Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2025 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number: 001-33216 (Registrant's telephone number, including area code) N/A (Former name or former address a ...

[Part I](index=4&type=section&id=PART%20I) [Business](index=4&type=section&id=ITEM%201.%20Business) Sonoma Pharmaceuticals develops and produces stabilized hypochlorous acid (HOCl) products for diverse healthcare applications, expanding global distribution and securing regulatory approvals to drive revenue - The company's core strategy is to work with partners in the United States and globally to market and distribute its products, which are sold in over **55 countries**[21](index=21&type=chunk) - Key business channels include Dermatology, First Aid and Wound Care, Eye Care, Oral/Dental/Nasal Care, Podiatry, Animal Health, and Surface Disinfectants[22](index=22&type=chunk)[30](index=30&type=chunk)[35](index=35&type=chunk)[37](index=37&type=chunk)[39](index=39&type=chunk)[41](index=41&type=chunk)[44](index=44&type=chunk) - In August 2024, Sonoma entered a five-year distribution agreement with Medline Industries, LP for its wound care products in the U.S., later expanded to include Canada and OTC products[34](index=34&type=chunk) - The company partners with Compana Pet Brands for animal health products in the U.S. and Canada, and with Petagon for Asian and European markets[42](index=42&type=chunk)[43](index=43&type=chunk) - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications[17](index=17&type=chunk) - Sonoma's business strategy involves selling products directly and through partners in over **55 countries**, with a focus on expanding its distribution network and customer base[18](index=18&type=chunk)[21](index=21&type=chunk) - Recent business updates include new FDA 510(k) clearances, expanded distribution agreements with Medline Industries and WellSpring Pharmaceutical, and the successful transition of European products to the new EU Medical Device Regulation (MDR)[23](index=23&type=chunk) - All products are manufactured at the company's facility in Zapopan, Mexico, which is certified under U.S. cGMP, ISO 13485, and Mexican Ministry of Health standards[75](index=75&type=chunk) [Business Channels and Products](index=5&type=section&id=Business%20Channels%20and%20Products) Sonoma markets its HOCl-based products across diverse healthcare channels, primarily through partnerships for U.S. and international distribution [Research and Development](index=14&type=section&id=Research%20and%20Development) Research and development expenses, consisting mainly of clinical studies, personnel, and regulatory services, were slightly down in fiscal year 2025 compared to 2024 R&D Expense Comparison | Fiscal Year | R&D Expense | | :--- | :--- | | **2025** | $1.814 million | | **2024** | $1.871 million | [Regulatory Approvals and Competition](index=14&type=section&id=Regulatory%20Approvals%20and%20Competition) Sonoma holds multiple U.S. FDA and EU regulatory approvals for its HOCl products, competing with larger firms by leveraging the superior stability of its solutions - The company has obtained **22 U.S. FDA 510(k) clearances** for its products as medical devices[78](index=78&type=chunk) - On January 29, 2025, Sonoma received an updated CE certificate under the new EU Medical Devices Regulation, covering all its commercialized products in Europe[79](index=79&type=chunk) - The company competes with large, well-established companies in dermatology, wound care, and other markets that have advantages such as greater name recognition, established distribution networks, and larger financial resources[92](index=92&type=chunk)[96](index=96&type=chunk) - Sonoma believes its HOCl-based solutions are among the most stable available, which provides a competitive advantage over other HOCl products that may become unstable over short periods[91](index=91&type=chunk) [Government Regulation](index=18&type=section&id=Government%20Regulation) The company's products are extensively regulated by the FDA in the U.S. and international authorities, requiring compliance with medical device regulations and healthcare laws - The company has received **22 510(k) clearances** for its products as medical devices, which are classified as Class I, II, or III depending on risk[93](index=93&type=chunk)[94](index=94&type=chunk) - A proposed FDA rule issued on November 30, 2023, may classify wound dressings with antimicrobials like HOCl into Class II, which would require new 510(k) applications and compliance with special controls[99](index=99&type=chunk)[137](index=137&type=chunk) - In the EU, the company's products are classified as medical devices and must comply with the Medical Devices Regulation (MDR) to affix the CE marking for sale in the European Economic Area. The company has successfully transitioned its commercialized products to the new MDR[113](index=113&type=chunk)[115](index=115&type=chunk) - The company is subject to various U.S. healthcare laws, including the Anti-Kickback Statute, False Claims Act, and HIPAA, which regulate financial arrangements with healthcare providers and protect patient information[106](index=106&type=chunk)[108](index=108&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) [Risk Factors](index=24&type=section&id=ITEM%201A.%20Risk%20Factors) The company faces significant risks including ongoing net losses, going concern doubts, reliance on key distributors, and international operational exposures to foreign exchange and regulatory challenges [Risks Related to Our Business](index=24&type=section&id=Risks%20Related%20to%20Our%20Business) Key business risks include a history of financial losses, a going concern warning, heavy dependence on key customers and international operations, and challenges with Mexican tax laws - The company has a history of losses, with a net loss of **$3.5 million** in FY2025 and an accumulated deficit of **$197.8 million**. The audited financial statements express substantial doubt about its ability to continue as a going concern[122](index=122&type=chunk) - The company relies heavily on key customers. In FY2025, Customer B and Customer C represented **21%** and **18%** of net revenues, respectively. In FY2024, Customers A, B, and C represented **17%**, **15%**, and **14%**, respectively[130](index=130&type=chunk) - A majority of business is conducted internationally, with approximately **82%** of total revenue in FY2025 generated from sales outside the United States, exposing the company to various international risks[131](index=131&type=chunk) - The company faces risks related to Mexican tax law, which prevents the deduction of intercompany interest expense and requires withholding tax on payments. As of March 31, 2025, its Mexican subsidiary owes approximately **$45.9 million** in principal, technical assistance payments, and accrued interest to the parent company[127](index=127&type=chunk) [Risks Related to Our Common Stock](index=37&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) Risks for common stock include price volatility, impact of operating results, anti-takeover provisions, potential dilution from future issuances, and delisting risk from Nasdaq non-compliance - The trading price of the common stock is volatile and depends on factors like operating results, financial situation, and market conditions[187](index=187&type=chunk) - Anti-takeover provisions, such as the ability of the Board to issue preferred stock without stockholder approval and limitations on calling special meetings, may make a takeover or change in management difficult[190](index=190&type=chunk)[194](index=194&type=chunk) - Future issuance of capital stock to raise funds will result in dilution to existing stockholders. The company is authorized to issue up to **50 million shares** of common stock[192](index=192&type=chunk) - Failure to maintain compliance with Nasdaq's continued listing requirements, such as the minimum bid price, could result in the delisting of the common stock[196](index=196&type=chunk) [Unresolved Staff Comments](index=39&type=section&id=ITEM%201B.%20Unresolved%20Staff%20Comments) Not applicable. The company has no unresolved staff comments - Not Applicable[197](index=197&type=chunk) [Cybersecurity](index=39&type=section&id=ITEM%201C.%20Cybersecurity) The company manages cybersecurity risks through management assessments, an outside IT consultant, and reliance on established third-party software providers, with active Board oversight and no material past incidents - Cybersecurity risk management involves assessments by management, an outside consultant, and secure third-party software[198](index=198&type=chunk) - The Board of Directors, as a whole, oversees the company's cybersecurity risks, with management keeping them apprised of threats and mitigation strategies[200](index=200&type=chunk) - The company is not aware of any cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[199](index=199&type=chunk) [Properties](index=40&type=section&id=ITEM%202.