Sonoma Pharmaceuticals, Inc.

NOTE 1 –Organization and Recent Developments

Organization

Sonoma Pharmaceuticals, Inc. (the “Company”) was incorporated under the laws of the State of California in April 1999 and was reincorporated under the laws of the State of Delaware in December 2006. The Company moved its principal office from Petaluma, California to Woodstock, Georgia in June 2020 and to Boulder, Colorado in October 2022. The Company is a global healthcare leader for developing and producing stabilized hypochlorous acid (“HOCl”) products for a wide range of applications, including wound care, eye, oral and nasal care, dermatological conditions, podiatry, animal health care, and as a non-toxic disinfectant. The Company’s products are clinically proven to reduce itch, pain, scarring, and irritation safely and without damaging healthy tissue. In-vitro and clinical studies of HOCl show it to safely manage skin abrasions, lacerations, minor irritations, cuts, and intact skin. The Company sells its products either directly or via partners in 55 countries worldwide.

Reverse Stock Split

Effective August 29, 2024, the Company effected a reverse stock split of its common stock, par value $0.0001 per share. Every twenty shares of common stock were reclassified and combined into one share of common stock. No fractional shares were issued as a result of the reverse stock split. Instead, each fractional share was settled with cash. The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 21,174,693 to 1,058,447. The total number of authorized shares of common stock was not proportionally decreased and the par value per share of the common stock continues to be $0.0001.

NOTE 2 –Liquidity and Financial Condition

The Company reported a net loss of $3,175,000 and $3,457,000 for the years ended March 31, 2026 and 2025, respectively. At March 31, 2026 and 2025, the Company’s accumulated deficit amounted to $200,981,000 and $197,806,000, respectively. The Company had working capital of $7,268,000 and $8,552,000 as of March 31, 2026 and 2025, respectively. During the years ended March 31, 2026 and 2025, net cash used in operating activities amounted to $3,933,000 and $88,000, respectively.

On April 24, 2026, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc. (the “Underwriter”). At the close of the offering, the Company issued 2,962,963 shares of common stock. The Company received gross proceeds of $4,000,000 and net proceeds of $3,574,000 after deducting commissions and other offering expenses paid by the Company (Note 17).

Management believes that the Company's existing cash, proceeds from the Dawson offering, and will be sufficient to fund its projected operating requirements for at least the next twelve months from the issuance date of these financial statements. This conclusion differs from prior periods due primarily to the Company's improved liquidity position resulting from the capital raise through the Dawson offering, together with actions taken to align operating expenditures with available resources and expected cash flow management. Additionally, the Company has access to capital resources, which may include public or private equity offerings, debt financings, corporate collaborations, or other means, if and when appropriate to support strategic initiatives. However, there can be no assurance that such financings will be available on commercially acceptable terms, or at all, if pursued in the future. If the economic climate in the U.S. deteriorates, the Company’s ability to access additional capital could be negatively impacted. If the Company elects to pursue additional financing in the future, it may do so to support growth initiatives, extend its financial flexibility, or fund strategic opportunities. Any such activities could result in delays or changes to planned commercialization activities depending on timing and market conditions.

NOTE 3 –Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aquamed Technologies, Inc. (“Aquamed”), Oculus Technologies of Mexico S.A. de C.V. (“OTM”), and Sonoma Pharmaceuticals Netherlands, B.V. (“SP Europe”). Aquamed has no current operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency for the Company's wholly-owned subsidiaries incorporated outside the United States (“U.S.”) is denominated in local currency.

Basis of presentation

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and are in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company’s fiscal year end is March 31. Unless otherwise stated, all years and dates refer to the fiscal year.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and all highly liquid investments with an original maturity of three months or less when purchased. The Company’s cash equivalents are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance relating to the Company’s deferred tax asset. Periodically, the Company evaluates and adjusts estimates accordingly.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”), Topic 606 Revenue from Contracts with Customers (“Topic 606”). Revenue is recognized when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

The Company derives the majority of its revenue through sales of its products directly to end users and to distributors. The Company also sells products to a customer base, including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company has also entered into agreements to license its technology and products.

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled.

All of the Company’s revenue is recognized when control of the product is transferred to the customer (i.e. when its performance obligation is satisfied), which typically occurs when title passes to the customer upon shipment but could occur when the customer receives the product based on the terms of the agreement with the customer. For product sales to its value-added resellers, non-stocking distributors and end-user customers, the Company grants return privileges to its customers, and because the Company has a long history with its customers, the Company is able to estimate the amount of product that will be returned.

Sales to stocking distributors are made under terms with fixed pricing and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.

At March 31, 2026, 2025 and 2024, the Company deferred revenue in the amounts of $284,000, $658,000 and $565,000, respectively.

Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents are maintained in financial institutions in the United States, Mexico and the Netherlands. The Company is exposed to credit risk in the event of default by these financial institutions for amounts in excess of the insured limits. Cash and cash equivalents held in foreign banks are intentionally kept at minimal levels, and therefore have minimal credit risk associated with them. We currently have $1,544,000 of deposits above insured limits.

