment of this Agreement, in particular
regarding the registration, marketing, promotion and distribution of the Product under this Agreement – such as but not limited to –
its office overhead costs, travel expenses, telephone, facsimile, sales promotion and advertising costs. Pohl-Boskamp shall not be
responsible for such expenses unless otherwise agreed to by the Parties in writing.
1.6
During the term of this Agreement, Pohl-Boskamp agrees to not distribute the Products, directly or indirectly, in the Territory either
by actively approaching customers directly, by appointing any third party to distribute the Products in the Territory, or otherwise,
unless otherwise agreed to by Pohl-Boskamp and IntraDerm in writing or otherwise agreed in this Agreement. Pohl-Boskamp agrees
to forward to IntraDerm all inquiries for Products from the Territory or for delivery in the Territory. Except as expressly provided in
this Agreement, no right, title or interest is granted by Pohl-Boskamp to IntraDerm.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 2 of 30
1.7
Notwithstanding the provisions of § 1.1 hereof, in order to maintain the exclusivity granted in § 1.1 above, IntraDerm shall achieve
at least [ ]†% of the projected sales targets set forth on ANNEX III (the “Annual Minimum Purchase Requirements”). However,
if IntraDerm fails to achieve the Annual Minimum Purchase Requirement during any calendar year and does not purchase the
outstanding quantity of Products by the end of the following calendar year, Pohl-Boskamp shall have the right by providing written
notice to IntraDerm to convert the exclusive distribution right granted in § 1.1 into a non-exclusive right and shall have the right
itself, through Affiliates or by appointing one or more third parties, to import, promote, market, offer for sale or otherwise distribute
the Products in the Territory.
§ 2
Products
The term “Products” refers to all products (whether finished or bulk) listed in ANNEX I (“Products”) as presently manufactured and sold
by Pohl-Boskamp, or as improved as provided in this § 2. Changes to ANNEX I are subject to a written agreement between the Parties.
Products added to ANNEX I will become “Products” within the meaning of this Agreement and will be covered by this Agreement.
The Parties recognize that Pohl-Boskamp has an interest in improving its products in order to provide to its customers the most advanced
devices. In the event that, during the term of this Agreement Pohl-Boskamp develops improvements to the Products that are incremental
and do not form the basis of a new product, such improvements will be included in the Products, as long as the change does not adversely
affect the Marketing Authorisation. In the event that, during the term of this Agreement, Pohl-Boskamp develops or has the right to market,
an improvement such as an additional indication and/or a change of the formulation of any Product that is suitable for the Territory
(hereinafter, the “Improvement”), and Pohl-Boskamp intends to exploit the Improvement in the Territory, for each such Improvement
IntraDerm shall have the right of first refusal for a period of [ ]† days in case Pohl-Boskamp would wish to name a separate distributor.
The Parties agree to negotiate in good faith commercially reasonable terms for distribution by IntraDerm of the new product that is subject
of any such Improvement. For the purpose of this Agreement, any product that has the same active ingredient as a Product, or is intended
for the same or substantially the same purpose or use as any Product listed on or contemplated by ANNEX I shall be deemed an
Improvement.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 3 of 30
The “Territory” is the geographical area listed in ANNEX II.
§ 3
Territory
§ 4
Duties of IntraDerm / Representations of IntraDerm
4.1
IntraDerm shall exert commercially diligent efforts to register, promote, market, distribute and sell the Products in the Territory.
4.2
IntraDerm shall pay Pohl-Boskamp a royalty within [ ]† days following the end of each calendar month, based on Net Sales of all
Products for which payment was received by IntraDerm in such previous calendar month, at the rates specified on ANNEX I.
4.3
IntraDerm further undertakes:
a)
to maintain at all times a sales organisation including, a sufficient number of qualified personnel (employees or contractors)
in the reasonable, good faith determination of IntraDerm, within the Territory in order to perform its obligations under this
Agreement;
b)
to always have quantities of the Products in stock or confirmed orders sufficient to cover a period of [ ]† months of
foreseeable sales to meet the requirements of the market in the Territory;
c)
to report to Pohl-Boskamp on a monthly basis its total stocks, turn-over figures, unit sales and sample movements as well as
any significant issues that have an impact on the market for the Product in the Territory, especially with regard to
competitive products and the price structure for Products in the Territory and any changes thereof. Monthly reports have to
reach Pohl-Boskamp by the tenth (10th) day of each following month;
d)
to take the appropriate advertising and public relation measures as specified in § 9 below;
e)
t o use commercially reasonable efforts to buy from Pohl-Boskamp the Annual Minimum Purchase Requirements of
Products;
f)
t o inform Pohl-Boskamp in writing as soon as possible about any substantial operational changes in personnel,
management, ownership, and legal structure of IntraDerm;
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 4 of 30
g)
to sell the Products with the labelling agreed to by the Parties in the original packaging and/or presentation and not to
modify the original presentations except in exceptional cases and then only with the prior written consent of Pohl-Boskamp
in writing.
h)
to provide Pohl-Boskamp within thirty (30) days after receipt by IntraDerm of the initial Marketing Authorisation Sales
Targets (as defined on ANNEX III) for the Products for each Contract Year (as defined on ANNEX III) during the Initial
Term, and within thirty (30) days prior to the end of Contract Year 5 (as defined on ANNEX III) and each Contract Year
thereafter, to provide Pohl-Boskamp with target sales projections for the following Contract Year. IntraDerm’s initial Sales
Targets are set forth on ANNEX III. The Parties further agree that the wording of the SebDerm Claim will have a material
impact on the marketability of the Product. IntraDerm shall update such Sales Targets after it obtains the 510k clearance
for the SebDerm Claim (as defined on ANNEX III), and such Sales Targets and Minimum Purchase Requirements, as
modified, shall be binding on the Parties.
i)
about the laws and regulations applicable to the Products in the Territory which may affect Pohl-Boskamp in the fulfilment
of its obligations under this Agreement (such as but not limited to statutory requirements regarding labelling of the
Products, etc.).
4.4
During the term of this Agreement IntraDerm is not allowed to
a)
produce, promote, distribute, sell or market in the Territory – either directly nor indirectly – products which have the same
ingredients and indications as the Products, except for the products listed under § 5.1; and/or
b)
actively solicit customers from outside the Territory to establish and/or maintain offices, branches and/or storage depots for
the Products outside the Territory.
4.5
Upon termination of this Agreement, Pohl-Boskamp is, at the request of IntraDerm, obliged to buy any remaining stock of the
Products from IntraDerm within [ ]† days after termination. However, upon request of Pohl-Boskamp, IntraDerm must resell any
remaining stock of the Products to Pohl-Boskamp, or any third party named by Pohl-Boskamp at the price for which IntraDerm had
initially bought the Products from Pohl-Boskamp. Pohl-Boskamp shall pay the shipping costs of the remaining stock of the
Products.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 5 of 30
4.6
IntraDerm represents that it adheres to and employs all applicable European GDP guideline standards for the wholesale distribution
of medicinal products for human use and that it retains valid certifications and/or licenses to distribute the Products listed in
ANNEX I of this Agreement, other than the Marketing Authorisation. Upon Pohl-Boskamp’s request, IntraDerm shall provide
copies of such certification to Pohl-Boskamp in a timely manner.
4.7
IntraDerm further represents and warrants to Pohl-Boskamp that: (i) it has the full right, power, and authority to enter into this
Agreement; and (ii) no consent of any third parties is required for IntraDerm to enter into this Agreement or (except for the
Marketing Authorisation) perform its obligations hereunder.
