Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2023
☐
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.)
5445 Conestoga Court, Suite 150
Boulder, Colorado 80301
(Address of principal executive offices) (Zip Code)
(800) 759-9305
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value
(Title of Each Class)
SNOA
(Trading Symbol(s))
The Nasdaq Stock Market LLC
(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 ☐ No ☒
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 ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Non-accelerated Filer ☒
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on September 30, 2022, was $6,580,267 based on a total of
3,089,327 shares of the registrant’s common stock held by non-affiliates on September 30, 2022, at the closing price of $2.13 per share, as reported on the Nasdaq Capital
Market.
There were 4,941,596 shares of the registrant’s common stock issued and outstanding on June 16, 2023.
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 2023 annual meeting of
stockholders.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
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
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
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
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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 Sonoma regarding
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 originally incorporated as Micromed Laboratories, Inc. in 1999 under the laws of the State of California. We changed our name to Oculus Innovative Sciences, Inc. in 2001.
In December 2006 we reincorporated under the laws of the State of Delaware, and in December 2016 we changed our name to Sonoma Pharmaceuticals, Inc.
In 2022, we relocated our principal executive offices from 645 Molly Lane, Suite 150, Woodstock, Georgia, 30189 to 5445 Conestoga Court, Suite 150, Boulder, Colorado
80301. We have two active wholly-owned subsidiaries: Oculus Technologies of Mexico, S.A. de C.V., and Sonoma Pharmaceuticals Netherlands, B.V. Our fiscal year end is
March 31. Our corporate telephone number is (800) 759-9305. Our websites are www.sonomapharma.com and www.sonomapharma.eu. The websites and any information
contained therein or connected thereto is not intended to be incorporated into this report.
Overview
We are a global healthcare leader for developing and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, eye
care, oral care, dermatological conditions, podiatry, animal health care and non-toxic disinfectants. Our products reduce infections, itch, pain, scarring and harmful
inflammatory responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-
inflammatory properties. Our stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the
cells in the area treated, assisting the body in its natural healing process. We sell our products either directly or via partners in 55 countries worldwide.
Business Update
Over the past three years, we have focused on restructuring Sonoma with the goal of growing our revenues while maintaining costs. During 2022, we consolidated all U.S.
operations into our Boulder, Colorado office, including sales, marketing and finance staff. Our revenues have grown as a result of adding new customers and distributors, and
organic growth from existing customers and distributors. We have also focused on introducing new products into multiple markets around the world and increasing our
regulatory reach by seeking new approvals and clearances.
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Some of our recent business updates include:
•
•
•
On June 8, 2023, we announced a new application of our Microcyn® Technology for intraoperative pulse lavage irrigation treatment, which can replace commonly
used IV bags in a variety of surgical procedures and is expected to be ready for commercial use in Europe in September 2023.
On April 11, 2023, we launched PodiacynTM Advanced Everyday Foot Care direct to consumers for over-the-counter use in the United States, intended for
management of foot odors, infections, and irritations, as well as daily foot health and hygiene. The same day we introduced a new pediatric dermatology and wound
care product for over-the-counter use, PediacynTM All Natural Skin Care & First Aid For Children.
In March 2023, we announced new EPA claims for our Nanocyn® hospital-grade disinfectant for effective use against Methicillin Resistant Staphylococcus Aureus
(MRSA), Salmonella, Norovirus, Poliovirus, and as a fungicide. Nanocyn was previously approved for use against COVID-19 as well as emerging pathogens
including Ebola virus, Mpox, and SARS-CoV-2. Nanocyn also received the esteemed Green Seal® Certification after surpassing a series of rigorous standards that
measure environmental health, sustainability and product performance.
• We continued to expand our network of global partners by entering into a distribution agreement with Daewoong Pharmaceutical Co., Ltd., one of the largest
pharmaceutical companies in South Korea, in January 2023 for the marketing and distribution of PrimocynTM Skin Solution products.
•
•
Our Microcyn® Rx products, including wound care, prescription dermatology products Celacyn® and Levicyn®, and prescription eye care Acuicyn®, received a
Distribution and Pricing Agreement (DAPA) in January 2023 for distribution by the Defense Logistics Agency (DLA), enabling our partner, EMC Pharma, LLC to
enter into distribution agreements for these products with federal customers.
On January 4, 2023, we launched a line of office dispense products exclusively for skin care professionals, including two new products, Reliefacyn® Plus Itch-Burn-
Rash-Pain Relief Hydrogel and Rejuvacyn® Plus Skin Repair Cooling Mist. Along with Regenacyn® Plus Scar Management Hydrogel, these office dispense products
are targeted to dermatology practices and medical spas.
We continue to invest in research and development, both in the U.S. and internationally, for our core performance-stabilized hypochlorous acid, or HOCl, technology. We have
an active pipeline of products and we continue to seek new regulatory clearances to expand potential markets we can sell our products into.
Business Channels
Our core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. We have been in business for over 20
years, and in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades of studies and data
collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while stimulating natural healing through increased
oxygenation and eliminating persistent microorganisms and biofilms.
We sell our products into many markets both in the U.S. and internationally. In international markets, we ship a variety of products to 55 countries. Our core strategy is to work
with partners both in the United States and around the world to market and distribute our products. In some cases, we market and sell our own products.
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Dermatology
We have developed unique, differentiated, prescription-strength and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our
products are primarily targeted at the treatment of redness and irritation, the management of scars and symptoms of eczema/atopic dermatitis. We are strategically focused on
introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures currently in demand. In
addition, we look for markets where we can provide effective product line extensions and pricing to new product families.
In the United States, we partner with EMC Pharma, LLC to sell our prescription dermatology products. Pursuant to our agreement with EMC Pharma, we manufacture products
for EMC Pharma and EMC Pharma has the right to market, sell and distribute them to patients and customers for an initial term of five years, subject to meeting minimum
purchase and other requirements.
On September 28, 2021, we launched a new over-the-counter product, Regenacyn® Advanced Scar Gel, which is clinically proven to improve the overall appearance of scars
while reducing pain, itch, redness, and inflammation. On the same day, we launched Regenacyn® Plus, a prescription-strength scar gel which is available as an office dispense
product through physician offices.
On October 27, 2022, we launched two new over-the-counter dermatology products in the United States, Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel for the
alleviation of red bumps, rashes, shallow skin fissures, peeling, and symptoms of eczema/atopic dermatitis, and Rejuvacyn® Advanced Skin Repair Cooling Mist for
management of minor skin irritations following cosmetic procedures as well as daily skin health and hydration.
In June 2022, the Natural Products Association certified Rejuvacyn Advanced as a Natural Personal Care Product.
On January 4, 2023, we launched a line of office dispense products exclusively for skin care professionals, including two new prescription strength dermatology products,
Reliefacyn® Plus Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Rejuvacyn® Plus Skin Repair Cooling Mist. These products, along with Regenacyn® Plus Scar Gel, will
be marketed and sold directly to dermatology practices and medical spas.
On April 11, 2023, we introduced a new pediatric dermatology and wound care product for over-the-counter use, PediacynTM All Natural Skin Care & First Aid For Children.
Our consumer products are available through Amazon.com, our website and third-party distributors.
We sell dermatology products in Europe and Asia through a distributor network. In these international markets, we have a network of partners, ranging from country specific
distributors to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners to create products they can market in
their home country. Some products we develop and manufacture are private label while others use branding we have already developed. We have created or co-developed a
wide range of products for international markets using our core HOCl technology.
First Aid and Wound Care
Our HOCl-based wound care products are intended for the treatment of acute and chronic wounds as well as first- and second-degree burns, and as an intraoperative irrigation
treatment. They work by first removing foreign material and debris from the skin surface and moistening the skin, thereby improving wound healing. Secondly, our HOCl
products assist in the wound healing process by removing microorganisms. Since HOCl is an important constituent of our innate immune system and is formed and released by
the macrophages during phagocytosis, it is advantageous to other wound-irrigation and antiseptic solutions, as highly organized cell structures such as human tissue can tolerate
the action of our wound care solution while single-celled microorganisms cannot. Due to its unique chemistry, our wound treatment solution is much more stable than similar
products on the market and therefore maintains much higher levels of hypochlorous acid over its shelf life.
3
In the United States, we sell our wound care products directly to hospitals, physicians, nurses, and other healthcare practitioners and indirectly through non-exclusive
distribution arrangements. In Europe, we sell our wound care products through a diverse network of distributors.
To respond to market demand for our HOCl technology-based products, we launched our first direct to consumer over-the-counter product in the United States in February
2021. Microcyn® OTC Wound and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including
sunburns and other skin irritations. Microcyn OTC is available without prescription through Amazon.com, our online store and third-party distributors.
In March 2021, we received approval to market and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation in France, Germany and
Portugal. The approval applies to our products MucoClyns™ for human hygiene to be marketed and commercialized by us, MicrocynAH® for animal heath marketed and
commercialized through our partner, Petagon Limited, and MicroSafe for disinfectant use to be marketed and commercialized through our partner, MicroSafe Group DMCC.
In June 2022, the Natural Products Association certified Microcyn OTC as a Natural Personal Care Product in the United States.
In June 2023, we announced a new application of our HOCl technology for intraoperative pulse lavage irrigation treatment, which can replace commonly used IV bags in a
variety of surgical procedures. The intraoperative pulse lavage container is designed to be used in combination with a pulse lavage irrigation device, or flush gun, for
abdominal, laparoscopic, orthopedic, and periprosthetic procedures. It is expected to be ready for commercial use in Europe in September 2023, and we anticipate commercial
launch in the U.S. in 2024.
Eye Care
Our prescription product Acuicyn™ is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes and helps manage red,
itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to provide near instant relief, and gentle enough to use as often as
needed. In the United States, our partner EMC Pharma is selling our prescription-based eye care product through its distribution network.
On September 28, 2021, we launched Ocucyn® Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com, through our online store, and through third
party distributors. Ocucyn® Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective solution for good eyelid and eyelash hygiene.
In international markets we rely on distribution partners to sell our eye products. On May 19, 2020, we entered into an expanded license and distribution agreement with our
existing partner, Brill International S.L. for our Microdacyn60® Eye Care HOCl-based product. Under the license and distribution agreement, Brill has the right to market and
distribute our eye care product under the private label Ocudox™ in Italy, Germany, Spain, Portugal, France, and the United Kingdom for a period of 10 years, subject to
meeting annual minimum sales quantities. In return, Brill paid us a one-time fee, and the agreed upon supply prices. In parts of Asia, Dyamed Biotech markets our eye product
under the private label Ocucyn.
Oral, Dental and Nasal Care
We sell a variety of oral, dental, and nasal products around the world.
In late 2020, we launched a HOCl-based product in the dental, head and neck markets called Endocyn®, a biocompatible root canal irrigant. In the U.S., we sell our dental
products through U.S.-based distributors.
4
In international markets, our product Microdacyn60® Oral Care treats mouth and throat infections and thrush. Microdacyn60 solution assists in reducing inflammation and
pain, provides soothing cough relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications and is ready
for use with no mixing or dilution.
Our international nasal care product Sinudox™ based on our HOCl technology is intended for nasal irrigation. Sinudox Hypotonic Nasal Hygiene clears and cleans a blocked
nose, stuffy nose and sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is currently sold through Amazon in Europe. In other parts of the
world, we partner with distributors to sell Sinudox.
Podiatry
Our HOCl-based wound care products are also indicated for the treatment of diabetic foot ulcers. In the United States, we sell our wound care products directly to podiatrists as
well as hospitals, nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements. In Europe, we sell our wound care products for
podiatric use through a diverse network of distributors.
On April 11, 2023, we launched PodiacynTM Advanced Everyday Foot Care direct to consumers for over-the-counter use in the United States, intended for management of foot
odors, infections, and irritations, as well as daily foot health and hygiene. Podiacyn is available through Amazon.com, our online store and third-party distributors.
Animal Health Care
MicrocynAH® is a HOCl-based topical product that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment
of a variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms and wounds to the outer ear of any animal.
For our animal health products sold in the U.S. and Canada, we partnered with Manna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro
distributes non-prescription products to national pet-store retail chains, farm animal specialty stores, in the United States and Canada, such as Chewy.com, PetSmart, Tractor
Supply, Cabela’s, PetExpress, and Bass Pro Shops. On August 2, 2022, we announced the launch of a MicrocynVS® line of products exclusively for veterinarians for the
management of wound, skin, ear and eye afflictions in all animal species.
For the Asian and European markets, on May 20, 2019, we partnered with Petagon, Limited, an international importer and distributor of quality pet food and products for an
initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. On August 3, 2020, Petagon received a license from the People’s Republic of
China for the import of veterinary drug products manufactured by us. This is the highest classification Petagon and Sonoma can receive for animal health products in China.
Surface Disinfectants
Our HOCl technology has been formulated as a disinfectant and sanitizer solution for our partner MicroSafe and is sold in numerous countries. It is designed to be used to spray
in aerosol format in areas and environments likely to serve as a breeding ground for the spread of infectious disease, which could result in epidemics or pandemics. The
medical-grade surface disinfectant solution is used in hospitals worldwide to protect doctors and patients. In May 2020, Nanocyn® Disinfectant & Sanitizer received approval
to be entered into the Australian Register of Therapeutic Goods, or ARTG for use against the coronavirus SARS-CoV-2, or COVID-19, and was also authorized in Canada for
use against COVID-19. Nanocyn has also met the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one
of the very few eco-certified, all-natural disinfectant solutions in Australia.
Through our partner MicroSafe, we sell hard surface disinfectant products into Europe, the Middle East and Australia.
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On July 31, 2021, we granted MicroSafe the non-exclusive right to sell and distribute Nanocyn in the United States provided that MicroSafe secure U.S. EPA approval. In April
of 2022, MicroSafe secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold in the United States as a surface disinfectant, and it was
subsequently added to the EPA’s list N for use against COVID-19. In June 2022, the EPA added Nanocyn to List Q as a disinfectant for Emerging Viral Pathogens, including
Ebola virus, Mpox, and SARS-CoV-2, and in March 2023 added Nanocyn to Lists G and H, for use against Methicillin Resistant Staphylococcus Aureus (MRSA), Salmonella,
Norovirus, Poliovirus, and as a fungicide. Nanocyn also received the Green Seal® Certification after surpassing a series of rigorous standards that measure environmental
health, sustainability and product performance. Nanocyn is a hospital-grade disinfectant and manufactured by us using our patented HOCl technology. Nanocyn is currently
sold by MicroSafe in Europe, the Middle East and Australia.
Employees
As of June 2, 2023, we employed a total of 8 full-time employees in the United States, and one full-time employee in the Netherlands. Additionally, we had 162 employees in
Mexico. We are not a party to any collective bargaining agreements. We believe relations with employees are very good.
Products
Our products are all classified as medical devices and categorized as prescription, over-the-counter (OTC), and office dispense products. Below are some of our key products
that we either sell through our own efforts or through partnership agreements.
Dermatology
In the United States, we offer Regenacyn Advanced Scar Gel, Reliefacyn Advanced Itch-Burn-Rash-Pain Relief Hydrogel, and Rejuvacyn Advanced Skin Repair Cooling Mist
for OTC purchase, and Regenacyn Plus Scar Gel, Reliefacyn Plus Itch-Burn-Rash-Pain Relief Hydrogel, and Rejuvacyn Plus Skin Repair Cooling Mist for office dispense. We
also offer PodiacynTM Advanced Everyday Foot Care and PediacynTM All Natural Skin Care & First Aid For Children for over-the-counter use.
Regenacyn® Advanced Scar Gel and Regenacyn® Plus Scar Gel
Regenacyn® Advanced Scar Gel is clinically proven to improve the overall appearance of scars while
reducing pain, itch, redness, and inflammation. Regenacyn® Plus is a prescription-strength scar gel
which is available as an office dispense product through dermatology practices and medical spas.
Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Reliefacyn® Plus Itch-Burn-Rash-Pain Relief Hydrogel
Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel is intended for the alleviation of red
bumps, rashes, shallow skin fissures, peeling, and symptoms of eczema/atopic dermatitis. Reliefacyn®
Plus is a prescription-strength formula available as an office dispense product through dermatology
practices and medical spas.
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Rejuvacyn® Advanced Skin Repair Cooling Mist and Rejuvacyn® Plus Skin Repair Cooling Mist
Rejuvacyn® Advanced Skin Repair Cooling Mist is intended for management of minor skin irritations
following cosmetic procedures as well as daily skin health and hydration. Rejuvacyn® Plus is a
prescription-strength formula available as an office dispense product through dermatology practices and
medical spas.
PediacynTM Skin Care & First Aid for Children
PediacynTM is a pediatric dermatology and wound care product for over-the-counter use.
Our prescription product offerings in the U.S. are sold by our partner EMC Pharma, LLC and include Epicyn® Antimicrobial Facial Cleanser, Levicyn® Antimicrobial Dermal
Spray, Levicyn® Antipruritic Gel, Levicyn® Antipruritic Spray Gel, Celacyn® Scar Management Gel and Sebuderm® Topical Gel.
Internationally, we offer GramaDerm™ Hydrogel and Solution Combo Pack to assist in the treatment of topical mild to moderate acne, Epicyn™ Scar Management Hydrogel
and Pediacyn™ Atopic Dermatitis Hydrogel.
Wound Care
In the United States we offer Microcyn® wound and skin care both as an OTC and prescription product.
Microcyn® OTC Advanced Wound & Skin Cleanser
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Microcyn® Wound Care Management for Professional Use
Microcyn® offers enhanced healing properties.
Microcyn® is a HOCl-based topical line of products designed to stimulate expedited healing by targeting a wide
range of pathogens including viruses, fungi, spores and bacteria, including antibiotic-resistant strains that slow the
natural healing of wounds.
Eye, Nasal and Oral Care
Ocucyn® Eyelid and Eyelash Cleanser is an OTC product sold directly in the United States.
Microdacyn60® Oral Care
Microdacyn60 Oral Care with patented technology supports the treatment of mouth and throat infections and the debridement and
moistening of mouth lesions and thrush.
This adjuvant solution assists in reducing inflammation, pain, soothing cough relief and does not contain any harmful chemicals. It
does not stain teeth, is non-irritating, non-sensitizing, has no contraindications and is ready for use with no mixing or dilution.
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Podiatry
PodiacynTM Advanced Everyday Foot Care
PodiacynTM is intended for management of foot odors, infections, and irritations, as well as daily foot health and hygiene.
Animal Health Care
In the United States and internationally, our HOCl-based MicrocynAH® line offers topical solutions designed to relieve the common symptoms of hot spots, scratches, skin
rashes post-surgical sites and irritated animal skin and promote expedited healing for all animals.
Our MicrocynVS® line is veterinarian-strength animal care for use in vet clinics and animal hospitals.
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Surface Disinfectants
Through our partner MicroSafe DMCC, Dubai, we sell Nanocyn®. Nanocyn is a hospital-grade disinfectant indicated to sterilize hard surfaces by spraying directly onto the
surface, for medical devices by submerging the device in Nanocyn, and also for fumigation into the air.
When fumigated, Nanocyn has demonstrated the ability to kill a wide range of airborne pathogens and significantly reduce the spread of infectious disease.
Research and Development
Research and development expense consists primarily of expenses for clinical studies, personnel, regulatory services and supplies. For the years ended March 31, 2023 and
2022, research and development expense amounted to $207,000 and $125,000, respectively. A small percentage of these expenses were borne by our customers.
We manufacture all of our products at our facility in Zapopan, Mexico. We have developed a 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 facility is required to meet and maintain regulatory standards
applicable to the manufacture of pharmaceutical and medical device products and is certified and complies with U.S. Current Good Manufacturing Practices, Quality Systems
Regulations for medical devices, and International Organization for Standardization, or ISO, guidelines. Our facility has been approved by the Ministry of Health and is also
ISO 13485 certified.
Our machines are tested regularly, 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 are proprietary to Sonoma. All other raw materials and supplies utilized in the manufacturing
process of our products are available from various third-party suppliers in quantities adequate to meet our needs.
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We believe we own a sufficient factory space and equipment to produce an adequate amount of product to meet anticipated future requirements for at least the next two years.
With expansion into new geographic markets, we may establish additional manufacturing facilities to better serve those new markets.
U.S. Regulatory Approvals and Clearances
To date, we have obtained 21 U.S. Food and Drug Administration, or FDA, clearances permitting the sale of products as medical devices for Section 510(k) of the Federal
Food, Drug and Cosmetic Act in the United States.
Outside the United States, we sell products for dermatological and advanced tissue care with a European Conformity marking, Conformité Européenne, or CE. On April 9,
2020, we received an updated CE certificate covering 39 products in 54 countries with various approvals in Brazil, China, Southeast Asia, South Korea, India, Australia, New
Zealand, and the Middle East.
The following table summarizes our current material regulatory approvals and clearances by brand.
Brand
Approval Type
Summary Indication
HOCl-based Products:
Microcyn® Wound Care Management
U.S. 510(k)
Microcyn® OTC Advanced Wound & Skin Cleanser
Lasercyn™ Gel, Levicyn™ Gel
Sebuderm™
Regenacyn® Advanced Scar Gel
Regenacyn® Plus Scar Gel
Celacyn® Scar Management Gel
Levicyn™ SG
U.S. 510(k)
EU CE Mark
U.S. 510(k)
EU CE Mark
U.S. 510(k)
U.S. 510(k)
EU CE Mark
Prescription product, intended to be used in the management, via debridement of wounds
such as stage I-IV pressure ulcers, partial and full thickness wounds, diabetic foot ulcers,
post surgical wounds, first and second degree burns, grafted and donor sites.
OTC product for use in the management of skin abrasions, lacerations, minor irritations,
cuts and intact skin.
Prescription and OTC product, intended for use to relieve itch and pain from minor skin
irritations, lacerations, abrasions and minor burns, such as sunburn. As a prescription
product it is also intended for sores, injuries, ulcers of dermal tissue and exuding wounds.
Prescription-only product, 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.
Prescription and OTC product, for the management of old and new hypertrophic and keloid
scarring resulting from burns, general surgical procedures and trauma wounds.
Prescription and OTC product, for the management and relief of burning and itching
associated with many common types of skin irritation, lacerations, abrasions and minor
burns. As a prescription product it also relieves burning and itching and pain associated
with various types of dermatoses, including radiation dermatitis and atopic dermatitis.
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Epicyn™ Antimicrobial Facial Cleanser
Rejuvacyn® Advanced Skin Repair Cooling Mist
Rejuvacyn® Plus Skin Repair Cooling Mist
Lasercyn™ Gel
U.S. 510(k)
EU CE Mark
U.S. 510(k)
Prescription and OTC product, management of skin abrasions, lacerations, minor
irritations, cuts and intact skin. As a prescription product it is intended for the cleansing,
irrigation, moistening, debridement and removal of foreign material and debris from
exudating wounds, first- and second-degree burns and other skin irritations.
Prescription and OTC product, intended for the management of minor skin irritations
following 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.
Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel
Reliefacyn® Plus Itch-Burn-Rash-Pain Relief Hydrogel
Levicyn™ Dermal Spray, Lasercyn™ Dermal Spray
U.S. 510(k)
Acuicyn Antimicrobial Eyelid & Eyelash Hygiene
U.S. 510(k)
removal of
foreign material
Prescription and OTC product, for the management of skin abrasions, lacerations, minor
irritations, cuts and intact skin. As a prescription product it is intended for the cleansing,
irrigation, moistening, debridement and
including
microorganisms and debris from exudating wounds, acute and chronic dermal lesions,
burns, and other skin irritations.
Prescription product, under the supervision of a healthcare professional, intended for the
cleansing, irrigation, moistening, debridement and removal of foreign material and debris
from exudating wounds, acute and chronic dermal lesions including stage I-IV pressure
ulcers, stasis ulcers, diabetic ulcers, post-surgical wounds, first- and second-degree burns,
abrasions, minor irritations of the skin, diabetic foot ulcers, ingrown toe nails,
grafted/donor sites and exit sites. It is also intended for use to moisten and lubricate wound
dressings and for use with devices intended to irrigate wounds.
Ocucyn Antimicrobial Eyelid & Eyelash Hygiene
Endocyn Root Canal Irrigation Solution
U.S.510(k)
OTC product, intended for OTC use in the management of skin abrasions, lacerations,
minor irritations, cuts, and intact skin.
Endocyn Root Canal Irrigation Solution is intended to irrigate, cleanse, and debride root
canal systems including the removal of foreign material and debris during root canal
therapy. It is also intended to provide for lubrication and irrigation during root canal
instrumentation.
Gramaderm®
Microdacyn60®
MucoClyns™
Sinudox™
EU CE Mark
Various product formulations for the topical treatment of mild to moderate acne.
EU CE Mark
Various product formulations for the management of itching, burning and other skin
irritations.
EU CE Mark
Indicated for the use in emergencies and 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.
EU CE Mark
Solution intended for nasal irrigation, including the moistening of cuts, abrasions and
lacerations located in the nasal cavity.
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Significant Customers
We rely on certain key customers for a significant portion of revenues. At March 31, 2023, customer A represented 22% of our net accounts receivable balance and customer D
represented 21% of our net accounts receivable balance. At March 31, 2022, customer B represented 20% of our net accounts receivable balance, customer D represented 15%
of our net accounts receivable balance, and customer E represented 14% of our net accounts receivable balance. For the year ended March 31, 2023, customer A represented
16%, customer B represented 18% and customer C represented 11% of net revenues. For the year ended March 31, 2022, customer A represented 21%, customer B represented
17%, and customer C represented 10% of net revenues.
Intellectual Property
Our success depends in part on an ability to obtain and maintain proprietary protection for product technology and know-how, to operate without infringing proprietary rights of
others, and to prevent others from infringing on our proprietary rights. We seek to protect a 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 the business. We have patented certain aspects of our HOCl
technology in the United States and worldwide. We also rely on trade secrets, know-how, continuing technological innovation, and in-licensing opportunities to develop and
maintain a proprietary position.
Although we work diligently to protect proprietary technology, there are no assurances that any patent will be issued from currently pending patent applications or from future
patent applications. The scope of any patent protection may not exclude competitors or provide competitive advantages, and any patent may not be held valid if subsequently
challenged, and others may claim rights in or ownership of patents and proprietary rights. Furthermore, others may develop products similar to ours and may duplicate any of
the products or design around patents.
