SONOMA PHARMACEUTICALS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 December 31, 2021 and our audited consolidated
financial statements for the year ended March 31, 2021 included in our Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on July
14, 2021.



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; our ability to manage our accounts
receivable; the impact of seasonality on our sales; 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
gain sufficient reimbursement from third-party payors; 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, disinfectant use 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. We sell our products either directly or via
partners in 54 countries worldwide.









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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 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 partnered with EMC Pharma, LLC in March 2021 to sell
our prescription 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, sell and
distribute them to patients and customers.



On September 28, 2021, we launched a new product direct to consumers on
Amazon.com, 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.



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.



In the United States, we sell our wound care products directly to hospitals,
physicians, and other healthcare practitioners. We have also begun partnering
with distributors to expand our reach into the wound care markets. In March
2021, we granted EMC Pharma the non-exclusive right to sell wound care products
to certain governmental entities. In January 2022, we entered into an agreement
with Salus Medical, LLC for a non-exclusive right to sell our wound care
products.









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In Europe, we rely on agreements with country-specific distributors for the sale
of our wound care products under a variety of brand names into 27 countries,
including Austria, Belgium, Croatia, Italy, the Netherlands, Germany, Greece,
Hungary, the Czech Republic, Spain, Norway, Switzerland, Poland, Portugal,
Slovenia, the Slovak Republic, Finland, Denmark, Montenegro and Serbia.



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 Sonoma's online store. It is
also available as a prescription product through physicians.



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. 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 a network of 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 will pay 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 and nasal care

We sell a variety of oral and nasal products worldwide.

In the United States, on December 14, 2020, we partnered with Gabriel Science,
LLC to market our HOCl-based products in the dental, head and neck markets and
launched Endocyn®, a biocompatible root canal irrigant. On January 19, 2022, we
added Salus Medical, LLC, as a partner to distribute Endocyn as well as
dermatology, wound care and eye care products on a non-exclusive basis.



Internationally, 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.









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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 and Tractor Supply. Most recently, we expanded our
animal health product offerings by adding a MicrocynAH line for felines at
PetSmart.



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.



Through our partner Microsafe Group DMCC, Dubai, we sell hard surface
disinfectant products into Europe, the Middle East and Australia. On July 31,
2020, we partnered with MicroSafe Group to seek regulatory approval in the
United States to sell hard surface disinfectants in the United States. To date,
we have not received such regulatory approval.



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 from continuing operations

Comparison of the three and nine month periods ended December 31, 2021and 2020

Revenue

The following tables present our consolidated revenues and our revenues by geographic region for the three and nine months ended December 31, 2021and 2020:

                                 Three Months Ended
                                    December 31,
(In thousands)                    2021          2020       $ Change       % Change
United States                  $      933      $ 1,978     $  (1,045 )         (53% )
Latin America                         273        1,307        (1,034 )         (79% )

Europe and Rest of the World        1,696        1,651            45       

     3%
Total                          $    2,902      $ 4,936     $  (2,034 )         (41% )










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                                 Nine Months Ended
                                    December 31,
(In thousands)                   2021          2020       $ Change       % Change
United States                  $   3,872     $  5,582     $  (1,710 )         (31% )
Latin America                      1,356        5,659        (4,303 )         (76% )

Europe and Rest of the World       5,102        5,231          (129 )      

   (2% )
Total                          $  10,330     $ 16,472     $  (6,142 )         (37% )

The decrease in United States revenues for the three and nine months ended
December 31, 2021, compared to the prior year of $1,045,000 and $1,710,000,
respectively, was primarily related to the transfer of sales of our prescription
dermatology products to EMC Pharma. As a result of the transfer, we now sell our
prescription products to EMC at a reduced price instead of selling directly to
patients, which has brought our U.S. prescription drug business to profitability
by eliminating the overhead costs of a direct sales force. Prior to this
transaction, our U.S. prescription dermatology business had operated at a
significant loss and partnering with EMC has improved our overall financial
health while retaining lower, but now profitable, revenues from the U.S.
prescription dermatology business. Wound care product revenues were essentially
flat from the prior year. For the three months ended December 31, 2021, we saw a
decline in U.S. animal care revenue versus the prior year of $500,000 which was
due to quarterly order fluctuations as for the nine months ended December 31,
2021, animal care revenue was flat compared to the prior year.