4.8
IntraDerm shall indemnify and hold harmless Pohl-Boskamp, its Affiliates and their respective officers, directors, agents, successors
and assigns against all suits, liabilities, losses, claims, damages, costs and expenses (including reasonable legal fees and costs)
incurred by them resulting from or arising out of: (i) any material breach by IntraDerm of its obligations under this Agreement,
including, without limitation, the obligations of § 9.3; (ii) any grossly negligent, wilful or unlawful act or omission of IntraDerm;
and (iii) any injury or death of any person, directly arising from damages alleged to arise from the storage, labelling, sale or
distribution of the Products in the Territory.
§ 5
Distribution of Other Products
5.1
At the time of signing this Agreement, IntraDerm produces, promotes, markets, distributes and/or sells the following products which
are directly competitive with the Products and which contain the following active ingredient(s):
Without limiting the generality of the foregoing, a product will be deemed to be directly competitive with a Product if it is intended for the
same, or substantially the same purpose or use as any of the Products.
NONE
5.2
Further exemptions from the regulation in § 4.4 of this Agreement are only admissible if Pohl-Boskamp gives its consent, in writing,
prior to the commencement of the production, promotion, marketing, distribution and/or sale of products which are competitive to
the Products.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 6 of 30
Purchase of Products / Obligations and Representations of Pohl-Boskamp
§ 6
6.1
IntraDerm agrees to purchase the Products on the terms and subject to the conditions of Pohl-Boskamp’s General Terms and
Conditions of Trade unless they are modified by this Agreement. Pohl-Boskamp’s current ‘General Terms and Condition of Trade’
are attached hereto as ANNEX IV. Pohl-Boskamp has the right to unilaterally change its ‘General Terms and Conditions of Trade’,
provided, however, that any such change shall not modify the terms and conditions of this Agreement without the prior written
consent of IntraDerm. Pohl-Boskamp will notify IntraDerm of any changes to the General Terms and Conditions of Trade in
writing, and the new ‘General Terms and Conditions of Trade’ will become effective three (3) months after the initial notification
from Pohl-Boskamp. In case any provision of this Agreement conflicts with or provides obligations in addition to any of the
provisions of the ‘General Terms and Conditions of Trade,’ the provisions of this Agreement shall control.
6.2
IntraDerm shall submit written purchase orders to Pohl-Boskamp for the Products. Each purchase order shall include (i) the Product
ordered; (ii) quantity, (iii) relevant price, as set forth on ANNEX I, (iv) requested delivery date, and (v) shipping instructions and
shipping address. Any preprinted terms and conditions on either IntraDerm’s purchase order or Pohl-Boskamp’s order
acknowledgement and/or invoice that are inconsistent with the terms and conditions of this Agreement shall have no force or effect,
and the terms of this Agreement shall govern.
6.3
The purchase price for the Products are listed in ANNEX I. Pohl-Boskamp shall have the right to increase the purchase price for
Products one time each year beginning on the one- year anniversary of the First Commercial Sale; provided, however, that no
purchase price increase shall exceed [ ]†% of the purchase price effectively immediately prior to the increase.
6.4
The delivery terms for the Products are listed in ANNEX I
6.5
Under this Agreement, Pohl-Boskamp will exert best efforts to carry out IntraDerm’s orders carefully and punctually. The scope of
the orders and the delivery date are only binding for Pohl-Boskamp upon written confirmation by Pohl-Boskamp. Should Pohl-
Boskamp not be able to execute a confirmed order in time, it will notify IntraDerm immediately. Pohl-Boskamp shall pack all
Products in accordance with Pohl-Boskamp’s standard packing procedure, cGMP(s) and any other applicable laws, regulations and
ordinances.
6.6
Pohl-Boskamp shall label the Products using the Product Trademark specified on Annex I and under a labelling using IntraDerm /
OCULUS branding, which labelling is mutually acceptable to Pohl-Boskamp and IntraDerm and compliant with the requirements of
the Marketing Authorisation and Health Authorities.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 7 of 30
6.7
Pohl-Boskamp shall invoice IntraDerm upon shipment of each purchase order to IntraDerm. IntraDerm shall pay all amounts due to
Pohl-Boskamp by wire transfer, and payment shall be made within thirty (30) days from the date of the relevant invoice.
6.8
IntraDerm determines its sales price for the Products within the Territory at its own discretion. Pohl-Boskamp, however, will give a
non-binding recommendation on the sales price for the Products which will be discussed with IntraDerm. IntraDerm undertakes to
notify Pohl-Boskamp of its sales prices and to provide Pohl-Boskamp with a corresponding price list if its sales prices are changed.
6.9
Any claim of IntraDerm concerning Pohl-Boskamp’s deliveries of the Products shall be considered by Pohl-Boskamp only if Pohl-
Boskamp receives such claim by registered mail, facsimile with confirmed letter or courier service within thirty (30) days after
IntraDerm received the Products or within thirty (30) days after discovery of any hidden defects of the Products.
6.10
Based on the sales forecast figures provided by IntraDerm as stipulated in § 4.2 h, Pohl-Boskamp warrants to have packaging
material in stock.
6.11
Pohl-Boskamp represents and warrants to IntraDerm that: (i) it is the owner of the Intellectual Property and that it has the right to
grant the licenses and rights granted to IntraDerm pursuant to this Agreement; (ii) it has the full right, power, and authority to enter
into this Agreement and there is nothing that will prevent it from performing its obligations under this Agreement; (iii) no consent
of any third party is required for Pohl-Boskamp to enter into this Agreement or perform its obligations hereunder; (iv) the Products
will, under normal use and conditions, substantially conform to the applicable Product specifications for a period in conformity with
the applicable Product label claims regarding shelf-life and that the Product has been manufactured in accordance and compliance
with current Good Manufacturing Practices and all applicable laws and regulations; (v) the Products supplied to IntraDerm shall at
all times conform to the specifications set forth in the Marketing Authorisation; (vi) use of the Intellectual Property as delivered to
IntraDerm does not infringe any patent, trademark, copyright or other intellectual property rights of any third party or
misappropriate any trade secret or other proprietary right of any third party; (vii) it is not a party to any outstanding assignments,
licenses, encumbrances, or other obligations that preclude or are inconsistent with this Agreement, specifically including, but not
limited to, any geographic or market segment restrictions on the distribution of the Products and the Intellectual Property
incorporated therein; (viii) no claims or suits are pending or threatened against Pohl-Boskamp or any other party with respect to all
or part of the Intellectual Property.
CONFIDENTIAL
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6.12
Pohl-Boskamp shall indemnify and hold harmless IntraDerm, its Affiliates and their respective officers, directors, agents, successors
and assigns against all suits, liabilities, losses, claims, damages, costs and expenses (including reasonable legal fees and costs)
incurred by them resulting from or arising out of: (i) any negligence in the manufacture of the Products; (ii) any breach by Pohl-
Boskamp of its obligations under this Agreement; any grossly negligent, wilful or unlawful act or omission of Pohl-Boskamp; or
(iii) any injury or death of any person, directly arising from damages alleged to arise from the quality and manufacture of the
products.
§ 7
Marketing Authorisation
7.1
For the term of this Agreement, Pohl-Boskamp grants to IntraDerm the right to utilise Pohl-Boskamp’s Marketing Authorisations
(as defined below) for the Medical Devices in the Territory for the fulfilment of IntraDerm’s obligations under this Agreement. For
purposes of this Agreement, “Marketing Authorisations ” means the health registrations, as well as any other governmental
approvals and/or official sales permissions, licenses and market authorisation in IntraDerm’s or Pohl-Boskamp’s name, which are
required for the import, labelling, distribution, promotion, marketing, offering for sale, and sale of the Products in the Territory.
7.2
IntraDerm agrees to assist Pohl-Boskamp in securing one or more Marketing Authorisations and/or registering new products in the
Territory, including, initially, a Marketing Authorisation for a Product claim for seborrheic dermatitis, and, thereafter, a Marketing
Authorisation for a Product claim for psoriasis. IntraDerm shall give Pohl-Boskamp advice on the set of necessary Marketing
Authorisation documents as required by the applicable laws in the Territory, and Pohl-Boskamp shall, for this purpose, provide to
IntraDerm, free of charge, the required documents in English against receipt of such information from IntraDerm.
