The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and notes to those statements included elsewhere in this Quarterly
Report on Form 10-Q as of June 30, 2022 and our audited consolidated financial
statements for the year ended March 31, 2022 included in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on July 13, 2022.



This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this report, the
words "anticipate," "suggest," "estimate," "plan," "project," "continue,"
"ongoing," "potential," "expect," "predict," "believe," "intend," "may," "will,"
"should," "could," "would," "proposal," and similar expressions are intended to
identify forward-looking statements.



Forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those projected. These risks
and uncertainties include, but are not limited to the risks described in our
Annual Report on Form 10-K including: the impact of the COVID-19 pandemic on the
overall economy and our results of operations; our ability to become profitable;
the impact of changes to reimbursement levels from third-party payors or
increased pricing pressure due to rebates; the impact of the Invekra transaction
on our business and results of operations; our dependence on third-party
distributors; certain tax impacts of inter-company loans between us and our
Mexican subsidiary; the progress and timing of our development programs and
regulatory approvals for our products; the benefits and effectiveness of our
products; the ability of our products to meet existing or future regulatory
standards; the progress and timing of clinical trials and physician studies; our
expectations and capabilities relating to the sales and marketing of our current
products and our product candidates; our ability to compete with other companies
that are developing or selling products that are competitive with our products;
the establishment of strategic partnerships for the development or sale of
products; the risk our research and development efforts do not lead to new
products; the timing of commercializing our products; our ability to penetrate
markets through our sales force, distribution network, and strategic business
partners to gain a foothold in the market and generate attractive margins; the
ability to attain specified revenue goals within a specified time frame, if at
all, or to reduce costs; the outcome of discussions with the U.S. Food and Drug
Administration, or FDA, and other regulatory agencies; the content and timing of
submissions to, and decisions made by, the FDA and other regulatory agencies,
including demonstrating to the satisfaction of the FDA the safety and efficacy
of our products; our ability to manufacture sufficient amounts of our products
for commercialization activities; our ability to protect our intellectual
property and operate our business without infringing on the intellectual
property of others; our ability to continue to expand our intellectual property
portfolio; the risk we may need to indemnify our distributors or other third
parties; risks attendant with conducting a significant portion of our business
outside the United States; our ability to comply with complex federal and state
fraud and abuse laws, including state and federal anti-kickback laws; risks
associated with changes to health care laws; our ability to attract and retain
qualified directors, officers and employees; our expectations relating to the
concentration of our revenue from international sales; our ability to expand to
and commercialize products in markets outside the wound care market; our ability
to protect our information technology and infrastructure; and the impact of any
future changes in accounting regulations or practices in general with respect to
public companies. These forward-looking statements speak only as of the date
hereof. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based, except
as required by law.



Our Business



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, animal health care, eye care, oral care and dermatological
conditions. 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.







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Business Channels




Our core market differentiation is based on being the leading developer and
producer of stabilized hypochlorous acid, or HOCl, solutions. Unlike many of our
competitors, 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 products to 54 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.



Dermatology



Sonoma Dermatology has 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
acne, the management of scars and 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 for an initial term of five years, subject to meeting
minimum purchase and other requirements. Pursuant to our agreement with EMC
Pharma, we manufacture products for EMC Pharma and EMC Pharma markets, sells and
distributes them to patients and customers.



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. Additionally, on
the same day, we launched Regenacyn® Plus, a prescription-strength scar gel
which is available as an office-dispense product through physician offices. Our
consumer products are available through Amazon.com, our website and U.S.-based
distributors.



We sell dermatology products in Europe, Asia, and Brazil 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. They work by first
removing foreign material and debris from the skin surface and moistening the
skin, thereby improving wound healing. Second, our HOCl products assist in the
wound healing process through their antimicrobial properties 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.







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In the United States, we sell our wound care products directly to hospitals,
physicians, nurses, and other healthcare practitioners and indirectly through
several non-exclusive distribution arrangements.



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 Wound and Skin
Cleanser is available without prescription through our online store. In June
2022, Microcyn OTC received the Natural Personal Care Product certification from
the National Products Association.



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 Dubai.



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 and through our online store. Ocucyn®
Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and
effective solution for good eyelid & 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.









  19







In international markets, our product Microdacyn60® Oral Care treats mouth and
throat infections and thrush. Microdacyn60 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. In New
Zealand and Australia, our partner Te Arai BioFarma Ltd. markets our oral
product under their label Oracyn® Oral Care. Our partner, Dyamed Biotech,
expects to launch Oracyn® Oral Care in parts of Asia this year. On January 18,
2022, we partnered with Anlicare International to seek regulatory clearances for
our dental and oral products in China and Macau.