%20Properties) As of March 31, 2025, Sonoma Pharmaceuticals leases a corporate office in Boulder, Colorado, and a manufacturing facility and warehouse space in Zapopan, Mexico, which management believes are adequate for the company's needs for at least the next 12 months Leased Properties as of March 31, 2025 | Location | Purpose | Rent per month | | :--- | :--- | :--- | | Boulder, CO | Principal executive office | USD 3,680 | | Zapopan, Mexico | Office, manufacturing | MXN 209,811 | | Zapopan, Mexico | Warehouse | MXN 213,625 | [Legal Proceedings](index=40&type=section&id=ITEM%203.%20Legal%20Proceedings) The company may be involved in legal matters in the ordinary course of business, which management currently believes are insignificant and not expected to have a material adverse effect on the company's business or financial condition - The company may be involved in ordinary course legal matters, but management currently considers them insignificant[202](index=202&type=chunk) [Mine Safety Disclosures](index=40&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) Not applicable. The company has no mine safety disclosures - Not applicable[203](index=203&type=chunk) [Part II](index=41&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=41&type=section&id=ITEM%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on The Nasdaq Capital Market under the symbol "SNOA", with approximately 61 holders of record as of June 10, 2025, and no intention to pay cash dividends in the foreseeable future - Common stock is traded on The Nasdaq Capital Market under the symbol "**SNOA**"[205](index=205&type=chunk) - As of June 10, 2025, there were approximately **61 holders** of record of the common stock[206](index=206&type=chunk) - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[207](index=207&type=chunk) [Selected Financial Data](index=41&type=section&id=ITEM%206.%20Selected%20Financial%20Data) As a smaller reporting company, Sonoma Pharmaceuticals has elected scaled disclosure and is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide information for this item[210](index=210&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=ITEM%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For FY2025, total revenue increased 12% to $14.3 million, driven by international growth, leading to a narrowed net loss and reduced operating cash outflow, despite ongoing going concern doubts [Results of Continuing Operations](index=42&type=section&id=Results%20of%20Continuing%20Operations) In FY2025, total revenue grew 12% to $14.3 million, driven by strong international sales offsetting U.S. decline, with gross profit increasing and operating expenses decreasing, leading to an improved loss from operations Revenue by Geographic Region (in thousands) | Region | FY 2025 | FY 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $2,611 | $3,058 | $(447) | (15%) | | Europe | $5,523 | $4,781 | $742 | 16% | | Latin America | $2,962 | $1,726 | $1,236 | 72% | | Asia | $2,317 | $2,298 | $19 | 1% | | Rest of the World | $875 | $872 | $3 | 0% | | **Total** | **$14,288** | **$12,735** | **$1,553** | **12%** | Gross Profit Analysis (in thousands) | Metric | FY 2025 | FY 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenues | $8,823 | $7,990 | $883 | 10% | | Gross Profit | $5,465 | $4,745 | $720 | 15% | | Gross Margin | 38% | 37% | - | - | - Selling, General and Administrative (SG&A) expenses decreased by **3%** to **$7.36 million** in FY2025 from **$7.58 million** in FY2024, due to ongoing cost containment efforts[222](index=222&type=chunk) Net Loss and EPS | Metric | FY 2025 | FY 2024 | | :--- | :--- | | Net Loss (in thousands) | $(3,457) | $(4,835) | | Net Loss per Share | $(2.79) | $(10.63) | [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2025, the company had $5.4 million in cash and $8.6 million in working capital, with reduced operating cash outflow, but its history of losses raises substantial doubt about its going concern ability, necessitating future capital raises Cash and Working Capital (in thousands) | Metric | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,374 | $3,128 | | Working capital | $8,552 | $8,829 | Summary of Cash Flows (in thousands) | Activity | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Net cash used in Operating | $(88) | $(2,398) | | Net cash used in Investing | $(80) | $(2) | | Net cash provided by Financing | $3,030 | $1,676 | - The company's history of losses and uncertainty about future funding indicate substantial doubt about its ability to continue as a going concern. The financial statements do not include adjustments that might result from this uncertainty[231](index=231&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=ITEM%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Sonoma Pharmaceuticals has elected scaled disclosure and is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide information for this item[239](index=239&type=chunk) [Consolidated Financial Statements and Supplementary Data](index=47&type=section&id=ITEM%208.%20Consolidated%20Financial%20Statements%20and%20Supplementary%20Data) The consolidated financial statements for FY2025 and FY2024 are presented, with the auditor's report expressing substantial doubt about the company's going concern ability due to losses and negative cash flows, reflecting decreased total assets and increased total liabilities - The report from the independent registered public accounting firm, Frazier & Deeter, LLC, includes a paragraph expressing substantial doubt about the Company's ability to continue as a going concern[244](index=244&type=chunk) Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $12,648 | $12,548 | | **Total Assets** | **$13,693** | **$14,740** | | Total Current Liabilities | $4,096 | $3,719 | | **Total Liabilities** | **$9,282** | **$8,603** | | **Total Stockholders' Equity** | **$4,411** | **$6,137** | Consolidated Statements of Comprehensive Loss Data (in thousands) | Account | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Revenues | $14,288 | $12,735 | | Gross Profit | $5,465 | $4,745 | | Loss from Operations | $(3,710) | $(4,701) | | **Net Loss** | **$(3,457)** | **$(4,835)** | | Comprehensive Loss | $(5,110) | $(4,140) | - Revenue is disaggregated by product type and geography. In FY2025, Human Care products generated **$12.1 million** and Animal Care products generated **$1.7 million** in revenue[363](index=363&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=72&type=section&id=ITEM%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) None. The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[364](index=364&type=chunk) [Controls and Procedures](index=72&type=section&id=ITEM%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2025, following successful remediation of prior material weaknesses through staffing and process improvements - Management concluded that disclosure controls and procedures were effective as of March 31, 2025[366](index=366&type=chunk) - Management concluded that internal control over financial reporting was effective as of March 31, 2025, based on the 2013 COSO framework[367](index=367&type=chunk) - The company has taken several remediation measures to address previously identified material weaknesses, including hiring an experienced CFO and Controller, separating duties, and enhancing training. These weaknesses are now considered remediated[368](index=368&type=chunk)[369](index=369&type=chunk) [Other Information](index=73&type=section&id=ITEM%209B.%20Other%20Information) On June 12, 2025, the Compensation Committee granted 13,500 Restricted Stock Units (RSUs) to each of three executive officers, vesting on the third anniversary or upon a change of control - On June 12, 2025, the Compensation Committee granted **13,500 Restricted Stock Units (RSUs)** to each of the CEO, CFO, and another executive officer[371](index=371&type=chunk) [Part III](index=74&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=74&type=section&id=ITEM%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance, including the code of business conduct and procedures for nominating directors, is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the registrant's 2025 proxy statement[374](index=374&type=chunk) - The company has adopted a Code of Business Conduct applicable to all officers, directors, and employees, which was updated on November 5, 2024[376](index=376&type=chunk) [Executive Compensation](index=74&type=section&id=ITEM%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[379](index=379&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=75&type=section&id=ITEM%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of certain beneficial owners and management, as well as matters related to equity compensation plans, is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[380](index=380&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=75&type=section&id=ITEM%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[381](index=381&type=chunk) [Principal Accounting Fees and Services](index=75&type=section&id=ITEM%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[382](index=382&type=chunk) [Part IV](index=76&type=section&id=PART%20IV) [Exhibits, Financial Statement Schedules](index=76&type=section&id=ITEM%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists documents filed as part of the report, referencing consolidated financial statements under Item 8 and providing a detailed index of exhibits including corporate governance documents, material contracts, and certifications - The consolidated financial statements are referenced under Item 8 of Part II of the report[385](index=385&type=chunk) - A list of exhibits is provided, including the Restated Certificate of Incorporation, Bylaws, material contracts such as distribution agreements with Medline and WellSpring, equity incentive plans, and Sarbanes-Oxley certifications[388](index=388&type=chunk)[389](index=389&type=chunk)[390](index=390&type=chunk) [Form 10-K Summary](index=79&type=section&id=ITEM%2016.%20Form%2010-K%20Summary) None. The company did not provide a Form 10-K summary - None[393](index=393&type=chunk)

