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 September 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 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.







  16






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 a variety of products to 55 countries. Our core
strategy is to work with partners both in the United States and around the world
to market and distribute our products. In some cases, we market and sell our own
products.



Dermatology



We have developed unique, differentiated, prescription-strength and safe
dermatologic products that support paths to healing among various key
dermatologic conditions. Our products are primarily targeted at the treatment of
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. Pursuant to our agreement with EMC Pharma, we manufacture
products for EMC Pharma and EMC Pharma has the right to market, sell and
distribute them to patients and customers for an initial term of five years,
subject to meeting minimum purchase and other requirements.



On September 28, 2021, we launched a new over-the-counter product, Regenacyn®
Advanced Scar Gel, which is clinically proven to improve the overall appearance
of scars while reducing pain, itch, redness, and inflammation. On the same day,
we launched Regenacyn® Plus, a prescription-strength scar gel which is available
as an office-dispense product through physician offices.



On October 27, 2022, we launched two new over-the-counter dermatology products
in the United States, Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel
for the alleviation of red bumps, rashes, shallow skin fissures, peeling, and
symptoms of eczema/atopic dermatitis, and Rejuvacyn® Advanced Skin Repair
Cooling Mist for management of minor skin irritations following cosmetic
procedures as well as daily skin health and hydration.

In June 2022the Natural Products Association certified Rejuvacyn Advanced as a Natural Personal Care Product.

Our consumer products are available through Amazon.com, our website and third party 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.







  17






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 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, nurses, and other healthcare practitioners and indirectly through
non-exclusive distribution arrangements. In Europe, we sell our wound care
products through a diverse network of distributors.



To respond to market demand for our HOCl technology-based products, we launched
our first direct to consumer over-the-counter product in the United States in
February 2021. Microcyn® OTC Wound and Skin Cleanser is formulated for home use
without prescription to help manage and cleanse wounds, minor cuts, and burns,
including sunburns and other skin irritations. Microcyn OTC is available without
prescription through our online store.

In June 2022the Natural Products Association certified Microcyn OTC as a Natural Personal Care Product.

In March 2021, we received approval to market and use our HOCl products as
biocides under Article 95 of the European Biocidal Products Regulation in
France, Germany and Portugal. The approval applies to our products MucoClyns™
for human hygiene to be marketed and commercialized by us, MicrocynAH® for
animal heath marketed and commercialized through our partner, Petagon Limited,
and MicroSafe for disinfectant use to be marketed and commercialized through our
partner, MicroSafe Group DMCC.

In September 2022our partner Te Arai BioFarma Ltd. received approval to market and sell our Microdacyn and Microdacyn Hydrogel products in Taiwan.

Eye Care



Our prescription product Acuicyn™ is an antimicrobial prescription solution for
the treatment of blepharitis and the daily hygiene of eyelids and lashes and
helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill
the bacteria that causes discomfort, fast enough to provide near instant relief,
and gentle enough to use as often as needed. In the United States, our partner
EMC Pharma is selling our prescription-based eye care product through its
distribution network.



On September 28, 2021, we launched Ocucyn® Eyelid & Eyelash Cleanser, which is
sold directly to consumers on Amazon.com, through our online store, and through
third party distributors. Ocucyn® Eyelid & Eyelash Cleanser, designed for
everyday use, is a safe, gentle, and effective solution for good eyelid and
eyelash hygiene.



In international markets we rely on distribution partners to sell our eye
products. On May 19, 2020, we entered into an expanded license and distribution
agreement with our existing partner, Brill International S.L. for our
Microdacyn60® Eye Care HOCl-based product. Under the license and distribution
agreement, Brill has the right to market and distribute our eye care product
under the private label Ocudox™ in Italy, Germany, Spain, Portugal, France, and
the United Kingdom for a period of 10 years, subject to meeting annual minimum
sales quantities. In return, Brill paid us a one-time fee, and the agreed upon
supply prices. In parts of Asia, Dyamed Biotech markets our eye product under
the private label Ocucyn.







  18






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 USwe sell our dental products through US-based distributors.

In international markets, our product Microdacyn60® Oral Care treats mouth and
throat infections and thrush. Microdacyn60 solution assists in reducing
inflammation and pain, provides soothing cough relief and does not contain any
harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing,
has no contraindications and is ready for use with no mixing or dilution. 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, is
seeking regulatory clearance to market Oracyn® Oral Care in parts of Asia. 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
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
and is sold in numerous countries. It is designed to be used to spray in aerosol
format in areas and environments likely to serve as a breeding ground for the
spread of infectious disease, which could result in epidemics or pandemics. The
medical-grade surface disinfectant solution is used in hospitals worldwide to
protect doctors and patients. In May 2020, Nanocyn® Disinfectant & Sanitizer
received approval to be entered into the Australian Register of Therapeutic
Goods, or ARTG for use against the coronavirus SARS-CoV-2, or COVID-19, and was
also authorized in Canada for use against COVID-19. Nanocyn has also met the
stringent environmental health and social/ethical criteria of Good Environmental
Choice Australia, or GECA, becoming one of the very few eco-certified,
all-natural disinfectant solutions in Australia.