We have also filed for trademark protection for marks used with 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
intellectual property rights. We believe that in order to have a competitive advantage, we must develop and maintain the proprietary aspects of technologies. Employees,
consultants and advisors are required to execute confidentiality agreements in connection with their employment, consulting or advisory relationships. Employees, consultants
and advisors with whom we expect to work with are also required to disclose and assign to us all inventions made in the course of a working relationship with them, while
using intellectual property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of
the products or to wrongfully obtain or use information that is regarded as proprietary.
Competition
We compete globally across six main channels: dermatology, eye, nasal and oral care, wound and acute care, podiatry, animal health care and surface disinfectants with our
HOCl technology.
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Dermatology
Our dermatology products are at the forefront of HOCl-based solutions, a safe and highly effective active ingredient designed to relieve itching, burning and inflammation and
acts as a highly effective antimicrobial agent. We believe no other solutions on the market provide the same patient benefits at the levels of safety and cost. Our HOCl-based
solutions face significant competition in the United States from prescription products including corticosteroids, topical steroids and topical antibiotics. Our opportunity as an
adjunct to these steroids is based on the insight that many doctors and patients limit steroid and antibiotic use due to potential side effects. These side effects include bacterial
resistance, stinging, burning and inflammation for topical antibiotics and stretch marks, easy bruising, tearing of the skin and, to a lesser extent, enlarged blood vessels for
topical steroids. Our HOCl-based products are safe, non-toxic and have shown few side effects in clinical studies.
Wound and Acute Care Markets
Similar to our dermatology products, our HOCl-based wound and acute care solutions provide improved efficacy at lower costs than traditional acute care products. Our HOCl-
based solutions compete with topical anti-infectives and antibiotics, as well as some advanced wound technologies, such as skin substitutes, growth factors and delayed release
silver-based dressings. Our opportunity in this space relative to antibiotics is based on the insight that competing antibiotic solutions may have resistance-building properties.
Factors Affecting Competitive Position
While some other companies are able to produce small molecule, HOCl-based formulations, based on our research, their products may become unstable after a relatively short
period of time or have large ranges of effectiveness. We believe our HOCl-based solutions are among the most stable therapeutics available.
Some of our competitors in the dermatology, wound care, eye, nasal and oral care, animal health care and surface disinfectant markets enjoy several competitive advantages.
These include:
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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;
experience in conducting research and development, manufacturing, obtaining regulatory approval for products and marketing; and
financial and human resources for product development, sales and marketing and patient support.
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.
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Medical Device Regulation
To date, we have received 21 510(k) clearances for use of 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 classified as medical devices will require
clearance by the FDA.
Medical devices 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.
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.
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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
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 marking.
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 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.
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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 Sonoma, 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 operations. Any such violations could have a material
adverse effect on our business, financial condition, results of operations or cash flows.
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.
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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 in dealing 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 the company 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 research and other aspects of 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 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, approval of a product by the applicable regulatory authorities of foreign countries must be obtained before clinical trials
or marketing of the product in those countries can begin. 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 medical device products within the European Union, we are required to comply with the
requirements of the Medical Devices Regulation, and its national implementations, including affixing CE markings on 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 Regulation, we must meet certain
requirements relating to the safety and performance of products and, prior to marketing products, we must successfully undergo verification of products’ regulatory compliance,
or conformity assessment.
The Medical Devices Regulation was adopted in the EU on May 26, 2017 to replace the existing Medical Device Directive, and became applicable on May 26, 2021, with a
transition period until May 26, 2024. Under the new Medical Devices Regulation, certain devices are classified in higher classes, new devices are classified, and certain new
obligations are imposed on manufacturers and distributors. Manufacturers are 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 are 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 Regulation.
We received a CE certificate for 39 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 Regulation and other regulatory requirements.
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.
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.
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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 Mexican
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 required 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 at our 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 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
We make available on sonomapharma.com, 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 these reports, as soon as reasonably practicable after electronically filing or furnishing such materials to the Securities and Exchange Commission, or SEC.
Sonomapharma.com and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K. The SEC maintains
an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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 and our March 31, 2023 audited consolidated financial statements
included disclosure that casts substantial doubt regarding our ability to continue as a going concern.
We reported a net loss of $5,151,000 and $5,086,000 for the years ended March 31, 2023 and 2022, respectively. At March 31, 2023 and 2022, our accumulated deficit
amounted to $189,514,000 and $184,363,000, respectively. We had working capital of $10,081,000 and $10,611,000 as of March 31, 2023 and 2022, respectively. During the
years ended March 31, 2023 and 2022, net cash used in operating activities amounted to $6,152,000 and $4,248,000, respectively. As of March 31, 2023, we had cash and cash
equivalents of $3,820,000.
We spent the most recent years working to reduce our losses and have made significant progress. However, we expect to continue incurring losses for the foreseeable future. We
may never achieve or sustain profitability. We must raise additional capital to pursue our product development initiatives, penetrate markets for the sale of our products and
continue as a going concern. We cannot provide any assurance that we will raise additional capital. We believe that we have access to capital resources through possible public
or private equity offerings, debt financings, corporate collaborations, or other means. If we are unable to secure additional capital, we may be required to curtail our research
and development initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations.
These measures could cause significant delays in our efforts to further commercialize our products, which are critical to the realization of our business plan and to our future
operations. These matters raise substantial doubt about our ability to continue as a going concern or become profitable.
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We depend on third party distributors 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 use distributors for most of our products.
We have limited control over the amount and timing of resources that our current partners or any future collaborators devote to our collaborations or potential products. These
partners may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our partners
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.
To penetrate our target markets, we may need to enter into additional collaborative agreements to assist in the development and commercialization of 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. 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.
Mexican tax law prevents us from deducting intercompany interest expense incurred by our Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V and requires
withholding tax on payments remitted to the US. At the same time, we are unable to recognize tax benefits for foreign tax credits for U.S. tax purposes.
Since 2004, we loaned substantial amounts to our Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V. at various interest rates to fund their operations. As of March
31, 2023, our Mexico subsidiary owes approximately $12.3 million in principal, $11.1 million in technical assistance payments and $21.8 million in accrued interest. The
intercompany loans mature in 2027. There is no guarantee that our Mexican subsidiary will be able to pay any or all of the amounts due. If we were to forgive the debt or if we
were to convert the debt to equity, it would be subject to Mexico income tax at 30%, or approximately $10.2 million, as well as Mexican withholding tax of 15%.
Mexico’s thin capitalization rules also require taxpayers to maintain a debt-to-equity ratio of 3:1. Any interest paid to foreign related parties that results in indebtedness
exceeding a ratio of 3:1 to their stockholder’s equity is not deductible for Mexican corporate income tax purposes and we did not meet that condition. Therefore, we have not
been able to deduct the intercompany interest on our Mexico tax returns since 2004. It has prevented our Mexico subsidiary from accruing net operating losses in Mexico to
offset potential future profits. At the same time the intercompany interest income in the United States decreases our U.S. net operating losses and reduces our ability to apply
these carryforwards to offset future taxable income in the United States.
In addition, any interest paid to a foreign lender is subject to Mexico withholding tax of 15%. We also have interest owed on our intercompany technical assistance agreement
and royalty withholding of 10% on our technical assistance agreement. This would amount to approximately $4.2 million in Mexico withholding tax at March 31, 2023, if all of
the interest and technical assistance were to be repaid to us. In general, the foreign related party parent can then claim a credit for these withholding taxes on their U.S. income
tax return. However, because of our substantial U.S. net operating losses, we are prevented from claiming any credit on any withholding tax for U.S. income tax purposes. Any
such failure to pay intercompany debt, inability to deduct income taxes or apply credits, or liability for tax payments could have a material adverse effect on our business,
financial condition, and results of operations.
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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. For the year ended March 31, 2023, customer A represented 16%, customer B represented 18% and customer C represented 11% of net revenues. For the year ended
March 31, 2022, customer A represented 21%, customer B represented 17%, and customer C represented 10% 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.
A majority 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, Asia and Europe. During the years ended March 31, 2023 and 2022, approximately 74% and 70% of our total revenue,
respectively, were generated from sales outside of the United States. Our business is highly regulated for the use, marketing and manufacturing of our HOCl-based products
both domestically and internationally. Our international operations are subject to risks, including:
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local political or economic instability;
continuing restrictions related to the Covid-19 pandemic;
changes in exchange rates;
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;
difficulties in collecting accounts receivables on a timely basis or, at all; and
adverse tax consequences or overlapping tax structures.
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. 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.
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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.
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.
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.
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 and may never recover any of the substantial costs we have invested in the development of HOCl.
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.
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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 with similar characteristics to HOCl, 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 HOCl. Such similar products marketed by larger competitors can hinder our or our
partners’ 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.
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, 2023, customer A represented 22% of our net accounts receivable balance and customer D represented 21% of our
net accounts receivable balance. At March 31, 2022, customer B represented 20% of our net accounts receivable balance, customer D represented 15% of our net accounts
receivable balance, and customer E represented 14% of our 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 HOCl, 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 our products, which could prevent us from commercializing one or more of our products.
The machines used to manufacture our 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 HOCl, 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 products may be delayed or foregone.
Manufacturing processes that are used to produce the smaller quantities of HOCl-based products 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 HOCl 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.
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 HOCl 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:
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we were the first to invent the inventions described in patent applications;
we were the first to file patent applications for inventions;
others will not independently develop similar or alternative technologies or duplicate our products without infringing our intellectual property rights;
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any patents licensed or issued to us will provide us with any competitive advantages;
we will develop proprietary technologies that are patentable; or
the patents of others will not have an adverse effect on our ability to do business.
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 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.
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 to 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.
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. There may be changes to existing trade agreements, like
the USMCA, which went to effect on July 1, 2020, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States,
particularly tariffs on products manufactured in Mexico, among other possible changes. Any changes to USMCA (or subsequent trade agreements) could impact our operations
in countries where we manufacture or sell products or source components, or materials, which could adversely affect our operating results and our business.
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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 markets in which we operate 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 may be reduced or eliminated.
Our success depends, in part, upon our ability to stay at the forefront of technological change and to 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:
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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 HOCl technology to other parties for
development and commercialization. We expect to seek collaborators for our potential products because of the expense, effort and expertise required to conduct 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 unable to establish collaborative agreements, we may not be able to develop and
commercialize new products, which would adversely affect our business and our revenues.
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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 licensing 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.
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
guarantee 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.
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.
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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 HOCl 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.
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.
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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 ability to generate revenue will be diminished if we or our partners are unable to obtain acceptable prices or an adequate level of reimbursement from third-party
payors, or our partners may face pricing pressure from private third-party payers, including customers, from rebates and restrictive reimbursement practices.
Our partner’s 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
products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance organizations, or HMOs.
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.
There is significant uncertainty concerning third-party coverage and reimbursement of newly approved medical products. 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 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 partner’s abilities to sell our products profitably, and thus lead to decreased demand for our products and revenues for us. We were able to negotiate minimum purchase
requirements in certain of our third-party distributor agreements. However, we have limited control over purchases by our distributors, to meet the minimum purchase
thresholds or above the minimum purchase thresholds.
Increasingly, private health insurance companies and self-insured employers have been raising co-payments required from beneficiaries and looking for other ways to shift
more of the cost burden to manufacturers and patients. This cost shifting has given consumers greater control of medication choices, as they pay for a larger portion of their
prescription costs and may cause consumers to favor lower cost generic alternatives to branded pharmaceuticals. Additionally, patients continue to face cost reduction pressures
that may cause them to curtail their use of, or seek reimbursement for, our products, to negotiate reduced fees or other concessions or to delay payment. Third-party payors may
reduce or limit reimbursement for our products in the future, such as by withdrawing their coverage policies, canceling any future contracts, reviewing and adjusting the rate of
reimbursement, or imposing limitations on coverage. Any such changes could negatively impact the sales of our products by our partners, and therefore, have a material adverse
effect on our revenues.
Our ability to generate revenue will be diminished if we or our partners are unable to manage customer product substitutions for our prescription products.
Similar to other pharmaceutical companies, patients are increasingly seeking lower-cost substitutes to our products. Even if our patients have a prescription for our product, the
pharmacist may recommend a less expensive product even if that product is less effective or designed for conditions different from what the patient is seeking to treat. As a
result, the patient may choose to abandon purchasing our prescribed product for a less expensive alternative product resulting in a lost sale for our partners. If the number of
consumers substituting our products increases, it could have a material adverse effect on sales of our products by our partners, and therefore, our revenues, financial position,
cash flows and results of operations.
30
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;
expand our manufacturing capabilities; and
finance capital expenditures and our general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
·
·
·
·
·
·
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.
31
Our information technology and infrastructure may be breached or attacked.
In the ordinary course of our business, we collect and store a limited amount of sensitive data, including intellectual property, our proprietary business information and that of
our customers, suppliers, business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure
processing, maintenance, and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks
and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or
proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and
damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, revenues and competitive position.
Our cash and cash equivalents may be exposed to failure of our banking institutions.
We maintain our cash at financial institutions, in balances that exceed current FDIC insurance limits. On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the
California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed receiver of SVB. While none of our cash and cash
equivalents was held at SVB, if the banks where we hold deposits were to become insolvent or enter receivership, our ability to access our cash, cash equivalents and
investments, including transferring funds, making payments or receiving funds, may be threatened, and this could 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.
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 HOCl-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 HOCl-based products in large clinical trials conducted by others;
32
·
·
·
·
·
·
·
·
·
·
·
·
·
·
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 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.
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
33
·
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.
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 24,000,000 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 preferred stock 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, 2023, we had outstanding warrants exercisable for an aggregate of 104,000 shares of our common stock at a weighted average exercise price of approximately
$9.27 per share. We also had units convertible into 46,000 shares of common stock at an exercise price of $11.25 per unit. In addition, as of March 31, 2023, options to
purchase an aggregate of 565,000 shares of our common stock were outstanding at a weighted average exercise price of $8.84 per share and a weighted average contractual
term of 8.41 years. In addition, 982,000 shares of our common stock were available on March 31, 2023 for future option grants under our 2016 Equity Incentive Plan and our
2021 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.
34
ITEM 2. Properties
At March 31, 2023, we have a corporate office in Boulder, Colorado and our manufacturing facility in Zapopan, Mexico. We currently lease the following material properties:
Location
5445 Conestoga Court, Unit 150, Boulder, CO 80301
Industria Vidriera 81, & 87 Zapopan Industrial Norte, Zapopan, Jalisco, 45135, Mexico
Industria Maderera 124, 106, 115 & 815 Zapopan Industrial Norte, Zapopan, Jalisco, 45135, Mexico
Rent per month
USD 3,790
MXN 173,063
MXN 191,036
Purpose
Principal executive office
Office, manufacturing
Warehouse
We believe that our properties will be adequate to meet our needs for at least the next 12 months.
ITEM 3. Legal Proceedings
We may be involved in legal matters arising in the ordinary course of our business including matters involving proprietary technology. While management believes that such
matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect
on our business, financial condition or results of comprehensive (loss) income.
ITEM 4. Mine Safety Disclosures.
Not applicable.
35
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
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.
Holders
As of June 12, 2023, we had approximately 301 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 any unregistered securities during the year ended March 31, 2023 and through June 12, 2023.
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.
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 of America 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.
36
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 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.
For a Summary of all Accounting Policies, please refer to Notes to Consolidated Financial Statements, Note 3.
Results of Continuing Operations
Comparison of the Year Ended March 31, 2023 and 2022
Revenue
The following table shows our consolidated total revenue and revenue by geographic region for the year ended March 31, 2023 and 2022:
(In thousands)
United States
Europe
Asia
Latin America
Rest of the World
Total
Years Ended
March 31,
2023
2022
$ Change
% Change
$
$
3,428
4,051
2,451
2,383
959
13,272
$
$
3,807
3,410
2,350
2,095
966
12,628
$
$
(379)
641
101
288
(7)
644
(10)%
19%
4%
14%
(1)%
5%
The decrease in United States revenues for the year ended March 31, 2023 compared to the prior year of $0.4 million is primarily the result of softening demand for our over-
the-counter animal health care products, partially offset by increases in our over-the-counter eye and dermatology products. Revenue for wound care products increased 10%
from the prior year.
Our revenues in Europe increased 19% as a result of bringing on new distributors and a increase in orders from existing distributors.
Our revenues in Asia increased slightly due to higher demand, and Rest of the World revenues were relatively flat.
The increase in Latin America revenue was primarily the result of service revenue from selling machinery to a customer for $750,000, which management expects to be a one-
time event, partially offset by a decline in manufacturing for one of our customers.
37
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics are as follows:
Year ended
March 31,
(In thousands, except for percentages)
Cost of Revenue
Cost of Revenue as a % of Revenue
Gross Profit
Gross Profit as a % of Revenue
2023
2022
Change
% Change
$
$
8,795
66%
4,477
34%
$
$
8,635
68%
3,993
32%
$
$
160
(2)%
484
2%
2%
12%
The gross margin increase of 2% for the year ended March 31, 2023 compared to the year ended March 31, 2022 is related to greater factory efficiency resulting from higher
volumes of product sold and product mix.
Research and Development Expense
The research and development metrics are as follows:
Year ended
March 31,
(In thousands, except for percentages)
Research and Development Expense
Research and Development Expense as a % of Revenue
2023
2022
Change
% Change
$
207
2%
$
125
1%
$
82
1%
66%
For the year ended March 31, 2023, research and development expenses increased due to higher clinical trial expense and seeking third party certification of our products.
Selling, General and Administrative Expense
The selling, general and administrative expense metrics are as follows:
Year ended
March 31,
(In thousands, except for percentages)
Selling, General and Administrative Expense
Selling, General and Administrative Expense as a % of Revenue
2023
2022
Change
% Change
$
8,840
67%
$
9,755
77%
$
(915)
(9)%
The decrease in Selling, General and Administrative expense for the year ended March 31, 2023 was primarily the result tight control of expenses across all categories and
consolidating our U.S. operations into one office.
Interest (Expense) Income, net
Interest (expense) income, net was $16,000 and $(10,000), respectively, for the years ended March 31, 2023 and March 31, 2022.
38
Forgiveness of PPP loan
On May 1, 2020, we received loan proceeds in the amount of $1,310,000 under the Paycheck Protection Program, from Coastal States Bank in Atlanta, Georgia. We used the
loan amount for eligible purposes, such as payroll expenses. For the year ended March 31, 2022, we received approval for loan forgiveness in the amount of $723,000. The
remainder was not forgiven as a result of a decline in headount.
Other Expense, net
Other expense, net for the year ended March 31, 2023 and 2022, was $631,000 and $394,000, respectively. The increase in other expense, net relates primarily to a increase in
foreign exchange losses.
Gain on Sale of Assets
For the year ended March 31, 2023, we sold equipment for a gain of $1,000 compared to a gain of $150,000 in the year ended March 31, 2022.
Income Tax Benefit (Expense)
Income tax benefit (expense) for the year ended March 31, 2023 was $33,000 compared to $332,000 for the year ended March 31, 2022.
Net Loss
The following table provides the net loss for each period along with the computation of basic and diluted net income per share:
(In thousands, except per share data)
Net loss
Weighted-average shares outstanding: basic and diluted
Net loss per share: basic and diluted
Liquidity and Capital Resources
For the Year Ended March 31,
2023
2022
$
$
(5,151)
$
3,394
(1.52)
$
(5,086)
2,653
(1.92)
We reported a net loss of $5,151,000 and $5,086,000 for the years ended March 31, 2023 and 2022, respectively. At March 31, 2023 and 2022, our accumulated deficit
amounted to $189,514,000 and $184,363,000, respectively. As of March 31, 2023, we had cash and cash equivalents of $3,820,000 compared to $7,396,000 on March 31, 2022.
Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our
revenues, as well as various loans and the sale of certain assets to Invekra, Petagon and MicroSafe.
39
Since April 1, 2022, substantially all of our operations have been financed through cash on hand and the following transaction:
·
Proceeds of $2,868,000 from the sale of common stock on our At-the-Market facility with Ladenburg Thalmann & Co. Inc.
The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the year ended March 31, 2023 and 2022 as well
balances of cash and cash equivalents and working capital:
(In thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates on cash
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
Working capital (1), end of period
(1) Defined as current assets minus current liabilities.
Year ended March 31,
2023
2022
$
$
$
(6,152)
(258)
2,489
345
(3,576)
7,396
3,820
10,081
$
$
$
(4,248)
(99)
7,396
127
3,176
4,220
7,396
10,611
As of March 31, 2023, we had cash and cash equivalents of $3,820,000 compared to $7,396,000 as of March 31, 2022.
Net cash used in operating activities during the year ended March 31, 2023 was $6,152,000, primarily due to net loss of $5,151,000 and a decline in deferred revenue.
Net cash used in operating activities during the year ended March 31, 2022 was $4,248,000, primarily due to a net loss of $5,086,000 and partially offset by an increase from
accounts receivable net provision for write-offs and returns and an increase of $900,000 from deferred revenue.
Net cash used in investing activities for the year ended March 31, 2023 was $258,000, primarily related to the purchase of capital property and equipment.
Net cash used in investing activities for the year ended March 31, 2022 was $99,000, primarily related to the purchase of property and equipment.
Net cash provided by financing activities for the year ended March 31, 2023 was $2,489,000 primarily related to related to proceeds of $2,868,000 from the sale of common
stock on our At-the-Market facility with Ladenburg Thalmann & Co. Inc. and proceeds of $515,000 from short-term notes, offset by payments on PPP loan and short-term
notes.
Net cash provided by financing activities for the year ended March 31, 2022 was $7,396,000 primarily related to proceeds of $7,554,000 from the sale of common stock on our
At-the-Market facility with HC Wainwright and proceeds of $216,000 from the exercise of stock options and warrants, partially offset by the payments on PPP loan and long
term debt.
40
We expect revenues to fluctuate and may incur losses in the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to
penetrate markets for the sale of our products and continue as a going concern. We cannot provide any assurances that we will be able to raise additional capital.
Management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means;
however, we cannot provide any assurance that new financing will be available on commercially acceptable terms, if at all. If the economic climate in the U.S. deteriorates, our
ability to raise additional capital could be negatively impacted. If we are unable to secure additional capital, we may be required to take additional measures to reduce costs in
order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our continued efforts to
commercialize our products, which is critical to the realization of our business plan and our future operations. These matters raise substantial doubt about our ability to continue
as a going concern.
Capital Expenditures
We currently forecast capital expenditures in order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures
will ultimately be determined by the volume of business. We currently do not anticipate that a material amount will be purchased for the year ended March 31, 2024. If we
purchase capital equipment, we expect to pay cash for those expenditures or to finance them through equipment leases.
Material Trends and Uncertainties
We rely on certain key customers for a significant portion of our 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.
We are exposed to risk from decline in foreign currency for both the Euro and the Mexico Peso versus the US dollar. Most recently there has been a sharp decline in the Euro
versus the U.S. Dollar which has impacted our financial results.
As we have previously discussed in our annual report on Form 10-K filed with the SEC on July 14, 2022, we face a substantial Mexico tax liability, intercompany debt, unpaid
technical assistance charges and accrued interest. These amounts are not due until 2027. At this time, management believes there are sufficient assets on the balance sheet to
more than cover any tax obligation without interrupting the Company’s operations or business. We have engaged tax professionals to review all options to limit our exposure to
these amounts and to proceed in a manner that is most advantageous to the Company.
The effects of the recent pandemic continue to impact economies worldwide, and we are closely watching inflation, increased volatility within financial markets, shipping costs,
supply chain issues and labor costs. Any impact to our business operations, customer demand and supply chain due to increased shipping costs may ultimately impact sales. We
continue to evaluate our end-to-end supply chain and assess opportunities to refine the impact on sales. Currently, most of our customers pay for shipping expenses, including
increased shipping costs, if any. We have not yet faced labor shortages however it is possible we may have difficulties retaining and finding qualified employees in a tight labor
market in the future. Furthermore, overall inflation tendencies may put pressure on our product pricing and/or costs.
We also closely monitor overall economic conditions and consumer sentiment and the prospect of a recession in the United States which may impact our financial results.
41
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include
reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance related to our deferred tax assets, valuation of
equity and derivative instruments, debt discounts, valuation of investments and the estimated amortization periods of upfront product licensing fees received from customers.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 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.
ITEM 8. Consolidated Financial Statements and Supplementary Data
Sonoma Pharmaceuticals, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB No. 215)
Consolidated Balance Sheets as of March 31, 2023 and 2022
Consolidated Statements of Comprehensive Loss for the Years Ended March 31, 2023 and 2022
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended March 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years Ended March 31, 2023 and 2022
Notes to Consolidated Financial Statements
42
Page
F-1
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Sonoma Pharmaceuticals, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sonoma Pharmaceuticals, Inc. and Subsidiaries (the “Company”) as of March 31, 2023 and 2022, and the
related consolidated statements of comprehensive loss, changes in stockholders' equity and cash flows for the years ended March 31, 2023 and 2022, and the related notes
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of March 31, 2023 and 2022, and the results of their operations and cash flows for the years ended March 31, 2023 and 2022, in conformity with
accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant losses and negative operating cash flows and needs to raise additional funds to meet its obligations and
sustain its operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
F-1
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the
audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. We determined that there are no critical audit matters.