7.3
N o later than thirty (30) days following the Effective Date of this Agreement, IntraDerm shall submit to Pohl-Boskamp for
approval, which approval shall not be unreasonably withheld or delayed, a written plan detailing regulatory requirements, including,
without limitation in respect to the content of the Marketing Authority application, dossiers, and estimated time frames for the
regulatory approval and registration for the Product claim for seborrheic dermatitis in the Territory (“Regulatory Plan”). Pohl-
Boskamp shall notify IntraDerm not later than thirty (30) days of any request for modification or clarification to the Regulatory Plan
after Pohl-Boskamp receives the Regulatory Plan from IntraDerm and provide IntraDerm with consent to submit the application to
the competent governmental or non governmental entity(ies) in the Territory (“Health Authorities”). IntraDerm shall take the steps
reasonably necessary and use commercially reasonable efforts to secure and obtain from the Health Authorities, and thereafter to
maintain the Marketing Authorisations for the Product in the name of IntraDerm in accordance with the local laws and regulations.
Pohl-Boskamp will fully cooperate with IntraDerm in securing and maintaining the Marketing Authorisation for the Products in the
Territory. If the Health Authorities issue a 510K clearance to IntraDerm for a Product claim for seborrheic dermatitis that in the
good faith judgement of IntraDerm, is sufficiently broad to allow IntraDerm to market the Product in the Territory (the “ SebDerm
Claim”), IntraDerm shall seek to obtain a Marketing Authorisation for a Product claim for psoriasis.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 9 of 30
7.4
In addition, IntraDerm undertakes to send a copy of all correspondence with the Health Authorities in the Territory regarding the
Marketing Authorisations for the Medical Devices to Pohl-Boskamp, such as but not limited to approvals, renewals, changes in
national texts (Summary of Product Characteristics (SmPC), labelling, Patient Information Leaflet (PIL)), requirements and all
correspondence for maintenance procedure to keep the Marketing Authorisation(s) and defined deadlines by Health Authorities.
This also includes the information and changes concerning officially registered contact persons (e.g. persons responsible for
pharmacovigilance or scientific service), if required by applicable law. IntraDerm commits to promptly forward all this information
to Pohl-Boskamp, so that Pohl-Boskamp is able to cope with transition periods and deadlines.
7.5
IntraDerm is obliged to keep itself informed at all times of the national laws concerning the application for and maintenance of the
marketing authorisation(s) for the Medical Devices in the Territory in particular regarding the wording on the packaging in a local
language as required by local laws of the Territory. IntraDerm shall promptly inform Pohl-Boskamp of any material change of the
laws which may endanger the validity of the Marketing Authorisations. IntraDerm shall provide Pohl-Bokamp the relevant
requirements and Pohl-Boskamp shall ensure compliance of the presentation of the Medical Devices, e.g. the packaging and
labelling of the Products (SmPC, labelling, PIL), with the Marketing Authorisation and the legal requirements that are applicable in
the Territory.
7.6
If any additional documentation such as, but not limited to, a clinical trial or any change of the Marketing Authorisation is required
in order to obtain or maintain the Marketing Authorisation, IntraDerm shall not undertake any action without the express written
consent of Pohl-Boskamp. Any necessary measures shall be carried out by IntraDerm only upon Pohl-Boskamp’s approval. Pohl-
Boskamp shall provide assistance free of charge. All other details will be agreed upon between the Parties separately in writing.
7.7
Upon termination of this Agreement, IntraDerm is obliged to return all documents in connection with the Marketing Authorisation
for such Product to Pohl-Boskamp within 30 days by courier service at Pohl-Boskamp’s expense, and to refund the Filing Fee to
IntraDerm.
7.8
All formalities and steps required by the competent Health Authorities of the Territory in relation to the Medical Devices shall be
effected by IntraDerm in the name of IntraDerm.
7.9
Subject to Pohl-Boskamp’s refund of the Filing Fee to IntraDerm, IntraDerm hereby agrees irrevocably and unconditionally to
surrender the Marketing Authorisation and the rights connected therewith as well as all documents and the dossier to Pohl-Boskamp
immediately and unconditionally when the Agreement terminates.
CONFIDENTIAL
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7.10
IntraDerm shall pay the filing fee for the Marketing Authorisation. All costs incurred by IntraDerm in connection with the
preparation, filing, maintenance and amendment to the Marketing Authorisation for Medical Devices, including the filing fees (the
“Filing Fee”) and out-of-pocket-expenses, shall be for the account of IntraDerm. Pohl-Boskamp shall reimburse IntraDerm for the
Filing Fee upon expiration or termination of this Agreement.
7.11
IntraDerm shall arrange for the translation of all documents to/from the official language spoken in the Territory which are required
for obtaining, maintaining or altering the Marketing Authorisation for the Medical Devices. IntraDerm affirms that it has no claim
against Pohl-Boskamp for compensation or indemnity based on a fruitless registration attempt other than for the Filing Fees.
7.12
IntraDerm is not allowed to use any Marketing Authorisation documentation outside the Territory and inside the territory for other
reasons as stipulated in this Agreement.
7.13
In the event that, due to unforeseen problems concerning the filing of the initial Marketing Authorisation (such as but not limited to
costs, duration of application process, requests of Health Authorities, or failure to obtain clearance for a Satisfactory Claim (as
defined below) prior to the one year anniversary of the Effective Date, IntraDerm is entitled to stop the process of pursuing the
Marketing Authorisation for the SebDerm Claim. For purposes of this Agreement, a “ Satisfactory Claim” is a claim that, in the
reasonable judgment of IntraDerm, is sufficiently broad to support successful commercialization of the Product in the Territory.
7.14
Pohl-Boskamp and IntraDerm stipulate details concerning pharmacovigilance issues in a Pharmacovigilance Agreement as
ANNEX V of this Agreement.
7.15
Pohl-Boskamp and IntraDerm shall comply with their respective quality and regulatory responsibilities as set forth in the Quality
Agreement which the Parties will negotiate in good faith to conform to the Marketing Authorisation after receipt of such Marketing
Authorisation.
CONFIDENTIAL
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§ 7a
Medical Device Regulations/Safety
7a.1
Pohl-Boskamp represents and warrants that those Products listed in ANNEX I that are medical devices are certified as medical
devices pursuant to Council Directive 93/42/EEC, as modified to date.
7a.2
This § 7a applies only to Products which are medical devices pursuant to Council Directive 93/42/EEC (“Medical Devices”).
7a.3
For the term of this Agreement, Pohl-Boskamp grants to IntraDerm the right to utilise in the Territory Pohl-Boskamp’s product
certifications for Medical Devices in accordance with the stipulations of this Agreement. Pohl-Boskamp undertakes to bear all cost
and expenses associated with any product certification (e.g. declaration of conformity) in the Territory.
7a.4
IntraDerm is not allowed to use any certification or any documentation of the Products outside the Territory.
7a.5
IntraDerm shall promptly inform, in an appropriate reporting format to be specified in the Pharmacovigilance Agreement, which the
Parties shall negotiate in good faith after receipt of each Regulatory Authorisation and which shall be attached hereto as ANNEX V,
the Safety Officer for Medical Devices at Pohl-Boskamp by e-mail or fax about any incident and side effect as shall be defined in
ANNEX V observed with the Products in the Territory during and beyond the Term of this Agreement for as long as IntraDerm is
marketing the Products in the Territory and Pohl-Boskamp and IntraDerm are maintaining business contacts or until the end of the
shelf-life of the Products depending on which deadline lasts longer. Pohl-Boskamp shall promptly inform IntraDerm by email or fax
about any incident and side effect as shall be defined in ANNEX V observed with the Products outside the Territory during the
Term of this Agreement. Further details shall be stipulated in ANNEX V.