Our international nasal care product Sinudox™ based on our HOCl technology is a
solution 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 sold through Amazon in Europe.
In New Zealand and Australia, our partner Te Arai markets our nasal product
under their label Nasocyn® Nasal Care.



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. We granted DV Medical Supply Inc. the
non-exclusive right to distribute and sell MicrocynVS products in veterinarian
clinics and practices throughout the United States.



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



In-vitro and clinical studies of HOCl show it to have impressive antipruritic,
antimicrobial, antiviral and anti-inflammatory properties. HOCl has been
formulated as a disinfectant and sanitizer solution for our partner MicroSafe
Group, Dubai, and is sold in numerous countries. It is designed to be used to
spray in aerosol format to areas and environments which are suspected to serve
as a breeding ground for the spread of infectious disease, likely to result in
epidemics or pandemics. The medical-grade surface disinfectant solution is used
in hospitals worldwide to keep doctors and patients protected and safe. In May
2020, Nanocyn® Disinfectant & Sanitizer, received approval to be entered into
the Australian Register of Therapeutic Goods, or ARTG, as well as in Canada, for
use against the coronavirus SARS-CoV-2, or 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.







  20

Through our partner MicroSafe Group DMCC, Dubai, we sell hard surface disinfectant products into Europe, the Middle East and Australia.


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 Monkeypox. We intend to
build upon this ground-breaking approval by securing further approvals of this
nature. 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.



Additional Information



Investors and others should note that we announce material financial information
using our company website (www.sonomapharma.com), our investor relations website
(ir.sonomapharma.com), SEC filings, press releases, public conference calls and
webcasts. The information on, or accessible through, our websites is not
incorporated by reference in this Quarterly Report on Form 10-Q.

Results of Continuing Operations

Comparison of the Three Months Ended June 30, 2022 and 2021





Revenue

The following table shows our consolidated total revenue and revenue by geographic region for the three months ended June 30, 2022 and 2021:





                                 Three Months Ended
                                      June 30,
(In thousands)                    2022          2021        $ Change       % Change
United States                  $      871      $ 1,592     $     (721 )         (45% )
Latin America                       1,048          565            483            85%

Europe and Rest of the World        2,064        1,527            537      

     35%
Total                          $    3,983      $ 3,684     $      299             8%





The decrease in United States revenues for the three months ended June 30, 2022
compared to the same periods in the prior year of $721,000, is primarily the
result of divesting our prescription dermatology business to our partner, EMC.
Divesting our prescription dermatology business resulted in a reduction of
revenues, however, we also eliminated significant expenses related to that line
of products including a direct sales force.

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.





The increase in Europe and Rest of World revenue was primarily the result of an
increase in orders from our distribution partners in Europe and Asia. Revenues
from our international distributors tend to be choppy when viewed on a quarterly
basis due to customers placing larger but less frequent orders to benefit from
quantity discounts and reduced shipping costs when ordering sufficient
quantities to fill standard sized shipping containers.







  21

Cost of Revenue and Gross Profit

The cost of revenue and gross profit metrics are as follows:





                                           Three Months ended
                                                June 30,

(In thousands, except for percentages) 2022 2021 Change % Change Cost of Revenue

$    2,537      $ 2,231     $    306           14%
Cost of Revenue as a % of Revenue               64%          61%
Gross Profit                             $    1,446      $ 1,453     $     (7 )          (1 )%
Gross Profit as a % of Revenue                  36%          39%




The decline in gross profit is primarily as a result of product and customer mix
and 1% of the decline is the result of increased shipping costs to transport
product from our manufacturing facility in Mexico to the United States and
Europe.

Research and Development Expense

The research and development metrics are as follows:





                                          Three Months ended
                                               June 30,
(In thousands, except for
percentages)                           2022                 2021           Change          % Change

Research and Development Expense   $          6         $         84     $       (78 )            (93 )%
Research and Development Expense
as a % of Revenue                            0%                   2%              (2 )%

For the three months ended June 30, 2022, research and development expenses decreased as a result reduced clinical trial expense.

Selling, General and Administrative Expense

The selling, general and administrative expense metrics are as follows:





                                       Three Months ended
                                            June 30,
(In thousands, except for
percentages)                          2022             2021          Change           % Change
Selling, General and
Administrative Expense             $     2,295      $    2,273     $        22                1%
Selling, General and
Administrative Expense as a % of
Revenue                                    58%             62%              (4 )%





Selling, general and administrative expenses were essentially flat for the three
months ended June 30, 2022 as compared to the previous year but expenses but
were down 4% as a percentage of revenue when comparing the quarter ended June
30, 2022 to the quarter ended June 30, 2021.