We have served as the Company’s auditor since 2021.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
June 21, 2023
F-2
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred consideration, net of discount
Total current assets
Property and equipment, net
Operating lease, right of use assets
Deferred tax asset
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
Current portion of debt-PPP
Short-term debt
Operating lease liabilities
Total current liabilities
Deferred revenue Invekra, net of current portion
Withholding tax payable
Operating lease liabilities, less current portion
Total liabilities
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Convertible preferred stock, $0.0001 par value; 714,286 shares authorized at March 31, 2023 and 2022,
respectively, no shares issued and outstanding at March 31, 2023 and 2022, respectively
Common stock, $0.0001 par value; 24,000,000 shares authorized at March 31, 2023 and 2022, respectively,
4,933,550 and 3,100,937 shares issued and outstanding at March 31, 2023 and 2022, respectively (Note 12)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
March 31,
2023
March 31,
2022
3,820
2,572
2,858
4,308
240
13,798
488
418
949
505
73
16,231
841
2,029
100
60
–
431
256
3,717
140
4,235
162
8,254
–
5
200,904
(189,514)
(3,418)
7,977
16,231
$
$
$
$
7,396
2,407
2,663
3,746
218
16,430
320
559
829
630
77
18,845
1,641
1,843
1,223
54
120
688
250
5,819
182
3,838
309
10,148
–
2
197,370
(184,363)
(4,312)
8,697
18,845
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-3
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(In thousands, except per share amounts)
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development
Selling, general and administrative
Total operating expenses
Loss from operations
Interest income (expense), net
Forgiveness of PPP Loan
Other expense, net
Gain on sale of assets
Loss from operations before income taxes
Income tax benefit (expense)
Net loss
Net loss per share: basic and diluted
Weighted-average shares outstanding: basic and diluted
Other comprehensive loss
Net loss
Foreign currency translation adjustments
Comprehensive loss
Year ended March 31,
2023
2022
$
13,272
8,795
4,477
207
8,840
9,047
(4,570)
16
–
(631)
1
(5,184)
33
(5,151)
(1.52)
3,394
(5,151)
894
(4,257)
$
$
$
$
12,628
8,635
3,993
125
9,755
9,880
(5,887)
(10)
723
(394)
150
(5,418)
332
(5,086)
(1.92)
2,653
(5,086)
267
(4,819)
$
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended March 31, 2023 and 2022
(In thousands, except share amounts)
Balance March 31, 2022
Shares issued in connection with ATM,
net of transaction costs
Employee stock-based compensation
expense
Stock based compensation related to
issuance of common stock restricted
stock grants
Foreign currency translation
adjustment
Net loss
Balance, March 31, 2023
Balance March 31, 2021
Shares issued in connection with ATM,
net of transaction costs
Shares issued in connection with
exercise of stock options
Shares issued in connection with
exercise of common stock warrants
Employee stock-based compensation
expense
Stock based compensation related to
issuance of common stock restricted
stock grants
Foreign currency translation
adjustment
Net loss
Balance, March 31, 2022
Series C Preferred Stock
($0.0001 par Value)
Shares
Amount
–
$
–
–
–
–
–
–
$
Series C Preferred Stock
($0.0001 par Value)
Shares
Amount
–
$
–
–
–
–
–
–
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Common Stock
($0.0001 par Value)
Shares
Amount
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
3,100,937
$
2
$
197,370
$
(184,363) $
(4,312) $
1,819,593
–
13,020
–
–
4,933,550
$
3
–
–
–
–
5
2,865
649
20
–
–
200,904
$
$
–
–
–
–
(5,151)
(189,514) $
–
–
–
894
–
(3,418) $
8,697
2,868
649
20
894
(5,151)
7,977
Common Stock
($0.0001 par Value)
Shares
Amount
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
2,092,909
$
2
$
189,217
$
(179,277) $
(4,579) $
950,100
44,042
12,290
–
1,596
–
–
3,100,937
$
–
–
–
–
–
–
–
2
7,554
193
24
372
10
–
–
–
–
–
–
–
–
–
–
–
–
197,370
$
(5,086)
(184,363) $
267
–
(4,312) $
$
5,363
7,554
193
24
372
10
267
(5,086)
8,697
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Recovery of doubtful accounts
Recovery of discounts, rebates, distributor fees and returns
Stock-based compensation
Forgiveness of PPP loan
Deferred income tax expense
Operating lease right-of-use asset
Gain on sale of assets
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Deferred consideration, net of discount
Accounts payable
Accrued expenses and other current liabilities
Withholding tax payable
Operating lease liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Deposits
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs
Payments on PPP Loan
Proceeds from exercise of common stock options and purchase warrants
Principal payments on short-term debt
Proceeds on short-term debt
Net cash provided by financing activities
Effect of exchange rate on cash and cash equivalents
Net (decrease) 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
Cash paid for taxes
Non-cash operating and financing activities:
Insurance premiums financed
Year Ended
March 31,
2023
2022
$
(5,151)
$
125
–
(66)
669
–
(37)
173
(1)
62
–
(306)
190
(864)
127
396
(173)
(1,296)
(6,152)
(269)
11
(258)
2,868
(120)
–
(774)
515
2,489
345
(3,576)
7,396
3,820
17
–
$
$
$
515
$
$
$
$
$
(5,086)
186
(125)
(1,407)
382
(723)
(829)
223
–
1,971
(100)
(460)
160
(157)
679
360
(222)
900
(4,248)
(137)
38
(99)
7,554
(467)
216
(30)
123
7,396
127
3,176
4,220
7,396
24
767
748
The accompanying footnotes are an integral part of these consolidated financial statements.
F-6
SONOMA PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Organization and Recent Developments
Organization
Sonoma Pharmaceuticals, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of
Delaware in December 2006. The Company’s principal office was moved to Woodstock, Georgia from Petaluma, California in June 2020 and to Boulder, Colorado in October
2022. The Company is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”) products for a wide range of applications, including
wound care, animal health care, eye care, oral care and dermatological conditions. The Company’s products reduce infections, itch, pain, scarring and harmful inflammatory
responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties.
The Company’s stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does not sting or irritate skin and oxygenates the cells in the area
treated assisting the body in its natural healing process. The Company sells its products either directly or via partners in 55 countries worldwide.
NOTE 2 – Liquidity and Financial Condition
The Company reported a net loss of $5,151,000 and $5,086,000 for the years ended March 31, 2023 and 2022, respectively. At March 31, 2023 and 2022, the Company’s
accumulated deficit amounted to $189,514,000 and $184,363,000, respectively. The Company had working capital of $10,081,000 and $10,611,000 as of March 31, 2023 and
2022, respectively. During the years ended March 31, 2023 and 2022, net cash used in operating activities amounted to $6,152,000 and $4,248,000, respectively
Management believes that the Company has access to additional capital resources through possible public or private equity offerings, debt financings, corporate collaborations
or other means; however, the Company cannot provide any assurance that other new financings will be available on commercially acceptable terms, if needed. If the economic
climate in the U.S. deteriorates, the Company’s ability to raise additional capital could be negatively impacted. If the Company is unable to secure additional capital, it may be
required to take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could
cause significant delays in the Company’s continued efforts to commercialize its products, which is critical to the realization of its business plan and the future operations of the
Company. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not
include any adjustments that may be necessary should the Company be unable to continue as a going concern.
COVID – 19 Pandemic Update
The impact from the COVID-19 pandemic, including recent COVID-19 variants, and the related disruptions had a significant adverse impact on the Company’s results of
operations in the years ended March 31, 2021, 2022 and 2023. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations,
financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may
emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national, and international markets. As the COVID-19
pandemic continues, the Company’s results of operations, financial condition, and cash flows may continue to be materially adversely affected, particularly if the pandemic
continues to persist for a significant amount of time.
F-7
NOTE 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”),
Oculus Technologies of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”). Aquamed has no current operations. All significant
intercompany accounts and transactions have been eliminated in consolidation. The functional currency for the Company's wholly-owned subsidiaries incorporated outside the
United States (“U.S.”) is denominated in local currency. All intercompany transactions and balances have been eliminated in consolidation.
Basis of presentation
The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (“SEC”) and are in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company’s fiscal year end is March 31. Unless otherwise
stated, all years and dates refer to the fiscal year.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments with an original maturity of three months or less when purchased. The Company’s cash
equivalents are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and
inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of options, and the estimated amortization
periods of upfront product licensing fees received from customers. Periodically, the Company evaluates and adjusts estimates accordingly.
Revenue Recognition
On April 1, 2018, the Company adopted Accounting Standards Update (“ASU”), "Revenue from Contracts with Customers Topic 606” (“Topic 606”) using the modified
retrospective method. There was no material impact to the Company upon the adoption of Topic 606. Revenue is recognized when the Company transfers promised goods or
services to the customer, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. In determining the
appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the
promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the
context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it
is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
The Company derives the majority of its revenue through sales of its products directly to end users and to distributors. The Company also sells products to a customer base,
including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company also has entered into agreements to license its technology and products.
F-8
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the
Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price the Company
evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled.
During the year ended March 31, 2022, for all of its sales to non-consignment distribution channels, revenue is recognized when control of the product is transferred to the
customer (i.e. when its performance obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could occur when the customer receives
the product based on the terms of the agreement with the customer. For product sales to its value-added resellers, non-stocking distributors and end-user customers, the
Company grants return privileges to its customers, and because the Company has a long history with its customers, the Company is able to estimate the amount of product that
will be returned. Sales incentives and other programs that the Company may make available to these customers are considered to be a form of variable consideration, and the
Company maintains estimated accruals and allowances using the expected value method. With the movement of these sales to a full distributor model in the year ended March
31, 2023 there were none of these arrangements anymore although we were still having returns from the period prior to the year ended March 31, 2023.
The Company has entered into consignment arrangements, in which goods are left in the possession of another party to sell. As products are sold from the customer to third
parties, the Company recognizes revenue based on a variable percentage of a fixed price. Revenue recognized varies depending on whether a patient is covered by insurance or
is not covered by insurance. In addition, the Company may incur a revenue deduction related to the use of the Company’s rebate program.
Sales to stocking distributors are made under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in their
inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.
The Company assessed the promised goods and services in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from on its
own and is separately identifiable from any other promises within the contract. Given that the distinct service is not substantially the same as other goods and services within
the Invekra contract, the Company accounted for the distinct service as a performance obligation.
Service revenue from testing contracts is recognized as tests are completed and a final report is sent to the customer.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash and cash
equivalents are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is exposed to credit risk in the event of default by these
financial institutions for amounts in excess of the Federal Deposit Insurance Corporation insured limits. Cash and cash equivalents held in foreign banks are intentionally kept
at minimal levels, and therefore have minimal credit risk associated with them. We currently have $2.5 million of deposits above federally insured limits.
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, 2023, customer A represented 22% of our net accounts receivable balance and
customer D represented 21% of our net accounts receivable balance. At March 31, 2022, customer B represented 20% of our net accounts receivable balance, customer D
represented 15% of our net accounts receivable balance, and customer E represented 14% of our net accounts receivable balance. For the year ended March 31, 2023, customer
A represented 16%, customer B represented 18% and customer C represented 11% of net revenues. For the year ended March 31, 2022, customer C represented 10%, customer
B represented 17%, and customer A represented 21% of net revenues.
F-9
Accounts Receivable
Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales
returns are based on analysis of contractual terms and historical trends.
The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The
Company periodically reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers include its existing contractual obligations, historical
payment patterns of its customers and individual customer circumstances, an analysis of days sales outstanding by customer and geographic region, and a review of the local
economic environment and its potential impact on government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts represents probable credit losses at
March 31, 2023 and 2022 in the amounts of $0 and $0, respectively. Additionally, at March 31, 2023 and 2022, the Company has allowances of $16,000 and $81,000,
respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying consolidated
balance sheets.
Inventories
Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.
Due to changing market conditions, estimated future requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory
quantities on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value. The Company recorded a provision to reduce the
carrying amounts of inventories to their net realizable value in the amounts of $236,000 and $218,000 at March 31, 2023 and 2022, respectively, which is included in cost of
revenues on the Company’s accompanying consolidated statements of comprehensive loss.
Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which management believes approximates fair value
due to the short-term nature of these instruments. The fair value of capital lease obligations and equipment loans approximates their carrying amounts as a market rate of
interest is attached to their repayment. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three
levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value
measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its
valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
F-10
As of March 31, 2023 and 2022, 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
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.
F-11
Research and Development
Research and development expenses are charged to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies. For the
years ended March 31, 2023 and 2022, research and development expense amounted to $207,000 and $125,000, respectively.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs amounted to $156,000 and $86,000 for the years ended March 31, 2023 and 2022, respectively.
Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.
Shipping and Handling Costs
The Company classifies amounts billed to customers related to shipping and handling in sale transactions as product revenues. The corresponding shipping and handling costs
incurred are recorded in cost of product revenues. For the years ended March 31, 2023 and 2022, the Company recorded revenue related to shipping and handling costs of
$42,000 and $52,000, respectively. These amounts are included in product revenues in the accompanying consolidated statements of comprehensive loss.
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 $894,000 and $267,000 for the years ended March 31, 2023 and 2022, respectively. These
amounts were recorded in other comprehensive loss in the accompanying consolidated statements of comprehensive loss for the years ended March 31, 2023 and 2022.
Foreign currency transaction gains (losses) relate primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and SP Europe. These
transactions are expected to be settled in the foreseeable future. The Company recorded foreign currency transaction losses of $692,000 for the year ended March 31, 2023, and
foreign currency transaction losses of $579,000, for the year ended March 31, 2022. The related amounts were recorded in other expense in the accompanying consolidated
statements of comprehensive 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 forfeitures for all stock options as incurred.
The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting
period or as earned.
F-12
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit
carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s consolidated financial statements. A tax benefit from an uncertain tax position is
only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s consolidated financial condition, results of comprehensive loss or cash
flows.
Comprehensive Loss
Other comprehensive loss includes all changes in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statement of changes in
stockholders’ equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments. Accumulated other comprehensive losses
at March 31, 2023 and 2022 were $3,418,000 and $4,312,000, respectively.
Net Income Loss per Share
The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares
outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur
upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
(In thousands, except per share data)
Net loss
Weighted-average shares outstanding: basic and diluted
Net loss per share: basic and diluted
For the Year Ended March 31,
2023
2022
$
$
(5,151)
$
3,394
(1.52)
$
(5,086)
2,653
(1.92)
The computation of basic loss per share for the years ended March 31, 2023 and 2022 excludes the potentially dilutive securities summarized in the table below because their
inclusion would be anti-dilutive.
(In thousands)
Common stock to be issued upon vesting of restricted stock units
Common stock to be issued upon exercise of options
Common stock to be issued upon exercise of warrants
Common stock to be issued upon exercise of common stock units (1)
(1)
Consists of 30,668 restricted stock units and warrants to purchase 15,332 shares of common stock
March 31,
2023
2022
–
565
104
46
715
1
466
108
46
621
F-13
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or
net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company
classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the
Company), (ii) give the counterparty a choice of net cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as
either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between
assets and liabilities is required. The Company determined that its freestanding derivatives, which principally consist of warrants to purchase common stock, satisfied the
criteria for classification as equity instruments, other than certain warrants that contained reset provisions and certain warrants that required net-cash settlement that the
Company classified as derivative liabilities. The company currently does not have any active derivative financial instruments.
Preferred Stock
The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that
are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred
shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control, as temporary equity. At all other times, preferred shares are classified as stockholders' equity.
Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date these consolidated financial statements were issued.
Employment Agreements with our Chief Executive Officer and Chief Operating Officer
Effective June 16, 2023, we entered into an amended and restated employment agreement with our Chief Executive Officer, Amy Trombly. The amended and restated
agreement provides that, in the event of termination upon change of control either without cause or for good reason, Ms. Trombly is entitled to receive, in addition to the other
benefits described therein, a lump sum severance equal to one and a half times her base salary and one and a half times her target annual bonus. All other material terms of the
amended and restated agreement remain unchanged from her prior employment agreement.
Also effective June 16, 2023, we amended and restated our employment agreement with Bruce Thornton, our Chief Operating Officer. Under the amended and restated
agreement, Mr. Thornton will serve as Executive Vice President and Chief Operating Officer of the Company. Mr. Thornton will no longer receive a monthly car allowance;
however, his base salary is adjusted to include such amount. The amended and restated agreement also provides that, in the event of termination upon change of control either
without cause or for good reason, Mr. Thornton is entitled to receive, in addition to the other benefits described therein, to a lump sum severance equal to one and a half times
his base salary and one and a half times his target annual bonus. The agreement further provides that upon termination for any reason, Mr. Thornton’s outstanding and vested
equity awards shall remain exercisable for 18 months following termination. Either party may terminate the employment agreement for any reason upon at least 60 days prior
written notice. All other material terms of his amended and restated agreement remain unchanged from his prior employment agreement.
F-14
Bonus Grants
Effective June 16, 2023, the Compensation Committee of the Board of Directors approved annual bonus awards of $162,500 for Ms. Trombly and $150,000 for Mr. Thornton.
Equity Awards
On June 16, 2023, the Compensation Committee of the Board of Directors approved an equity award of 100,000 shares of the Company’s common stock to each of Ms.
Trombly and Mr. Thornton, to be issued to on June 30, 2023, at a valuation based on the five day weighted trailing average of the Company’s stock price on the day of grant. In
addition, the Compensation Committee also approved a one-time cash payment by the Company as reimbursement for estimated taxes payable with respect to such equity
awards.
Recent Accounting Standards
The Company has evaluated all the recent accounting standards and determined that none of them are material to it.
NOTE 4 – Accounts Receivable
Accounts receivable, net consists of the following:
Accounts receivable
Less: discounts, rebates, distributor fees and returns
Total accounts receivable, net
March 31,
2023
2022
$
$
2,588,000
(16,000)
2,572,000
$
$
2,488,000
(81,000)
2,407,000
F-15
NOTE 5 – Inventories
Inventories consist of the following:
Raw materials
Finished goods
Total inventories
NOTE 6 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
Prepaid insurance
Tax prepaid to Mexican tax authorities
Other prepaid expenses and other current assets
NOTE 7 – 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
Total property and equipment, net and equipment, net
March 31,
2023
2022
1,764,000
1,094,000
2,858,000
$
$
1,626,000
1,037,000
2,663,000
March 31,
2023
2022
438,000
3,845,000
25,000
4,308,000
$
$
755,000
2,371,000
620,000
3,746,000
March 31,
2023
2022
1,624,000
202,000
122,000
554,000
2,502,000
(2,014,000)
488,000
$
$
1,281,000
139,000
108,000
503,000
2,031,000
(1,711,000)
320,000
$
$
$
$
$
$
Depreciation and amortization expense amounted to $125,000 and $186,000 for the years ended March 31, 2023 and 2022, respectively.
F-16
NOTE 8 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
Salaries and related costs
Other
Total accrued expenses and other current liabilities
NOTE 9 – Debt
Financing of Insurance Premiums
March 31,
2023
2022
$
$
1,463,000
566,000
2,029,000
$
$
1,059,000
784,000
1,843,000
On February 1, 2022, the Company entered into a note agreement for $748,000 with an interest rate of 4.68% per annum with final payment on January 1, 2023. This
instrument was issued in connection with financing insurance premiums. The note is payable in ten monthly installment payments of principal and interest of $76,000, with the
first installment beginning March 1, 2022, and was fully paid as of March 31, 2023.
On February 1, 2023, the Company entered into a note agreement for $453,000 with an interest rate of 8.98% per annum with final payment on January 1, 2024. This
instrument was issued in connection with financing insurance premiums. The note is payable in eleven monthly installment payments of principal and interest of $21,000, with
the first installment beginning March 1, 2023.
Paycheck Protection Program Loan
On May 1, 2020, the Company received loan proceeds in the amount of $1,310,000 under the Paycheck Protection Program (“PPP”), from Coastal States Bank in Atlanta,
Georgia. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, (“CARES Act”), provided for loans to qualifying businesses for amounts up to
2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest were forgivable after eight or 24 weeks as long as the Company
used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains payroll levels. The amount of loan forgiveness was reduced if the
Company terminated employees or reduced salaries during the applicable period.
The unsecured loan, which was in the form of a note dated April 29, 2020, matured on April 29, 2022 and bore interest at a rate of 1% per annum, payable monthly
commencing on May 1, 2021. The note allowed for prepayment at any time prior to maturity with no prepayment penalties. The Company used the loan amount for eligible
purposes, such as payroll expenses. The Company met the conditions for $723,000 in forgiveness of the loan. At March 31, 2023 and 2022 the loan balance amounted to $0 and
$120,000, respectively.
NOTE 10 – Leases
The Company’s operating leases are comprised primarily of facility leases. Balance sheet information related to the Company’s leases is presented below:
Operating leases:
Operating lease right-of-use assets
Operating lease liabilities – current
Operating lease liabilities – non-current
March 31,
2023
March 31,
2022
$
$
418,000
256,000
162,000
559,000
250,000
309,000
F-17
Other information related to leases is presented below:
Lease cost
Operating lease cost
As of March 31, 2023
Other information:
Operating cash flows from operating leases
Weighted-average remaining lease term – operating leases (in months)
Weighted-average discount rate – operating leases
$
$
As of March 31, 2023, the annual future minimum lease payments of the Company’s operating lease liabilities were as follows:
For Years Ending March 31,
2024
2025
2026
Thereafter
Total future minimum lease payments, undiscounted
Less: imputed interest
Total lease liability
NOTE 11 – Commitments and Contingencies
Legal Matters
Year ended
March 31, 2023
Year ended
March 31, 2022
385,000
$
367,000
(173,000)
19.4
6%
$
$
$
(222,000)
27.3
6%
296,000
154,000
15,000
–
465,000
(47,000)
418,000
The Company may be involved in legal matters arising in the ordinary course of business including matters involving proprietary technology. While management believes that
such matters are currently insignificant, matters arising in the ordinary course of business for which the Company is or could become involved in litigation may have a material
adverse effect on its business and financial condition of comprehensive loss.
Employment Agreements
As of March 31, 2023, the Company had employment agreements in place with two of its key executives. These executive employment agreements provide, among other
things, for the payment of up to twelve months of severance compensation for terminations under certain circumstances. With respect to these agreements, at March 31, 2023,
aggregated annual salaries would be $575,000 and potential severance payments to these key executives would be $862,500 if triggered. On June 16, 2023, the Company
entered into new employment agreements with its two key executives, which increased potential severance payments to $1.3 million if triggered.
Related Party Transactions
Ms. Trombly is the Chief Executive Officer of the Company. Ms. Trombly is the owner of Trombly Business Law, PC, which has been retained by the Company to advise on
certain corporate and securities law matters. During the years ended March 31, 2023 and 2022, the Company incurred $27,000 and $170,000, respectively, in legal services
from Trombly Business Law, PC.
F-18
NOTE 12 – Stockholders’ Equity
Authorized Capital
Effective September 13, 2018, the Company filed a certificate of amendment to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of
Delaware in order to affect an increase of the total number of shares of common stock, $0.0001 par value per share, authorized for issuance from 12,000,000 to a total of
24,000,000. Additionally, the Company is authorized to issue 714,286 shares of convertible preferred stock with a par value of $0.0001 per share.
Description of Common Stock
Each share of common stock has the right to one vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board
of directors.
Description of Series B Preferred Stock
On October 18, 2016, the Company’s board of directors approved, and the Company entered into, a Section 382 rights agreement, or the Rights Agreement, with
Computershare Inc., or the Rights Agent. The Rights Agreement provides for a dividend of one preferred stock purchase right, or a Right, for each share of common stock, par
value $0.0001 per share, of the Company outstanding on November 1, 2016, or the Record Date. Each Right entitles the holder to purchase from the Company one one-
thousandth of a share of Series B Preferred Stock, par value $0.0001 per share, or the Preferred Stock, for a purchase price of $10.00, subject to adjustment as provided in the
Rights Agreement. The description and terms of the rights are set forth in the Rights Agreement.
In connection with the adoption of the Rights Agreement, the Company’s board of directors adopted a Certificate of Designation of Series B Preferred Stock. The Certificate of
Designation was filed with the Secretary of State of the State of Delaware and became effective on October 18, 2016.
The Company’s board of directors adopted the Rights Agreement to protect shareholder value by guarding against a potential limitation on the Company’s ability to use its net
operating loss carryforwards, or NOLs, and other tax benefits, which may be used to reduce potential future income tax obligations. The Company has experienced and
continue to experience substantial operating losses, and under the Internal Revenue Code of 1986, as amended, and rules promulgated thereunder, the Company may “carry
forward” these NOLs and other tax benefits in certain circumstances to offset any current and future earnings and thus reduce our income tax liability, subject to certain
requirements and restrictions. To the extent that the NOLs and other tax benefits do not otherwise become limited, the Company believes that it will be able to carry forward a
significant amount of NOLs and other tax benefits, and therefore these NOLs and other tax benefits could be a substantial asset to the Company. However, if the Company
experiences an “ownership change,” as defined in Section 382 of the Code, its ability to use its NOLs and other tax benefits will be substantially limited. Generally, an
ownership change would occur if our shareholders who own, or are deemed to own, 5% or more of the Company’s common stock increase their collective ownership in the
Company by more than 50% over a rolling three-year period.
NOTE 13 – 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.”
F-19
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.
The plan expired in 2016 in accordance with its term.
At March 31, 2021, there were no shares available for future issuance.
2011 Stock Plan
On September 12, 2011, upon recommendation of the board, the stockholders approved the Company’s 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan is effective
as of June 21, 2012.
The 2011 Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, and the grant of non-statutory stock
options and stock purchase rights to employees, non-employee directors, advisors and consultants. The 2011 Plan also permits the grant of stock appreciation rights, stock units
and restricted stock.
The board has initially authorized 9,508 of the Company’s common stock for issuance under the 2011 Plan, in addition to automatic increases provided for in the 2011 Plan
through April 1, 2021. The number of shares of the Company’s common stock reserved for issuance under the 2011 Plan will automatically increase, with no further action by
the stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 15% of the outstanding shares of the Company’s common stock on the last day of
the immediately preceding year, or (ii) an amount approved by the Company’s board of directors.
Options issued under the 2011 Plan will generally have a ten-year term.
In accordance with the 2011 Plan, the stated exercise price of an employee incentive stock option shall not be less than 100% of the estimated fair market value of a share of
common stock on the date of grant, and the stated exercise price of an non-statutory option shall not be less 85% of the estimated fair market value of a share of common stock
on the date of grant, as determined by the board of directors. An employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of
the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue
Code.
Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2011 Plan. No participant
in the 2011 Plan can receive option grants, stock appreciation rights, restricted shares, or stock units for more than 2,381 shares in the aggregate in any calendar year. As
provided under the 2011 Plan, the aggregate number of shares authorized for issuance as awards under the 2011 Plan automatically increases on April 1 of each year by in an
amount equal to the lesser of (i) 15% of the outstanding shares on the last day of the immediately preceding year, or (ii) an amount determined by the board. During the year
ended March 31, 2019, the board of directors approved an increase of 102,863 shares authorized for issuance. During the year ended March 31, 2020, the board of directors
approved an increase of 197,450 shares authorized for issuance.