7a.6
IntraDerm shall be responsible for: (i) the surveillance, receipt, evaluation, and reporting of the complaints related to the Products in
the Territory as well as of reports on incidents and side effects as defined in applicable laws, ordinance and regulations in the
Territory ANNEX VI (Adverse Events) connected with the Products in the Territory, and (ii) investigating the relevant customer
complaints and reports on adverse effects with Medical Devices and on other information which is relevant for the safety of the
Medical Devices in the Territory in compliance with applicable laws, ordinances and regulations in the Territory. After IntraDerm
receives the SubDerm Claim from the FDA, and during the remainder of the Term of this Agreement, IntraDerm shall provide Pohl-
Boskamp with any reports that it files with the governmental or regulatory authorities in the Territory that pertain to the Products.
Pohl-Boskamp shall comply with the postmarket surveillance aspects of the EU Medical Device Directive described in ANNEX VI
(Adverse Events) connected with the Products in the Territory. Pohl-Boskamp shall be responsible for revising the Medical
Device’s labelling for use in the Territory.
CONFIDENTIAL
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7a.7
Pohl-Boskamp is obliged and hereby covenants to fulfil all necessary measures to allow IntraDerm to comply with all local
obligations for reporting adverse events or other aspects regarding the Medical Devices in the Territory. IntraDerm will keep Pohl-
Boskamp informed and updated on all reporting that has been made by IntraDerm in the Territory.
7a.8
If, in case of a severe product defect or adverse event - a recall is considered, the Parties will consult one another whereas Pohl-
Boskamp retains the right to finally decide on a potential voluntary recall or withdrawal. To the extent that (i) any Health Authority
issues an order or directive that a Product be recalled or withdrawn in the Territory, or (ii) a court of competent jurisdiction orders a
recall or withdrawal of a Product in the Territory, the Parties shall recall or withdraw such Product as provided in this § 7a. Pohl-
Boskamp will assist IntraDerm in conducting the recall in the Territory. To that end, IntraDerm is obliged to keep itself acquainted
with the national laws concerning a recall of Medical Devices in the Territory (such as but not limited to time limits, forms, notice to
competent authorities, wholesalers, pharmacies, logistic partners).
7a.9
All out of pocket expenses (including costs of refunded sales) for the execution of any recall or withdrawal of such Product (“Recall
Costs”) pursuant to this § 7a shall be shared equally between the Parties; provided, that in the case of any voluntary recall or
withdrawal determined by IntraDerm pursuant to subclause (ii) of § 7a.8, Pohl-Boskamp shall initially bear the entire expense of
such recall or withdrawal; provided further that, in each case, responsibility of the Recall Costs shall be subject to the final
allocation between the Parties as set out in paragraphs (i) and (ii) below. In the event that it is finally determined, or agreed between
the Parties, that such recall or withdrawal is caused by:
(i)
breach of Pohl-Boskamp’s representations, warranties and covenants set forth in this Agreement, or the gross negligence
or wilful misconduct of Pohl-Boskamp or those acting under the authority of Pohl-Boskamp, or the failure of Pohl-
Boskamp or those acting under the authority of Pohl-Boskamp to comply with applicable laws, Pohl-Boskamp shall be
responsible for Recall Costs; and
(ii)
failure of IntraDerm to properly handle, store, transport, or distribute or use Product, as applicable, supplied by Pohl-
Boskamp, or the gross negligence or wilful misconduct of IntraDerm or those acting under the authority of IntraDerm, or
the failure of IntraDerm or those acting under the authority of IntraDerm to comply with applicable laws, IntraDerm shall
be responsible for Recall Costs; and
In all other cases, fifty percent (50%) of the Recall Costs shall be borne by Pohl-Boskamp and fifty percent (50)% of the Recall
Costs shall be borne by IntraDerm.
CONFIDENTIAL
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§ 8
Scientific Use of Products
8.1
If IntraDerm learns that a Product is used for scientific studies in the Territory which are or might be intended for publication,
IntraDerm undertakes to get in touch and, to the extent reasonably practicable, and keep in touch with the respective scientists and to
seek to coordinate the study with Pohl-Boskamp, especially in the stages of protocol planning and of formulating the study results
before the actual publication. This duty extends to all scientific studies in which the Products are involved, i.e. regardless of whether
Products may be involved alone or in conjunction with other drugs or placebos.
8.2
IntraDerm undertakes not to commence, initiate or, to the extent reasonably practicable, allow scientific studies involving the
Products without obtaining Pohl-Boskamp’s written authorization. IntraDerm shall promptly report to Pohl-Boskamp any scientific
studies which are or may be conducted already, whether they are unauthorized or not, once IntraDerm gains knowledge of such
studies.
§ 9
Advertisement/Publicity
9.1
Pohl-Boskamp agrees to provide – free of charge - to IntraDerm examples of marketing materials for the Products, specifically
electronic drafts hereof, and reports on scientific tests of the Products as far as they are reasonably available.
9.2
IntraDerm undertakes to advertise the Products, in particular but not limited to: through visits to medical specialists, advertising in
applicable medical journals and public media using leaflets, and the internet. IntraDerm shall keep available at all times a sufficient
number of qualified personnel in order to visit medical specialists. Upon request, IntraDerm shall send Pohl-Boskamp copies of all
advertising materials.
9.3
IntraDerm undertakes to comply with all legal requirements concerning advertisement/publicity for the Products in the Territory.
IntraDerm is solely liable for any violation of those legal requirements, any error or omission in the advertisements unless any such
error or omission is attributable to an act or omission of Pohl-Boskamp.
9.4
Any and all expenses for any advertising and/or publicity activities in the Territory are borne by IntraDerm.
9.5
If IntraDerm decides it would like to build a product specific website, this undertaking shall be stipulated in a separate written
agreement mutually acceptable to the Parties.
CONFIDENTIAL
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§ 10
Proprietary Rights
10.1
“Intellectual Property” means all of the following relating to the Products: (i) all patents and design patents of Pohl-Boskamp, (ii)
all trademarks (including the trademark for the product name “LOYON” registered with the U.S. Patent and Trademark Office (the
“Trademark”)), service marks, trade dress, logos, slogans, trade names, and internet domain names of Pohl-Boskamp covering or
used in connection with the Products, including any goodwill associated therewith, and all applications, registrations, and renewals
in connection therewith, (iii) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection
therewith, (iv) all trade secrets and confidential business information (including ideas, inventions, research and development, know-
how, improvements, formulas, compositions, manufacturing and production processes, standard operating procedures and
techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business
and marketing plans and proposals), and (v) all advertising and promotional materials. “Patents” mean those patents and patent
applications covering the Products and any and all reissues, renewals, re-examinations, extensions, substitutions, confirmations,
registrations, revalidations, additions, continuations, continuations-in-part or divisions of or to any of the aforesaid patents or patent
applications, including, without limitation, that certain Patent Application [ ]† filed with the U.S. Patent and Trademark Office,
which application is pending.
10.2
Pohl-Boskamp hereby grants to IntraDerm a non-exclusive, non-transferable, and royalty-free right and license to use the
Intellectual Property in connection with the importation, offer for sale, sale and other distribution, promotion and marketing of the
Products pursuant to this Agreement. Except for the license granted in this Agreement, this Agreement does not confer upon
IntraDerm, and IntraDerm will not claim, any proprietary right, title, interest or other rights in any Intellectual Property in the
Products or Intellectual Property otherwise owned or controlled by Pohl-Boskamp. IntraDerm may use Pohl-Boskamp’s Intellectual
Property only to the extent it is authorized by this Agreement. Upon termination of this Agreement such authorization ceases.