As a result of the asset purchase agreement and arrangement we entered into on
October 27, 2016, with Invekra, we were obligated to supply Invekra with product
at a reduced price through October 27, 2020. Although the end of this contract
has caused a reduction in the top line, the overall impact has been neutral to
our bottom line due to the low margins required by the contract. Since then,
Invekra has started its own manufacturing and we have continued to manufacture
for Invekra in small amounts as overflow manufacturing. However, we now charge
market prices for manufacturing since the contract ended. The decrease in Latin
American revenues for the three and nine months ended December 31, 2021,
compared to the prior year periods was the result of the Invekra revenue
declining to $273,000 and $1,356,000 from $1,307,000 and $5,659,000,
respectively.



The increase in Europe and Rest of the World revenues for the three months ended
December 31, 2021, compared to the prior year was the result of increases in
Asia partially offset by decreases in Europe and the Middle East. For the nine
months ended December 31, 2021, the decrease in Europe and Rest of the World
revenues was the result of decreases in Europe and the Middle East partially
offset by increases in Asia.

Revenue cost and gross profit

The revenue cost and gross margin measures are as follows:

                                           Three Months Ended
                                              December 31,

(In thousands, except for percentages) 2021 2020 Change % Change Cost of revenue

                          $    1,699      $ 2,941     $ (1,242 )         (42% )
Cost of Revenue as a % of Revenue               59%          60%          (1% )
Gross Profit                             $    1,203      $ 1,995     $   (792 )         (40% )
Gross Profit as a % of Revenue                  41%          40%          

1%




                                           Nine Months Ended
                                              December 31,

(In thousands, except for percentages)      2021         2020        Change       % Change
Cost of Revenue                          $    6,433     $ 9,719     $ (3,286 )         (34% )
Cost of Revenue as a % of Revenue               62%         59%           

3%

Gross Profit                             $    3,897     $ 6,753     $ (2,856 )         (42% )
Gross Profit as a % of Revenue                  38%         41%          (3% )










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For the three months ended December 31, 2021, gross margins increased by 1% and
for the nine months ended December 31, 2021, gross margins decreased by 3%. The
increase in margins for the three months ended December 31, 2021 was the result
of Invekra prices changing as described above. The decline of 3% for the nine
months ended December 31, 2021 was the result of the EMC Pharma transaction. Our
partnership with EMC Pharma has resulted in lower revenue from the sale of our
prescription dermatology products in the U.S. because the transfer price that
EMC Pharma, LLC pays is lower than the prices we received for these products
when we sold them ourselves directly to patients. However, our operating costs
associated with this business have dropped substantially due to the elimination
of the direct sales force for these prescription products and reduction of
associated overhead costs. As a result, our U.S. prescription product business
is now smaller, but profitable, and is improving the overall health of Sonoma.

Research and development costs

The research and development indicators are as follows:

                                          Three Months Ended
                                             December 31,
(In thousands, except for
percentages)                           2021                 2020           Change         % Change

Research and Development Expense   $         26         $         33     $        (7 )          (21% )
Research and Development Expense
as a % of Revenue                            1%                   1%               -






                                         Nine Months Ended
                                           December 31,
(In thousands, except for
percentages)                          2021              2020           Change         % Change

Research and Development Expense   $       121       $       425     $      (304 )          (72% )
Research and Development Expense
as a % of Revenue                           1%                3%             (2% )




For the three months ended December 31, 2021, research and development expenses
of $26,000 decreased by $7,000 from the prior year and was nearly flat. The
decrease in research and development expenses of $304,000 for the nine months
ended December 2021 versus the prior year was the result of closing our Seattle
facility and moving the R&D function to Mexico.