  22

Interest Income (Expense), net

Interest Income (Expense), net was zero for the three months ended June 30, 2022 as compared to (1,000) for the three months ended June 30, 2021.





Other Expense (Income), net




Other expense for the three months ended June 30, 2022 of $67,000 decreased by
$126,000 when compared to other expense of $193,000 for the three months ended
June 30, 2021. The decrease in other income relates primarily to fluctuations in
foreign exchange.



Net Loss

The following table provides the net loss for each period along with the computation of basic and diluted net income per share:






                                                           For the Three Months Ended June 30,

(In thousands, except per share data)                        2022          

           2021
Numerator:
Net income (loss)                                      $           (887 )       $           (1,098 )

Denominator:
Weighted-average number of common shares
outstanding: basic                                                3,101                      2,093
Weighted-average number of commons shares
outstanding: diluted                                              3.101                      2,093

Net income (loss) per share - basic
Net income (loss) per share                            $          (0.29 )       $            (0.52 )
Net income (loss) per share - diluted
Net income (loss) per share                            $          (0.29 )  

    $            (0.52 )

Liquidity and Capital Resources

We reported a net loss of $887,000 for the three months ended June 30, 2022. At June 30, 2022 and March 31, 2022, our accumulated deficit amounted to $185,250,000 and $184,363,000, respectively. We had working capital of $9,963,000 and $10,611,000 as of June 30, 2022 and March 31, 2022, respectively.





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.







  23






Management believes that we have access to capital resources through possible
public or private equity offerings, debt financings, corporate collaborations or
other means; however, it is possible that new financing will not 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.



Sources of Liquidity




As of June 30, 2022, we had cash and cash equivalents of $5,586,000. Since our
inception, substantially all of our operations have been financed through sales
of equity securities. Other sources of financing that we have used to date
include our revenues, as well as various loans and the sale of certain assets to
Invekra, Petagon, Microsafe and Infinity Labs.



Cash Flows

The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the three months ended June 30, 2022 and 2021 as well balances of cash and cash equivalents and working capital:





                                                           Three Months ended June 30,
(In thousands)                                              2022

2021


Net cash provided by (used in):
Operating activities                                   $       (1,533 )     $       (1,223 )
Investing activities                                              (23 )                (49 )
Financing activities                                             (387 )               (209 )

Effect of exchange rates on cash                                  133                   72
Net change in cash and cash equivalents                        (1,810 )             (1,409 )
Cash and cash equivalents, beginning of the period              7,396

4,220


Cash and cash equivalents, end of the period           $        5,586       $        2,811
Working capital (1), end of period                     $        9,963
$        6,924

(1) Defined as current assets minus current liabilities.

As of June 30, 2022, we had cash and cash equivalents of $5,586,000, compared to $2,811,000 as of June 30, 2021.





Net cash used by operating activities during the three months ended June 30,
2022 was $1,533,000, primarily due to a net loss of $887,000 and a decrease

in
deferred revenue.



Net cash used by operating activities during the three months ended June 30,
2021 was $1,223,000, primarily due to a net loss of $1,098,000 and an increase
in accounts receivable.

Net cash used in investing activities was $23,000 for three months ended June 30, 2022, primarily related to the purchase of equipment.









  24

Net cash used in investing activities was $49,000 for three months ended June 30, 2021, primarily related to the purchase of equipment.

Net cash used in financing activities was $387,000 for the three months ended June 30, 2022, primarily related to principal payments on PPP loan and short-term debt of $350,000 and to a payment of a long-term deposit.

Net cash used in financing activities was $209,000 for the three months ended June 30, 2021, primarily related to principal payments on long-term debt of $199,000.

Material Trends and Uncertainties





We are exposed to risk from decline in foreign currency for both the Euro and
the Mexico Peso versus the U.S. 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 13, 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 our 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 us.



As the pandemic continues to impact economies worldwide, we are closely watching
inflation, increased volatility within financial markets, shipping costs, supply
chain issues and labor costs. At this time, we have seen an increase in shipping
costs however, the overall impact of these issues has been minimal. The
potential 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, our customers pay for most of the shipping expenses
necessary to get products to their home countries, 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, consumer sentiment and the prospect of a recession in the United States which may impact our financial results.





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.







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