The plan expired on September 12, 2021 in accordance with its term.
F-20
At March 31, 2022, there were no shares available for future issuance.
2016 Stock Plan
On September 2, 2016, upon recommendation of the board, the stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan is effective
as of September 2, 2016 and has a ten year term.
The 2016 Plan provides for the grant of options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation
rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.
Options issued under the 2016 Plan will generally have a ten-year term.
In accordance with the 2016 Plan, the stated exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated
fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes of outstanding
stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal
Revenue Code.
Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2016 Plan. No participant
in the 2016 Plan can receive more than 11,112 option grants, or other awards with respect to more than 13,334 shares in the aggregate in any calendar year.
The board has authorized 44,445 of the Company’s common stock for issuance under the 2016 Plan, in addition to automatic increases provided for in the 2016 Plan through
April 1, 2026. The number of shares of the Company’s common stock reserved for issuance under the 2016 Plan will automatically increase, with no further action by the
stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 8% of the outstanding shares of the Company’s common stock on the last day of the
immediately preceding year, or (ii) an amount determined by the Company’s board of directors. During the year ended March 31, 2019, the board of directors approved an
increase of 4,860 shares authorized for issuance. During the year ended March 31, 2020, the board of directors approved an increase of 105,306 shares authorized for issuance.
During the year ended March 31, 2022, the board of directors approved an increase of 167,432 shares authorized for issuance.
At March 31, 2023 there were 169,467 shares available for future issuance.
2021 Stock Plan
On September 21, 2021, upon recommendation of the board, the stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan is
effective as of September 21, 2021 and has a five year term.
The 2021 Plan provides for the grant of options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation
rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.
Options issued under the 2021 Plan will generally have a ten-year term.
F-21
In accordance with the 2021 Plan, the stated exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated
fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes of outstanding
stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal
Revenue Code.
Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2021 Plan.
The board has authorized 1,000,000 shares of the Company’s common stock for issuance under the 2021 Plan.
At March 31, 2023, there were 667,126 shares available for future issuance.
Stock-Based Compensation
The Company issues service, performance and market-based stock options to employees and non-employees. The Company estimates the fair value of service and performance
stock option awards using the Black-Scholes option pricing model. The Company estimates the fair value of market-based stock option awards using a Monte-Carlo simulation.
Compensation expense for stock option awards is amortized on a straight-line basis over the awards’ vesting period. Compensation expense includes the impact of forfeitures as
they are incurred.
The expected term of the stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using
the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla” options. The expected stock price volatility for the
Company’s stock options was determined by using an average of the historical volatilities of the Company. The Company will continue to analyze the stock price volatility and
expected term assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption is based on the U.S.
Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history
and expectation of dividend payouts.
The Company estimated the fair value of employee and non-employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is
being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair value of employee stock options was estimated using the following
weighted-average assumptions:
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
F-22
Year Ended March 31,
2023
2022
1.09
6.00 yrs
3.92%
0.00%
110.88%
0.92
$
$
4.60
6.00 yrs
1.60%
0.00%
123.27%
4.03
$
$
Share-based awards compensation expense is as follows:
Cost of revenues
Research and development
Selling, general and administrative
Total stock-based compensation
Year Ended March 31,
2023
2022
$
$
–
–
669,000
669,000
$
$
–
–
382,000
382,000
At March 31, 2023, there were unrecognized compensation costs of $562,000 related to stock options which is expected to be recognized over a weighted-average amortization
period of 1.83 years.
A tax benefit of $20,000 has been recognized relating to stock-based compensation as a result of non-qualified stock options and restricted stock exercised during the year
ending March 31, 2023. In addition, the stock-based compensation deferred tax asset has been increased by $102,000 primarily related to the expiration of stock compensation
grants.
Stock-Based Award Activity
Stock-based awards outstanding at March 31, 2023 under the various plans are as follows:
Plan
2006 Plan
2011 Plan
2016 Plan
2021 Plan
Stock-based awards available for grant as of March 31, 2023
Stock options award activity is as follows:
Outstanding at April 1, 2022
Options granted
Options exercised
Options forfeited
Options expired
Outstanding at March 31, 2023
Exercisable at March 31, 2023
Stock Options
Unvested
Restricted Stock
Total
2,454
89,937
164,136
308,500
565,027
–
–
–
–
–
2,454
89,937
164136
308,500
565,027
836,593
Number of
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Contractual Term
Aggregate
Intrinsic
Value
12.09
1.11
–
5.33
20.38
8.84
17.23
466,234
191,082
–
(68,525)
(23,764)
565,027
236,068
$
$
$
F-23
8.41
7.20
$
$
0.98
0.98
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 $0.98 and $4.01 per share at March 31, 2023 and 2022, respectively.
Restricted stock award activity is as follows:
Unvested restricted stock awards outstanding at April 1, 2022
Restricted stock awards granted
Restricted stock awards vested
Unvested restricted stock awards outstanding at March 31, 2023
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 14 – Income Taxes
Number of
Shares
–
12,187
(12,187)
–
$
$
Weighted
Average Award
Date Fair Value
per Share
–
1.71
(1.71)
–
The income tax provision (benefit) is based on the following loss before income taxes, which are from domestic sources and foreign: Income (loss) before income taxes:
Domestic
Foreign
Year Ended March 31,
2023
2022
$
$
(988,000)
(4,194,000)
(5,182,000)
$
$
(3,516,000)
(1,883,000)
(5,399,000)
The federal, state and foreign income tax provisions for the years ended March 31, 2023 and 2022 are summarized as follows:
Current:
State
Foreign
Current Income Tax Expense
Deferred:
Federal
State
Foreign
Total deferred income tax
Year Ended March 31,
2023
2022
$
$
2,000
–
2,000
–
–
(35,000)
(33,000)
$
$
8,000
469,000
477,000
–
–
(809,000)
(332,000)
F-24
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
Foreign earnings taxed at different rates
Foreign tax true-up
Effect of permanent differences
Effect of intercompany interest permanent differences
True-up of state deferred assets
Total effective rate
Change in valuation allowance
Totals
The tax effects of temporary differences that give rise to significant components of our deferred tax assets consist of::
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credit carryforwards
Stock-based compensation
Reserves and accruals
Other deferred tax assets
Lease liability
Gross deferred tax assets
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Fixed assets
Prepaid expenses
Right of Use asset
Gross deferred tax liabilities
Net deferred tax assets
Year Ended March 31,
2023
2022
21.0%
0.8%
6.5%
–
(7.5%)
(16.1%)
1.3%
6.0%
(5.4%)
0.6%
21.0%
5.7%
3.7%
–
(3.0%)
(12.3%)
(25.6%)
(10.5%)
16.7%
6.2%
March 31,
2023
2022
28,558,000
1,800,000
739,000
795,000
20,000
24,000
31,936,000
$
$
28,224,000
1,850,000
309,000
1,336,000
–
63,000
31,782,000
(30,809,000)
(30,613,000)
1,127,000
$
1,169,000
(16,000)
(138,000)
(24,000)
(178,000)
949,000
$
(17,000)
(260,000)
(63,000)
(339,000)
829,000
$
$
$
$
As of March 31, 2022, the Company had net operating loss carryforwards for Federal, State and Foreign income tax purposes of approximately $117.0 million, $42.3 million
and $1.6 million, respectively. Due to the Tax Cuts and Job Act, Federal NOLs generated after March 31, 2018 have an indefinite life. Federal NOL generated on and before
March 31, 2017 will begin to expire 2024, if not utilized. State NOLs will begin to expire in the year 2026 if not utilized. Foreign NOLs will carry over for 10 years.
F-25
As of March 31, 2022, the Company had Federal and California research credit carryforwards of approximately $1 million and $790,000, respectively. The Federal research
credits will begin to expire in 2024 while the California research credits have no expiration date.
Section 382 of the Internal Revenue Code limits the use of the Federal net operating losses in certain situations where changes occur in stock ownership of a company. If the
Company should have an ownership change of more than 50% of the value of the Company's capital stock, utilization of the carryforwards could be restricted. The Company is
not aware of any changes in ownership that would result in a change in control under Internal Revenue Code section 382.
The Company, after considering all available evidence, fully reserved against all deferred tax assets in the U.S. since it is more likely than not such benefits will not be realized
in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future
benefit.
The Company has filed tax returns for federal, state and foreign jurisdictions. The Company’s evaluation of uncertain tax matters was performed for tax years ended through
March 31, 2023. Generally, the Company is subject to audit for the years ended March 31, 2022, 2021 and 2020. 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 result in a material change to its financial position.
NOTE 15 – 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 $101,000 and $51,000 for the years ended March 31, 2023 and 2022, respectively.
NOTE 16 – Revenue Disaggregation
The Company generates product revenues from products which are sold into the human and animal healthcare markets, and the Company generates service revenues from
laboratory testing services which are provided to medical device manufacturers.
The following table presents the Company’s disaggregated revenues by source:
Product
Human Care
Animal Care
Total Product Revenue
Service/Royalty
Total
Year Ended March 31,
2023
2022
$
$
9,426,000
2,500,000
11,926,000
1,346,000
13,272,000
$
$
9,010,000
3,169,000
12,179,000
449,000
12,628,000
F-26
The following table shows the Company’s revenues by geographic region:
United States
Europe
Asia
Latin America
Rest of the World
Total
Year Ended March 31,
2023
2022
$
$
3,428,000
4,051,000
2,451,000
2,383,000
959,000
13,272,000
$
$
3,807,000
3,410,000
2,350,000
2,095,000
966,000
12,628,000
The Company’s service revenues in Latin America amounted to $1,227,000 and $349,000 for the years ended March 31, 2023 and 2022, respectively.
F-27
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 not
effective as of March 31, 2023.
Notwithstanding the material weaknesses, management believes the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all
material respects, the Company’s financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted
accounting principles.
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)
and 15d-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 not effective as of March 31, 2023. We concluded this because of the errors we found in our Form 10-Q for the quarter ended June 30, 2020 that were restated in our Form
10-Q/A filed on November 17, 2020. We have determined that there were inadequate spreadsheet controls, a lack of separation of duties with preparation and review of the
reported numbers, and inadequate analysis of revenue reporting among other things. We also determined during the quarter ended March 31, 2021 that there were errors related
to income tax withholding accruals that required a revision in these financial statements. We believe we have taken steps to correct this, but the controls have not been tested
and have not been working for a sufficient period of time to remove this weakness.
Management’s Remediation Measures
Management, with oversight from the Audit Committee of our Board of Directors, is actively engaged in remediation efforts to address the material weaknesses identified in the
management’s evaluation of internal controls and procedures. Management has taken a number of actions to remediate the material weaknesses described above, including the
following:
·
·
·
·
·
Improved monitoring and risk assessment activities to address these control deficiencies.
Separated the preparation of the financial reports from review of the financial reports.
Implemented additional process-level controls over revenue recognition of new contracts.
Developed and delivered further internal controls training to individuals associated with these control deficiencies and enhanced training provided to all personnel
who have financial reporting or internal control responsibilities in these areas. The training includes a review of individual roles and responsibilities related to
internal controls and of proper oversight and reemphasizes the importance of completing the control procedures.
Did a detailed review of income taxes and our intercompany agreements which uncovered the fact that we should be accruing withholding taxes that will be paid to
Mexico when intercompany interest and Technical Assistance payments are made to Mexico from the United States, and that we will not be eligible for a tax credit in
the United States because of our Net Operating Loss positions.
43
These improvements are targeted at strengthening our internal control over financial reporting and remediating the material weaknesses. We remain committed to an effective
internal control environment, and management believes that these actions and the improvements management expects to achieve as a result will effectively remediate the
material weaknesses. However, the material weaknesses in our internal control over financial reporting will not be considered remediated until the controls operate for a
sufficient period of time and management has concluded through testing that these controls operate effectively. As of the date of filing this Form 10-K, management is in the
process of testing and evaluating these additional controls to determine whether they are operating effectively. As announced in July 2022, we have closed our Woodstock,
Georgia office and consolidated operations in Boulder, Colorado. Our Chief Financial Officer resigned in connection with the consolidation but assisted with this transition
through November 18, 2022 and currently serves as our Interim Chief Financial Officer. We have hired appropriate accounting staff in Colorado to establish effective internal
controls and processes.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended March 31, 2023 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. We have not finished our testing our remediated controls and sufficient time has not elapsed to make the determination these
controls are operating effectively.
ITEM 9B. Other Information
Employment Agreements with our Chief Executive Officer and Chief Operating Officer
Effective June 16, 2023, we entered into an amended and restated employment agreement with our Chief Executive Officer, Amy Trombly. The amended and restated
agreement provides that, in the event of termination upon change of control either without cause or for good reason, Ms. Trombly is entitled to receive, in addition to the other
benefits described therein, a lump sum severance equal to one and a half times her base salary and one and a half times her target annual bonus. All other material terms of the
amended and restated agreement remain unchanged from her prior employment agreement.
Also effective June 16, 2023, we amended and restated our employment agreement with Bruce Thornton, our Chief Operating Officer. Under the amended and restated
agreement, Mr. Thornton will serve as Executive Vice President and Chief Operating Officer of the Company. Mr. Thornton will no longer receive a monthly car allowance;
however, his base salary is adjusted to include such amount. The amended and restated agreement also provides that, in the event of termination upon change of control either
without cause or for good reason, Mr. Thornton is entitled to receive, in addition to the other benefits described therein, to a lump sum severance equal to one and a half times
his base salary and one and a half times his target annual bonus. The agreement further provides that upon termination for any reason, Mr. Thornton’s outstanding and vested
equity awards shall remain exercisable for 18 months following termination. Either party may terminate the employment agreement for any reason upon at least 60 days prior
written notice. All other material terms of his amended and restated agreement remain unchanged from his prior employment agreement.
The foregoing descriptions of the employment agreements are not complete and are qualified in their entirety by reference to the full text of the employment agreements, copies
of which are filed herewith as Exhibits 10.38 and 10.39 to this Annual Report on Form 10-K and are incorporated herein by reference.
Bonus Grants
Effective June 16, 2023, the Compensation Committee of the Board of Directors approved annual bonus awards of $162,500 for Ms. Trombly and $150,000 for Mr. Thornton.
Equity Awards
On June 16, 2023, the Compensation Committee of the Board of Directors approved an equity award of 100,000 shares of the Company’s common stock to each of Ms.
Trombly and Mr. Thornton, to be issued to on June 30, 2023, at a valuation based on the five day weighted trailing average of the Company’s stock price on the day of grant. In
addition, the Compensation Committee also approved a one-time cash payment by the Company as reimbursement for estimated taxes payable with respect to such equity
awards.
44
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 2023 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, 2023 (the “2023 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 2023 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, 5445 Conestoga Court, Suite 150, Boulder, Colorado,
80301.
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.
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, 5445 Conestoga Court, Suite 150,
Boulder, Colorado, 80301. 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.
45
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to the 2023 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 2023 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 2023 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 2023 Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the 2023 Proxy Statement.
46
ITEM 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) Financial Statements
PART IV
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.
(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
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).
47
3.12
4.1
4.2
4.3
4.4
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†
Certificate of Amendment of Restated Certificate of Incorporation of Sonoma Pharmaceuticals, Inc., as amended, effective June 19, 2019 (included as exhibit
3.1 to the Company’s Current Report on Form 8-K filed June 19, 2019, and incorporated herein by reference).
Specimen Common Stock Certificate (included as exhibit 4.1 to the Company’s Annual Report on Form 10-K filed June 28, 2017, and incorporated herein by
reference).
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 Placement Agent Warrant granted to Dawson James Securities, Inc. and The Benchmark Company, LLC in connection with the March 2, 2018 public
offering, dated March 6, 2018 (included as exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 6, 2018, and incorporated herein by
reference).
Form of Placement Agent Warrant granted to Dawson James Securities, Inc. in connection with the November 2019 public offering (included as exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on November 29, 2019, and incorporated herein by reference).
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 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 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).
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).
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).
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).
2016 Equity Incentive Plan (included as exhibit A in the Company’s Definitive Proxy Statement on Schedule 14A filed July 29, 2016, and incorporated herein
by reference).
Securities Purchase Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and Montreux Equity Partners V, L.P., dated March 1, 2018
(included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 6, 2018, and incorporated herein by reference).
Exclusive License and Distribution Agreement entered into by and between Sonoma Pharmaceuticals, Inc. and EMS.S.A., dated June 4, 2018 (included as
exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 5, 2018, and incorporated herein by reference).
48
10.14
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+⸸
10.32+⸸
Warrant Agency Agreement entered into by and among Sonoma Pharmaceuticals, Inc., Computershare, Inc. and Computershare Trust Company, N.A., dated
November 21, 2018 (included as exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 21, 2018, and incorporated herein by
reference).
Asset Purchase Agreement dated May 14, 2019, between Sonoma Pharmaceuticals, Inc. and Petagon, Ltd. (included as exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on May 22, 2019, and incorporated herein by reference).
Asset Purchase Agreement dated February 21, 2020, between Sonoma Pharmaceuticals, Inc. and MicroSafe Group, DMCC (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on February 27, 2020, and incorporated herein by reference.)
License, Distribution and Supply Agreement by and between Sonoma Pharmaceuticals, Inc. and Brill International, S.L. dated May 19, 2020 (included as
exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 26, 2020, and incorporated herein by reference.)
Consulting Agreement between the Company and Dr. Robert Northey, dated May 30, 2020. (included as exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on June 4, 2020, and incorporated herein by reference.)
Asset Purchase Agreement between the Company and Infinity Labs SD, Inc., dated June 24, 2020 (included as exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on June 30, 2020, and incorporated herein by reference.)
Woodstock Lease Agreement between the Company and Fowler Crossing Partners, LP, dated October 1, 2018.
Licensing Agreement between Sonoma Pharmaceuticals, Inc. and MicroSafe Group, effective July 27, 2020 (included as exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on August 6, 2020, and incorporated herein by reference).
Licensing and Distribution Agreement between Sonoma Pharmaceuticals, Inc. and Gabriel Science, LLC, effective December 14, 2020 (included as exhibit
10.1 to the Company’s Current Report on Form 8-K filed on December 17, 2020, and incorporated herein by reference).
Exclusive Supply and Distribution Agreement between the Company and EMC Pharma, LLC, dated March 26, 2021 (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on March 31, 2021, and incorporated herein by reference).
Amended and Restated Employment Agreement by and between the Company and Amy Trombly, dated July 22, 2022 (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on July 22, 2022, and incorporated herein by reference).
Employment Agreement by and between the Company and Jerry Dvonch, dated July 1, 2021 (included as exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on July 6, 2021, and incorporated herein by reference).
Amended and Restated Employment Agreement by and between the Company and Bruce Thornton, dated July 22, 2022 (included as exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on July 22, 2022, and incorporated herein by reference).
Offer letter to Chad White dated September 8, 2022 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 7, 2022, and
incorporated herein by reference).
At-The-Market Offering Agreement, by and between the Company and H.C. Wainwright & Co., LLC, dated July 30, 2021 (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on July 30, 2021, and incorporated herein by reference).
2021 Equity Incentive Plan (included as appendix on the Company’s proxy statement filed on July 29, 2021 and incorporated herein by reference).
Exclusive License and Distribution Agreement between the Company and Dyamed Biotech Pte Ltd., dated November 4, 2021 (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on November 9, 2021, and incorporated herein by reference).
Non-Exclusive Distribution and Supply Agreement between the Company and Salus Medical, LLC dated January 19, 2022 (included as exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 20, 2022, and incorporated herein by reference).
Exclusive License and Distribution Agreement between Sonoma Pharmaceuticals, Inc. and Anlicare International dated January 18, 2022 (included as exhibit
10.2 to the Company’s Current Report on Form 8-K filed on January 20, 2022, and incorporated herein by reference).
49
10.33
10.34
10.35+⸸
10.36
10.37
10.38*
10.39*
14.1
21.1
31.1*
31.2*
32.1*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
At-The-Market Offering Agreement, by and between the Company and Ladenburg Thalmann & Co. Inc., dated December 23, 2022 (included as exhibit 1.1 to
the Company’s Current Report on Form 8-K filed on December 23, 2022, and incorporated herein by reference).
Sonoma Pharmaceuticals, Inc. Non-Employee Director Compensation Program and Stock Ownership Guidelines, revised by the Board of Directors on
December 29, 2022 (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 30, 2022, and incorporated herein by
reference).
Exclusive Distribution and Supply Agreement, dated January 26, 2023, by and between Sonoma Pharmaceuticals, Inc. and Daewoong Pharmaceutical Co.,
Ltd. (included as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 31, 2023, and incorporated herein by reference).
Amendment to At-The-Market Offering Agreement, by and between the Company and Ladenburg Thalmann & Co. Inc., dated February 24, 2023 (included as
exhibit 1.1 to the Company’s Current Report on Form 8-K filed on February 24, 2023, and incorporated herein by reference).
Consulting Agreement, by and between the Company and Jerome Dvonch, dated April 7, 2023 (included as exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on April 13, 2023, and incorporated herein by reference).
Amended and Restated Employment Agreement by and between the Company and Amy Trombly, dated June 16, 2023.
Amended and Restated Employment Agreement by and between the Company and Bruce Thornton, dated June 16, 2023.
Code of Business Conduct (included as Exhibit 14.1 to the Company’s Current Report on Form 8-K filed on January 23, 2017, and incorporated herein by
reference).
List of Subsidiaries (included as Exhibit 21.1 to the Company’s Annual Report on Form 10-K on June 28, 2017, and incorporated herein by reference).
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.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted in inline XBRL, and included in exhibit 101).
*
†
⸸
+
Filed herewith.
Confidential treatment has been granted with respect to certain portions of this agreement.
Certain portions of the exhibit have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the
SEC upon request.
The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules
to the SEC upon request.
Copies of above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee, upon written request to: Chief Financial Officer,
Sonoma Pharmaceuticals, Inc., 5445 Conestoga Court, Suite 150, Boulder, Colorado 80301.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
ITEM 16. Form 10-K Summary.
None.
50
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.
SIGNATURES
Date: June 21, 2023
By:
Date: June 21, 2023
/s/ Amy Trombly
Amy Trombly
President and Chief Executive Officer,
(Principal Executive Officer)
/s/ Jerome Dvonch
Jerome Dvonch
Interim Chief Financial Officer
(Principal Financial and
Principal Accounting 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/ Amy Trombly
Amy Trombly
/s/ Jerome Dvonch
Jerome Dvonch
/s/ Jay Edward Birnbaum
Jay Edward Birnbaum
/s/ Philippe Weigerstorfer
Philippe Weigerstorfer
/s/ Jerry McLaughlin
Jerry McLaughlin
Title
President, Chief Executive Officer
(Principal Executive Officer)
Interim Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
Director
Director
Director
51
Date
June 21, 2023
June 21, 2023
June 21, 2023
June 21, 2023
June 21, 2023
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Exhibit 10.38
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between Amy Trombly (the “Executive”), and
Sonoma Pharmaceuticals, Inc., a Delaware corporation (the “Corporation”), as of June 16, 2023 (the “Effective Date”). This Agreement replaces that certain employment
agreement dated as of July 22, 2022, and entered into by and between the Executive and the Corporation.
RECITALS
WHEREAS, the Corporation desires that the Executive continue to be employed by the Corporation as its Chief Executive Officer and to serve as a member of the
Board of Directors of the Corporation, and to carry out the duties and responsibilities described below, all on the terms and conditions set forth herein;
WHEREAS, the Executive is willing to accept and continue such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and promises of the parties herein, the receipt and sufficiency of which
are hereby acknowledged by each of the parties, the Corporation and the Executive hereto agree as follows:
1. Employment and Duties.
1.1 Position. On the terms and subject to the conditions set forth herein, the Corporation agrees to employ Executive as its Chief Executive Officer until such time as
the employment relationship ends or is terminated by either Party pursuant to Section 2. Executive does hereby accept and agree to such employment, on the terms and
conditions expressly set forth in this Agreement. Executive shall also serve as a member of the Board of Directors of the Corporation (the “Board”) and may be required to
serve as an officer or director of any affiliate of the Corporation for no additional compensation.
1.2 Duties. During the Term of Employment (as defined in Section 2), Executive shall serve the Corporation as its Chief Executive Officer and as a member of the
Board of Directors of the Corporation. Executive and shall, without limitation and without limiting Executive’s other duties to the Corporation, and without limiting the
authority of the Corporation’s Board of Directors, be responsible for the general supervision, direction and control of the business and affairs of the Corporation and have such
other duties and responsibilities as the Board shall designate that are consistent with Executive’s position as Chief Executive Officer of the Corporation. Executive shall
perform all of such duties and responsibilities in accordance with the legal directives of the Board and in accordance with the practices and policies of the Corporation as in
effect from time to time throughout the Term of Employment (including, without limitation, the Corporation’s insider trading and ethics policies, as they may change from time
to time). While employed as Chief Executive Officer of the Corporation, Executive shall report exclusively to the Board. Throughout the Term of Employment, Executive shall
not serve on the boards of directors or advisory boards of any other entity, except for any wholly or majority owned subsidiaries of the Corporation, unless such service is
expressly approved by the Board.
1.3 No Other Employment; Minimum Time Commitment. Throughout the Term of Employment, the Executive shall both (i) devote substantially all of the Executive’s
business time, energy and skill to the performance of the Executive’s duties for the Corporation, and (ii) hold no other job. The Executive agrees that any investment or direct
involvement in, or any appointment to or continuing service on the board of directors or similar body of, any corporation or other entity, other than wholly or majority owned
subsidiaries of the Corporation, must be first approved in writing by the Corporation. The foregoing provisions of this Section 1.3 shall not prevent the Executive from
investing in non-competitive, publicly-traded securities to the extent permitted by Section 6(b).
1.4 No Breach of Contract. Executive hereby represents to the Corporation that the execution and delivery of this Agreement by the Executive and the Corporation and
the performance by the Executive of the Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any other agreement or policy to
which the Executive is a party or otherwise bound.