Selling, general and administrative expenses

Selling, general and administrative expense measures are as follows:

                                       Three Months Ended
                                          December 31,
(In thousands, except for
percentages)                          2021             2020          Change          % Change
Selling, General and
Administrative Expense             $     2,135      $    2,100     $        35               2%
Selling, General and
Administrative Expense as a % of
Revenue                                    74%             43%             31%








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                                       Nine Months Ended
                                          December 31,
(In thousands, except for
percentages)                          2021            2020          Change         % Change
Selling, General and
Administrative Expense             $     6,603     $    6,963     $      (360 )           (5% )
Selling, General and
Administrative Expense as a % of
Revenue                                    64%            42%             22%




The increase in Selling, General and Administrative expense for the three months
ended December 31, 2021, was $35,000 due to increased insurance costs. The
decrease in Selling, General and Administrative expenses for the nine months
ended December 31, 2021 of $360,000 was the result the reduction in sales force
related to the EMC Pharma transaction partially offset by increased insurance
costs.

Interest income (expense), net

Interest (expense) income, net for the three and nine months ended December 31,
2021, was $3,000 and ($1,000), respectively, compared to $(2,000) and $2,000,
for the three and nine months ended December 31, 2020, respectively.



Other (Expense) Income, net



Other (expense) income for the three and nine months ended December 31, 2021,
was $11,000 and $542,000 respectively, compared to $(490,000) and $(687,000),
respectively, for the three and nine months ended December 31, 2020. The
increase in other income relates primarily to the recognition of PPP loan
forgiveness in the amount of $723,000.



Gain on Sale of Assets



Gain on the sale of assets was $0 for the three months ended December 31, 2021
and $150,000 for the nine months ended December 31, 2021, respectively, compared
to $4,000 and $137,000, respectively, for the three and nine months ended
December 31, 2020. During the three months ended December 31, 2020, we sold
fixed assets no longer needed after closing our Petaluma manufacturing facility
and during the nine months ended December 31, 2020, we also sold assets to
Infinity along with our Micromed division. In September 2021, we recognized
revenue related to the sale of asset to Microsafe previously held in deferred
revenue.

Net income (loss) from continuing operations

Net losses from continuing operations for the three and nine months ended
December 31, 2021, were $944,000 and $2,136,000, respectively, compared to net
losses of $626,000 and $1,183,000, respectively, for the three and nine months
ended December 31, 2020.

Results of discontinued operations

Comparison of the three and nine month periods ended December 31, 2021and 2020

On June 24, 2020, we closed on an asset purchase agreement with Infinity Labs
SD, Inc. We decided to divest our Micromed business, resulting in a strategic
shift that had a major effect on our operations and financial results.
Therefore, the divested Micromed operations meet the criteria to be reported as
discontinued operations.

The assets, liabilities, results of operations and related cash flows of our
Micromed are classified as discontinued operations for all periods presented.

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The operations of the Micromed business included in discontinued operations is
summarized as follows:



                                    Three Months Ended December 31,      

Nine month period ended the 31st of December,

                                       2021                 2020             2021                 2020
Revenues                           $          -         $          -     $          -         $    214,000
Cost of revenues                              -                    -                -               53,000
Selling general and

administrative expenses                       -               (1,000 )              -               38,000
Income from discontinued
operations before tax                         -                1,000                -              123,000
Gain on disposal of discontinued
operations before income taxes                -              (25,000 )              -              770,000
Total income (loss) from
discontinued operations, before
tax                                           -              (24,000 )              -              893,000
Income tax benefit (expense)                  -                    -                -                    -
Income (loss) from discontinued
operations, net of tax             $          -         $    (24,000 )   $ 

        -         $    893,000




Gain on disposal of discontinued operations for the nine months ended December
31, 2020, includes $795,000 of gain primarily from the value of the customer
base of Micromed.