Core Viewpoint - Momentum investing focuses on "buying high and selling higher," contrasting with traditional strategies of "buying low and selling high" [1] Group 1: Momentum Investing Characteristics - Momentum investing can be risky as stocks may lose momentum when their valuations exceed future growth potential [2] - A safer approach involves investing in bargain stocks that exhibit recent price momentum, identified through the Zacks Momentum Style Score [3] Group 2: Sonoma Pharmaceuticals, Inc. (SNOA) Analysis - SNOA has shown a four-week price change of 32.5%, indicating strong recent price momentum [4] - Over the past 12 weeks, SNOA's stock gained 16.7%, with a beta of 1.56, suggesting it moves 56% more than the market [5] - SNOA has a Momentum Score of A, indicating a favorable time to invest [6] - The stock has a Zacks Rank 2 (Buy) due to upward revisions in earnings estimates, which attract more investor interest [7] - SNOA is trading at a Price-to-Sales ratio of 0.36, suggesting it is undervalued at 36 cents for each dollar of sales [7] Group 3: Investment Opportunities - SNOA is highlighted as a strong candidate for investment, with potential for further price appreciation [8] - Other stocks meeting the "Fast-Paced Momentum at a Bargain" criteria are also available for consideration [8]

PART I - FINANCIAL INFORMATION [Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) These unaudited statements detail the company's financial position and performance, noting increased cash from financing activities and a persistent net loss [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheets show total assets decreased to **$13.7 million**, while cash increased to **$5.2 million**, and stockholders' equity declined to **$4.9 million** due to an accumulated deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 (Unaudited) | Mar 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,236 | $3,128 | | Total current assets | $12,380 | $12,548 | | Total assets | $13,668 | $14,740 | | Total current liabilities | $3,703 | $3,719 | | Total liabilities | $8,798 | $8,603 | | Total stockholders' equity | $4,870 | $6,137 | [Condensed Consolidated Statements of Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Revenues increased for both three and nine-month periods, reaching **$10.5 million** for nine months, while net loss narrowed to **$2.7 million** for the nine-month period, improving loss per share Performance Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2024 | Three Months Ended Dec 31, 2023 | Nine Months Ended Dec 31, 2024 | Nine Months Ended Dec 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,564 | $3,138 | $10,534 | $9,296 | | Gross Profit | $1,270 | $1,460 | $3,937 | $3,654 | | Loss from operations | $(1,031) | $(844) | $(3,054) | $(3,292) | | Net loss | $(928) | $(866) | $(2,681) | $(3,768) | | Net loss per share | $(0.63) | $(1.59) | $(2.40) | $(10.74) | [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly improved to **$7,000**, with financing activities providing **$2.8 million**, resulting in a **$2.1 million** net increase in cash to **$5.2 million** Cash Flow Summary for Nine Months Ended Dec 31 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7 | $(2,550) | | Net cash used in investing activities | $(33) | $(20) | | Net cash provided by financing activities | $2,788 | $1,054 | | **Net increase (decrease) in cash** | **$2,108** | **$(1,414)** | | **Cash and cash equivalents, end of period** | **$5,236** | **$2,406** | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Stockholders' equity decreased to **$4.9 million** due to net loss and foreign currency translation loss, partially offset by **$3.1 million** from common stock sales - Total stockholders' equity declined from **$6,137,000** on March 31, 2024, to **$4,870,000** on December 31, 2024[16](index=16&type=chunk) - The company raised approximately **$3.1 million** (net) from the sale of common stock through its At-the-Market (ATM) facility during the nine months ended December 31, 2024[16](index=16&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies, a reverse stock split, going concern doubts due to losses, disaggregated revenue by product and geography, and significant customer concentration risk - Effective August 29, 2024, the company executed a **1-for-20 reverse stock split** of its common stock[19](index=19&type=chunk) - The company's history of losses and financial condition indicate **substantial doubt about its ability to continue as a going concern** within one year[22](index=22&type=chunk) Revenue by Source - Nine Months Ended Dec 31 (in thousands) | Revenue Source | 2024 | 2023 | | :--- | :--- | :--- | | Human Care | $8,886 | $7,286 | | Animal Care | $1,176 | $1,688 | | Service and Royalty | $472 | $322 | | **Total** | **$10,534** | **$9,296** | Revenue by Geography - Nine Months Ended Dec 31 (in thousands) | Region | 2024 | 2023 | | :--- | :--- | :--- | | United States | $1,930 | $2,214 | | Europe | $3,943 | $3,488 | | Asia | $1,832 | $1,730 | | Latin America | $2,174 | $1,165 | | Rest of the World | $655 | $699 | | **Total** | **$10,534** | **$9,296** | - For the nine months ended December 31, 2024, three customers (B and C, and another not named for the full period) accounted for **21%**, **19%**, and a percentage over **10%** of net revenue, respectively[59](index=59&type=chunk) - Subsequent to the quarter end, on January 2, 2025, the company granted a total of **49,500 stock options** and **45,000 restricted stock units** to directors, employees, and management[60](index=60&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's global HOCl product business, highlighting a **13% revenue increase** driven by international growth, slight gross margin compression, and ongoing liquidity challenges raising going concern doubts [Our Business](index=16&type=section&id=Our%20Business) The company specializes in stabilized hypochlorous acid (HOCl) products globally, expanding its wound care line and securing a new distribution agreement with Medline Industries - The company's core business is developing and producing **stabilized hypochlorous acid (HOCl) products** for a wide range of healthcare applications, sold in **55 countries**[65](index=65&type=chunk) - In August 2024, the company entered into a **five-year distribution agreement with Medline Industries, LP**, to market and distribute its wound care products in the United States, later expanded to include Canada and OTC products[81](index=81&type=chunk) - The company manufactures all its goods in Mexico, with approximately **82% of revenue** for the nine months ended Dec 31, 2024, derived from sales outside the U.S.[97](index=97&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Total revenue increased **13%** to **$10.5 million** for the nine months, driven by Latin America and Europe, despite a slight gross margin compression and U.S. revenue decline, narrowing the net loss Revenue Change by Geography (Three Months Ended Dec 31, 2024 vs 2023) | Region | $ Change (in thousands) | % Change | | :--- | :--- | :--- | | United States | $(254) | (29%) | | Europe | $40 | 3% | | Asia | $57 | 11% | | Latin America | $461 | 125% | | Rest of the World | $122 | 75% | | **Total** | **$426** | **14%** | - For the three months ended Dec 31, 2024, gross profit margin decreased to **36%** from **47%** in the prior year, due to changes in the utilization of manufacturing resources compared to the prior period[108](index=108&type=chunk) Revenue Change by Geography (Nine Months Ended Dec 31, 2024 vs 2023) | Region | $ Change (in thousands) | % Change | | :--- | :--- | :--- | | United States | $(284) | (13%) | | Europe | $455 | 13% | | Asia | $102 | 6% | | Latin America | $1,009 | 87% | | Rest of the World | $(44) | (6%) | | **Total** | **$1,238** | **13%** | - For the nine months ended Dec 31, 2024, gross profit margin was **37%**, compared to **39%** in the prior year period[120](index=120&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity improved with cash increasing to **$5.2 million** due to **$3.1 million** from stock sales, yet substantial doubt about going concern remains due to accumulated deficit and historical losses - The company reported an accumulated deficit of **$197.0 million** as of December 31, 2024[128](index=128&type=chunk) - Management has concluded that there is **substantial doubt about the company's ability to continue as a going concern** due