  19

Through our partner MicroSafe, we sell hard surface disinfectant products into
Europethe 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.

Result of Continuing Operations

Comparison of the Three and Six Months Ended September 30, 2022 and 2021

Revenue



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



                      Three Months Ended
                         September 30,
(In thousands)         2022          2021        $ Change       % Change
United States       $      973      $ 1,347     $     (374 )         (28% )
Europe                   1,170          919            251            27%
Asia                       330          437           (107 )         (24% )
Latin America              394          518           (124 )         (24% )
Rest of the World          464          523            (59 )         (11% )
Total               $    3,331      $ 3,744     $     (413 )         (11% )




                      Six Months Ended
                        September 30,
(In thousands)        2022         2021       $ Change       % Change
United States       $   1,842     $ 2,939     $  (1,097 )         (37% )
Europe                  2,012       1,688           324            19%
Asia                    1,155         638           517            81%
Latin America           1,444       1,083           361            33%
Rest of the World         861       1,080          (219 )         (20% )
Total               $   7,314     $ 7,428     $    (114 )          (2% )








  20






The decrease in United States revenues for the three and six months ended
September 30, 2022 compared to the same periods in the prior year of $374,000
and $1,097,000 is primarily the result of divesting our prescription dermatology
business to our partner, EMC Pharma. 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 decrease is also partially due to a decline in sales of our
over-the-counter animal health care products. These amounts were partially
offset by an increase in wound care and prescription animal health care product
sales.

The increase in Europe revenue for the three and six months ended September 30,
2022 was caused by an increase in demand for our wound care products as well as
the introduction of several new products into Europe.



The decrease in Asia revenue for the three months and the increase for the six
months ended September 30, 2022 is due to lumpiness in ordering with increased
orders in the first quarters and lower orders in the second quarter. Revenues
from our international distributors tend to be choppy 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.



The decrease in Latin America revenue for the three months ended September 30,
2022 was caused by a decline in manufacturing for one of our customers. Our
contract with Invekra ended in 2021 and since then we have continued to
manufacture product for them at lower quantities but higher margins. The
increase in Latin America revenue for the six months ended September 30, 2022
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. This increase was
partially offset by a decline in overflow manufacturing for one of our
customers.

The decrease in Rest of World revenue for the three and six months ended
September 30, 2022 was primarily the result of decreased disinfectant sales in the Middle East partially offset by an increase in sales in New Zealand.

Cost of Revenue and Gross Profit

The cost of revenue and gross profit metrics for the three and six months ended
September 30, 2022 and 2021 are as follows:

                                           Three Months Ended
                                              September 30,
(In thousands, except for percentages)      2022          2021       Change       % Change
Cost of Revenue                          $    1,995      $ 2,503     $  (508 )         (20% )
Cost of Revenue as a % of Revenue               60%          67%         (7% )
Gross Profit                             $    1,336      $ 1,241     $    95             8%
Gross Profit as a % of Revenue                  40%          33%          7%




                                           Six Months Ended
                                             September 30,

(In thousands, except for percentages)     2022         2021       Change      % Change
Cost of Revenue                          $   4,532     $ 4,734     $  (202 )         (4% )
Cost of Revenue as a % of Revenue              62%         64%         (2% )
Gross Profit                             $   2,782     $ 2,694     $    88 

3%

Gross Profit as a % of Revenue                 38%         36%          2%




The increase in gross profit margin for the three months ended September 30,
2022 was primarily the result of producing higher unit volumes in the Mexico
manufacturing facility, partially offset by a decline in margins in the
Netherlands as a result of product mix and shipping costs to Europe. The
increase in gross profit margin for the six months ended September 30, 2022 is
primarily due to the sale of machinery to a customer for $750,000, which
management expects to be a one-time event.







  21

Research and Development Expense

The research and development metrics as of September 30, 2022 and 2021 are as
follows:



                                        Three Months Ended
                                           September 30,
(In thousands, except for
percentages)                          2022              2021           Change        % Change

Research and Development Expense   $         -       $        10     $      (10 )         (100% )
Research and Development Expense
as a % of Revenue                           0%              0.3%          (0.3% )





                                         Six Months Ended
                                           September 30,
(In thousands, except for
percentages)                          2022              2021           Change         % Change

Research and Development Expense   $         6       $        95     $       (89 )          (94% )
Research and Development Expense
as a % of Revenue                           0%                1%             (1% )

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

Selling, General and Administrative Expenses

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

                                       Three Months Ended
                                          September 30,
(In thousands, except for
percentages)                          2022             2021          Change         % Change
Selling, General and
Administrative Expense (SG&A)      $     2,067      $    2,195     $      (128 )           (6% )
SG&A Expense as a % of Revenue             62%             59%             

3%




                                        Six Months Ended
                                         September 30,
(In thousands, except for
percentages)                          2022            2021          Change         % Change
Selling, General and
Administrative Expense (SG&A)      $     4,362     $    4,468     $      (106 )           (2% )
SG&A Expense as a % of Revenue             60%            60%             

0%




The decline in Selling, General and Administrative expense for the three and six
months ended September 30, 2022 was $128,000 and $106,000, respectively, and was
the result of ongoing efforts to contain expenses across all parts of the
company.