IntraDerm acknowledges that all Intellectual Property existing in connection with the Products or arising or resulting from this
Agreement (other than the customer lists, pricing information, business and marketing plans and proposals and advertising
generated by IntraDerm, to which IntraDerm shall retain sole title) are and will be the sole property of Pohl-Boskamp. Except as
provided in the immediately preceding sentence, IntraDerm hereby assigns to Pohl-Boskamp, without further consideration, its
entire right, title and interest in each Intellectual Property arising or resulting from this Agreement. IntraDerm must not apply to
register in its own name any proprietary right covering the Products.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
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10.3
Pohl-Boskamp will prosecute infringements, maintain, and enforce its Intellectual Property. IntraDerm undertakes to assist Pohl-
Boskamp, at the expense of Pohl-Boskamp, as far as Intellectual Property in the Territory is concerned.
10.4
If either Party learns that a third party claims the Products are infringing any intellectual property rights owned by a third party in
the Territory, such Party will promptly inform the other Party of such allegations and provide the other Party with any available
evidence of such allegations. Pohl-Boskamp shall have the first right to defend its interests and, in doing so, shall confer with
IntraDerm and consider the actions that will be most beneficial to both Parties. In the event that Pohl-Boskamp does not defend
against allegations of infringement, the provisions relating to Minimum Purchase Requirements and payment of Royalties will be
suspended until such allegations have been settled, resolved or dismissed.
10.5
In the event that IntraDerm learns that Pohl-Boskamp’s Intellectual Property is infringed in the Territory (e.g. counterfeit Product or
trademarks that are imitated or illegally used by a third person), IntraDerm will promptly inform Pohl-Boskamp. IntraDerm agrees
to cooperate with Pohl-Boskamp and to take commercially reasonable steps to protect the Intellectual Property of Pohl-Boskamp at
Pohl-Boskamp’s expense if requested by Pohl-Boskamp in writing.
§ 11
Confidentiality
11.1
All data, literature, information, know-how reports provided by one Party to the other Party, directly or indirectly, hereunder, that
bears a written designation of as “confidential”, “proprietary” or other similar designation, or which the receiving Party should
reasonably conclude is confidential or proprietary under the circumstances, is considered “Confidential Information”; provided,
however, that the following shall not be considered confidential information: (i) information in the public domain at the time of
transmittal; (ii) information that becomes a part of the public domain after its transmittal through no fault of the receiving Party; (iii)
information that is subsequently disclosed to the receiving Party by a third party that has the right to make such disclosure; and (iv)
information that the receiving Party can show through its books and records was independently developed by the receiving Party
without the aid, application or use of the other Party’s confidential information. Each Party undertakes to keep secret all data,
literature, information and know-how regarding the Products, especially concerning their formulations and the know-how of the
manufacturing process. The receiving Party is not allowed to make use of any such data, literature, information and know-how itself
nor to make it available nor to reveal or transfer such data, literature, information and know-how to third parties, except in
connection with obtaining and maintaining the Marketing Authorisation. In the event that the receiving Party becomes legally
compelled (by deposition, interrogatory, subpoena or similar process) to disclose any of the Confidential Information, the receiving
Party shall provide the disclosing Party with prompt written notice of such requirement prior to such disclosure to allow the
disclosing Party to seek a protective order or other remedy. In the event that a protective order or other remedy is not obtained, or
that disclosing Party waives compliance with the provisions hereof, the receiving Party agrees to furnish only that portion of the
Confidential Information that the receiving Party reasonably believes is legally required to be furnished.
CONFIDENTIAL
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11.2
The receiving Party has to return all data, literature, information and know-how in its possession which was made available to it
within the framework of this Agreement to the disclosing Party within 30 days after this Agreement is terminated; provided,
however, the receiving Party is entitled to retain one copy of the Confidential Information for archival purposes, which it shall
maintain in confidence and not disclose to non-Affiliate third parties. In case that IntraDerm receives such documents from third
parties – especially from the Health Authorities – after the 30-day-period, it has to forward them to Pohl-Boskamp or a person
appointed by Pohl-Boskamp immediately after receipt of such document.
11.3
Each Party remains bound by the confidentiality obligation beyond the term of this Agreement for a period of [ ]† years following
the expiration of termination of this Agreement.
11.4
If the Parties should decide to enter into discussions/ negotiations regarding a possible collaboration for further products which are
not yet part of this Agreement, the Parties shall keep secret any transferred information related to these products as well, and agrees
that §11 of the Agreement will apply to such aforementioned discussions/ negotiations as well.
11.5
The Confidentiality Agreement signed by the Parties on June 18, 2015 (the “Confidentiality Agreement”), remains in full force
and effect and by this reference is incorporated herein.
§ 12
Term of the Agreement/Termination
12.1
This Agreement is valid from the date of the last signature the “Effective Date”) and shall continue (i) for a period of five (5) years
after the Parties obtain a Marketing Authorisation (the “Initial Term”). The Initial Term of this Agreement will be extended
automatically for two five (5) year periods (each, an “Extension Period”) unless it is cancelled with a six (6) month written notice
by one of the contractual Parties prior to the end of the Initial Term or the initial Extension Period. The “Term” of this Agreement
shall refer to the Initial Term and the Renewal Period unless and until this Agreement is terminated as provided herein.
12.2
The notice of termination has to be in writing. It has to be delivered to the other Party by courier service.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
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12.3
If either Party materially defaults in the performance of any material provision of this Agreement, the non-defaulting Party may give
written notice to the defaulting Party that if the default is not cured within thirty (30) days of such notice, the non-defaulting Party
may terminate the Agreement. If the non-defaulting Party gives such notice and the default is not cured during the thirty (30) day
period, this Agreement shall automatically terminate at the end of such period without further action by the non-defaulting Party,
which shall be the effective date of termination.
12.4
This Agreement may be terminated by either Party upon written notice to the other Party (i) upon the institution by or against the
other Party of insolvency, receivership, liquidation, moratorium, bankruptcy or similar proceedings or any other proceedings for the
settlement of Distributor's debts, or (ii) upon Distributor's making an assignment or compromise for the benefit of creditors or a
similar proceeding.
12.5
This Agreement may be terminated by IntraDerm upon written notice to Pohl-Boskamp if the Marketing Authorisation with a
Satisfactory Claim is not obtained by the one-year anniversary of the Effective Date.
12.6
This Agreement may be terminated by Pohl-Boskamp effective either upon written notice to IntraDerm or up to three months after
written notice to IntraDerm received by IntraDerm no later than 30 days after the occurrence of a triggering event specified in this
§12.6 (a) or (b): (a) in the event that a majority of IntraDerm’s Senior Management in any three-month period is replaced; or (b) if
an entity that markets one or more products that are directly competitive with the Product resulting in revenues to the entity that are
at least equal to the revenues generated by the Product in the United States directly or indirectly acquires control of IntraDerm. For
purposes of this §12.6: (x) “Senior Management” means those executive officers who possess the power to direct or cause the
direction of the management and policies of IntraDerm, which, as of the Execution Date, are [ ]†, [ ]† and [ ]†; (y) a product
will be deemed to be “directly competitive” with a Product if it is intended for the same, or substantially the same, purpose or use as
any Product; and (z) “control” means the possession of power to direct or cause the direction of management and the policies of
IntraDerm, whether through the ownership of voting securities, by contract or otherwise.
12.7
Upon expiration of this Agreement (or termination of this Agreement for whatsoever reason),
(i) IntraDerm shall take the following actions:
· Notify Health Authorities and, at Pohl-Boskamp’s cost and expense, adopt any and all actions necessary for the transfer of
·
·
the Marketing Authorisation for the Products to Pohl-Boskamp;
Cease using all Pohl-Boskamp Intellectual Property furnished to it by Pohl-Boskamp hereunder and return it to Pohl-
Boskamp pursuant to § 11.2; and
Cease any marketing and sale activity and discontinue the use of the Trademark; provided, however, that IntraDerm shall
have a reasonable period of time to remove the Trademark from its website, and IntraDerm shall have no liability for
marketing materials that contain Pohl-Boskamp’s trademarks distributed to third parties prior to the date of termination.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 18 of 30
(ii) Pohl-Boskamp shall take the following actions:
·
·
·
Reimburse the Filing Fee to IntraDerm;
Repurchase IntraDerm’s remaining stock of Products pursuant to § 4.4;
Cease using IntraDerm’s intellectual property and know-how furnished to it by IntraDerm.