to its history of losses and uncertainty about securing additional capital[129](index=129&type=chunk) - During the nine months ended December 31, 2024, the company raised **$3,079,000** in net proceeds from the sale of common stock[131](index=131&type=chunk) [Material Trends and Uncertainties](index=28&type=section&id=Material%20Trends%20and%20Uncertainties) Key uncertainties include significant customer concentration, foreign currency risks, a substantial Mexican tax liability due in 2027, and the potential impact of global economic conditions and tariffs - The company relies on certain **key customers** for a significant portion of its revenues[138](index=138&type=chunk) - The company is exposed to risk from **foreign currency devaluation**, especially the Mexican Peso and the Euro against the US dollar[139](index=139&type=chunk) - A substantial **tax liability** related to its Mexico operations, including intercompany debt and interest, is due in 2027[140](index=140&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[144](index=144&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls were ineffective due to a material weakness in internal control over financial reporting, specifically a lack of separation of duties, with remediation efforts underway - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were **not effective** as of December 31, 2024[147](index=147&type=chunk) - Management identified a **material weakness in internal control over financial reporting** due to a lack of separation of duties in the preparation and review of reported numbers[149](index=149&type=chunk) - Remediation measures include hiring a new CFO and Controller in 2023, separating preparation and review duties, and enhancing internal controls training[150](index=150&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) The company may be involved in ordinary course legal matters, but management currently deems them insignificant - While the company may be involved in ordinary course legal matters, management believes such matters are currently **insignificant**[155](index=155&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) New risk factors include potential tariffs on Mexican imports and the critical need to transition European products to the new Medical Device Regulation (MDR) by December 2028 - A key risk is the potential for new or increased **tariffs on goods imported into the U.S. from Mexico**, which could adversely affect the business as all products are manufactured there[157](index=157&type=chunk) - The company faces a significant risk related to transitioning its European products to the new **Medical Device Regulation (MDR)**; failure to meet the requirements by the December 31, 2028 deadline could result in products being withdrawn from the EU market[160](index=160&type=chunk)[161](index=161&type=chunk)[164](index=164&type=chunk) - While four products have successfully transitioned to the new MDR, several others, including eye care and acne products, are still under review or require additional studies for transition[162](index=162&type=chunk)[163](index=163&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered securities were issued during the quarter ended December 31, 2024 - No unregistered securities were issued during the quarter ended December 31, 2024[165](index=165&type=chunk) [Other Information](index=32&type=section&id=Item%205.%20Other%20Information) No director or officer adopted or terminated any Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated any Rule 10b5-1 trading arrangement during the quarter[168](index=168&type=chunk) [Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section indexes all exhibits filed with or incorporated by reference into the Form 10-Q, including corporate governance documents, material contracts, and certifications - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[175](index=175&type=chunk) - Exhibits include various material agreements, such as the Equity Distribution Agreement with Maxim Group LLC and the Distribution Agreement with Medline Industries, LP[175](index=175&type=chunk)

Core Viewpoint - Momentum investing focuses on "buying high and selling higher" rather than traditional strategies of "buying low and selling high" [1] Group 1: Momentum Investing Strategy - Momentum investors often face challenges in determining the right entry point for fast-moving stocks, which can lose momentum if future growth does not justify high valuations [2] - Investing in bargain stocks that have recently shown price momentum can be a safer strategy [3] Group 2: Sonoma Pharmaceuticals, Inc. (SNOA) Analysis - Sonoma Pharmaceuticals (SNOA) has shown a four-week price change of 0.7%, indicating growing investor interest [4] - The stock has gained 3.9% over the past 12 weeks and has a beta of 1.38, suggesting it moves 38% more than the market [5] - SNOA has a Momentum Score of B, indicating a favorable time to invest [6] - The stock has a Zacks Rank 2 (Buy) due to upward revisions in earnings estimates, which attract more investors [7] - SNOA is trading at a Price-to-Sales ratio of 0.29, meaning investors pay 29 cents for each dollar of sales, indicating a reasonable valuation [7] Group 3: Additional Investment Opportunities - Besides SNOA, there are other stocks that meet the criteria of the 'Fast-Paced Momentum at a Bargain' screen, suggesting further investment opportunities [8] - The Zacks Premium Screens offer over 45 different strategies to help identify winning stock picks [9]

Core Viewpoint - Momentum investing focuses on "buying high and selling higher," contrasting with traditional strategies of "buying low and selling high." Sonoma Pharmaceuticals, Inc. (SNOA) is highlighted as a strong candidate for momentum investing due to its rapid price movement and reasonable valuation. Group 1: Momentum Characteristics - SNOA has a beta of 1.38, indicating it moves 38% more than the market in either direction, showcasing its fast-paced momentum [2] - The stock has gained 147.7% over the past 12 weeks, demonstrating its ability to deliver positive returns over a longer timeframe [6] - A recent price increase of 107.8% over the past four weeks reflects growing investor interest [11] Group 2: Valuation Metrics - SNOA is currently trading at a Price-to-Sales ratio of 0.55, meaning investors pay only 55 cents for each dollar of sales, indicating a reasonable valuation [3] - The stock has a Momentum Score of A, suggesting it is an opportune time to invest in SNOA to capitalize on its momentum [12] Group 3: Analyst Ratings and Earnings Estimates - SNOA has earned a Zacks Rank 1 (Strong Buy) due to an upward trend in earnings estimate revisions, which attracts more investors [7] - The momentum-effect is particularly strong among Zacks Rank 1 and 2 stocks, as rising earnings estimates lead to increased investor interest [7] Group 4: Additional Opportunities - Besides SNOA, there are other stocks that meet the criteria of the 'Fast-Paced Momentum at a Bargain' screen, providing additional investment opportunities [8]

Core Viewpoint - Sonoma Pharmaceuticals, Inc. (SNOA) is identified as a strong candidate for investment due to its favorable momentum characteristics and reasonable valuation metrics. Group 1: Momentum Characteristics - SNOA has a four-week price change of 2.4%, indicating growing investor interest [9] - The stock has gained 31% over the past 12 weeks, demonstrating its ability to deliver positive returns over a longer time frame [10] - SNOA has a Momentum Score of A, suggesting it is an opportune time to invest [11] Group 2: Valuation Metrics - SNOA is currently trading at a Price-to-Sales ratio of 0.31, meaning investors pay only 31 cents for each dollar of sales, which is considered cheap [12] - The stock's beta is 1.37, indicating it moves 37% higher than the market in either direction, reflecting its fast-paced momentum [11] Group 3: Investment Strategy - The 'Fast-Paced Momentum at a Bargain' screen helps identify stocks like SNOA that are attractively priced while exhibiting recent price momentum [8] - Momentum investors typically focus on "buying high and selling higher," which aligns with SNOA's current performance [6]