Cash and capital resources

We reported a net loss of $944,000 and $2,142,000 for the three and nine months
ended December 31, 2021. At December 31, 2021 and March 31, 2021, our
accumulated deficit amounted to $181,419,000 and $179,277,000, respectively. As
of December 31, 2021, we had cash and cash equivalents of $8,529,000 compared to
$5,541,000 on December 31, 2020. 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.



The following table presents a summary of our consolidated cash flows for
operating, investing and financing activities for the nine months ended December
31, 2021, and 2020 as well as balances of cash and cash equivalents and working
capital:



                                                              Nine Months Ended December 31,
(In thousands)                                                  2021                  2020
Net cash provided by (used in):
Operating activities                                       $        (2,853 )     $        (1,902 )
Investing activities                                                   (38 )                 392
Financing activities                                                 7,174                 3,039

Effect of exchange rates on cash                                        26                   321
Net change in cash and cash equivalents                              4,309                 1,850
Cash and cash equivalents, beginning of the period                   4,220                 3,691
Cash and cash equivalents, end of the period               $         8,529       $         5,541
Working capital (1), end of period                         $        13,824 

     $        12,329




  (1) Defined as current assets minus current liabilities










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Net cash used by operating activities during the nine months ended December 31,
2021, was $2,853,000, primarily due to a net loss of $2,142,000 and forgiveness
on PPP loans of $723,000.

Net cash used by operating activities during the nine months ended December 31,
2020, was primarily due to an increase in inventories of $403,000, a decrease in
accrued expenses of $779,000 and a decrease in accounts payable of $168,000 and
a net loss of $290,000 for the period. These uses were partially offset by a
decrease in accounts receivable of $464,000.

Net cash used by investing activities was $38,000 for the nine months ended
December 31, 2021mainly related to equipment purchases.

Net cash provided by investing activities for the nine months ended December 31, 2020was primarily related to proceeds from the sale of our Micromed
division of $610,000 partially offset by the purchase of equipment.

Net cash provided by financing activities was $7,174,000 for the nine months ended December 31, 2021primarily related to proceeds from the issuance of common shares of $7,554,000and partially offset by payments on long-term debt.

Net cash provided by financing activities for the nine months ended December 31,
2020, was primarily related to proceeds from the exercise of stock options and
warrants of $2,210,000, and PPP loans of $1,310,000.



We expect revenues to fluctuate and may incur losses in the foreseeable future
and may need to raise additional capital to pursue our product development
initiatives, to penetrate markets for the sale of our products and continue as a
going concern. We cannot provide any assurances that we will be able to raise
additional capital.



Management believes that we have access to capital resources through possible
public or private equity offerings, debt financings, corporate collaborations or
other means; however, we cannot provide any assurance that new financing will be
available on commercially acceptable terms, if at all. If the economic climate
in the U.S. deteriorates, our ability to raise additional capital could be
negatively impacted. If we are unable to secure additional capital, we may be
required to take additional measures to reduce costs in order to conserve our
cash in amounts sufficient to sustain operations and meet our obligations. These
measures could cause significant delays in our continued efforts to
commercialize our products, which is critical to the realization of our business
plan and our future operations. These matters raise substantial doubt about our
ability to continue as a going concern.

Material trends and uncertainties

As we have previously discussed in our annual report on Form 10-K filed with the
SEC on July 14, 2021, we face a substantial Mexico tax liability, intercompany
debt, unpaid technical assistance charges and accrued interest. These amounts
are not due until 2027. At this time, management believes there are sufficient
assets on the balance sheet to more than cover any tax obligation without
interrupting the Company's operations or business. We have engaged tax
professionals to review all options to limit our exposure to these amounts and
to proceed in a manner that is most advantageous to the Company.







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As Covid impacts economies worldwide, we are closely watching inflation,
shipping costs, supply chain issues and labor costs. At this time, 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, most of our
customers pay for shipping expenses, including increased shipping costs, if any.
We have not yet faced labor shortages however it is possible we may have
difficulties retaining and finding qualified employees in a tight labor market
in the future. Furthermore, overall inflation tendencies may put pressure on our
product pricing and/or costs.



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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