1
1.5 Place of Performance. The principal place of Executive’s employment shall be the Corporation’s offices located in Boulder, Colorado, though such principal place
of employment of the Executive may be moved from time to time upon mutual agreement by the Executive and the Corporation. The Executive agrees that the Executive will
be regularly present at the Corporation’s principal executive offices, or such other location as the parties may designate, and that the Executive may be required to travel from
time to time in the course of performing the Executive’s duties for the Corporation. The Corporation acknowledges that Executive’s principal place of residence is and will
remain during the Term of Employment, Colorado.
2. At-Will Employment, Term of Employment. The “Term of Employment” shall commence on the Effective Date, and shall continue in full force until the Termination Date
pursuant to Section 5.9. The Parties agree that Executive’s employment with the Corporation will be “at-will” employment and may be terminated at any time with or without
cause in accordance with Section 5. This Agreement shall govern the terms of Executive’s employment hereunder on and after the Effective Date.
3. Compensation.
3.1 Base Salary. As of the Effective Date and during the Term of Employment, the Corporation shall pay to the Executive a base salary at the rate of $27,083.33 per
month ($325,000 per annum), subject to increase (but not decrease) by the Board (the “Base Salary”). The Executive’s Base Salary shall be paid in accordance with the
Corporation’s regular payroll practices in effect from time to time, but no less frequently than monthly.
3.2 Annual Bonus. For each fiscal year during the Term of Employment, Executive shall be eligible to receive a target annual bonus (the “Annual Bonus”) of 50% of
Base Salary, up to 120% of the target Annual Bonus. The decision to provide any annual bonus and the amount and terms of any Annual Bonus shall be in the sole and absolute
discretion of the Compensation Committee of the Board. Executive must be employed by the Corporation on the day that any Annual Bonus is paid. The Board of Directors or
the Compensation Committee, as appropriate, may in its sole discretion agree to pay a pro rata or full Annual Bonus, and if such Annual Bonus is granted, then determine the
amount, form and payment schedule.
3.3 Equity. During the Term of Employment, Executive shall be eligible to participate in the Corporation’s equity-based incentive programs in effect at the time,
subject to the terms of such plans, as determined by the Board or the Compensation Committee, in its sole discretion.
3.4 Indemnification. (a) In the event that the Executive is made a party or threatened to be made a party to any action, suit, or proceeding, whether civil, criminal,
administrative or investigative (a “Proceeding”), other than any Proceeding initiated by the Executive or the Corporation related to any contest or dispute between the Executive
and the Corporation or any of its affiliates with respect to this Agreement or the Executive’s employment hereunder, by reason of the fact that the Executive is or was a director
or officer of the Corporation, or any affiliate of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member, employee or agent of
another corporation or a partnership, joint venture, trust or other enterprise, the Executive shall be indemnified and held harmless by the Corporation to the maximum extent
permitted under applicable law and the Corporation’s articles and bylaws, as may be amended from time to time, from and against any liabilities, costs, claims and expenses,
including all costs and expenses incurred in defense of any Proceeding (including attorneys’ fees).
(b) During the Term of Employment and for a period of six (6) years thereafter, the Corporation or any successor to the Corporation shall purchase and maintain, at its
own expense, directors’ and officers’ liability insurance providing coverage to the Executive on terms that are no less favorable than the coverage provided to other directors
and similarly situated executives of the Corporation.
3.5 Clawback Provisions. Any incentive-based compensation, or any other compensation, paid to the Executive pursuant to this Agreement or any other agreement or
arrangement with the Corporation which is subject to recovery under any law, government regulation or stock exchange listing requirement, will be subject to such deductions
and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Corporation
pursuant to any such law, government regulation or stock exchange listing requirement). The Corporation will make any determination for clawback or recovery in accordance
with any applicable law or regulation.
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4. Benefits.
4.1 Health and Welfare. During the Term of Employment, Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs
made available by the Corporation to the Corporation’s senior-level employees generally, as such plans or programs may be in effect from time to time.
4.2 Reimbursement of Business Expenses. Executive is authorized to incur reasonable expenses in carrying out Executive’s duties for the Corporation under this
Agreement and entitled to reimbursement for all such expenses Executive incurs during the Term of Employment in connection with carrying out the Executive’s duties for the
Corporation, as approved by the Corporation’s Chief Financial Officer and subject to the Corporation’s reasonable expense reimbursement policies in effect from time to time.
Such expenses may include but are not limited to travel, lodging and meals. The Corporation shall reimburse Executive to the extent required by the preceding sentence.
4.3 Vacation and Other Leave. During the Term of Employment, Executive shall accrue and be entitled to take paid vacation of 4 weeks per annum pro-rated in
accordance with the Corporation’s standard vacation policies in effect from time to time, including the Corporation’s policies regarding vacation accruals, provided however,
that Executive shall be able to accrue a maximum of two times of the annual vacation time. Executive shall also be entitled to all other holiday and leave pay generally
available to all other employees of the Corporation.
5. Termination.
5.1. Termination. The Term of Employment and Executive’s employment hereunder may be terminated by the Corporation or by Executive upon sixty (60) days’
written notice at any time and for any reason, for or without cause, for or without good reason, or upon Death of the Executive. Upon termination of Executive’s employment
during the Term of Employment, Executive (or the Executive’s estate and/or beneficiaries, as the case may be) shall be entitled to the compensation and benefits describe in this
Section 5 and shall have no further rights to any compensation or any other benefits from the Corporation or any of its affiliates. Notwithstanding any other provision contained
herein, all payments made in connection with Executive’s Death shall be provided in a manner which is consistent with federal and state law. The Corporation may deduct from
all payments made hereunder, all applicable taxes and other appropriate deductions.
5.2. Definitions. For purposes of this Agreement:
(a) “Accrued Amounts” shall mean:
(i) any accrued but unpaid Base Salary and accrued but unused vacation which shall be paid in the next regularly scheduled payroll following one (1) week after
termination; and
(iii) reimbursement for unreimbursed business expenses properly incurred by the Executive, which shall be subject to and paid in accordance with the
Corporation’s expense reimbursement policy.
(b) “Change in Control” shall mean the occurrence of any of the following after the Effective Date:
(i) one person (or more than one person acting as a group) acquires ownership of stock of the Corporation that, together with the stock held by such person or
group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation; provided that, a Change in Control shall not occur if any
person (or more than one person acting as a group) owns more than 50% of the total fair market value or total voting power of the Corporation’s stock and acquires additional
stock;
(ii) a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a
majority of the Board before the date of appointment or election; or
3
(iii) the sale of all or substantially all of the Corporation’s assets.
Notwithstanding the foregoing, a Change in Control shall not occur unless such transaction constitutes a change in the ownership of the Corporation, a change
in effective control of the Corporation, or a change in the ownership of a substantial portion of the Corporation’s assets under Section 409A.
For purposes of the definition of “Change of Control”, the following definitions shall be applicable:
(i) The term “person” shall mean any individual, corporation or other entity and any group as such term is used in Section 13(d) (3) or 14(d) (2) of the Exchange
Act.
(ii) Any person shall be deemed to be the beneficial owner of any shares of capital stock of the Corporation:
a. which that person owns directly whether or not of record, or
b. which that person has the right to acquire pursuant to any agreement or understanding or upon exercise of conversion rights, warrants, or options, or
otherwise, or
c. which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (b) above, by an “affiliate” or
“associate” (as defined in the rules of the Securities and Exchange Commission under the Securities Act of 1933, as amended) of that person, or
d. which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (b) above), by any other person
with which that person or her “affiliate” or “associate” (defined as aforesaid) has any agreement, arrangement, or understanding for the purpose of
acquiring, holding, voting or disposing of capital stock of the Corporation.
(iii) The outstanding shares of capital stock of the Corporation shall include shares deemed owned through application of clause (ii) (b), (c), and (d) above, but
shall not include any other shares which may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise, but which are not
actually outstanding.
(c) “Cause” shall mean:
(i) the Executive’s willful failure to perform Executive’s duties (other than any such failure resulting from incapacity due to physical or mental illness);
(ii) the Executive’s willful failure to comply with any valid and legal directive of the Board communicated to Executive in writing;
(iii) the Executive’s willful engagement in dishonesty, illegal conduct or gross misconduct, which is, in each case, materially injurious to the Company Group;
(iv) the Executive’s embezzlement, misappropriation or fraud, whether or not related to the Executive’s employment with the Corporation;
(v) the Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a
misdemeanor involving moral turpitude;
4
(vi) the Executive’s violation of a material policy of the Corporation that has been provided to Executive (documents made public on the Corporation’s website
or through filings with the U.S. Securities and Exchange Commission are deemed provide to the Executive);
(vii) the Executive’s willful unauthorized disclosure of Confidential Information (as defined below);
(viii) the Executive’s material breach of any material obligation under this Agreement or any other written agreement between the Executive and the
Corporation; or
(ix) any material failure by the Executive to comply with the Corporation’s written policies or rules, as they may be in effect from time to time during the
Employment Term, if such failure causes material, reputational or financial harm to the Corporation.
For purposes of this provision, no act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the
Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or upon the advice of counsel for the Corporation shall be conclusively presumed to be done, or omitted to
be done, by the Executive in good faith and in the best interests of the Corporation. In all cases the Corporation shall notify the Executive in writing of the basis for any for
Cause termination by providing a detailed description of the alleged facts and circumstances giving rise to Cause. In addition, with respect to clauses (i), (ii), (vi), (viii) and (ix)
Executive shall be given a period of at least 30 days to cure and only if Executive fails to cure within such time period will a termination be for Cause.
(d) “Disability” shall mean the Executive’s inability, due to physical or mental incapacity, to substantially perform her duties and responsibilities under this Agreement,
with or without reasonable accommodation, for 90 calendar days out of any three hundred sixty-five (365) calendar day period, but only if the Executive is considered disabled
within the meaning of Treasury Regulation section 1.409A-3(i)(4). Without limiting the circumstances in which the Executive may be determined to be disabled as defined in
Treasury Regulation section 1.409A-3(i)(4), the Executive will be presumed to be disabled if determined to be totally disabled by the Social Security Administration or if
determined to be disabled in accordance with a disability insurance program, provided the definition of disability applied under such disability insurance program complies with
the requirements of Treasury Regulation section 1.409A-3(i)(4). Any question as to the existence of the Executive’s Disability as to which the Executive and the Corporation
cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to the Executive and the Corporation. If the Executive and the
Corporation cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such
determination in writing. The determination of Disability made in writing to the Corporation and the Executive shall be final and conclusive for all purposes of this Agreement.
(e) “Good Reason” shall mean the occurrence of any of the following, in each case during the Employment Term without the Executive’s written consent:
(i) a reduction in the Executive’s then current Base Salary;
(ii) a relocation of the Executive’s principal place of employment by more than 50 miles, unless the new principal place of employment is closer to Executive’s
principal residence;
(iii) the Corporation’s failure to obtain an agreement from any successor to the Corporation to assume and agree to perform this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no succession had taken place, except where such assumption occurs by operation of law; or
(iv) a material, adverse change in the Executive’s title, authority, duties or responsibilities (other than temporarily while the Executive is physically or mentally
incapacitated or as required by applicable law).
5
The Executive cannot terminate his employment for Good Reason unless he has provided written notice to the Corporation of the existence of the circumstances
providing grounds for termination for Good Reason within 30 business days of the initial existence of such grounds and the Corporation has had at least 30 business days from
the date on which such notice is provided to cure such circumstances. If the Executive does not terminate his employment for Good Reason within 30 calendar days after the
expiration of the cure period, then the Executive will be deemed to have waived his right to terminate for Good Reason with respect to such grounds.
5.3. Termination for Cause or Without Good Reason. In case of termination by the Corporation for Cause or by the Executive without Good Reason, Executive shall be
entitled to the Accrued Amounts.
5.4. Termination without Cause or for Good Reason. In case of termination without Cause by the Corporation or for Good Reason by the Executive, Executive shall be
entitled to:
(a) the Accrued Amounts;
(b) subject to the Executive’s compliance with Sections 6 through 11 of this Agreement and her execution of a release of claims in favor of the Corporation, its
affiliates and their respective officers and directors in a form attached hereto (the “Release”) and such Release becoming effective within the applicable time period set forth in
the Release (the “Release Execution Period”), the Executive shall be entitled to receive a lump sum payment equal to one time the sum of the Executive’s annual Base Salary,
which shall be paid within 30 days following the Termination Date;
(c) upon determination by the Corporation’s Board of Directors or Compensation Committee, as appropriate, to be made in its sole discretion as to whether to grant
such bonus, a pro-rata Annual Bonus, and if such pro-rata Annual Bonus is granted, determine the amount, form and payment schedule. For the avoidance of doubt, Executive
shall not be entitled to any Annual Bonus solely for reason of termination, unless the Board of Directors or the Compensation Committee, as appropriate, in its sole discretion
awards a bonus to Executive;
(d) If the Executive timely and properly elects health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the
Corporation shall reimburse the Executive for the monthly COBRA premium paid by the Executive for herself and her dependents. Such reimbursement shall be paid to the
Executive on the 10th day of the month immediately following the month in which the Executive timely remits the premium payment (“COBRA Premium Reimbursements”).
The Executive shall be eligible to receive such COBRA Premium Reimbursement until the earliest of: (i) the six-month anniversary of the termination; (ii) the date the
Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive becomes eligible to receive substantially similar coverage
from another employer or other source. Notwithstanding the foregoing, if the Corporation’s making payments under this Section 5.4(d) would violate the nondiscrimination
rules applicable to non-grandfathered plans under the Affordable Care Act (the “ACA”), or result in the imposition of penalties under the ACA and the related regulations and
guidance promulgated thereunder), the parties agree to reform this Section 5.4(d) in a manner as is necessary to comply with the ACA;
(e) All outstanding time-based equity-based compensation awards granted to the Executive during the Term of Employment shall become fully vested; and
(f) All outstanding performance-based equity compensation awards granted to the Executive during the Term of Employment shall remain outstanding and shall vest
or be forfeited in accordance with the terms of the applicable award agreements, if the applicable performance goals are satisfied. The determination whether such performance
goals are satisfied shall be in the sole discretion of the Compensation Committee or the Board, as the case may be.
5.5. Termination upon Change in Control. Notwithstanding any other provision contained herein, if the Executive’s employment hereunder is terminated by the
Executive for Good Reason or without Cause (other than on account of the Executive’s death or Disability), in each case within three (3) months prior to or twelve (12) months
following a Change in Control, the Executive shall be entitled to receive:
6
(a) the Accrued Amounts;
(b) subject to the Executive’s compliance with Sections 6 through 11 of this Agreement and execution of a Release which becomes effective by the end of the Release
Execution Period, the Executive shall be entitled to receive a lump sum payment equal to 1.5 times the sum of the Executive’s annual Base Salary;
(c) 1.5 times the target Annual Bonus amount;
(d) If the Executive timely and properly elects health continuation coverage under COBRA, the Corporation shall reimburse the Executive for the monthly COBRA
premium paid by the Executive for herself and her dependents. Such reimbursement shall be paid to the Executive on the 10th day of the month immediately following the
month in which the Executive timely remits the premium payment. The Executive shall be eligible to receive such reimbursement until the earliest of: (i) the twelve-month
anniversary of the termination; (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive becomes
eligible to receive substantially similar coverage from another employer or other source. Notwithstanding the foregoing, if the Corporation’s making payments under
this Section 5.5(d) would violate the nondiscrimination rules applicable to non-grandfathered plans under the ACA, or result in the imposition of penalties under the ACA, the
parties agree to reform this Section 5.5(d) in a manner as is necessary to comply with the ACA;
(e) All outstanding time-based equity-based compensation awards granted to the Executive during the Term of Employment shall become fully vested; and
(f) All outstanding performance-based equity compensation awards granted to the Executive during the Term of Employment shall remain outstanding and shall vest
or be forfeited in accordance with the terms of the applicable award agreements, if the applicable performance goals are satisfied. The determination whether such performance
goals are satisfied shall be in the sole discretion of the Compensation Committee or the Board, as the case may be.
5.6 Release; Exclusive Remedy.
(a) The Executive agrees that the payments contemplated by this Section 5 shall constitute the exclusive and sole remedy for any termination of her employment and
the Executive covenants not to assert or to pursue any other remedies, at law or in equity, with respect to any termination of employment. The Corporation and Executive
acknowledge and agree that there is no duty of the Executive to mitigate damages under this Agreement. All amounts paid to the Executive pursuant to Section 5 shall be paid
without regard to whether the Executive has taken or takes actions to mitigate damages.
(b) As used herein, “Release” shall mean a written release, discharge and covenant not to sue entered into by the Executive in favor of the Corporation in the form as
in Exhibit A hereto.
5.7. Death or Disability.
(a) The Executive’s employment hereunder shall terminate automatically upon the Executive’s death during the Term of Employment, and the Corporation may
terminate the Executive’s employment on account of the Executive’s Disability consistent with applicable law. Executive will be eligible for any employee plans in place that
cover Disability and will be eligible for any employee benefits consistent with those plans.
(b) If the Executive’s employment is terminated during the Term of Employment on account of the Executive’s death or Disability, the Executive (or the Executive’s
estate and/or beneficiaries, as the case may be) shall be entitled to receive the Accrued Amounts. In addition, Executive’s spouse or partner and other dependents shall be
entitled to six months of COBRA Premium Reimbursements upon timely request to the Corporation for such benefits. All outstanding equity-based compensation awards
granted to the Executive during the Term of Employment shall become fully vested.
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5.8 Notice of Termination. Any termination of the Executive’s employment hereunder by the Corporation or by the Executive during the Term of Employment (other
than termination pursuant to Section 5.4 on account of the Executive’s death) shall be communicated by written notice of termination (the “Notice of Termination”) to the other
party hereto in accordance with Section 14(j). The Notice of Termination shall specify:
(a) The termination provision of this Agreement relied upon;
(b) To the extent applicable, the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provisions so indicated;
and
(c) The applicable Termination Date.
5.9 Termination Date. The Executive’s Termination Date shall be:
(a)
If the Executive’s employment hereunder terminates on account of the Executive’s death, the date of the Executive’s death;
(b) If the Executive’s employment hereunder is terminated on account of the Executive’s Disability, the date that it is determined that the Executive has a Disability;
(c)
If the Corporation terminates the Executive’s employment hereunder for Cause, the date the Notice of Termination is delivered to the Executive;
(d) If the Corporation terminates the Executive’s employment hereunder without Cause, the date specified in the Notice of Termination, which shall be no less than 30
calendar days following the date on which the Notice of Termination is delivered; provided that, the Corporation shall have the option to provide the Executive
with a lump sum payment equal to 60 calendar days’ Base Salary in lieu of such notice, which shall be paid in a lump sum on the Executive’s Termination Date
and for all purposes of this Agreement, the Executive’s Termination Date shall be the date on which such Notice of Termination is delivered; and
(e)
If the Executive terminates his employment hereunder with or without Good Reason, the date specified in the Executive’s Notice of Termination, which shall be
no less than 60 calendar days following the date on which the Notice of Termination is delivered.
Notwithstanding anything contained herein, the Termination Date shall not occur until the date on which the Executive incurs a Separation from Service within the meaning of
Section 409A.
5.10 Equity. Upon termination under this Section 5 for any reason, Executive’s outstanding and vested equity awards shall remain exercisable for 18 months following
termination, subject to the provisions of the Corporation’s equity incentive plans.
5.11 Resignation From Boards and Committees. Following any termination of Executive’s employment as Chief Executive Officer with the Corporation, Executive
agrees to resign, as of the date of such termination, from (i) each and every board of directors (or similar body, as the case may be) of the Corporation and each of its affiliates
on which Executive may then serve, including, but not limited to, the Board (and any committees thereof), and (ii) each and every office of the Corporation and each of its
affiliates that the Executive may then hold, and all positions that he may have previously held with the Corporation and any of its affiliates.
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5.12 Section 409A of the Internal Revenue Code.
(a) This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986 (“Section 409A”) and shall be construed and interpreted consistent
with that intent. In the event that any payment or benefit payable under Section 5 of this Agreement is not compliant with Section 409A and any taxes, penalties or interest are
imposed on the Executive under Section 409A as a result of such noncompliance (the “Section 409A Penalties”), the Corporation shall put the Executive in an after-tax
economic position equivalent to the position the Executive would have been in without the imposition of such Section 409A Penalties. Executive shall notify the Corporation in
writing of any claim by the Internal Revenue Service or state tax authorities that, if successful, would require the payment of any such Section 409A Penalties or related state
tax statutes. Executive’s right to be put in an equivalent after tax economic position is subject to the Executive providing such notification no later than ten (10) business days
after Executive is informed in writing of such claim. If the Corporation desires to contest such claim, Executive shall (i) cooperate with the Corporation in good faith in order to
effectively contest such claim and (ii) permit the Corporation to participate in any proceedings relating to such claim. The Corporation shall control all proceedings taken in
connection with such contest; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in
connection with such contest. This section shall also apply to any taxes, penalties, or interest imposed by any state that are calculated in a manner similar to taxes, penalties, or
interest imposed by Section 409A(a)(1)(B), including those amounts imposed by the State of Colorado tax laws and regulations.
(b) If and to the extent that any payment or benefit under this Agreement, or any plan or arrangement of the Corporation, is determined by the Corporation to constitute
“non-qualified deferred compensation” subject to Section 409A and is payable to the Executive by reason of the Executive’s termination of employment, then (a) such payment
or benefit shall be made or provided to the Executive only upon a “separation from service” as defined for purposes of Section 409A under applicable regulations (a
“Separation from Service”) and (b) if the Executive is a “specified employee” (within the meaning of Section 409A and as determined by the Corporation), such payment or
benefit shall not be made or provided before the date that is six (6) months after the date of the Executive’s Separation from Service (or the Executive’s earlier death). For the
purposes of clarity, the first payment thereof will include a catch-up payment covering the amount that would have otherwise been paid to the Executive during the period
between the termination of Executive’s employment and the first payment date but for the application of this provision, and the balance of the installments (if any) will be
payable in accordance with their original schedule.
(c) To the extent any expense reimbursement or in-kind benefit is determined to be subject to Section 409A, the amount of any such expenses eligible for
reimbursement or in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits provided in any other taxable year
(except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed after the last day of the calendar year following the
calendar year in which the Executive incurred such expenses, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for
another benefit.
(d) To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A, the provision will be read in such a manner so that all
payments hereunder comply with Section 409A. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the meaning of Section
409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under another provision of Section 409A. Payments
pursuant to this section are intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
6. Non-Competition.
The Executive acknowledges and recognizes the highly competitive nature of the businesses of the Corporation, the amount of sensitive and confidential information
involved in the discharge of the Executive’s position with the Corporation, and the harm to the Corporation that would result if such knowledge or expertise was disclosed or
made available to a competitor. Based on that understanding, the Executive hereby expressly agrees as follows:
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(a) As a result of the particular nature of the Executive’s relationship with the Corporation, in the capacities identified earlier in this Agreement, for the Term of
Employment, the Executive hereby agrees that Executive will not, directly or indirectly, (i) engage in any business for the Executive’s own account or otherwise derive any
personal benefit from any business that competes with the business of the Corporation or any of its affiliates (the Corporation and its affiliates are referred to, collectively, as the
“Company Group”), (ii) enter the employ of, or render any services to, any person engaged in any business that competes with the business of any entity within the Company
Group, (iii) acquire a financial interest in any person engaged in any business that competes with the business of any entity within the Company Group, directly or indirectly, as
an individual, partner, member, shareholder, officer, director, principal, agent, trustee or consultant, or (iv) interfere with business relationships (whether formed before or after
the Effective Date) between the Corporation, any of its respective affiliates or subsidiaries, and any customers, suppliers, officers, employees, partners, members or investors of
any entity within the Company Group. For purposes of this Agreement, businesses in competition with the Company Group shall include, without limitation, businesses which
any entity within the Company Group may conduct operations, and any businesses which any entity within the Company Group has specific plans to conduct operations in the
future and as to which the Executive is aware of such planning, whether or not such businesses have or have not as of that date commenced operations.
(b) Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or indirectly, own, solely as an investment, securities of any Person, other
than a business that competes with the business of the Company Group, which are publicly traded on a national or regional stock exchange or on the over-the-counter market if
the Executive (i) is not a controlling Person of, or a member of a group that controls, such Person, and (ii) does not, directly or indirectly, beneficially own one percent (1%) or
more of any class of securities of such Person. Executive may indirectly, through a mutual or exchange traded fund, own, solely as an investment, securities of a business that
competes with the business of the Company Group, which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is
not a controlling Person of, or a member of a group that controls, such Person, and (ii) does not, directly or indirectly, beneficially own one percent (1%) or more of any class of
securities of such business. For purposes of this Section 6(b), “Person” shall have the meaning ascribed to such terms in Section 3(a)(9) of the Exchange Act and used in
Sections 13(d) and 14(d) thereof, including a “group” as described in Section 13(d) thereof.
7. Confidential Information.
As a material part of the consideration for the Corporation’s commitment to the terms of this Agreement, the Executive hereby agrees that the Executive will not at any
time (whether during or after the Executive’s employment with the Corporation), other than in the course of the Executive’s duties hereunder, or unless compelled by lawful
process after written notice to the Corporation of such notice along with sufficient time for the Corporation to try and overturn such lawful process, disclose or use for the
Executive’s own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization,
entity or enterprise, any trade secrets, or other confidential data or information relating to customers, development programs, costs, marketing, trading, investment, sales
activities, promotion, credit and financial data, financing methods, or plans of any entity within the Company Group; provided, however, that the foregoing shall not apply to
information which is generally known to the industry or the public, other than as a result of the Executive’s breach of this covenant. The Executive further agrees that the
Executive will not retain or use for Executive’s own account, at any time, any trade names, trademark or other proprietary business designation used or owned in connection
with the business of any entity within the Company Group.
8. Proprietary Rights.
(a) Inventions. All inventions, policies, systems, developments or improvements conceived, designed, implemented and/or made by Executive, either alone or in
conjunction with others, at any time or at any place during the Term of Employment, whether or not reduced to writing or practice during such Term of Employment, which
directly or indirectly relate to the business of any entity within the Company Group, or which were developed or made in whole or in part using the facilities and/or capital of
any entity within the Company Group, shall be the sole and exclusive property of the Company Group. Executive shall promptly give notice to the Corporation of any such
invention, development, patent or improvement, and shall at the same time, without the need for any request by any person or entity within the Company Group, assign all of
Executive’s rights to such invention, development, patent and/or improvement to the Company Group. Executive shall sign all instruments necessary for the filing and
prosecution of any applications for, or extensions or renewals of, letters patent of the United States or any foreign country that any entity in the Company Group desires to file.