Part I [Item 1. Business](index=4&type=section&id=ITEM%201.%20Business) Sonoma Pharmaceuticals is a global healthcare company specializing in stabilized hypochlorous acid (HOCl) products for wound care, eye care, dermatology, and animal health, focusing on revenue growth and cost management through direct sales and partnerships in 55 countries - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications[16](index=16&type=chunk) - Business strategy involves growing revenues through new customers and distributors, introducing new products, and expanding regulatory approvals, while maintaining cost controls[17](index=17&type=chunk) - Sonoma sells its products directly and through partners in **55 countries** across various channels, including dermatology, wound care, eye care, oral care, podiatry, and animal health[16](index=16&type=chunk)[20](index=20&type=chunk) - Recent business developments include expanding product lines like MicrocynAH® and Microcyn® Negative Pressure Wound Therapy, launching new consumer products like Lumacyn Clarifying Mist, and establishing a Scientific Advisory Board[22](index=22&type=chunk) - As of June 17, 2024, the company employed **9 full-time employees in the U.S.**, **one in the Netherlands**, and **162 in Mexico**[52](index=52&type=chunk) [Business Channels and Products](index=5&type=section&id=Business%20Channels%20and%20Products) Sonoma's business is structured across key channels including Dermatology, Wound Care, Eye Care, Oral/Nasal Care, Podiatry, Animal Health, and Surface Disinfectants, leveraging its core HOCl technology through direct sales and partnerships - Dermatology products target redness, irritation, scars, and eczema, with partners like EMC Pharma for prescription products in the U.S. and various distributors internationally[21](index=21&type=chunk)[23](index=23&type=chunk)[30](index=30&type=chunk) - Wound care products are used for acute and chronic wounds, sold directly to healthcare practitioners in the U.S. and through distributors in Europe, the Middle East, and Asia[31](index=31&type=chunk)[32](index=32&type=chunk) - Eye care products, such as Acuicyn™ and Ocucyn®, are sold through partners like EMC Pharma in the U.S. and Brill International in Europe[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) - Animal health products (MicrocynAH®) are distributed in the U.S. and Canada by Compana Pet Brands and in Asia and Europe by Petagon[47](index=47&type=chunk)[48](index=48&type=chunk) - Surface disinfectant Nanocyn® is sold through partner MicroSafe and has received EPA approval for use in the U.S. against pathogens like COVID-19, MRSA, and Norovirus[49](index=49&type=chunk)[51](index=51&type=chunk) [Research and Development, Manufacturing, and Regulatory](index=14&type=section&id=Research%20and%20Development%2C%20Manufacturing%2C%20and%20Regulatory) R&D expenses significantly increased in FY2024, with all products manufactured at its ISO 13485 certified facility in Mexico, holding 21 FDA 510(k) clearances and a CE certificate for broad market access Research and Development Expense | Fiscal Year | R&D Expense (USD) | | :--- | :--- | | 2024 | $1,871,000 | | 2023 | $207,000 | - All products are manufactured at the company's facility in Zapopan, Mexico, which is certified under U.S. cGMP, ISO 13485, and approved by the Mexican Ministry of Health[72](index=72&type=chunk) - The company has obtained **21 U.S. FDA 510(k) clearances** for its products as medical devices[75](index=75&type=chunk) - Internationally, Sonoma has a CE certificate covering **39 products in 54 countries**, along with various other approvals in regions like Brazil, China, and the Middle East[76](index=76&type=chunk) [Customers, IP, and Competition](index=17&type=section&id=Customers%2C%20IP%2C%20and%20Competition) Sonoma relies on a few key customers, protects its technology through IP, and competes in crowded markets against larger companies, with its stable HOCl-based formulations providing a competitive edge Significant Customer Revenue Concentration (FY2024) | Customer | % of Net Revenues | | :--- | :--- | | Customer A | 17% | | Customer B | 15% | | Customer C | 14% | - The company's success depends on protecting its proprietary technology through patents, trademarks, and trade secrets[82](index=82&type=chunk) - Competes with large healthcare companies that have advantages in name recognition, distribution, and financial resources[89](index=89&type=chunk)[91](index=91&type=chunk) - The company believes its HOCl-based solutions are among the most stable available, providing a key competitive advantage[88](index=88&type=chunk) [Government Regulation](index=18&type=section&id=Government%20Regulation) Sonoma operates in a highly regulated environment, with products primarily regulated as medical devices requiring FDA 510(k) clearance and CE marking, subject to various U.S. healthcare laws and foreign regulations, including potential reclassification of wound care products - Products are subject to extensive regulation by the FDA and foreign authorities, covering research, manufacturing, marketing, and sales[89](index=89&type=chunk) - In the U.S., products are regulated as medical devices, typically requiring 510(k) pre-market notification to demonstrate substantial equivalence to a legally marketed device[90](index=90&type=chunk)[92](index=92&type=chunk) - A proposed FDA rule may reclassify certain wound dressings containing hypochlorous acid into Class II devices, which would require new 510(k) applications and compliance with special controls[95](index=95&type=chunk) - The company is subject to U.S. healthcare laws including the Physician Payments Sunshine Act, Anti-Kickback Statute, False Claims Act, and HIPAA[99](index=99&type=chunk)[101](index=101&type=chunk)[103](index=103&type=chunk)[105](index=105&type=chunk) - In the European Union, products must comply with the Medical Devices Regulation and affix a CE marking to be sold[109](index=109&type=chunk) [Item 1A. Risk Factors](index=24&type=section&id=ITEM%201A.%20Risk%20Factors) The company faces significant risks including ongoing net losses, going concern doubts, dependence on key customers and distributors, international operational and tax risks, extensive regulatory hurdles, market competition, and potential Nasdaq delisting - The company has a history of net losses, with a **net loss of $4.8 million in FY2024**, and an **accumulated deficit of $194.3 million** These conditions raise **substantial doubt about its ability to continue as a going concern**[119](index=119&type=chunk) - Dependence on third-party distributors and a few key customers is a major risk In FY2024, **three customers accounted for 17%, 15%, and 14% of net revenues**, respectively[121](index=121&type=chunk)[127](index=127&type=chunk) - Significant international operations (**76% of revenue in FY2024**) expose the company to political, economic, and currency risks A substantial intercompany debt of its Mexican subsidiary poses a significant tax liability risk[124](index=124&type=chunk)[128](index=128&type=chunk) - The company faces extensive regulatory risks, including potential delays or failure to obtain FDA clearances for new products and the risk of non-compliance with ongoing regulations, which could lead to recalls or market withdrawal[132](index=132&type=chunk)[137](index=137&type=chunk) - The company is not in compliance with Nasdaq's minimum bid price requirement of **$1.00 per share** and has until **September 16, 2024**, to regain compliance, facing a **risk of delisting**[188](index=188&type=chunk) [Item 1B. Unresolved Staff Comments](index=39&type=section&id=ITEM%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments - Not Applicable[190](index=190&type=chunk) [Item 1C. Cybersecurity](index=39&type=section&id=ITEM%201C.%20Cybersecurity) Cybersecurity risks are managed through internal and external assessments, employee policies, and Board oversight, with no material incidents reported to date - Cybersecurity risk management involves management assessments, an outside consultant, and secure third-party software[191](index=191&type=chunk) - The Board of Directors, as a whole, oversees cybersecurity risks, with management providing regular updates[193](index=193&type=chunk) - The company is not currently aware of any cybersecurity threats that have materially affected or are likely to materially affect its business, operations, or financial condition[192](index=192&type=chunk) [Item 2. Properties](index=39&type=section&id=ITEM%202.%20Properties) The company leases its principal executive office in Colorado and manufacturing facilities in Mexico, which are deemed adequate for the next 12 months Leased Properties | Location | Purpose | Monthly Rent | | :--- | :--- | :--- | | Boulder, CO | Principal executive office | USD 3,573 | | Zapopan, Mexico | Office, manufacturing | MXN 209,811 | | Zapopan, Mexico | Warehouse | MXN 213,625 | [Item 3. Legal Proceedings](index=39&type=section&id=ITEM%203.%20Legal%20Proceedings) The company may be involved in ordinary course legal matters, but management considers them insignificant and not materially adverse - The company may be involved in ordinary course legal matters, but management currently considers them insignificant[195](index=195&type=chunk) [Item 4. Mine Safety Disclosures](index=39&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[196](index=196&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=40&type=section&id=ITEM%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under "SNOA", has approximately 291 holders, and has never paid or intends to pay cash dividends - Common stock is traded on The Nasdaq Capital Market under the symbol **"SNOA"**[198](index=198&type=chunk) - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[200](index=200&type=chunk) [Item 6. Selected Financial Data](index=40&type=section&id=ITEM%206.