12.8
The termination of this Agreement shall not affect any rights or obligations of the Parties that have accrued or matured prior thereto.
In addition, the following provisions shall survive the expiration or termination of this Agreement in accordance with their
respective terms: §§ 4.5, 4.8, 6.12, 7.7, 7.9, 7.10, 7.11, 7a.6, 7a.9, 11.1-11.3, 11.5, 12, 14, 15, 18 and 20-22.
12..9
In the event of an expiration of this Agreement neither Party shall be liable to the other because of such termination, including but
not limited to compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or
goodwill, or on account of any expenditures, inventory, investments, leases or other commitments including hiring of personnel, in
connection with the business of Pohl-Boskamp or IntraDerm. IntraDerm acknowledges that its profit margins derived on sale of the
Products pursuant to this Agreement have induced IntraDerm to enter into and perform this Agreement and that such profits
constitute good, sufficient and valuable consideration for its duties and obligations hereunder. The expiration shall not, however,
relieve either Party of obligations incurred prior to the expiration.
§ 13
Force Majeure
13.1
The Parties hereto shall not be liable for any damage if the performance of all or parts of this Agreement is hindered or prevented by
causes beyond the performing Party’s control and without its fault or negligence, including but not limited to acts of God or of
public enemy, nuclear incidents, acts, laws, orders or regulations of any government or department or agency thereof acting in either
its sovereign or contractual capacity, fires, floods, epidemics, quarantine restrictions, strikes, work stoppages, slowdowns or other
job actions, freight embargoes, shortages of fuel or other items, delays in transportation, boycotts, unusually severe weather and
riots, insurrections, revolutions, wars or other civil or military disturbances.
13.2
If Pohl-Boskamp is not able to deliver pursuant to force majeure as stipulated in § 13 and/or direction by government, IntraDerm
shall not be entitled to claim for compensation in any kind.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 19 of 30
§ 14
Written Requirements
14.1
This Agreement and the Annexes attached hereto and the Confidentiality Agreement set forth in writing all agreements and
understandings between Pohl-Boskamp and IntraDerm. Oral agreements do not exist. All previous agreements or arrangements (if
any) between the Parties, be it in writing or orally, relating to the subject matter hereof are hereby cancelled and superseded.
14.2 Modifications, amendments and changes of this Agreement, including this clause, must be in writing. Pohl-Boskamp’s ‘General
Terms and Conditions of Trade’ (ANNEX IV) apply unless they have been modified by the Parties in this Agreement.
§ 15
Notices
All notices will be deemed to have been given when received if sent by personal delivery, registered mail return receipt, reputable express
courier or when receipt of a facsimile has been acknowledged by machine generated receipt, to the following address:
If to Pohl-Boskamp:
If to IntraDerm :
G. Pohl-Boskamp GmbH & Co. KG
Kieler Strasse 1125551 Hohenlockstedt
Germany
Attn: Executive Director
Facsimile:+49 4826 59-376
IntraDerm Pharmaceuticals,
a division of Oculus Innovative Sciences, Inc.
1129 North McDowell Blvd.
Petaluma, California 94954
USA
Attn: Chief Financial Officer
Facsimile: (707) 283-0551
If notice is personally delivered, the individual accepting such notice, if requested, will sign a duplicate of the notice to confirm receipt
thereof.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 20 of 30
§ 16
Insurance
Each Party shall maintain comprehensive general liability and product liability insurance, covering the obligations of such Party under this
Agreement throughout the Term of this Agreement and as long as the Products sold under this Agreement are marketed or sold in the
Territory. Upon request of either Party, the other Party will provide Pohl-Boskamp with certificate(s) of insurance evidencing the above
and showing the name of the issuing company, the policy number, the effective date, the expiration date and the limits of liability.
§ 17
Partial Invalidity
Should any of the provisions of this Agreement be or become invalid, the invalidity does not prejudice the validity of the remaining
provisions of this Agreement, and the Agreement shall be enforced in accordance with its terms and its validity shall not in any way be
affected or impaired thereby. In the event that any term or provision of this Agreement is held to be unreasonable, the same shall not fail,
but shall be deemed amended only to the extent necessary to render it reasonable and the Parties agree in writing to be bound by the
amended term or provision.
§ 18
Applicable Law/
18.1
This Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Germany, regardless of
the laws that might otherwise govern under applicable principles of conflicts of law thereof. The provisions of the U.N. Convention
on Contracts for the International Sale of Goods shall not apply.
18.2
Both Parties are entitled to take legal action, submitted to the jurisdiction of the courts of Hamburg, Federal Republic of Germany,
on their own discretion.
However, with mutual consent, disputes arising out of or relating to this Agreement shall be submitted to arbitration in London,
England in accordance with the rules of the International Chamber of Commerce or its successor by three arbitrators, one chosen
by each of the Parties, and the third arbitrator being chosen by the two chosen arbitrators. The decision of the arbitrator shall be
conclusive and binding on the Parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having
jurisdiction. Each Party will take care of its own cost in this arbitration and both Parties will pay half of the arbitration court costs
itself. All information relating to or disclosed by any Party in connection with the arbitration shall be treated by the Parties as
confidential information and no disclosure of such information shall be made by either Party without the prior written consent of
the other Party. The Parties expressly agree that any arbitration shall be conducted, and any and all evidence, pleadings,
correspondence, and other documents relating to the arbitration will be presented, in the English language.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 21 of 30
§ 19
Registration of the Agreement
If required IntraDerm shall take all the necessary activities and bear all the expenses and costs arising from the registration of this
Agreement before the local authorities, including all necessary translations and provide evidence thereof to Pohl-Boskamp.
§ 20
Relationship of Parties
This Agreement does not, and shall not be construed to create a relationship of joint venture, partnership or principal and agent between
Pohl-Boskamp and IntraDerm. Neither Party has, or may exercise, any authority, express, implied or apparent, to act on behalf of or as an
agent of the the other Party for any purpose, and neither Party shall take any action which might tend to create an obligation on behalf of
the other Party. Each Party is, and shall at all times remain an independent contractor responsible for all obligations and liabilities of, and
for all loss or damage arising out of its business activities.
§ 21
Non-Assignment
Neither Party may assign, delegate or otherwise transfer any of its right or obligation arising under this Agreement whether by agreement,
or otherwise, without the express prior written consent of the other Party; provided, however, that either Party may assign this Agreement
to any person or entity into which the assigning Party has merged or which has otherwise succeeded to all or substantially all of the
business and assets to which this Agreement pertains, by merger, consolidation, reorganization or otherwise if such successor entity has
assumed in writing or by operation of law the assigning Party's obligations under this Agreement. Any purported assignment, delegation, or
transfer in violation of the previous sentence will be null and void. Subject to the foregoing, this Agreement in its entirety will bind each
Party and its successors and permitted assigns.
§ 22
Counterparts
The Parties may execute this Agreement in one or more counterparts, and each fully executed counterpart shall be deemed an original, and
when taken together with other signed counterparts, shall be binding upon and effective as to all Parties hereto. This Agreement in the
English language shall be the controlling text to the extent allowable under applicable law.