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(b) Work Product. Executive acknowledges and agrees that all writings, works of authorship, technology, inventions, discoveries, ideas and other work product of any
nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived or reduced to practice by the Executive individually or jointly with others during
the Term of Employment by the Corporation and relating in any way to the business or contemplated business, research or development of the Corporation (regardless of when
or where the Work Product is prepared or whose equipment or other resources is used in preparing the same) and all printed, physical and electronic copies, all improvements,
rights and claims related to the foregoing, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all rights in and to copyrights, trade
secrets, trademarks (and related goodwill), patents and other intellectual property rights therein arising in any jurisdiction throughout the world and all related rights of priority
under international conventions with respect thereto, including all pending and future applications and registrations therefor, and continuations, divisions, continuations-in-part,
reissues, extensions and renewals thereof (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the Corporation.
For purposes of this Agreement, Work Product includes, but is not limited to, Company Group information, including plans, publications, research, strategies,
techniques, agreements, documents, contracts, terms of agreements, negotiations, know-how, computer programs, computer applications, software design, web design, work in
process, databases, manuals, results, developments, reports, graphics, drawings, sketches, market studies, formulae, notes, communications, algorithms, product plans, product
designs, styles, models, audiovisual programs, inventions, unpublished patent applications, original works of authorship, discoveries, experimental processes, experimental
results, specifications, customer information, client information, customer lists, client lists, manufacturing information, marketing information, advertising information, and
sales information.
(c) Work Made for Hire; Assignment. All copyrightable work by Executive during the Term of Employment that relates to the business of any entity in the Company
Group is intended to be “work made for hire” as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Company Group. If the copyright to any
such copyrightable work is not the property of the Company Group by operation of the law, Executive will, without further consideration, assign to the Company Group all
right, title and interest in such copyrightable work and will assist the entities in the Company Group and their nominees in every way, at the Company Group’s expense, to
secure, maintain and defend for the Company Group’s benefit, copyrights and any extensions and renewals thereof on any and all such work including translations thereof in
any and all countries, such work to be and to remain the property of the Company Group whether copyrighted or not.
(d) Further Assurances; Power of Attorney. During and after the Term of Employment, Executive agrees to reasonably cooperate with the Corporation to (i) apply for,
obtain, perfect and transfer to the Company Group the Work Product as well as an Intellectual Property Right in the Work Product in any jurisdiction in the world; and (ii)
maintain, protect and enforce the same, including, without limitation, executing and delivering to the Corporation any and all applications, oaths, declarations, affidavits,
waivers, assignments and other documents and instruments as shall be requested by the Corporation. Executive hereby irrevocably grants the Corporation power of attorney to
execute and deliver any such documents on Executive’s behalf in the Executive’s name and to do all other lawfully permitted acts to transfer the Work Product to the
Corporation and further the transfer, issuance, prosecution and maintenance of all Intellectual Property Rights therein, to the full extent permitted by law, if Executive does not
promptly cooperate with the Corporation’s request (without limiting the rights the Corporation shall have in such circumstances by operation of law). The power of attorney is
coupled with an interest and shall not be affected by Executive’s subsequent incapacity.
(e) No License. Executive understands that this Agreement does not, and shall not be construed to, grant the Executive any license or right of any nature with respect
to any Work Product or Intellectual Property Rights or any Confidential Information, materials, software or other tools made available to the Executive by the Corporation.
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9. Anti-Solicitation.
In light of the amount of sensitive and confidential information involved in the discharge of the Executive’s duties, and the harm to the Corporation that would result if
such knowledge or expertise were disclosed or made available to a competitor, and as a reasonable step to help protect the confidentiality of such information, the Executive
promises and agrees that during the Term of Employment and for a period of two (2) years thereafter, the Executive will not use the Corporation’s confidential information to,
directly or indirectly, individually or as a consultant to, or as an employee, officer, shareholder, director or other owner or participant in any business, influence or attempt to
influence the customers, vendors, suppliers, joint venturers, associates, consultants, agents, or partners of any entity within the Company Group, either directly or indirectly, to
divert their business away from the Company Group, to any individual, partnership, firm, corporation or other entity then in competition with the business of any entity within
the Company Group, and he will not otherwise materially interfere with any business relationship of any entity within the Company Group.
10. Non-Solicitation of Employees.
In light of the amount of sensitive and confidential information involved in the discharge of the Executive’s duties, and the harm to the Corporation that would result if
such knowledge or expertise were disclosed or made available to a competitor, and as a reasonable step to help protect the confidentiality of such information, the Executive
promises and agrees that during the Term of Employment and for a period of one (1) year thereafter, the Executive will not, directly or indirectly, individually or as a consultant
to, or as an employee, officer, shareholder, director, or other owner of or participant in any business, solicit (or assist in soliciting) any person who is then, or at any time within
six (6) months prior thereto was, an employee of an entity within the Company Group, who earned annually $25,000 or more as an employee of such entity during the last six
(6) months of his or her own employment to work for (as an employee, consultant or otherwise) any business, individual, partnership, firm, corporation, or other entity whether
or not engaged in competitive business with any entity in the Company Group.
11. Non-Disparagement.
The Executive agrees and covenants that the Executive shall not at any time make, publish, or communicate to any person or entity or in any public forum any
defamatory, or maliciously false, or disparaging remarks, comments, or statements concerning the Company Group or its businesses, or any of its employees, officers, or
directors and their existing and prospective customers, suppliers, investors, and other associated third parties, now or in the future.
12. Return of Property.
Executive agrees to truthfully and faithfully account for and deliver to the Corporation all property belonging to the Corporation, any other entity in the Company
Group, or any of their respective affiliates, which Executive may receive from or on account of the Corporation, any other entity in the Company Group, or any of their
respective affiliates, and upon the termination of the Term of Employment, or the Corporation’s demand, Executive shall immediately deliver to the Corporation all such
property belonging to the Corporation, any other entity in the Company Group, or any of their respective affiliates.
13. Withholding Taxes.
Notwithstanding anything else herein to the contrary, the Corporation may withhold (or cause there to be withheld, as the case may be) from any amounts otherwise
due or payable under or pursuant to this Agreement such federal, state and local income, employment, or other taxes as may be required to be withheld pursuant to any
applicable law or regulation.
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14. Cooperation in Litigation.
Executive agrees that, during the Term of Employment or after the termination of Executive’s employment, Executive will reasonably cooperate with the Corporation,
subject to Executive’s reasonable personal and business schedules, in any litigation which arises out of events occurring prior to the termination of Executive’s employment,
including but not limited to, serving as a witness or consultant and producing documents and information relevant to the case or helpful to the Corporation. The Corporation
agrees to reimburse Executive for all reasonable costs and expenses Executive incurs in connection with her obligations under this Section 9 and, in addition, to reasonably
compensate Executive for time actually spent in connection therewith following the termination of Executive’s employment with the Corporation.
15. Miscellaneous.
(a) Assignment. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights
or obligations hereunder; provided, however, that in the event of a merger, consolidation, or transfer or sale of all or substantially all of the assets of the Corporation with or to
any other individual(s) or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of the Corporation hereunder.
(b) Number and Gender. Where the context requires, the singular shall include the plural, the plural shall include the singular, and any gender shall include all other genders.
(c) Section Headings. The section headings of, and titles of paragraphs and subparagraphs contained in, this Agreement are for the purposes of convenience only, and they
neither form a part of this Agreement nor are they to be used in the construction or interpretation thereof.
(d) Governing Law. This Agreement, and all questions relating to its validity, interpretation, performance and enforcement, as well as the legal relations hereby created between
the parties hereto, shall be governed by and construed under, and interpreted and enforced in accordance with, the laws of the State of Colorado, notwithstanding any Colorado
or other conflict of law provision to the contrary. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986 and the regulations
promulgated thereunder. Any action or proceeding by either of the parties to enforce this Agreement shall be brought only in a state or federal court located in the State of
Colorado, Boulder county. The parties hereby irrevocably submit to the exclusive jurisdiction of such courts and waive the defense of inconvenient forum to the maintenance of
any such action or proceeding in such venue.
(e) Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement
which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.
(f) Entire Agreement. This Agreement embodies the entire agreement of the parties hereto respecting the matters within its scope. Any prior negotiations, correspondence,
agreements, proposals or understandings relating to the subject matter hereof shall be deemed to have been merged into this Agreement, and to the extent inconsistent herewith,
such negotiations, correspondence, agreements, proposals, or understandings shall be deemed to be of no force or effect. There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the subject matter hereof, except as expressly set forth herein.
(g) Modifications. This Agreement may not be amended, modified or changed (in whole or in part), except by a formal definitive written agreement expressly referring to this
Agreement, which agreement is executed by both of the parties hereto.
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(h) Waiver. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any
other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
(i) Resolution of Disputes.
(i) Any controversy arising out of or relating to Executive’s employment (whether or not before or after the expiration of the Term of Employment), any termination of
Executive’s employment, this Agreement or the enforcement or interpretation of this Agreement, or because of an alleged breach, default, or misrepresentation in connection
with any of the provisions of this Agreement, including (without limitation) any state or federal statutory claims, shall be submitted to arbitration in Denver, Colorado, before a
sole arbitrator (the “Arbitrator”) selected from the American Arbitration Association (“AAA”), and shall be conducted in accordance with the provisions of Colorado Revised
Uniform Arbitration Act as the exclusive remedy of such dispute; provided, however, that provisional injunctive relief may, but need not, be sought in a court of law while
arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is finally determined by the Arbitrator.
Final resolution of any dispute through arbitration may include any remedy or relief that the Arbitrator deems just and equitable, including any and all remedies provided by
applicable state or federal statutes. At the conclusion of the arbitration, the Arbitrator shall issue a written decision that sets forth the essential findings and conclusions upon
which the Arbitrator’s award or decision is based. Any award or relief granted by the Arbitrator hereunder shall be final and binding on the parties hereto and may be enforced
by any court of competent jurisdiction.
(ii) The parties acknowledge and agree that they are hereby waiving any rights to trial by jury in any action, proceeding or counterclaim brought by either of the parties
against the other in connection with any matter whatsoever arising out of or in any way connected with any of the matters referenced in the first sentence of Section 15(i)(i).
(iii) The parties agree that the Corporation shall be responsible for payment of the forum costs of any arbitration hereunder, including the Arbitrator’s fee. The parties
further agree that in any proceeding with respect to such matters, the prevailing party will be entitled to recover its reasonable attorney’s fees and costs from the non-prevailing
party (other than forum costs associated with the arbitration which in any event shall be paid by the Corporation).
(iv) Without limiting the remedies available to the parties and notwithstanding the foregoing provisions of this Section 15, the Executive and the Corporation
acknowledge that any breach of any of the covenants or provisions contained in Sections 6 through 11 could result in irreparable injury to either of the parties hereto for which
there might be no adequate remedy at law, and that, in the event of such a breach or threat thereof, the non-breaching party shall be entitled to obtain a temporary restraining
order and/or a preliminary injunction and a permanent injunction restraining the other party hereto from engaging in any activities prohibited by any covenant or provision in
Sections 6 through 11 or such other equitable relief as may be required to enforce specifically any of the covenants or provisions of Sections 6through 11.
(j) Publicity.
Executive hereby irrevocably consents during the term of this Agreement to any and all uses and displays, by the Company Group and its agents, representatives and
licensees, of Executive’s name, voice, likeness, image, appearance and biographical information in, on or in connection with any pictures, photographs, audio and video
recordings, digital images, websites, television programs and advertising, other advertising and publicity, sales and marketing brochures, books, magazines, other publications,
CDs, DVDs, tapes and all other printed and electronic forms and media throughout the world, at any time during or after the period of Executive’s employment by the
Corporation, for all legitimate commercial and business purposes of the Company Group (”Permitted Uses”) without further consent from or royalty, payment or other
compensation to the Executive. The Executive hereby forever waives and releases the Company Group and its directors, officers, employees and agents from any and all
claims, actions, damages, losses, costs, expenses and liability of any kind, arising under any legal or equitable theory whatsoever at any time during or after the period of
Executive’s employment by the Corporation, arising directly or indirectly from the Company Group’s and its agents’, representatives’ and licensees’ exercise of their rights in
connection with any Permitted Uses. At the end of the term of this Agreement, the Corporation shall have no obligation to remove any previously-published displays described
in this paragraph.
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(k) Notices.
(i) All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly
received if (i) delivered by hand or by courier, effective upon delivery, (ii) given by facsimile or electronic version, when transmitted if transmitted on a business day and during
normal business hours of the recipient, and otherwise delivered on the next business day following transmission, or (iii) sent by registered or certified mail, postage prepaid,
return receipt requested, 5 business days after being deposited in the U.S. postal mail. Any notice shall be duly addressed to the parties as follows:
(i) If to the Corporation:
Sonoma Pharmaceuticals, Inc.
Lead Independent Director of the Board or any Independent Director
5445 Conestoga Court, Suite 150
Boulder, Colorado 80301
(ii) If to the Executive:
Amy Trombly
At the address on file with the Corporation
(ii) Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of
this Section 13 for the giving of notice.
(l) Legal Counsel; Mutual Drafting. Each party recognizes that this is a legally binding contract and acknowledges and agrees that they have had the opportunity to consult with
legal counsel of their choice. Each party has cooperated in the drafting, negotiation and preparation of this Agreement. Hence, in any construction to be made of this
Agreement, the same shall not be construed against either party on the basis of that party being the drafter of such language.
(m) Provisions that Survive Termination. The provisions of Sections 3.4, 3.5, 5 through 11, 14 and this Section 15 shall survive any termination of the Term of Employment.
(n) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears
thereon, and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or
taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. Photographic copies of such signed counterparts may be used in lieu of the
originals for any purpose.
(o) Tolling. Should the Executive violate any of the terms of the restrictive covenant obligations articulated herein, the obligation at issue will run from the first date on which
the Executive ceases to be in violation of such obligation.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Corporation and Executive have executed this Amended and Restated Employment Agreement as of the Effective Date.
CORPORATION
Sonoma Pharmaceuticals, Inc.,
a Delaware corporation
By:
Name:
Title:
/s/ Jerry McLaughlin
Jerry McLaughlin
Lead Independent Director of
Sonoma Pharmaceuticals, Inc.
EXECUTIVE
/s/ Amy Trombly
By:
Name: Amy Trombly
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EXHIBIT A — RELEASE
1. Definitions. I intend all words used in this Release to have their plain meanings in ordinary English. Technical legal words are not needed to describe what I mean.
Specific terms I use in this Release have the following meanings:
A. “I,” “me,” and “my” include me, Amy Trombly, and anyone who has or obtains any legal rights or claims through me, including my heirs and estate, and each of
my descendants, dependents, executors, administrators, assigns and successors.
B. “Employer,” as used in this Release, shall at all times mean Sonoma Pharmaceuticals, Inc. and “Released Party” or “Released Parties”, individual and collectively,
means the Employer and the Employer’s parent, past or present subsidiaries, affiliates, each of any present or former officers, directors, shareholders, employees, agents or
attorneys, trustees, insurers, successors, predecessors, assigns, or personal representatives.
C. “My Claims” mean actions or causes of action, suits, claims, charges, complaints, contracts (whether oral or written, express or implied from any source), and
promises, whatsoever, in law or equity, that I ever had, may now have or hereafter can, shall or may have against the Employer or other Released Party as of the date of the
execution of this Release, including all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to me for, upon, or by reason of any matter,
cause or thing whatsoever, that are in any way related to my employment with or separation (termination of employment) from the Employer.
By signing this Release, I am agreeing to release any actual and potential claim, known or unknown, I have or may potentially have, in law or in equity, either as an
individual or standing in the shoes of the government, under any federal, state or local law, administrative regulation or legal principle (except as provided in Paragraph 4 of
this Release). The following listing of laws and types of claims is not meant to, and shall not be interpreted to, exclude any particular law or type of claim, law, regulation or
legal principle not listed. I understand I am releasing all my Claims, including, but not limited to, claims for invasion of privacy; breach of written or oral, express or implied,
contract; fraud or misrepresentation; and any claim under Section 1981 of the Civil Rights Act of 1866, Title VII of the Civil Rights Act of 1964, Age Discrimination in
Employment Act of 1967 (“ADEA”), 29 U.S.C. § 626, as amended, the Older Workers Benefit Protection Act of 1990 (“OWBPA”), 29 U.S.C. 626(f), Title VII of the Civil
Rights Act of 1964 (“Title VII”), 42 U.S.C. § 2000e, et seq., the Americans with Disabilities Act Amendments Act (“ADAAA”), 29 U.S.C. § 2101, et seq., the Family and
Medical Leave Act (“FMLA”), 29 U.S.C. § 2601 et seq., the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. §§ 1001, et seq., Equal Pay
Act (“EPA”), 29 U.S.C. § 206(d), the Worker Adjustment and Retraining Notification Act (“WARN”), 29 U.S.C. § 2101 et seq., the False Claims Act, 31 U.S.C. § 3729 et seq.,
the Colorado Anti-Discrimination Act (CADA), the Workplace Accommodations for Nursing Mothers Act, the Pregnant Workers Fairness Act, the Lawful Off-Duty Activities
Statute (LODA), the Personnel Files Employee Inspection Right Statute, the Colorado Labor Peace Act, the Colorado Labor Relations Act, the Colorado Equal Pay Act, the
Colorado Minimum Wage Order, the Colorado Genetic Information Non-Disclosure Act, any other state human rights or fair employment practices act, and any other federal,
state, or local statute, law, rule, regulation, ordinance or order. This includes, but is not limited to, claims for violation of any civil rights laws based on protected class status;
claims for assault, battery, defamation, intentional or negligent infliction of emotional distress, breach of the covenant of good faith and fair dealing, promissory estoppel,
negligence, negligent hiring, retention or supervision, retaliation, constructive discharge, violation of whistleblower protection laws, unjust enrichment, payment of any kind,
including any other claim for severance pay, bonus or incentive pay, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit,
medical expenses, or disability, violation of public policy, and all other claims for unlawful employment practices, and all other common law or statutory claims. To the
maximum extent permitted by law, I agree that I will not seek and waive any right to accept any relief or award from any charge or action against the Employer before any
federal, state, or local administrative agency or federal state or local court whether filed by me or on my behalf with respect to any claim or right covered by this Release.
2. Agreement to Release My Claims. Except as stated in Paragraph 4, I agree to give up all My Claims, waive any rights thereunder, and forever discharge the
Employer and all Released Parties of and from any and all liability to me for actions or causes of action, suits, or Claims. To the maximum extent permitted by law, I agree that
I will not seek and I waive any right to accept any relief or award from any charge or action against the Employer or other Released Party before any federal, state, or local
administrative agency or federal state or local court whether filed by me or on my behalf with respect to any claim or right covered by this Release. I also agree to withdraw any
and all of my charges and lawsuits against Employer or other Released Party, except that I may, but am not required to, withdraw or dismiss, or attempt to withdraw or dismiss,
any charges that I may have pending against the Employer or other Released Party with the EEOC or other civil rights enforcement agency.
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I represent and warrant that I have not transferred or otherwise assigned my Claims, or parts thereof, to any person or entity, other than the Employer. I will defend,
indemnify and hold harmless the Employer from and against any claim (including the payment of attorneys’ fees and costs actually incurred whether or not litigation is
commenced) that is directly or indirectly based on or in connection with or arising out of any such assignment or transfer made, purported or claimed.
In exchange for my agreement to release my Claims, I am receiving satisfactory Consideration (compensation) from the Employer to which I am not otherwise
entitled by law, contract, or under any Employer policy. The consideration I am receiving is a full and fair payment for the release of all my Claims. The Employer and the
Released Parties do not owe me anything in addition to what I will be receiving.
3. Older Workers Benefit Protection Act. [This section may be revised if Executive terminates employment as part of a “group” termination.] The Older Workers
Benefit Protection Act (“OWBPA”) applies to individuals age 40 and older and sets forth certain criteria for such individuals to waive their rights under the Age Discrimination
in Employment Act (“ADEA”) in connection with an exit incentive program or other employment termination program. I understand and have been advised that this Release of
My Claims is subject to the terms of the OWBPA. The OWBPA provides that an individual cannot waive a right or claim under the ADEA unless the waiver is knowing and
voluntary. I have been advised of this law, and I agree that I am signing this Release voluntarily, and with full knowledge of its consequences. I understand that the Employer is
giving me at least twenty-one (21) calendar days from the date I received a copy of this Release to decide whether I want to sign it. I acknowledge that I have been advised to
use this time to consult with an attorney about the effect of this Release. If I sign this Release before the end of the twenty-one (21) day period it will be my personal, voluntary
decision to do so, and will be done with full knowledge of my legal rights. I agree that material and/or immaterial changes to the Separation Agreement or this Release will not
restart the running of this consideration period.
4. Exclusions from Release. My Claims do not include my rights, if any, to claim the following: unemployment insurance or workers compensation benefits; claims for
my vested post-termination benefits under any 401(k) or similar tax-qualified retirement benefit plan; my COBRA rights; and my rights to enforce the terms of this Release.
A. Nothing in this Release interferes with my right to file a charge with the Equal Employment Opportunity Commission (“EEOC”) or other local civil rights
enforcement agency, or participate in any manner in an EEOC investigation or proceeding under Title VII, the ADA, the ADEA, or the EPA. I, however, understand that I am
waiving my right to recover individual relief including, but not limited to, back pay, front pay, reinstatement, attorneys’ fees, and/or punitive damages, in any administrative or
legal action whether brought by the EEOC or other civil rights enforcement agency, me or any other party.
B. Nothing in this Release interferes with my right to challenge the knowing and voluntary nature of this Release under the ADEA and/or OWBPA, if I have rights
under such laws.
C. I agree that the Employer and the Released Parties reserve any and all defenses, which any of them has or might have against any claims brought by me. This
includes, but is not limited to, the Employer’s or other Released Party’s right to seek available costs and attorneys’ fees, and to have any monetary award granted to me, if any,
reduced by the amount of money that I received in consideration for this Release.
D. Nothing in this Release releases any claims for indemnification by Executive pursuant to any indemnification agreement, statute or otherwise or claims for
coverage under any D&O or other similar insurance policy.
5. Effective Date; Right to Rescind or Revoke. I understand that insofar as this Release relates to my rights under the Age Discrimination in Employment Act
(“ADEA”), it shall not become effective or enforceable until seven (7) calendar days after I sign it. I also have the right to rescind (or revoke) this Release insofar as it extends
to potential claims under the ADEA by written notice to Employer within seven (7) calendar days following my signing this Release (the “Rescission Period”). Any such
rescission (or revocation) must be in writing and hand-delivered to Employer or, if sent by mail, postmarked within the applicable time period, sent by certified mail, return
receipt requested, and addressed as follows:
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A. post-marked within the seven (7) calendar day Rescission Period;
B. properly addressed to
[INSERT NAME AND ADDRESS]; and
C. sent by certified mail, return receipt requested.
6. I Understand the Terms of this Release. I have had the opportunity to read this Release carefully and understand all its terms. I have had the opportunity to review
this Release with my own attorney. In agreeing to sign this Release, I have not relied on any statements or explanations made by the Employer or its attorneys. I understand and
agree that this Release and the attached Agreement contain all the agreements between the Employer (and any other Released Party) and me. We have no other written or oral
agreements. I understand this Release is a very important legal document and I agree to be bound by the terms of this Release.
Dated: ____________, 20__
_______________________________
Amy Trombly
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AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Exhibit 10.39
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between Bruce Thornton (the “Executive”), and
Sonoma Pharmaceuticals, Inc., a Delaware corporation (the “Corporation”), as of June 16, 2023 (the “Effective Date”). This Agreement replaces that certain employment
agreement dated as of July 22, 2022, and entered into by and between the Executive and the Corporation.
RECITALS
WHEREAS, prior to the date hereof, the Executive has served as the Corporation’s Executive Vice President of International Operations and Sales and Chief
Operating Officer;
WHEREAS, the Corporation desires that the Executive continue to be employed by the Corporation as its Executive Vice President and Chief Operating Officer, and
to carry out the duties and responsibilities described below, all on the terms and conditions set forth herein;
WHEREAS, the Executive is willing to accept and continue such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and promises of the parties herein, the receipt and sufficiency of which
are hereby acknowledged by each of the parties, the Corporation and the Executive hereto agree as follows:
1. Employment and Duties.
1.1 Position. On the terms and subject to the conditions set forth herein, the Corporation agrees to continue to employ the Executive as its Executive Vice President
and Chief Operating Officer for the Term of Employment (as defined in Section 2). The Executive does hereby accept and agree to such employment, on the terms and
conditions expressly set forth in this Agreement. The Executive shall, if requested, also serve as a member of the Board of Directors of the Corporation (the “Board”) or as an
officer or director of any affiliate of the Corporation for no additional compensation.
1.2 Duties. During the Term of Employment (as defined in Section 2), the Executive shall serve the Corporation as its Executive Vice President and Chief Operating
Officer. The Executive shall, without limitation and without limiting the Executive’s other duties to the Corporation, and without limiting the authority of the Corporation’s
Board of Directors, be responsible for the general supervision, direction and control of the business and affairs of the Corporation and have such other duties and
responsibilities as the Board shall designate that are consistent with the Executive’s position as Executive Vice President and Chief Operating Officer of the Corporation. The
Executive shall perform all of such duties and responsibilities in accordance with the legal directives of the Board and in accordance with the practices and policies of the
Corporation as in effect from time to time throughout the Term of Employment (as defined in Section 2) (including, without limitation, the Corporation’s insider trading and
ethics policies, as they may change from time to time). While employed as Executive Vice President and Chief Operating Officer of the Corporation, the Executive shall report
exclusively to the Board. Throughout the Term of Employment (as defined in Section 2), the Executive shall not serve on the boards of directors or advisory boards of any other
entity, except for any wholly or majority owned subsidiaries of the Corporation, unless such service is expressly approved by the Board. As Executive Vice President and Chief
Operating Officer, Mr. Thornton is responsible for operations, partner management and sales, manufacturing, R&D, regulatory compliance and quality control for the
Corporation.