%20Selected%20Financial%20Data) As a smaller reporting company, Sonoma Pharmaceuticals is not required to provide selected financial data - The company is a smaller reporting company and is not required to provide selected financial data[203](index=203&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=ITEM%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) FY2024 revenue decreased 4% to $12.7 million, gross margin improved to 37%, R&D surged 804% to $1.9 million, resulting in a $4.8 million net loss and $2.4 million net cash used in operations, raising substantial doubt about going concern [Results of Operations](index=41&type=section&id=Results%20of%20Operations) FY2024 total revenue decreased 4% to $12.7 million, with Europe growing 18% offset by U.S. and Latin America declines, while gross profit increased to $4.7 million (37% margin), R&D surged 804%, leading to a $4.8 million net loss Revenue by Geographic Region (in thousands) | Region | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | United States | $3,058 | $3,428 | (11%) | | Europe | $4,781 | $4,051 | 18% | | Asia | $2,298 | $2,451 | (6%) | | Latin America | $1,726 | $2,383 | (28%) | | Rest of the World | $872 | $959 | (9%) | | **Total** | **$12,735** | **$13,272** | **(4%)** | Key Operating Metrics (in thousands) | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Gross Profit | $4,745 | $4,477 | 6% | | Gross Margin | 37% | 34% | N/A | | R&D Expense | $1,871 | $207 | 804% | | SG&A Expense | $7,575 | $8,840 | (14%) | | Net Loss | $(4,835) | $(5,151) | (6%) | [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2024, cash was $3.1 million and working capital $8.8 million, with net cash used in operations at $2.4 million, but ongoing losses and negative cash flows raise substantial doubt about going concern, requiring future capital Cash and Working Capital (in thousands) | Metric | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,128 | $3,820 | | Working capital | $8,829 | $10,081 | Summary of Cash Flows (in thousands) | Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,398) | $(6,152) | | Net cash used in investing activities | $(2) | $(258) | | Net cash provided by financing activities | $1,676 | $2,489 | - Management states that the company's history of losses and need for additional capital raise **substantial doubt about its ability to continue as a going concern**[230](index=230&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=ITEM%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Sonoma Pharmaceuticals is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[239](index=239&type=chunk) [Item 8. Consolidated Financial Statements and Supplementary Data](index=46&type=section&id=ITEM%208.%20Consolidated%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the consolidated financial statements for FY2024 and FY2023, including the auditor's report highlighting going concern doubt, along with balance sheets, statements of comprehensive loss, changes in equity, cash flows, and accompanying notes [Report of Independent Registered Public Accounting Firm](index=47&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor's report confirms fair presentation of financial statements but expresses substantial doubt about the company's ability to continue as a going concern due to significant losses and negative operating cash flows - The auditor's report explicitly states that the company's significant losses, negative operating cash flows, and need to raise additional funds raise **substantial doubt about its ability to continue as a going concern**[244](index=244&type=chunk) [Consolidated Financial Statements](index=48&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show total assets of $14.7 million and liabilities of $8.6 million as of March 31, 2024, with a $4.8 million net loss on $12.7 million revenue for the year, and an accumulated deficit of $194.3 million Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $12,548 | $13,798 | | Total Assets | $14,740 | $16,231 | | Total Current Liabilities | $3,719 | $3,717 | | Total Liabilities | $8,603 | $8,254 | | Total Stockholders' Equity | $6,137 | $7,977 | Consolidated Statement of Comprehensive Loss (in thousands) | Account | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Revenues | $12,735 | $13,272 | | Gross Profit | $4,745 | $4,477 | | Loss from Operations | $(4,701) | $(4,570) | | Net Loss | $(4,835) | $(5,151) | Revenue Disaggregation (in thousands) | Source | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Human Care | $10,110 | $9,426 | | Animal Care | $2,203 | $2,500 | | Service/Royalty | $422 | $1,346 | | **Total** | **$12,735** | **$13,272** | [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=72&type=section&id=ITEM%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There were no changes in or disagreements with accountants on accounting and financial disclosure - None[366](index=366&type=chunk) [Item 9A. Controls and Procedures](index=72&type=section&id=ITEM%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of March 31, 2024, due to material weaknesses in internal control over financial reporting, with remediation efforts underway but not yet fully effective - Management concluded that disclosure controls and procedures were **not effective as of March 31, 2024**[368](index=368&type=chunk) - **Material weaknesses** in internal control over financial reporting were identified, including inadequate spreadsheet controls, lack of separation of duties, and inadequate revenue reporting analysis[370](index=370&type=chunk) - Remediation measures are underway, such as hiring new financial leadership, separating duties, and improving controls, but the weaknesses are not yet considered fully remediated[371](index=371&type=chunk)[372](index=372&type=chunk) [Item 9B. Other Information](index=73&type=section&id=ITEM%209B.%20Other%20Information) On June 14, 2024, the Board amended bylaws to reduce the stockholder meeting quorum to one-third, and the Compensation Committee approved 53,586 Restricted Stock Units for three key executives - On **June 14, 2024**, the company amended its bylaws to reduce the quorum for stockholder meetings from a majority to **one-third of outstanding stock**[374](index=374&type=chunk) - On **June 14, 2024**, equity awards of **53,586 Restricted Stock Units** were granted to CEO Amy Trombly, CFO Jerome Dvonch, and COO Bruce Thornton[375](index=375&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=74&type=section&id=ITEM%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement, with the company maintaining a Code of Business Conduct and procedures for director nominations - Required information is incorporated by reference from the 2024 Annual Meeting Proxy Statement[379](index=379&type=chunk) - The company has a Code of Business Conduct available on its website and has established procedures for stockholders to nominate directors[381](index=381&type=chunk)[383](index=383&type=chunk) [Item 11. Executive Compensation](index=75&type=section&id=ITEM%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[384](index=384&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=75&type=section&id=ITEM%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[385](index=385&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=75&type=section&id=ITEM%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[386](index=386&type=chunk) [Item 14. Principal Accounting Fees and Services](index=75&type=section&id=ITEM%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[387](index=387&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=76&type=section&id=ITEM%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists documents filed as part of the Form 10-K, referencing financial statements under Item 8, noting omitted schedules, and providing an index of all exhibits including corporate governance and material contracts - This section contains an index of all exhibits filed with the Form 10-K, including corporate governance documents, material agreements, and Sarbanes-Oxley certifications[392](index=392&type=chunk)[393](index=393&type=chunk) - Financial statements are referenced under Item 8, and financial statement schedules are omitted as they are not applicable or the information is included elsewhere[390](index=390&type=chunk)[391](index=391&type=chunk) [Item 16. Form 10-K Summary](index=79&type=section&id=ITEM%2016.%20Form%2010-K%20Summary) There is no Form 10-K summary provided - None[399](index=399&type=chunk)