*****
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 22 of 30
Hohenlockstedt, April 13, 2016
For and on behalf of
G. Pohl-Boskamp GmbH & Co. KG
represented by its general partner
Boskamp GmbH
Petaluma, April 13, 2016
For and on behalf of
IntraDerm Pharmaceuticals,
a Division of Oculus Innovative Sciences, Inc.
represented by its President
/s/ Thomas Höppner___________________
Dr. Thomas Höppner
Executive Director
/s/ Robert Miller_____________________
Robert Miller
Chief Financial Officer
/s/ André Horst_______________________
André Horst
Legal Affairs
Annex I – Products, Prices and Royalties
Annex II – Territory
Annex III – Minimum Purchase Requirements
Annex IV – General Terms and Conditions of Trade
Annex V – Pharmacovigilance Agreement
Annex VI – Adverse Events
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 23 of 30
ANNEX I
Products, Prices and Royalties
Product
Size
Price
Medical Device (Yes/No)
Loyon
Loyon
Loyon
Loyon
[ ]†ml
[ ]† ml
[ ]† ml
[ ]† ml (sample)
TBD
US$ [ ]†
US$ [ ]†*
US$ [ ]†**
Yes
Yes
Yes
Yes
*Subject to confirmation about feasibility of Pohl-Boskamp providing this size in one bottle
Medical Product
(Yes/No)
No
No
No
No
**Parties agree to revisit the sample program within on year after First Commercial Sale to assess results and then determine what
the year 2 samples volume and price should be. Price of samples in year 2 shall not exceed US$[ ]†.
Terms of transportation and delivery of product is ExWorks Incoterms 2010 at Pohl-Boskamp’s facility in Germany.
All labelling shall bear Pohl-Boskamp’s Trademark, “Loyon” (the “Trademark”).
ROYALTIES
The Royalty structure is as follows:
Year 1 – [ ]†%
Year 2 – [ ]†%
Year 3 – [ ]†% and remaining at [ ]†% through the balance of the agreement as long as the Product is in Sales Position 1 or 2.
If the Sales Position changes to a higher position during Contract Year 1 or Contract Year 2, the royalty rate will move to [ ]†%.
If the Parties have not been able to obtain a psoriasis claim during Contract Year 1 or Contract Year 2, IntraDerm may move the Product into
Sales Position 3 with royalties staying at [ ]†%. If the Sales Position changes to a higher position, the royalty rate will immediately
move to [ ]†%.
If the Parties have been able to obtain a psoriasis claim during Contract Year 1 or Contract Year 2, and the Sales Position changes to a higher
position than it occupied in the prior year, the royalty rate will move to [ ]†%.
IntraDerm shall, in good faith, make the sole good faith determination as to the Sales Position of the Product at any time or times.
The Royalty structure therefore is as follows:
Year 1
Year 2
no psoriasis claim
Sales Position
Royalty
#1 or #2
[ ]†%
≥ #3
[ ]†%
#1 or #2
[ ]†%
≥ #3
[ ]†%
#1 or #2 or #3
[ ]†%
Year 3
≥ #4
[ ]†%
psoriasis claim
≥ #3
[ ]†%
#1 or #2
[ ]†%
For Purposes of this Agreement:
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 24 of 30
“Net Sales” means, the amount of gross sales of applicable Product invoiced by IntraDerm to independent third Parties, and received by
IntraDerm, net of the amount paid by IntraDerm for the Products, less the following deductions: returns (including allowances actually
given for spoiled, damaged, expired, rejected, returned Product sold, return reserves, withdrawals, and recalls), rebates (price
reductions, rebates to social and welfare systems, charge backs, government mandated rebates, and similar types of rebates (e.g.,
Medicaid)), volume (quantity) discounts, and/or taxes (value added or sales taxes, government-mandated exceptional taxes and other
taxes directly imposed upon and paid with respect to such sales, excluding any taxes on income); in each case, only to the extent such
deductions are (i) consistently applied in accordance with US GAAP, (ii) actually incurred, (iii) included in the amount of gross sales
invoiced and separately identified on the invoice or other documentation maintained in the ordinary course of business, and (iv) not
otherwise recovered by or reimbursed to IntraDerm. Notwithstanding the foregoing, amounts received by IntraDerm for the sale of
Product among IntraDerm Affiliates for resale shall not be included in the computation of Net Sales; provided if and when such Product
is resold to a non-Affiliate third party, amounts for any such sales shall be included in Net Sales.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 25 of 30
The United States of America and its territories and possessions, including Puerto Rico and the District of Columbia.
ANNEX II
Territory
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 26 of 30
ANNEX III
Minimum Purchases
IntraDerm and Pohl-Boskamp have discussed the following Sales Targets. However, the Parties acknowledge and agree that the wording of
the SebDerm Claim, which IntraDerm will pursue, will impact the marketability of the Product in the Territory. Accordingly, the Parties
agree that IntraDerm shall modify the Sales Targets upon receipt of the SebDerm Claim language, and such Sales Targets shall replace the
Sales Targets below.
Loyon units
Loyon Samples
*commences on First Commercial Sale
Loyon units
Loyon Samples
Loyon units
Loyon Samples
For purposes of this Agreement:
Total Contract
Year 1
Sales Target
[ ]†
[ ]†
Total Contract
Year 2
Sales Target
[ ]†
[ ]†
Total Contract Year 3
Sales Target
[ ]†
[ ]†
Contract Year 1*
Minimum Purchase
Requirement
[ ]†
[ ]†
Contract Year 2
Minimum Purchase
Requirement
Contract Year 3
Minimum Purchase
Requirement
[ ]†
[ ]†
[ ]†
[ ]†
·
·
·
·
“Contract Year 1” means the twelve (12) month period commencing on the First Commercial Sale.
Each successive Contract Year is the twelve (12) month period commencing on the same number anniversary of the First
Commercial Sale.
“First Commercial Sale” shall mean the date on which the cumulative Net Sales in the Terrritory reaches US $[ ]† following
issuance of the Marketing Authorisation with the SebDerm Claim required to commercialize the Product in the Territory.
Sales Targets set forth above are for discussion purposes only and are not binding on the Parties. After Health Authority issues the
Marketing Authority for the SebDerm Claim, IntraDerm shall provide Pohl-Boskamp updated Sales Targets for each Contract Year
during the Initial Term, and such Sales Targets shall be binding on the Parties.
· Minimum Purchase Requirement for each Contract Year is [ ]†% of the Sales Target for such Contract Year.
† Confidential material redacted and separately filed with the Commission.
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 27 of 30
ANNEX IV
General Terms and Condition of Trade
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 28 of 30
ANNEX V
Pharmacovigilance Agreement
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 29 of 30
ANNEX VI
Adverse Events
CONFIDENTIAL
Distribution Agreement Pohl-Boskamp J. IntraDerm, OCLS, 12/Apr/2016, page 30 of 30
Exhibit 10.34
AMENDMENT NO. 8 TO LEASE
THIS AMENDMENT NO. 8 TO LEASE (this “Amendment”) dated as of June 23, 2016 is entered into between SSCOP
PROPERTIES LLC, a Delaware limited liability company (“Landlord”) and OCULUS INNOVATIVE SCIENCES, INC. , a Delaware
corporation (“Tenant”).
THE PARTIES ENTER INTO THIS AMENDMENT based upon the following facts, understandings and intentions:
A. Landlord (successor in interest to 1125-1137 North McDowell, LLC, a Delaware limited liability company, successor in
interest to RNM Lakeville, L.P., a California limited partnership) and Tenant (formerly known as MicroMed Laboratories, Inc., a California
corporation) previously entered into that certain Lease dated October 26, 1999, as amended by that certain Amendment No. 1 to Lease
dated September 15, 2000, as amended by that certain Amendment No. 2 to Lease dated July 29, 2005, as amended by that certain
Amendment No. 3 to Lease dated August 23, 2006, as amended by that certain Amendment No. 4 to Lease dated September 13, 2007, as
amended by that certain Amendment No. 5 to Lease dated May 18, 2009, as amended by that certain Amendment No. 6 to Lease dated
April 26, 2011, as amended by that certain Amendment No. 7 to Lease dated October 10, 2012 (collectively, the “ Lease”), pursuant to
which Landlord leases to Tenant approximately Thirteen Thousand, Eight Hundred Forty (13,840) rentable square feet of space at 1129
North McDowell Boulevard, Petaluma, California 94954 (the “Premises”) located at 1125-1137 North McDowell Boulevard in Petaluma,
California 94954 (the “Building”), as more particularly described in the Lease. The capitalized terms used in this Amendment and not
otherwise defined herein shall have the same meanings given to such terms in the Lease.