1.3 No Other Employment; Minimum Time Commitment. Throughout the Term of Employment, the Executive shall both (i) devote substantially all of the Executive’s
business time, energy and skill to the performance of the Executive’s duties for the Corporation, and (ii) hold no other job. The Executive agrees that any investment or direct
involvement in, or any appointment to or continuing service on the board of directors or similar body of, any corporation or other entity, other than wholly or majority owned
subsidiaries of the Corporation, must be first approved in writing by the Corporation. The foregoing provisions of this Section 1.3 shall not prevent the Executive from
investing in non-competitive, publicly-traded securities to the extent permitted by Section 6(b).
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1.4 No Breach of Contract. The Executive hereby represents to the Corporation that: (i) the execution and delivery of this Agreement by the Executive and the
Corporation and the performance by the Executive of the Executive’s duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any other
agreement or policy to which the Executive is a party or otherwise bound; (ii) the Executive has no information (including, without limitation, confidential information and
trade secrets) of any other person or entity which the Executive is not legally and contractually free to disclose to the Corporation; and (iii) the Executive is not bound by any
confidentiality, trade secret or similar agreement (other than this Agreement) with any other person or entity.
1.5 Place of Performance. The principal place of Executive’s employment shall be the Corporation’s principal executive offices, currently located in Boulder,
Colorado, though such principal place of employment of the Executive may be moved from time to time upon mutual agreement by the Executive and the Corporation;
however, Executive may work remotely as long as he is available to be present at the Corporation’s principal executive offices if required by the Corporation. The Executive
agrees that the Executive will be regularly present at the Corporation’s principal executive offices, or such other location as the parties may designate, and that the Executive
may be required to travel from time to time in the course of performing the Executive’s duties for the Corporation.
1.6 Performance Review. During the Term of Employment, the Compensation Committee of the Corporation, in its sole discretion, will review Executive’s
performance every twelve (12) months beginning on the Effective Date. The Compensation Committee will determine the performance goals and factors after consultation with
the Executive in its sole discretion and its decision shall be binding on all persons.
2. Term of Employment. The “Term of Employment” shall commence on the Effective Date, and shall continue in full force and effect until the Termination Date pursuant to
Section 5.8. This Agreement shall govern the terms of Executive’s employment hereunder on and after the Effective Date.
3. Compensation.
3.1 Base Salary. As of the Effective Date and during the Term of Employment, the Corporation shall pay to the Executive a base salary at the rate of $260,800 per year,
subject to increase (but not decrease) by the Board (the “Base Salary”). The Executive’s Base Salary shall be paid in accordance with the Corporation’s regular payroll practices
in effect from time to time, but no less frequently than monthly.
3.2 Annual Bonus. For each fiscal year during the Term of Employment, Executive shall be eligible to receive a target annual bonus (the “Annual Bonus”) of 50% of
Base Salary, up to 120% of the target Annual Bonus. However, the decision to provide any Annual Bonus and the amount and terms of any Annual Bonus shall be in the sole
and absolute discretion of the Compensation Committee of the Board. Executive must be employed by the Corporation on the day that any Annual Bonus is paid. However, the
Board of Directors or the Compensation Committee, as appropriate, may in its sole discretion agree to pay a pro rata or full Annual Bonus, and if such Annual Bonus is granted,
then determine the amount, form and payment schedule.
3.3 Equity Awards. During the Term of Employment, Executive shall be eligible to participate in the Corporation’s equity incentive plans in effect at the time, subject
to the terms of such plans, as determined by the Board or the Compensation Committee, in its discretion.
3.4. Indemnification. (a) In the event that the Executive is made a party or threatened to be made a party to any action, suit, or proceeding, whether civil, criminal,
administrative or investigative (a “Proceeding”), other than any Proceeding initiated by the Executive or the Corporation related to any contest or dispute between the Executive
and the Corporation or any of its affiliates with respect to this Agreement or the Executive’s employment hereunder, by reason of the fact that the Executive is or was a director
or officer of the Corporation, or any affiliate of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member, employee or agent of
another corporation or a partnership, joint venture, trust or other enterprise, the Executive shall be indemnified and held harmless by the Corporation to the maximum extent
permitted under applicable law and the Corporation’s articles and bylaws, as may be amended from time to time, from and against any liabilities, costs, claims and expenses,
including all costs and expenses incurred in defense of any Proceeding (including attorneys’ fees).
(b) During the Term of Employment and for a period of six (6) years thereafter, the Corporation or any successor to the Corporation shall purchase and maintain, at its
own expense, directors’ and officers’ liability insurance providing coverage to the Executive on terms that are no less favorable than the coverage provided to other directors
and similarly situated executives of the Corporation.
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3.5 Clawback Provisions. Any incentive-based compensation, or any other compensation, paid to the Executive pursuant to this Agreement or any other agreement or
arrangement with the Corporation which is subject to recovery under any law, government regulation or stock exchange listing requirement, will be subject to such deductions
and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Corporation
pursuant to any such law, government regulation or stock exchange listing requirement). The Corporation will make any determination for clawback or recovery in accordance
with any applicable law or regulation.
4. Benefits.
4.1 Health and Welfare. During the Term of Employment, Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs
made available by the Corporation to the Corporation’s senior-level employees generally, as such plans or programs may be in effect from time to time.
4.2 Reimbursement of Business Expenses. Executive is authorized to incur reasonable expenses in carrying out the Executive’s duties for the Corporation under this
Agreement and entitled to reimbursement for all such expenses the Executive incurs during the Term of Employment in connection with carrying out the Executive’s duties for
the Corporation, subject to the Corporation’s reasonable expense reimbursement policies in effect from time to time. The Corporation shall reimburse the Executive to the
extent required by the preceding sentence.
4.3 Vacation and Other Leave. During the Term of Employment, Executive shall accrue and be entitled to take paid vacation in accordance with the Corporation’s
standard vacation policies in effect from time to time, including the Corporation’s policies regarding vacation accruals. The Executive shall also be entitled to all other holiday
and leave pay generally available to all other employees of the Corporation.
5. Termination.
The Term of Employment and the Executive’s employment hereunder may be terminated by either the Corporation or the Executive at any time and for any reason;
provided that, unless otherwise provided herein, either party shall be required to give the other party at least 60 calendar days advance written notice of any termination of the
Executive’s employment in accordance with Sections 5.7 and 5.8. Upon termination of the Executive’s employment during the Term of Employment, the Executive shall be
entitled to the compensation and benefits described in this Section 5 and shall have no further rights to any compensation or any other benefits from the Corporation or any of
its affiliates.
5.1 Definitions. For purposes of this Agreement:
(a) “Accrued Amounts” shall mean:
(i) any accrued but unpaid Base Salary and accrued but unused vacation which shall be paid within one (1) week following the Termination Date (as defined
below);
(ii) reimbursement for unreimbursed business expenses properly incurred by the Executive, which shall be subject to and paid in accordance with the
Corporation’s expense reimbursement policy; and
(iii) such employee benefits (including equity compensation), if any, to which the Executive may be entitled under the Corporation’s employee benefit plans as
of the Termination Date; provided that, in no event shall the Executive be entitled to any payments in the nature of severance or termination payments except as
specifically provided herein.
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(b) “Change in Control” shall mean the occurrence of any of the following after the Effective Date:
(i) one person (or more than one person acting as a group) acquires ownership of stock of the Corporation that, together with the stock held by such person or
group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation; provided that, a Change in Control shall
not occur if any person (or more than one person acting as a group) owns more than 50% of the total fair market value or total voting power of the Corporation’s
stock and acquires additional stock;
(ii) a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a
majority of the Board before the date of appointment or election; or
(iii) the sale of all or substantially all of the Corporation’s assets.
Notwithstanding the foregoing, a Change in Control shall not occur unless such transaction constitutes a change in the ownership of the Corporation, a change in
effective control of the Corporation, or a change in the ownership of a substantial portion of the Corporation’s assets under Section 409A.
For purposes of the definition of “Change of Control”, the following definitions shall be applicable:
(i) The term “person” shall mean any individual, corporation or other entity and any group as such term is used in Section 13(d) (3) or 14(d) (2) of the Exchange
Act.
(ii) Any person shall be deemed to be the beneficial owner of any shares of capital stock of the Corporation:
a. which that person owns directly whether or not of record, or
b. which that person has the right to acquire pursuant to any agreement or understanding or upon exercise of conversion rights, warrants, or options, or
otherwise, or
c. which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (b) above, by an “affiliate” or
“associate” (as defined in the rules of the Securities and Exchange Commission under the Securities Act of 1933, as amended) of that person, or
d. which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (b) above), by any other person
with which that person or his “affiliate” or “associate” (defined as aforesaid) has any agreement, arrangement, or understanding for the purpose of
acquiring, holding, voting or disposing of capital stock of the Corporation.
(iii) The outstanding shares of capital stock of the Corporation shall include shares deemed owned through application of clause (ii) (b), (c), and (d) above, but
shall not include any other shares which may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise, but
which are not actually outstanding.
(c) “Cause” shall mean:
(i) the Executive’s willful failure to perform his duties (other than any such failure resulting from incapacity due to physical or mental illness);
(ii) the Executive’s willful failure to comply with any valid and legal directive of the Board communicated to him in writing;
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(iii) the Executive’s willful engagement in dishonesty, illegal conduct or gross misconduct, which is, in each case, materially injurious to the Corporation or its
affiliates;
(iv) the Executive’s embezzlement, misappropriation or fraud, whether or not related to the Executive’s employment with the Corporation;
(v) the Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a
misdemeanor involving moral turpitude;
(vi) the Executive’s violation of a material policy of the Corporation that has been provided to Executive (documents made public on the Corporation’s website
or through filings with the U.S. Securities and Exchange Commission are deemed provide to the Executive);
(vii) the Executive’s willful unauthorized disclosure of Confidential Information (as defined below);
(viii) the Executive’s material breach of any material obligation under this Agreement or any other written agreement between the Executive and the
Corporation; or
(ix) any material failure by the Executive to comply with the Corporation’s written policies or rules, as they may be in effect from time to time during the
Employment Term, if such failure causes material, reputational or financial harm to the Corporation.
For purposes of this provision, no act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the
Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or upon the advice of counsel for the Corporation shall be conclusively presumed to be done, or omitted to
be done, by the Executive in good faith and in the best interests of the Corporation. In all cases the Corporation shall notify the Executive in writing of the basis for any for
Cause termination by providing a detailed description of the alleged facts and circumstances giving rise to Cause. In addition, with respect to clauses (i), (ii), (vi), (viii) and (ix)
Executive shall be given a period of at least 30 days to cure and only if Executive fails to cure within such time period will a termination be for Cause.
(d) “Disability” shall mean the Executive’s inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities under this
Agreement, with or without reasonable accommodation, for 90 calendar days out of any three hundred sixty-five (365) calendar day period, but only if the Executive is
considered disabled within the meaning of Treasury Regulation section 1.409A-3(i)(4). Without limiting the circumstances in which the Executive may be determined to be
disabled as defined in Treasury Regulation section 1.409A-3(i)(4), the Executive will be presumed to be disabled if determined to be totally disabled by the Social Security
Administration or if determined to be disabled in accordance with a disability insurance program, provided the definition of disability applied under such disability insurance
program complies with the requirements of Treasury Regulation section 1.409A-3(i)(4). Any question as to the existence of the Executive’s Disability as to which the Executive
and the Corporation cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to the Executive and the Corporation. If the
Executive and the Corporation cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall
make such determination in writing. The determination of Disability made in writing to the Corporation and the Executive shall be final and conclusive for all purposes of this
Agreement.
(e) “Good Reason” shall mean the occurrence of any of the following, in each case during the Employment Term without the Executive’s written consent:
(i) a reduction in the Executive’s then current Base Salary;
(ii) a relocation of the Executive’s principal place of employment by more than 50 miles, unless the new principal place of employment is closer to Executive’s
principal residence;
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(iii) the Corporation’s failure to obtain an agreement from any successor to the Corporation to assume and agree to perform this Agreement in the same manner
and to the same extent that the Corporation would be required to perform if no succession had taken place, except where such assumption occurs by operation of
law; or
(iv) a material, adverse change in the Executive’s title, authority, duties or responsibilities (other than temporarily while the Executive is physically or mentally
incapacitated or as required by applicable law).
The Executive cannot terminate his employment for Good Reason unless he has provided written notice to the Corporation of the existence of the circumstances
providing grounds for termination for Good Reason within 30 business days of the initial existence of such grounds and the Corporation has had at least 30 business days from
the date on which such notice is provided to cure such circumstances. If the Executive does not terminate his employment for Good Reason within 30 calendar days after the
expiration of the cure period, then the Executive will be deemed to have waived his right to terminate for Good Reason with respect to such grounds.
5.2 Termination for Cause or Without Good Reason.
The Executive’s employment hereunder may be terminated by the Corporation for Cause or by the Executive without Good Reason. If the Executive’s employment
is terminated, by the Corporation for Cause or by the Executive without Good Reason, the Executive shall be entitled to receive the Accrued Amounts.
5.3 Termination Without Cause or for Good Reason.
The Term of Employment and the Executive’s employment hereunder may be terminated by the Executive for Good Reason or by the Corporation without Cause. In
the event of such termination, the Executive shall be entitled to receive the Accrued Amounts and subject to the Executive’s compliance with Sections 6 through 11 of this
Agreement and his execution of a release of claims in favor of the Corporation, its affiliates and their respective officers and directors in a form attached hereto (the “Release”)
and such Release becoming effective within the applicable time period set forth in the Release, (the “Release Execution Period”), the Executive shall be entitled to receive the
following:
(a) a lump sum payment equal to one time the Executive’s Base Salary, which shall be paid on the 30th day following the Termination Date; and
(b) upon determination by the Corporation’s Board of Directors or Compensation Committee, as appropriate, to be made in its sole discretion as to whether to grant a
bonus, and if such bonus is granted, the amount, form and payment schedule. For the avoidance of doubt, Executive shall not be entitled to any bonus solely for
reason of termination, unless the Board of Directors or the Compensation Committee, as appropriate, in its sole discretion awards a bonus to Executive.
(c) If the Executive timely and properly elects health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the
Corporation shall reimburse the Executive for the monthly COBRA premium paid by the Executive for himself and his dependents. Such reimbursement shall be paid to the
Executive on the 10th day of the month immediately following the month in which the Executive timely remits the premium payment (“COBRA Premium Reimbursements”).
The Executive shall be eligible to receive such COBRA Premium Reimbursement until the earliest of: (i) the twelve-month anniversary of the Termination Date; (ii) the date
the Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive becomes eligible to receive substantially similar
coverage from another employer or other source. Notwithstanding the foregoing, if the Corporation’s making payments under this Section 5.3(c) would violate the
nondiscrimination rules applicable to non-grandfathered plans under the Affordable Care Act (the “ACA”), or result in the imposition of penalties under the ACA and the
related regulations and guidance promulgated thereunder), the parties agree to reform this Section 5.3(c) in a manner as is necessary to comply with the ACA.
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(d) Consistent with the terms of any equity incentive plan of the Corporation, as approved by the stockholders, as applicable:
(i) all outstanding time-based equity-based compensation awards granted to the Executive during the Term of Employment shall become fully vested and
exercisable for the remainder of their full term; and
(ii) all outstanding performance-based equity compensation awards granted to the Executive during the Term of Employment shall remain outstanding and shall
vest or be forfeited in accordance with the terms of the applicable award agreements, if the applicable performance goals are satisfied. The determination
whether such performance goals are satisfied shall be in the sole discretion of the Compensation Committee or the Board, as the case may be.
5.4 Death or Disability.
(a) The Executive’s employment hereunder shall terminate automatically upon the Executive’s death during the Term of Employment, and the Corporation may
terminate the Executive’s employment on account of the Executive’s Disability.
(b) If the Executive’s employment is terminated during the Term of Employment on account of the Executive’s death or Disability, the Executive (or the Executive’s
estate and/or beneficiaries, as the case may be) shall be entitled to receive the Accrued Amounts. In addition, Executive’s spouse and other dependents shall be entitled to 12
months of COBRA Premium Reimbursements upon timely request to the Corporation for such benefits. Notwithstanding any other provision contained herein, all payments
made in connection with the Executive’s Disability shall be provided in a manner which is consistent with federal and state law. The Corporation may deduct, from all
payments made hereunder, all applicable taxes and other appropriate deductions.
5.5 Change in Control Termination.
(a) Notwithstanding any other provision contained herein, if the Executive’s employment hereunder is terminated by the Executive for Good Reason or without
Cause (other than on account of the Executive’s death or Disability), in each case within three (3) months prior to or twelve (12) months following a Change in Control, the
Executive shall be entitled to receive: (i) the Accrued Amounts; (ii) subject to the Executive’s compliance with Sections 6 through 11 of this Agreement and his execution of a
Release which becomes effective by the end of the Release Execution Period, a lump sum payment equal to 1.5 times the sum of the Executive’s Base Salary, which shall be
paid on the 30th day following the Termination Date; and (iii) 1.5 times the target Annual Bonus amount.
(b) If the Executive timely and properly elects health continuation coverage under COBRA, the Corporation shall reimburse the Executive for the monthly COBRA
premium paid by the Executive for himself and his dependents. Such reimbursement shall be paid to the Executive on the 10th day of the month immediately following the
month in which the Executive timely remits the premium payment. The Executive shall be eligible to receive such reimbursement until the earliest of: (i) the twelve-month
anniversary of the Termination Date; (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive
becomes eligible to receive substantially similar coverage from another employer or other source. Notwithstanding the foregoing, if the Corporation’s making payments under
this Section 5.5(b) would violate the nondiscrimination rules applicable to non-grandfathered plans under the ACA, or result in the imposition of penalties under the ACA, the
parties agree to reform this Section 5.5(b) in a manner as is necessary to comply with the ACA.
(c) Consistent with the terms of any equity incentive plan of the Corporation, as approved by the stockholders, as applicable:
(i) all outstanding time-based equity-based compensation awards granted to the Executive during the Term of Employment shall become fully vested and
exercisable for the remainder of their full term; and
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(ii) all outstanding performance-based equity compensation awards granted to the Executive during the Term of Employment shall remain outstanding and shall
vest or be forfeited in accordance with the terms of the applicable award agreements, if the applicable performance goals are satisfied. The determination
whether such performance goals are satisfied shall be in the sole discretion of the Compensation Committee or the Board, as the case may be.
5.6 Release; Exclusive Remedy.
(a) The Executive agrees that the payments contemplated by Section 5 shall constitute the exclusive and sole remedy for any termination of his employment and the
Executive covenants not to assert or to pursue any other remedies, at law or in equity, with respect to any termination of employment. The Corporation and Executive
acknowledge and agree that there is no duty of the Executive to mitigate damages under this Agreement. All amounts paid to the Executive pursuant to Section 5 shall be paid
without regard to whether the Executive has taken or takes actions to mitigate damages.
(b) As used herein, “Release” shall mean a written release, discharge and covenant not to sue entered into by the Executive in favor of the Corporation in the form as in
Exhibit A hereto.
5.7 Notice of Termination. Any termination of the Executive’s employment hereunder by the Corporation or by the Executive during the Term of Employment (other
than termination pursuant to Section 5.4 on account of the Executive’s death) shall be communicated by written notice of termination (the “Notice of Termination”) to the other
party hereto in accordance with Section 14(k). The Notice of Termination shall specify:
(a) The termination provision of this Agreement relied upon;
(b) To the extent applicable, the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provisions so indicated;
and
(c) The applicable Termination Date.
5.8 Termination Date. The Executive’s Termination Date shall be:
(a)
If the Executive’s employment hereunder terminates on account of the Executive’s death, the date of the Executive’s death;
(b) If the Executive’s employment hereunder is terminated on account of the Executive’s Disability, the date that it is determined that the Executive has a Disability;
(c)
If the Corporation terminates the Executive’s employment hereunder for Cause, the date the Notice of Termination is delivered to the Executive;
(d) If the Corporation terminates the Executive’s employment hereunder without Cause, the date specified in the Notice of Termination, which shall be no less than 60
calendar days following the date on which the Notice of Termination is delivered; provided that, the Corporation shall have the option to provide the Executive
with a lump sum payment equal to 60 calendar days’ Base Salary in lieu of such notice, which shall be paid in a lump sum on the Executive’s Termination Date
and for all purposes of this Agreement, the Executive’s Termination Date shall be the date on which such Notice of Termination is delivered; and
(e)
If the Executive terminates his employment hereunder with or without Good Reason, the date specified in the Executive’s Notice of Termination, which shall be
no less than 60 calendar days following the date on which the Notice of Termination is delivered.
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Notwithstanding anything contained herein, the Termination Date shall not occur until the date on which the Executive incurs a Separation from Service within the meaning of
Section 409A.
5.9 Equity. Upon termination under this Section 5 for any reason, Executive’s outstanding and vested equity awards shall remain exercisable for 18 months following
termination, subject to the provisions of the Corporation’s equity incentive plans.
5.10 Resignation From Boards and Committees. Upon or promptly following any termination of Executive’s employment with the Corporation, the Executive agrees
to resign, as of the date of such termination, from (i) each and every board of directors (or similar body, as the case may be) of the Corporation and each of its affiliates on
which the Executive may then serve, including, but not limited to, the Board (and any committees thereof), and (ii) each and every office of the Corporation and each of its
affiliates that the Executive may then hold, and all positions that he may have previously held with the Corporation and any of its affiliates.
5.10 Section 409A of the Internal Revenue Code.
(a) This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986 (“Section 409A”) and shall be construed and interpreted consistent
with that intent. In the event that any payment or benefit payable under Section 5 of this Agreement is not compliant with Section 409A and any taxes, penalties or interest are
imposed on the Executive under Section 409A as a result of such noncompliance (the “Section 409A Penalties”), the Corporation shall put the Executive in an after tax
economic position equivalent to the position the Executive would have been in without the imposition of such Section 409A Penalties. The Executive shall notify the
Corporation in writing of any claim by the Internal Revenue Service or state tax authorities that, if successful, would require the payment of any such Section 409A Penalties or
related state tax statutes. The Executive’s right to be put in an equivalent after tax economic position is subject to the Executive providing such notification no later than ten
(10) business days after Executive is informed in writing of such claim. If the Corporation desires to contest such claim, Executive shall (i) cooperate with the Corporation in
good faith in order to effectively contest such claim and (ii) permit the Corporation to participate in any proceedings relating to such claim. The Corporation shall control all
proceedings taken in connection with such contest; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest. This section shall also apply to any taxes, penalties, or interest imposed by any state that are calculated in a manner similar
to taxes, penalties, or interest imposed by Section 409A(a)(1)(B), including those amounts imposed by the California Revenue and Taxation Code (R&TC) Sections 17501 and
24601.
(b) If and to the extent that any payment or benefit under this Agreement, or any plan or arrangement of the Corporation, is determined by the Corporation to constitute
“non-qualified deferred compensation” subject to Section 409A and is payable to the Executive by reason of the Executive’s termination of employment, then (a) such payment
or benefit shall be made or provided to the Executive only upon a “separation from service” as defined for purposes of Section 409A under applicable regulations (a
“Separation from Service”) and (b) if the Executive is a “specified employee” (within the meaning of Section 409A and as determined by the Corporation), such payment or
benefit shall not be made or provided before the date that is six (6) months after the date of the Executive’s Separation from Service (or the Executive’s earlier death). For the
purposes of clarity, the first payment thereof will include a catch-up payment covering the amount that would have otherwise been paid to the Executive during the period
between the termination of Executive’s employment and the first payment date but for the application of this provision, and the balance of the installments (if any) will be
payable in accordance with their original schedule.
(c) To the extent any expense reimbursement or in-kind benefit is determined to be subject to Section 409A, the amount of any such expenses eligible for
reimbursement or in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits provided in any other taxable year
(except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed after the last day of the calendar year following the
calendar year in which the Executive incurred such expenses, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for
another benefit.
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(d) To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A, the provision will be read in such a manner so that all
payments hereunder comply with Section 409A. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the meaning of Section
409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under another provision of Section 409A. Payments
pursuant to this section are intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
6. Non-Competition.
The Executive acknowledges and recognizes the highly competitive nature of the businesses of the Corporation, the amount of sensitive and confidential information
involved in the discharge of the Executive’s position with the Corporation, and the harm to the Corporation that would result if such knowledge or expertise was disclosed or
made available to a competitor. Based on that understanding, the Executive hereby expressly agrees as follows:
(a) As a result of the particular nature of the Executive’s relationship with the Corporation, in the capacities identified earlier in this Agreement, for the Term of
Employment, the Executive hereby agrees that he will not, directly or indirectly, (i) engage in any business for the Executive’s own account or otherwise derive any personal
benefit from any business that competes with the business of the Corporation or any of its affiliates (the Corporation and its affiliates are referred to, collectively, as the
“Company Group”), (ii) enter the employ of, or render any services to, any person engaged in any business that competes with the business of any entity within the Company
Group, (iii) acquire a financial interest in any person engaged in any business that competes with the business of any entity within the Company Group, directly or indirectly, as
an individual, partner, member, shareholder, officer, director, principal, agent, trustee or consultant, or (iv) interfere with business relationships (whether formed before or after
the Effective Date) between the Corporation, any of its respective affiliates or subsidiaries, and any customers, suppliers, officers, employees, partners, members or investors of
any entity within the Company Group. For purposes of this Agreement, businesses in competition with the Company Group shall include, without limitation, businesses which
any entity within the Company Group may conduct operations, and any businesses which any entity within the Company Group has specific plans to conduct operations in the
future and as to which the Executive is aware of such planning, whether or not such businesses have or have not as of that date commenced operations.