[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) This section presents the company's unaudited financial statements, highlighting a reduced net loss for Q3 FY2024, a decrease in total assets to $14.6 million, and notes detailing liquidity and subsequent equity offerings [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of December 31, 2023, total assets decreased to $14.6 million from $16.2 million, primarily due to reduced cash and cash equivalents, while total liabilities and stockholders' equity also saw slight declines Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Dec 31, 2023 (Unaudited) | Mar 31, 2023 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $2,406 | $3,820 | | Total current assets | $12,502 | $13,798 | | Total assets | $14,618 | $16,231 | | **Liabilities & Equity** | | | | Total current liabilities | $3,074 | $3,717 | | Total liabilities | $7,926 | $8,254 | | Total stockholders' equity | $6,692 | $7,977 | [Condensed Consolidated Statements of Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) For Q3 2023, revenues increased to $3.14 million and net loss significantly narrowed to $0.87 million, while nine-month revenues decreased to $9.30 million with a stable net loss Financial Performance (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,138 | $2,944 | $9,296 | $10,258 | | Gross Profit | $1,460 | $831 | $3,654 | $3,613 | | Loss from Operations | ($844) | ($1,834) | ($3,292) | ($3,423) | | Net Loss | ($866) | ($1,939) | ($3,768) | ($3,843) | | Net Loss Per Share | ($0.08) | ($0.62) | ($0.54) | ($1.24) | [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended December 31, 2023, net cash used in operating activities improved to $2.55 million, while financing activities provided $1.05 million, resulting in a $1.41 million decrease in cash and equivalents Cash Flow Summary (Nine Months Ended Dec 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,550) | $(3,711) | | Net cash used in investing activities | $(20) | $(176) | | Net cash provided by (used in) financing activities | $1,054 | $(883) | | **Net decrease in cash** | **$(1,414)** | **$(4,762)** | | **Cash and cash equivalents, end of period** | **$2,406** | **$2,634** | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail the company's financial condition, raising substantial doubt about its going concern ability due to recurring losses, and highlight recent equity offerings, revenue disaggregation, and a new license agreement - The company's recurring net losses and cash usage raise **substantial doubt about its ability to continue as a going concern**[18](index=18&type=chunk)[19](index=19&type=chunk) - In October 2023, the company sold **8,500,000 shares** of common stock for net proceeds of **$1,446,000**[52](index=52&type=chunk) - Subsequent to quarter end, on January 5, 2024, the company entered a license and distribution agreement with NovaBay Pharmaceuticals, Inc. to sell Avenova-branded products in the European Union[68](index=68&type=chunk) Revenue Disaggregation (Nine Months Ended Dec 31, in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | **By Revenue Source** | | | | Human Care | $7,286 | $7,050 | | Animal Care | $1,688 | $1,957 | | Service and Royalty | $322 | $1,251 | | **Total** | **$9,296** | **$10,258** | | **By Geographic Region** | | | | United States | $2,214 | $2,603 | | Europe | $3,488 | $3,117 | | Asia | $1,730 | $1,952 | | Latin America | $1,165 | $1,827 | | Rest of the World | $699 | $759 | | **Total** | **$9,296** | **$10,258** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a 7% Q3 revenue increase driven by U.S. and Europe, a 9% nine-month decrease, significant gross margin improvement, reduced operating expenses, and capital raises to address liquidity and going concern issues [Our Business](index=18&type=section&id=Our%20Business) Sonoma Pharmaceuticals is a global healthcare company specializing in stabilized hypochlorous acid (HOCl) products, utilizing a partnership distribution model, and has recently launched several new products across various care markets - The company's core business is developing and producing **stabilized hypochlorous acid (HOCl) products** for various healthcare applications[73](index=73&type=chunk) - Recent product launches include Pediacyn™ for pediatric dermatology, an intraoperative pulse lavage irrigation treatment, and Lumacyn Clarifying Mist for direct-to-consumer skincare[83](index=83&type=chunk)[91](index=91&type=chunk) - The company primarily uses a **partnership model** for marketing and distribution across **55 countries**, alongside direct sales to consumers and professionals[16](index=16&type=chunk)[76](index=76&type=chunk) [Results of Continuing Operations](index=23&type=section&id=Results%20of%20Continuing%20Operations) Q3 2024 total revenue increased 7% to $3.1 million, driven by U.S. and European sales, while nine-month revenue decreased 9%, with gross profit surging 76% and operating loss significantly reduced due to lower SG&A Revenue by Geography (Q3, in thousands) | Region | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $868 | $761 | $107 | 14% | | Europe | $1,217 | $1,104 | $113 | 10% | | Asia | $522 | $514 | $8 | 2% | | Latin America | $368 | $384 | ($16) | (4%) | | **Total** | **$3,138** | **$2,944** | **$194** | **7%** | Key Operating Metrics (Q3, in thousands) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Gross Profit | $1,460 | $831 | 76% | | Gross Margin | 47% | 28% | - | | R&D Expense | $601 | $– | 100% | | SG&A Expense | $1,703 | $2,665 | (36%) | - The decrease in nine-month revenue for Latin America was primarily due to a **one-time $750,000 sale of machinery** in the prior year period[113](index=113&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) The company ended the quarter with $2.4 million in cash, an accumulated deficit of $193.3 million, and raised capital through recent equity offerings, but management still expresses substantial doubt about its going concern ability - The company's cash position was **$2.4 million** as of December 31, 2023, with an accumulated deficit of **$193.3 million**[122](index=122&type=chunk) - In October 2023, the company raised net proceeds of **$1,446,000** through a common stock offering[124](index=124&type=chunk) - In December 2023, the company entered an Equity Distribution Agreement, subsequently selling **1,923,100 shares** in January 2024 for net proceeds of approximately **$356,000**[126](index=126&type=chunk)[67](index=67&type=chunk) - Management has concluded there is **substantial doubt about the company's ability to continue as a going concern** and may need to reduce costs if additional capital is not secured[133](index=133&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Sonoma Pharmaceuticals is not required to provide quantitative and qualitative disclosures about market risk - The company is a **smaller reporting company** and is not required to provide quantitative and qualitative disclosures about market risk[141](index=141&type=chunk) [Item 4. Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting, with remediation efforts underway but not yet fully complete - The CEO and CFO concluded that disclosure controls and procedures were **not effective** as of December 31, 2023, due to material weaknesses in internal controls over financial reporting[143](index=143&type=chunk) - Identified weaknesses include inadequate spreadsheet controls, lack of separation of duties in financial reporting, and insufficient analysis of revenue[146](index=146&type=chunk) - Remediation measures include hiring an interim CFO and a Controller, separating financial report preparation and review, and implementing additional revenue recognition controls[149](index=149&type=chunk) [PART II - OTHER INFORMATION](index=29&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) The company may be involved in ordinary course legal matters, but management currently considers them insignificant - While the company may be involved in ordinary course legal matters, management currently considers them to be **insignificant**[151](index=151&type=chunk) [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) A new material risk factor concerns the company's non-compliance with Nasdaq's minimum bid price requirement, potentially leading to delisting if not resolved by March 20, 2024 - The company received a notice from Nasdaq on September 22, 2023, for **non-compliance with the minimum bid price rule of $1.00 per share**[153](index=153&type=chunk) - The company has until **March 20, 2024**, to regain compliance, with potential delisting materially affecting access to capital markets if unresolved[153](index=153&type=chunk)[154](index=154&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not issue any unregistered securities during the quarter ended December 31, 2023 - No unregistered securities were issued during the quarter ended December 31, 2023[155](index=155&type=chunk) [Item 5. Other Information](index=30&type=section&id=Item%205.%20Other%20Information) Jerome Dvonch was appointed as the permanent Chief Financial Officer effective February 7, 2024, and a new offer letter was issued to the company's Controller - Jerome Dvonch was appointed as the **permanent Chief Financial Officer**, effective February 7, 2024[158](index=158&type=chunk) - Mr. Dvonch's annual salary is **$240,000** with a potential bonus of up to **50%**[159](index=159&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and offer letters for key personnel