  22

Interest Income (Expense), net

Interest (expense) income, net for the three and six months ended September 30,
2022 was $2,500 and $2,500, respectively, compared to $4,000, and $5,000 for the
three and six months ended September 30, 2021, respectively.



Other (Expense) Income, net



Other (expense) income for the three and six months ended September 30, 2022 was
$(189,000) and $(256,000) respectively, compared to $723,000 and $531,000,
respectively, for the three and six months ended September 30, 2021. The
decrease in other income (expense) relates primarily to the recognition of PPP
loan forgiveness in the amount of $723,000 in the prior year and, to a lesser
extent, to exchange rate fluctuations.



Income taxes

Income tax expense for the three and six months ended September 30, 2022 was
$100,000 and $65,000.

Net Loss

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

                                       Three Months Ended September 30,             Six Months Ended September 30,
(In thousands, except per share
data)                                    2022                     2021                2022                  2021
Numerator:
Net loss                           $          (1,017 )       $          (100 )   $        (1,904 )     $        (1,198 )

Denominator:
Weighted-average number of
common shares outstanding: basic               3,101                   2,344               3,101                 2,219
Weighted-average number of
common shares outstanding:
diluted                                        3,101                   2,344               3,101                 2,219

Net income (loss) per share:
basic                              $           (0.33 )       $         (0.04 )   $         (0.61 )     $         (0.54 )
Net income (loss) per share:
diluted                            $           (0.33 )       $         (0.04 )   $         (0.61 )     $         (0.54 )








  23

Liquidity and Capital Resources

We reported a net loss of $1,017,000 and $1,904,000 for the three and six months
ended September 30, 2022. At September 30, 2022 and March 31, 2022, our
accumulated deficit amounted to $186,267,000 and $184,363,000, respectively. As
of September 30, 2022, we had cash and cash equivalents of $3,351,000 compared
to $8,392,000 on September 30, 2021. 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, royalty
payments from licensing our products, as well as various loans and the sale of
certain assets to Invekra, Petagon, and Microsafe.



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



                                                          Six Months Ended September 30,
(In thousands)                                              2022                  2021
Net cash provided by (used in):
Operating activities                                   $        (3,363 )     $        (2,527 )
Investing activities                                              (210 )                 (38 )
Financing activities                                              (565 )               6,711

Effect of exchange rates on cash                                    93                    26
Net change in cash and cash equivalents                         (4,045 )               4,172
Cash and cash equivalents, beginning of the period     $         7,396       $         4,220
Cash and cash equivalents, end of the period           $         3,351       $         8,392
Working capital (1), end of period                     $         8,866     

 $        13,943

(1) Defined as current assets minus current liabilities

Net cash used by operating activities during the six months ended September 30,
2022 was $3,363,000, primarily due to a net loss of $1,904,000, and a decrease
in deferred revenue of $1,149,000.



Net cash used by operating activities during the six months ended September 30,
2021 was $2,527,000, primarily due to a net loss of $1,198,000, an increase in
accounts receivable of $595,000 and forgiveness on PPP loans of $723,000.

Net cash used by investing activities was $210,000 for the six months ended
September 30, 2022primarily related to long term deposits and purchases of equipment.

Net cash used by investing activities was $38,000 for the six months ended
September 30, 2021primarily related to Invekra deferred revenue, partially offset by purchases of equipment.

Net cash used by financing activities was $565,000 for the six months ended
September 30, 2022primarily due to principal payments on long-term debt of
$460,000 and payments of PPP loans of $120,000.

  24

Net cash provided by financing activities was $6,711,000 for the six months ended September 30, 2021primarily related to the proceeds from issuance of common stock of $6,892,000 and principal payments on long-term debt of $397,000.

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

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.

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act. The
Inflation Reduction Act introduces a new 15% corporate minimum tax, based on
adjusted financial statement income of certain large corporations. Applicable
corporations would be allowed to claim a credit for the minimum tax paid against
regular tax in future years. The minimum tax impact applies starting in 2023.
The Inflation Reduction Act also includes an excise tax that would impose a 1%
surcharge on stock repurchases. This excise tax is effective January 1, 2023.

The Company is currently evaluating the effect of the Inflation Reduction Act on its consolidated financial statements.

  25






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.

© Edgar Online, source Glimpses