(b) Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or indirectly, own, solely as an investment, securities of any Person, other
than a business that competes with the business of the Company Group, which are publicly traded on a national or regional stock exchange or on the over-the-counter market if
the Executive (i) is not a controlling Person of, or a member of a group that controls, such Person, and (ii) does not, directly or indirectly, beneficially own one percent (1%) or
more of any class of securities of such Person. Executive may indirectly, through a mutual or exchange traded fund, own, solely as an investment, securities of a business that
competes with the business of the Company Group, which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is
not a controlling Person of, or a member of a group that controls, such Person, and (ii) does not, directly or indirectly, beneficially own one percent (1%) or more of any class of
securities of such business. For purposes of this Section 6(b), “Person” shall have the meaning ascribed to such terms in Section 3(a)(9) of the Exchange Act and used in
Sections 13(d) and 14(d) thereof, including a “group” as described in Section 13(d) thereof.
7. Confidential Information.
As a material part of the consideration for the Corporation’s commitment to the terms of this Agreement, the Executive hereby agrees that the Executive will not at any
time (whether during or after the Executive’s employment with the Corporation), other than in the course of the Executive’s duties hereunder, or unless compelled by lawful
process after written notice to the Corporation of such notice along with sufficient time for the Corporation to try and overturn such lawful process, disclose or use for the
Executive’s own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization,
entity or enterprise, any trade secrets, or other confidential data or information relating to customers, development programs, costs, marketing, trading, investment, sales
activities, promotion, credit and financial data, financing methods, or plans of any entity within the Company Group; provided, however, that the foregoing shall not apply to
information which is generally known to the industry or the public, other than as a result of the Executive’s breach of this covenant. The Executive further agrees that the
Executive will not retain or use for his own account, at any time, any trade names, trademark or other proprietary business designation used or owned in connection with the
business of any entity within the Company Group.
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8. Proprietary Rights.
(a) Inventions. All inventions, policies, systems, developments or improvements conceived, designed, implemented and/or made by the Executive, either alone or in
conjunction with others, at any time or at any place during the Term of Employment, whether or not reduced to writing or practice during such Term of Employment, which
directly or indirectly relate to the business of any entity within the Company Group, or which were developed or made in whole or in part using the facilities and/or capital of
any entity within the Company Group, shall be the sole and exclusive property of the Company Group. The Executive shall promptly give notice to the Corporation of any such
invention, development, patent or improvement, and shall at the same time, without the need for any request by any person or entity within the Company Group, assign all of
the Executive’s rights to such invention, development, patent and/or improvement to the Company Group. The Executive shall sign all instruments necessary for the filing and
prosecution of any applications for, or extensions or renewals of, letters patent of the United States or any foreign country that any entity in the Company Group desires to file.
(b) Work Product. The Executive acknowledges and agrees that all writings, works of authorship, technology, inventions, discoveries, ideas and other work product of
any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived or reduced to practice by the Executive individually or jointly with others
during the Term of the Executive’s employment by the Corporation and relating in any way to the business or contemplated business, research or development of the
Corporation (regardless of when or where the Work Product is prepared or whose equipment or other resources is used in preparing the same) and all printed, physical and
electronic copies, all improvements, rights and claims related to the foregoing, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all
rights in and to copyrights, trade secrets, trademarks (and related goodwill), patents and other intellectual property rights therein arising in any jurisdiction throughout the world
and all related rights of priority under international conventions with respect thereto, including all pending and future applications and registrations therefor, and continuations,
divisions, continuations-in-part, reissues, extensions and renewals thereof (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the
Corporation.
For purposes of this Agreement, Work Product includes, but is not limited to, Company Group information, including plans, publications, research, strategies,
techniques, agreements, documents, contracts, terms of agreements, negotiations, know-how, computer programs, computer applications, software design, web design, work in
process, databases, manuals, results, developments, reports, graphics, drawings, sketches, market studies, formulae, notes, communications, algorithms, product plans, product
designs, styles, models, audiovisual programs, inventions, unpublished patent applications, original works of authorship, discoveries, experimental processes, experimental
results, specifications, customer information, client information, customer lists, client lists, manufacturing information, marketing information, advertising information, and
sales information.
(c) Work Made for Hire; Assignment. All copyrightable work by the Executive during the Term of Employment that relates to the business of any entity in the
Company Group is intended to be “work made for hire” as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Company Group. If the
copyright to any such copyrightable work is not the property of the Company Group by operation of the law, the Executive will, without further consideration, assign to the
Company Group all right, title and interest in such copyrightable work and will assist the entities in the Company Group and their nominees in every way, at the Company
Group’s expense, to secure, maintain and defend for the Company Group’s benefit, copyrights and any extensions and renewals thereof on any and all such work including
translations thereof in any and all countries, such work to be and to remain the property of the Company Group whether copyrighted or not.
(d) Further Assurances; Power of Attorney. During and after the Executive’s employment, the Executive agrees to reasonably cooperate with the Corporation to (i)
apply for, obtain, perfect and transfer to the Company Group the Work Product as well as an Intellectual Property Right in the Work Product in any jurisdiction in the world;
and (ii) maintain, protect and enforce the same, including, without limitation, executing and delivering to the Corporation any and all applications, oaths, declarations,
affidavits, waivers, assignments and other documents and instruments as shall be requested by the Corporation. The Executive hereby irrevocably grants the Corporation power
of attorney to execute and deliver any such documents on the Executive’s behalf in the Executive’s name and to do all other lawfully permitted acts to transfer the Work Product
to the Corporation and further the transfer, issuance, prosecution and maintenance of all Intellectual Property Rights therein, to the full extent permitted by law, if the Executive
does not promptly cooperate with the Corporation’s request (without limiting the rights the Corporation shall have in such circumstances by operation of law). The power of
attorney is coupled with an interest and shall not be effected by the Executive’s subsequent incapacity.
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(e) No License. The Executive understands that this Agreement does not, and shall not be construed to, grant the Executive any license or right of any nature with
respect to any Work Product or Intellectual Property Rights or any Confidential Information, materials, software or other tools made available to the Executive by the
Corporation.
9. Anti-Solicitation.
In light of the amount of sensitive and confidential information involved in the discharge of the Executive’s duties, and the harm to the Corporation that would result if
such knowledge or expertise were disclosed or made available to a competitor, and as a reasonable step to help protect the confidentiality of such information, the Executive
promises and agrees that during the Term of Employment and for a period of two (2) years thereafter, the Executive will not use the Corporation’s confidential information to,
directly or indirectly, individually or as a consultant to, or as an employee, officer, shareholder, director or other owner or participant in any business, influence or attempt to
influence the customers, vendors, suppliers, joint venturers, associates, consultants, agents, or partners of any entity within the Company Group, either directly or indirectly, to
divert their business away from the Company Group, to any individual, partnership, firm, corporation or other entity then in competition with the business of any entity within
the Company Group, and he will not otherwise materially interfere with any business relationship of any entity within the Company Group.
10. Non-Solicitation of Employees.
In light of the amount of sensitive and confidential information involved in the discharge of the Executive’s duties, and the harm to the Corporation that would result if
such knowledge or expertise were disclosed or made available to a competitor, and as a reasonable step to help protect the confidentiality of such information, the Executive
promises and agrees that during the Term of Employment and for a period of one (1) year thereafter, the Executive will not, directly or indirectly, individually or as a consultant
to, or as an employee, officer, shareholder, director, or other owner of or participant in any business, solicit (or assist in soliciting) any person who is then, or at any time within
six (6) months prior thereto was, an employee of an entity within the Company Group, who earned annually $25,000 or more as an employee of such entity during the last six
(6) months of his or her own employment to work for (as an employee, consultant or otherwise) any business, individual, partnership, firm, corporation, or other entity whether
or not engaged in competitive business with any entity in the Company Group.
11. Non-Disparagement. The Executive agrees and covenants that the Executive shall not at any time make, publish, or communicate to any person or entity or in any public
forum any defamatory, or maliciously false, or disparaging remarks, comments, or statements concerning the Company Group or its businesses, or any of its employees,
officers, or directors and their existing and prospective customers, suppliers, investors, and other associated third parties, now or in the future.
12. Return of Property.
The Executive agrees to truthfully and faithfully account for and deliver to the Corporation all property belonging to the Corporation, any other entity in the Company
Group, or any of their respective affiliates, which the Executive may receive from or on account of the Corporation, any other entity in the Company Group, or any of their
respective affiliates, and upon the termination of the Term of Employment, or the Corporation’s demand, the Executive shall immediately deliver to the Corporation all such
property belonging to the Corporation, any other entity in the Company Group, or any of their respective affiliates.
13. Withholding Taxes.
Notwithstanding anything else herein to the contrary, the Corporation may withhold (or cause there to be withheld, as the case may be) from any amounts otherwise
due or payable under or pursuant to this Agreement such federal, state and local income, employment, or other taxes as may be required to be withheld pursuant to any
applicable law or regulation.
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14. Cooperation in Litigation.
The Executive agrees that, during the Term of Employment or after the termination of the Executive’s employment, he will reasonably cooperate with the Corporation,
subject to his reasonable personal and business schedules, in any litigation which arises out of events occurring prior to the termination of his employment, including but not
limited to, serving as a witness or consultant and producing documents and information relevant to the case or helpful to the Corporation. The Corporation agrees to reimburse
the Executive for all reasonable costs and expenses he incurs in connection with his obligations under this Section 14 and, in addition, to reasonably compensate the Executive
for time actually spent in connection therewith following the termination of his employment with the Corporation.
15. Miscellaneous.
(a) Assignment. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights
or obligations hereunder; provided, however, that in the event of a merger, consolidation, or transfer or sale of all or substantially all of the assets of the Corporation with or to
any other individual(s) or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of the Corporation hereunder.
(b) Number and Gender. Where the context requires, the singular shall include the plural, the plural shall include the singular, and any gender shall include all other genders.
(c) Section Headings. The section headings of, and titles of paragraphs and subparagraphs contained in, this Agreement are for the purposes of convenience only, and they
neither form a part of this Agreement nor are they to be used in the construction or interpretation thereof.
(d) Governing Law. This Agreement, and all questions relating to its validity, interpretation, performance and enforcement, as well as the legal relations hereby created between
the parties hereto, shall be governed by and construed under, and interpreted and enforced in accordance with, the laws of the State of California, notwithstanding any
California or other conflict of law provision to the contrary. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986 and the regulations
promulgated thereunder. Any action or proceeding by either of the parties to enforce this Agreement shall be brought only in a state or federal court located in the state of
California, Sonoma county. The parties hereby irrevocably submit to the exclusive jurisdiction of such courts and waive the defense of inconvenient forum to the maintenance
of any such action or proceeding in such venue.
(e) Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement
which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.
(f) Entire Agreement. This Agreement replaces and supersedes prior employment agreements, including the employment agreement executed by and between the Executive and
the Corporation dated July 22, 2022. This Agreement embodies the entire agreement of the parties hereto respecting the matters within its scope. Any prior negotiations,
correspondence, agreements, proposals or understandings relating to the subject matter hereof shall be deemed to have been merged into this Agreement, and to the extent
inconsistent herewith, such negotiations, correspondence, agreements, proposals, or understandings shall be deemed to be of no force or effect. There are no representations,
warranties, or agreements, whether express or implied, or oral or written, with respect to the subject matter hereof, except as expressly set forth herein.
(g) Modifications. This Agreement may not be amended, modified or changed (in whole or in part), except by a formal definitive written agreement expressly referring to this
Agreement, which agreement is executed by both of the parties hereto.
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(h) Waiver. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any
other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
(i) Resolution of Disputes.
(i) Any controversy arising out of or relating to the Executive’s employment (whether or not before or after the expiration of the Term of Employment), any
termination of the Executive’s employment, this Agreement or the enforcement or interpretation of this Agreement, or because of an alleged breach, default, or
misrepresentation in connection with any of the provisions of this Agreement, including (without limitation) any state or federal statutory claims, shall be submitted to
arbitration in California, before a sole arbitrator (the “Arbitrator”) selected from the American Arbitration Association (“AAA”), and shall be conducted in accordance with the
provisions of California Code of Civil Procedure §§ 1280 et seq. as the exclusive remedy of such dispute; provided, however, that provisional injunctive relief may, but need
not, be sought in a court of law while arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is
finally determined by the Arbitrator. Final resolution of any dispute through arbitration may include any remedy or relief that the Arbitrator deems just and equitable, including
any and all remedies provided by applicable state or federal statutes. At the conclusion of the arbitration, the Arbitrator shall issue a written decision that sets forth the essential
findings and conclusions upon which the Arbitrator’s award or decision is based. Any award or relief granted by the Arbitrator hereunder shall be final and binding on the
parties hereto and may be enforced by any court of competent jurisdiction.
(ii) The parties acknowledge and agree that they are hereby waiving any rights to trial by jury in any action, proceeding or counterclaim brought by either of the parties
against the other in connection with any matter whatsoever arising out of or in any way connected with any of the matters referenced in the first sentence of Section 15(i)(i).
(iii) The parties agree that the Corporation shall be responsible for payment of the forum costs of any arbitration hereunder, including the Arbitrator’s fee. The parties
further agree that in any proceeding with respect to such matters, the prevailing party will be entitled to recover its reasonable attorney’s fees and costs from the non-prevailing
party (other than forum costs associated with the arbitration which in any event shall be paid by the Corporation).
(iv) Without limiting the remedies available to the parties and notwithstanding the foregoing provisions of this Section 15, the Executive and the Corporation
acknowledge that any breach of any of the covenants or provisions contained in Sections 5.9, and Sections 6 through 11 could result in irreparable injury to either of the parties
hereto for which there might be no adequate remedy at law, and that, in the event of such a breach or threat thereof, the non-breaching party shall be entitled to obtain a
temporary restraining order and/or a preliminary injunction and a permanent injunction restraining the other party hereto from engaging in any activities prohibited by any
covenant or provision in Sections 5.9, and Sections 6 through 11 or such other equitable relief as may be required to enforce specifically any of the covenants or provisions of
Sections 5.9, and Sections 6 through 11.
(j) Publicity.
The Executive hereby irrevocably consents during the term of this Agreement to any and all uses and displays, by the Company Group and its agents, representatives
and licensees, of the Executive’s name, voice, likeness, image, appearance and biographical information in, on or in connection with any pictures, photographs, audio and video
recordings, digital images, websites, television programs and advertising, other advertising and publicity, sales and marketing brochures, books, magazines, other publications,
CDs, DVDs, tapes and all other printed and electronic forms and media throughout the world, at any time during or after the period of his employment by the Corporation, for
all legitimate commercial and business purposes of the Company Group (“Permitted Uses”) without further consent from or royalty, payment or other compensation to the
Executive. The Executive hereby forever waives and releases the Company Group and its directors, officers, employees and agents from any and all claims, actions, damages,
losses, costs, expenses and liability of any kind, arising under any legal or equitable theory whatsoever at any time during or after the period of his employment by the
Corporation, arising directly or indirectly from the Company Group’s and its agents’, representatives’ and licensees’ exercise of their rights in connection with any Permitted
Uses. At the end of the term of this Agreement, the Corporation shall have no obligation to remove any previously-published displays described in this paragraph.
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(k) Notices.
(i) All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly
received if (i) delivered by hand or by courier, effective upon delivery, (ii) given by facsimile or electronic version, when transmitted if transmitted on a business day and during
normal business hours of the recipient, and otherwise delivered on the next business day following transmission, or (iii) sent by registered or certified mail, postage prepaid,
return receipt requested, 5 business days after being deposited in the U.S. postal mail. Any notice shall be duly addressed to the parties as follows:
(i) If to the Corporation:
Sonoma Pharmaceuticals, Inc.
Lead Independent Director
5445 Conestoga Court, Suite 150
Boulder, Colorado 80301
(ii) If to the Executive:
Bruce Thornton
At the address on file with the Corporation
(ii) Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of
this Section 15 for the giving of notice.
(l) Legal Counsel; Mutual Drafting. Each party recognizes that this is a legally binding contract and acknowledges and agrees that they have had the opportunity to consult with
legal counsel of their choice. Each party has cooperated in the drafting, negotiation and preparation of this Agreement. Hence, in any construction to be made of this
Agreement, the same shall not be construed against either party on the basis of that party being the drafter of such language.
(m) Provisions that Survive Termination. The provisions of Sections 3.4, 3.5, 5 through 11, 14 and this Section 15 shall survive any termination of the Term of Employment.
(n) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears
thereon, and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or
taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. Photographic copies of such signed counterparts may be used in lieu of the
originals for any purpose.
(o) Tolling. Should the Executive violate any of the terms of the restrictive covenant obligations articulated herein, the obligation at issue will run from the first date on which
the Executive ceases to be in violation of such obligation.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Corporation and the Executive have executed this Amended and Restated Employment Agreement as of the Effective Date.
CORPORATION
Sonoma Pharmaceuticals, Inc.,
a Delaware corporation
By:
Name:
Title:
/s/ Jerry McLaughlin
Jerry McLaughlin
Chairman of the Compensation Committee
EXECUTIVE
/s/ Bruce Thornton
By:
Name: Bruce Thornton
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EXHIBIT A — RELEASE
1. Definitions. I intend all words used in this Release to have their plain meanings in ordinary English. Technical legal words are not needed to describe what I mean.
Specific terms I use in this Release have the following meanings:
A. “I,” “me,” and “my” include me, Bruce Thornton, and anyone who has or obtains any legal rights or claims through me, including my heirs and estate, and each of
my descendants, dependents, executors, administrators, assigns and successors.
B. “Employer,” as used in this Release, shall at all times mean Sonoma Pharmaceuticals, Inc. and “Released Party” or “Released Parties”, individual and collectively,
means the Employer and the Employer’s parent, past or present subsidiaries, affiliates, each of any present or former officers, directors, shareholders, employees, agents or
attorneys, trustees, insurers, successors, predecessors, assigns, or personal representatives.
C. “My Claims” mean actions or causes of action, suits, claims, charges, complaints, contracts (whether oral or written, express or implied from any source), and
promises, whatsoever, in law or equity, that I ever had, may now have or hereafter can, shall or may have against the Employer or other Released Party as of the date of the
execution of this Release, including all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to me for, upon, or by reason of any matter,
cause or thing whatsoever, that are in any way related to my employment with or separation (termination of employment) from the Employer.
By signing this Release, I am agreeing to release any actual and potential claim, known or unknown, I have or may potentially have, in law or in equity, either as an
individual or standing in the shoes of the government, under any federal, state or local law, administrative regulation or legal principle (except as provided in Paragraph 4 of
this Release). The following listing of laws and types of claims is not meant to, and shall not be interpreted to, exclude any particular law or type of claim, law, regulation or
legal principle not listed. I understand I am releasing all my Claims, including, but not limited to, claims for invasion of privacy; breach of written or oral, express or implied,
contract; fraud or misrepresentation; and any claim under Section 1981 of the Civil Rights Act of 1866, Title VII of the Civil Rights Act of 1964, Age Discrimination in
Employment Act of 1967 (“ADEA”), 29 U.S.C. § 626, as amended, the Older Workers Benefit Protection Act of 1990 (“OWBPA”), 29 U.S.C. 626(f), Title VII of the Civil
Rights Act of 1964 (“Title VII”), 42 U.S.C. § 2000e, et seq., the Americans with Disabilities Act Amendments Act (“ADAAA”), 29 U.S.C. § 2101, et seq., the Family and
Medical Leave Act (“FMLA”), 29 U.S.C. § 2601 et seq., the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. §§ 1001, et seq., Equal Pay
Act (“EPA”), 29 U.S.C. § 206(d), the Worker Adjustment and Retraining Notification Act (“WARN”), 29 U.S.C. § 2101 et seq., the False Claims Act, 31 U.S.C. § 3729 et seq.,
the California Fair Employment and Housing Act, the California Family Rights Act, any other state human rights or fair employment practices act, and any other federal, state,
or local statute, law, rule, regulation, ordinance or order. This includes, but is not limited to, claims for violation of any civil rights laws based on protected class status; claims
for assault, battery, defamation, intentional or negligent infliction of emotional distress, breach of the covenant of good faith and fair dealing, promissory estoppel, negligence,
negligent hiring, retention or supervision, retaliation, constructive discharge, violation of whistleblower protection laws, unjust enrichment, payment of any kind, including any
other claim for severance pay, bonus or incentive pay, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, medical
expenses, or disability, violation of public policy, and all other claims for unlawful employment practices, and all other common law or statutory claims. To the maximum
extent permitted by law, I agree that I will not seek and waive any right to accept any relief or award from any charge or action against the Employer before any federal, state,
or local administrative agency or federal state or local court whether filed by me or on my behalf with respect to any claim or right covered by this Release.
2. Agreement to Release My Claims. Except as stated in Paragraph 4, I agree to give up all My Claims, waive any rights thereunder, and forever discharge the
Employer and all Released Parties of and from any and all liability to me for actions or causes of action, suits, or Claims. To the maximum extent permitted by law, I agree that
I will not seek and I waive any right to accept any relief or award from any charge or action against the Employer or other Released Party before any federal, state, or local
administrative agency or federal state or local court whether filed by me or on my behalf with respect to any claim or right covered by this Release. I also agree to withdraw any
and all of my charges and lawsuits against Employer or other Released Party, except that I may, but am not required to, withdraw or dismiss, or attempt to withdraw or dismiss,
any charges that I may have pending against the Employer or other Released Party with the EEOC or other civil rights enforcement agency.
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I represent and warrant that I have not transferred or otherwise assigned my Claims, or parts thereof, to any person or entity, other than the Employer. I will defend,
indemnify and hold harmless the Employer from and against any claim (including the payment of attorneys’ fees and costs actually incurred whether or not litigation is
commenced) that is directly or indirectly based on or in connection with or arising out of any such assignment or transfer made, purported or claimed.
In exchange for my agreement to release my Claims, I am receiving satisfactory Consideration (compensation) from the Employer to which I am not otherwise
entitled by law, contract, or under any Employer policy. The consideration I am receiving is a full and fair payment for the release of all my Claims. The Employer and the
Released Parties do not owe me anything in addition to what I will be receiving.
3. Older Workers Benefit Protection Act. [This section may be revised if Executive terminates employment as part of a “group” termination.] The Older Workers
Benefit Protection Act (“OWBPA”) applies to individuals age 40 and older and sets forth certain criteria for such individuals to waive their rights under the Age Discrimination
in Employment Act (“ADEA”) in connection with an exit incentive program or other employment termination program. I understand and have been advised that this Release of
My Claims is subject to the terms of the OWBPA. The OWBPA provides that an individual cannot waive a right or claim under the ADEA unless the waiver is knowing and
voluntary. I have been advised of this law, and I agree that I am signing this Release voluntarily, and with full knowledge of its consequences. I understand that the Employer is
giving me at least twenty-one (21) calendar days from the date I received a copy of this Release to decide whether I want to sign it. I acknowledge that I have been advised to
use this time to consult with an attorney about the effect of this Release. If I sign this Release before the end of the twenty-one (21) day period it will be my personal, voluntary
decision to do so, and will be done with full knowledge of my legal rights. I agree that material and/or immaterial changes to the Separation Agreement or this Release will not
restart the running of this consideration period.
4. Exclusions from Release. My Claims do not include my rights, if any, to claim the following: unemployment insurance or workers compensation benefits; claims for
my vested post-termination benefits under any 401(k) or similar tax-qualified retirement benefit plan; my COBRA rights; and my rights to enforce the terms of this Release.
A. Nothing in this Release interferes with my right to file a charge with the Equal Employment Opportunity Commission (“EEOC”) or other local civil rights
enforcement agency, or participate in any manner in an EEOC investigation or proceeding under Title VII, the ADA, the ADEA, or the EPA. I, however, understand that I am
waiving my right to recover individual relief including, but not limited to, back pay, front pay, reinstatement, attorneys’ fees, and/or punitive damages, in any administrative or
legal action whether brought by the EEOC or other civil rights enforcement agency, me or any other party.
B. Nothing in this Release interferes with my right to challenge the knowing and voluntary nature of this Release under the ADEA and/or OWBPA, if I have rights
under such laws.
C. I agree that the Employer and the Released Parties reserve any and all defenses, which any of them has or might have against any claims brought by me. This
includes, but is not limited to, the Employer’s or other Released Party’s right to seek available costs and attorneys’ fees, and to have any monetary award granted to me, if any,
reduced by the amount of money that I received in consideration for this Release.
D. Nothing in this Release releases any claims for indemnification by Executive pursuant to any indemnification agreement, statute or otherwise or claims for
coverage under any D&O or other similar insurance policy.
5. Effective Date; Right to Rescind or Revoke. I understand that insofar as this Release relates to my rights under the Age Discrimination in Employment Act
(“ADEA”), it shall not become effective or enforceable until seven (7) calendar days after I sign it. I also have the right to rescind (or revoke) this Release insofar as it extends
to potential claims under the ADEA by written notice to Employer within seven (7) calendar days following my signing this Release (the “Rescission Period”). Any such
rescission (or revocation) must be in writing and hand-delivered to Employer or, if sent by mail, postmarked within the applicable time period, sent by certified mail, return
receipt requested, and addressed as follows:
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A. post-marked within the seven (7) calendar day Rescission Period;
B. properly addressed to
[INSERT NAME AND ADDRESS]; and
C. sent by certified mail, return receipt requested.
6. I Understand the Terms of this Release. I have had the opportunity to read this Release carefully and understand all its terms. I have had the opportunity to review
this Release with my own attorney. In agreeing to sign this Release, I have not relied on any statements or explanations made by the Employer or its attorneys. I understand and
agree that this Release and the attached Agreement contain all the agreements between the Employer (and any other Released Party) and me. We have no other written or oral
agreements. I understand this Release is a very important legal document and I agree to be bound by the terms of this Release.
Dated: ____________, 20__
_______________________________
Bruce Thornton
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Amy Trombly, certify that:
1. I have reviewed this annual report on Form 10-K of Sonoma Pharmaceuticals, Inc. for the year ended March 31, 2023;
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 21, 2023
By:
/s/ Amy Trombly
Amy Trombly
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Jerome Dvonch, certify that:
1. I have reviewed this annual report on Form 10-K of Sonoma Pharmaceuticals, Inc. for the year ended March 31, 2023;
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 21, 2023
By:
/s/ Jerome Dvonch
Jerome Dvonch
Interim 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, 2023 (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 21, 2023
Date: June 21, 2023
By:
By:
/s/ Amy Trombly
Amy Trombly
Chief Executive Officer
(Principal Executive Officer)
/s/ Jerome Dvonch
Jerome Dvonch
Interim Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)