[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) The company reported a net loss of $2.9 million for the six months ended September 30, 2023, with total assets decreasing and significant going concern doubt [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$13.6 million** as of September 30, 2023, driven by a drop in cash, while total stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2023 (Unaudited) | March 31, 2023 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $2,137 | $3,820 | | Total current assets | $11,516 | $13,798 | | **Total assets** | **$13,635** | **$16,231** | | **Liabilities & Equity** | | | | Total current liabilities | $3,239 | $3,717 | | **Total liabilities** | **$7,960** | **$8,254** | | **Total stockholders' equity** | **$5,675** | **$7,977** | [Condensed Consolidated Statements of Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Revenues decreased to **$6.2 million** for the six months ended September 30, 2023, leading to a widened net loss of **$2.9 million** Statement of Comprehensive Loss Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $2,731 | $3,331 | $6,158 | $7,314 | | Gross Profit | $990 | $1,536 | $2,194 | $3,182 | | Loss from Operations | $(1,208) | $(731) | $(2,448) | $(1,586) | | Net Loss | $(1,484) | $(1,017) | $(2,902) | $(1,904) | | Net Loss Per Share | $(0.29) | $(0.33) | $(0.57) | $(0.61) | [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities improved to **$1.4 million** for the six months ended September 30, 2023, with cash and cash equivalents ending at **$2.1 million** Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,446) | $(3,363) | | Net cash used in investing activities | $(19) | $(210) | | Net cash used in financing activities | $(264) | $(565) | | **Net decrease in cash and cash equivalents** | **$(1,683)** | **$(4,045)** | | **Cash and cash equivalents, end of period** | **$2,137** | **$3,351** | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes highlight substantial doubt about going concern due to recurring losses and low cash, with revenue concentrated and a recent **$1.4 million** stock offering - The company's recurring net losses (**$2.9M** for the six months ended Sep 30, 2023), accumulated deficit (**$192.4M**), and low cash balance (**$2.1M**) raise substantial doubt about its ability to continue as a going concern[18](index=18&type=chunk)[19](index=19&type=chunk) Revenue Disaggregation by Source (in thousands) | Revenue Source | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Human Care | $4,825 | $4,615 | | Animal Care | $1,067 | $1,523 | | Service and Royalty | $266 | $1,176 | | **Total** | **$6,158** | **$7,314** | Revenue Disaggregation by Geography (in thousands) | Geographic Region | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | United States | $1,396 | $1,842 | | Europe | $2,271 | $2,012 | | Asia | $1,208 | $1,438 | | Latin America | $747 | $1,444 | | Rest of the World | $536 | $578 | | **Total** | **$6,158** | **$7,314** | - For the six months ended September 30, 2023, three customers (C, B, and A) represented **17%**, **12%**, and **14%** of net revenue, respectively[62](index=62&type=chunk) - In October 2023, the company sold 8,500,000 shares of common stock at **$0.20 per share**, generating gross proceeds of **$1.7 million** and estimated net proceeds of **$1.414 million**[65](index=65&type=chunk)[66](index=66&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a **16%** revenue decline due to lower sales and a one-time event, a reduced gross profit margin, cost containment efforts, and ongoing liquidity concerns with substantial doubt about going concern [Our Business](index=16&type=section&id=Our%20Business) Sonoma Pharmaceuticals develops stabilized hypochlorous acid (HOCl) products for diverse applications, employing a global distribution strategy alongside direct sales and launching new products - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications[71](index=71&type=chunk) - The core strategy is to work with partners for marketing and distribution, but the company also sells its own products directly. Key markets include dermatology, wound care, eye care, oral/nasal care, podiatry, animal health, and surface disinfectants[73](index=73&type=chunk) - Recent product launches include Pediacyn™ for pediatric care (April 2023) and Podiacyn™ for foot care (April 2023), both sold direct-to-consumer in the U.S. The company is also developing an intraoperative pulse lavage irrigation treatment, anticipating a U.S. commercial launch in 2024[80](index=80&type=chunk)[88](index=88&type=chunk)[96](index=96&type=chunk) [Results of Continuing Operations](index=20&type=section&id=Results%20of%20Continuing%20Operations) Total revenue decreased by **16%** to **$6.2 million** for the six months ended September 30, 2023, driven by declines in U.S. and Latin American sales, while R&D expenses increased and SG&A decreased Revenue by Geographic Region (in thousands) | Region | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $1,396 | $1,842 | $(446) | (24%) | | Europe | $2,271 | $2,012 | $259 | 13% | | Asia | $1,208 | $1,438 | $(230) | (16%) | | Latin America | $747 | $1,444 | $(697) | (48%) | | Rest of the World | $536 | $578 | $(42) | (7%) | | **Total** | **$6,158** | **$7,314** | **$(1,156)** | **(16%)** | - The decrease in U.S. revenue was primarily due to a decline in over-the-counter animal health care sales. The decrease in Latin America was mainly due to a one-time **$750,000** service revenue from selling machinery in the prior period[104](index=104&type=chunk)[107](index=107&type=chunk) Operating Expense Changes (in thousands) | Expense Category | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Research and Development | $861 | $406 | 112% | | Selling, General and Administrative | $3,781 | $4,362 | (13)% | [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is precarious with **$2.1 million** cash and a **$192.4 million** accumulated deficit, raising substantial doubt about its going concern ability despite a recent **$1.4 million** stock offering - As of September 30, 2023, the company had cash and cash equivalents of **$2.1 million** and an accumulated deficit of **$192.4 million**[116](index=116&type=chunk) - Net cash used in operating activities for the six months ended September 30, 2023, was **$1.4 million**, an improvement from **$3.4 million** in the prior-year period, primarily due to favorable changes in accounts receivable and inventory[119](index=119&type=chunk)[120](index=120&type=chunk) - Management states that recurring losses and the need for additional capital raise substantial doubt about the company's ability to continue as a going concern[124](index=124&type=chunk) - Subsequent to the quarter end, on October 30, 2023, the company raised estimated net proceeds of **$1.414 million** through a common stock offering[118](index=118&type=chunk) [Material Trends and Uncertainties](index=24&type=section&id=Material%20Trends%20and%20Uncertainties) The company identifies key risks including customer concentration, foreign currency fluctuations, a Mexican tax liability, and broader macroeconomic uncertainties like inflation and recession - The company faces risks from customer concentration, foreign currency fluctuations (Euro and Mexican Peso), and a substantial tax liability in Mexico[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) - Economic uncertainties, including inflation, shipping costs, supply chain issues, and the prospect of a recession, are being closely monitored as they may impact financial results[128](index=128&type=chunk)[129](index=129&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the company has elected not to provide market risk disclosures - As a smaller reporting company, the registrant is not required to provide the information for this item[132](index=132&type=chunk) [Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of September 30, 2023, due to material weaknesses, despite ongoing remediation efforts - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of September 30, 2023[134](index=134&type=chunk) - Material weaknesses identified include inadequate spreadsheet controls, a lack of separation of duties in financial reporting, and errors related to income tax withholding accruals[136](index=136&type=chunk) - Remediation measures include hiring an interim CFO and a Controller, separating preparation and review of financial reports, and implementing additional controls. However, these controls have not yet been tested over a sufficient period to confirm their effectiveness[137](index=137&type=chunk)[139](index=139&type=chunk) [PART II - OTHER INFORMATION](index=27&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Management believes any legal proceedings in the ordinary course of business are currently insignificant - While the company may be involved in ordinary course legal matters, management currently considers them to be insignificant[141](index=141&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) A key risk is non-compliance with Nasdaq's minimum bid price requirement, potentially leading to delisting if not resolved by March 20, 2024 - On September 22, 2023, the company received a notice from Nasdaq for failing to maintain a minimum bid price of **$1.00 per share**[143](index=143&type=chunk) - The company has a 180-day period, until March 20, 2024, to regain compliance. Failure to do so could result in the delisting of its common stock from Nasdaq[143](index=143&type=chunk)[144](index=144&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered securities were issued during the quarter ended September 30, 2023 - No unregistered securities were issued during the quarter ended September 30, 2023[145](index=145&type=chunk) [Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section provides an index of all exhibits filed with the Form 10-Q, including corporate governance documents and certifications