B. Landlord and Tenant now desire to amend the Lease as provided herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements herein contained and other good and
valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1 . Term. The Term of the Lease is hereby extended for an additional seven (7) years commencing October 1, 2017 and
expiring September 30, 2024 (the “Seventh Extended Term ”), unless sooner terminated in accordance with the terms of this Lease.
2. Base Rent. Tenant shall pay Base Rent to the Landlord during the Seventh Extended Term as follows:
Period
10/1/2017 – 9/30/2018
10/1/2018 – 9/30/2019
10/1/2019 – 9/30/2020
10/1/2020 – 9/30/2021
10/1/2021 – 9/30/2022
10/1/2022 – 9/30/2023
10/1/2023 – 9/30/2024
Total Monthly
Base Rent
Per Square Foot
$0.85
$0.88
$0.90
$0.93
$0.96
$0.99
$1.01
Monthly NNN
Base Rent
$11,764.00
$12,116.92
$12,480.43
$12,854.84
$13,240.49
$13,637.70
$14,046.83
*Monthly Base Rent per square foot is rounded to the nearest penny and is provided for reference only.
1
3 . Early Termination Right . Tenant shall have the one-time right to terminate this Lease effective as of the last day of the
36th month of the Seventh Extended Term if the Landlord is unable to accommodate Tenant’s growth by at least fifty percent (50%) by
finding a different property which is price competitive and which provides for medical device and drug compliance in a cost effective
manner (this right, the “Early Termination Right”). Tenant shall give Landlord at least nine (9) months prior written notice thereof if Tenant
chooses to exercise its Early Termination Right. After Tenant provides notice to Landlord, then Landlord will have three months to provide
potential, alternative spaces to Tenant to evaluate. If Tenant exercises its Early Termination Right, it shall not be subject to a termination
penalty, and the Lease shall terminate and the parties shall have no further duties and obligations under the Lease or otherwise, except for
those obligations that expressly survive termination. If Tenant does not exercise its Early Termination Right, the Lease shall remain in full
force and effect for the remainder of the Seventh Extended Term.
4 . Tenant Improvements. Landlord shall, at Landlord’s sole cost and expense, replace the carpet in the office area and wrap
the warehouse lights, using reasonable efforts not to disturb Tenant’s use of the Premises. Tenant shall be responsible for moving and
relocating any furniture or equipment.
5. Costs of Tenant Improvements. Notwithstanding anything to the contrary in the Lease and except as otherwise specifically
provided in this Amendment, Tenant shall be responsible, at its sole cost and expense, for the cost of changes to the Premises, the Building
or the Project required during the Term (or if any such requirement is enforced) under any existing, ordinance, regulation or requirement
(including, without limitation, the Americans with Disabilities Act and Title 24 of the California Code of Regulations) of any governmental
authority having jurisdiction over the Building as a result of any improvements or alterations to the Premises performed by or at the request
of Tenant after the date of this Amendment. At the time of any improvements, which are approved by the Landlord, Landlord will inform
Tenant of any relevant non-compliance with existing codes or regulations.
6. Notice. The Landlord’s address as set forth in the Lease is hereby deleted in its entirety and replaced by the following:
Landlord:
SSCOP Properties LLC
________________
________________
Attention:
7 . Previous Extension Options. Tenant’s options or rights to extend the Term of the Lease are limited to those set forth in
this Amendment. All of Tenant's previous rights and options to extend the Term set forth in the Lease, if any, shall be of no further force or
effect.
8 . Entire Agreement. This Amendment, together with the Lease, represents the entire understanding between Landlord and
Tenant concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the
Premises not set forth in writing and signed by the parties hereto. No party hereto has relied upon any representation, warranty or
understanding not set forth herein, either oral or written, as an inducement to enter into this Amendment.
9 . Continuing Obligations. Except as expressly set forth to the contrary in this Amendment, the Lease remains unmodified
and in full force and effect. To the extent of any conflict between the terms of this Amendment and the terms of the Lease, the terms of this
Amendment shall control.
1 0 . Partial Invalidity. If any provision of this Amendment or the application thereof to any person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this Amendment, or the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Amendment shall remain
in effect and shall be enforceable to the full extent permitted by law.
2
1 1 . Authority to Execute. Each signatory of this Amendment represents hereby that he or she has the authority to execute
and deliver the same on behalf of the party hereto for which such signatory is acting.
12. Counterparts/Facsimile. This Amendment may be executed in counterparts and delivered via facsimile.
[Remainder of page left intentionally blank]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written.
LANDLORD:
TENANT:
SSCOP PROPERTIES LLC
a Delaware limited liability company
By: G&W Ventures, LLC
a California limited liability company
Its Manager
By: /s/ Matthew White
Matthew T. White,
Manager
OCULUS INNOVATIVE SCIENCES, INC.,
a Delaware corporation
By: /s/ Robert Miller
Name: Robert Miller
Its: CFO
By: _____________
Name: ________
Its: __________
4
SUBSIDIARIES OF REGISTRANT
Exhibit 21.1
1.
2.
3.
Aquamed Technologies, Inc., a corporation organized under the laws of California (wholly owned).
Oculus Technologies of Mexico, S.A. de C.V., a corporation organized under the laws of Mexico (wholly owned).
Sonoma Pharmaceuticals Netherlands B.V., a corporation organized under the laws of the Netherlands (wholly owned).
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement of Sonoma Pharmaceuticals, Inc. on Form S-3 (File No. 333-
195554), Form S-8 (File No. 333-214760), Form S-8 (File No. 333-205171), Form S-8 (File No. 333-171412), Form S-8 (File No. 333-
141017), Form S-8 (File No. 333-182263), Form S-8 (File No. 333-195530), Form S-8 (File No. 333-194314) and Form S-8 (File No.
333-163988) of our report dated June 28, 2017, with respect to our audits of the consolidated financial statements of Sonoma
Pharmaceuticals, Inc. (formerly known as Oculus Innovative Sciences, Inc.) and Subsidiaries as of March 31, 2017 and 2016 and for the
years then ended, which report is included in this Annual Report on Form 10-K of Sonoma Pharmaceuticals, Inc. for the year ended March
31, 2017.
/s/ Marcum LLP
Marcum LLP
New York, NY
June 28, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
Exhibit 31.1
I, Jim Schutz, certify that:
1. I have reviewed this Annual Report on Form 10-K of Sonoma Pharmaceuticals, Inc. for the year ended March 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: June 28, 2017
By:
/s/ Jim Schutz
Jim Schutz
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
Exhibit 31.2
I, Robert Miller, certify that:
1. I have reviewed this Annual Report on Form 10-K of Sonoma Pharmaceuticals, Inc. for the year ended March 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(e)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(f)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(g)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(h)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(c)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(d)Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: June 28, 2017
By:
/s/ Robert Miller
Robert Miller
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
Exhibit 32.1
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States
Code), the undersigned officers of Sonoma Pharmaceuticals, Inc., a Delaware corporation (the “Company”), do hereby certify, to such
officers’ knowledge, that:
The Annual Report on Form 10-K for the year ended March 31, 2017 (the “Form 10-K”) of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 28, 2017
Date: June 28, 2017
By:
By:
/s/ Jim Schutz
Jim Schutz
Chief Executive Officer
(Principal Executive Officer)
/s/ Robert Miller
Robert Miller
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)