The following table shows major customers revenues as a percentage of revenue:

The following table shows major customers accounts receivable balances as a percentage of net accounts receivables:

Accounts Receivable

Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment, doubtful accounts, and sales returns. Estimates for cash discounts and sales returns are based on analysis of contractual terms and historical trends.

The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Other factors that the Company considers include its existing contractual obligations, historical payment patterns of its customers and individual customer circumstances, an analysis of days sales outstanding by customer and geographic region, and a review of the local economic environment and its potential impact on government funding and reimbursement practices. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company didnot deem it necessary to record an allowance for doubtful accounts for probable credit losses at March 31, 2026, 2025 and 2024. Additionally, at March 31, 2026, 2025 and 2024, the Company has allowances of $19,000, $8,000 and $27,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included in accounts receivable, net in the accompanying consolidated balance sheets. Accounts receivable, net at March 31, 2024 was $2,898,000.

Inventories

Inventories are stated at the lower of cost, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis), or net realizable value.

Due to changing market conditions, estimated future requirements, age of the inventories on hand and production of new products, the Company regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventory to its estimated net realizable value. At March 31, 2026 and 2025, the Company recorded provisions to reduce the carrying amounts of inventories to their net realizable value in the amounts of $614,000 and $298,000, respectively. The provisions are included in inventories, net in the accompanying consolidated balance sheets.

Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities;

Level 2 – quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets;

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

As of March 31, 2026 and 2025, there wereno material Level 2 or Level 3 assets or liabilities.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful life of the improvement or the remaining term of the lease. Estimated useful asset life by classification is as follows:

Upon retirement or sale, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.

Impairment of Long-Lived Assets

The Company periodically reviews the carrying values of its long-lived assets when events or changes in circumstances would indicate that it is more likely than not that their carrying values may exceed their realizable values, and records impairment charges when considered necessary. Specific potential indicators of impairment include, but are not necessarily limited to:

When circumstances indicate that an impairment may have occurred, the Company tests such assets for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of such assets and their eventual disposition to their carrying amounts. In estimating these future cash flows, assets and liabilities are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other such groups. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss, measured as the excess of the carrying value of the asset over its estimated fair value, will be recognized. The cash flow estimates used in such calculations are based on estimates and assumptions, using all available information that management believes is reasonable. The Company didnot record impairment losses for the years ended March 31, 2026 and 2025.

Research and Development

Research and development expenses are charged to operations as incurred and consists primarily of personnel expenses, clinical and regulatory services and supplies.

Advertising Costs

Advertising costs are charged to operations as incurred. Advertising costs amounted to $91,000 and $190,000 for the years ended March 31, 2026 and 2025, respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

Shipping and Handling Costs

The Company classifies amounts billed to customers related to shipping and handling in sale transactions as product revenues. The corresponding shipping and handling costs incurred are recorded in cost of product revenues. For the years ended March 31, 2026 and 2025, the Company recorded revenue related to shipping and handling costs of $180,000 and $18,000, respectively. These amounts are included in revenues in the accompanying consolidated statements of comprehensive loss.

Foreign Currency Reporting

The Company’s subsidiary, OTM, uses the local currency (Mexican Pesos) as its functional currency and its subsidiary, SP Europe, uses the local currency (Euro) as its functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenue and expense accounts are translated at average exchange rates during the period. Resulting translation adjustments amounted to gains of $1,133,000 and losses of $1,653,000 for the years ended March 31, 2026 and 2025, respectively. These amounts were recorded in other comprehensive loss in the accompanying consolidated statements of comprehensive loss for the years ended March 31, 2026 and 2025.

Foreign currency transactions relate primarily to trade payables and receivables and intercompany transactions between subsidiaries OTM and SP Europe. These transactions are expected to be settled in the foreseeable future. The Company recorded foreign currency transaction losses of $1,446,000 and gains of $243,000 for the years ended March 31, 2026 and 2025, respectively. The related amounts were recorded in other income (expense) in the accompanying consolidated statements of comprehensive loss.

Stock-Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. The Company estimates the fair value of employee stock option awards using the Black-Scholes option pricing model. The Company amortizes the fair value of employee stock options on a straight-line basis over the requisite service period of the awards. Compensation expense includes the impact of forfeitures for all stock options as incurred.

The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period or as earned.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s consolidated financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s consolidated financial condition, results of comprehensive loss or cash flows.

Comprehensive Loss

Other comprehensive loss includes all changes in stockholders’ equity during a period from non-owner sources and is reported in the consolidated statements of changes in stockholders’ equity. To date, other comprehensive loss consists of changes in accumulated foreign currency translation adjustments.

Net Loss per Share

The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.

The computation of basic and diluted loss per share for the years ended March 31, 2026 and 2025 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.

Convertible Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, preferred shares are classified as stockholders' equity. There areno shares issued as of March 31, 2026 and 2025. All convertible preferred stock is presented as stockholders' equity as of March 31, 2026 and 2025.

Segment Reporting

The Company has one primary business activity and operates inone reportable segment. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer (“CEO”) who evaluates performance and makes operating decisions about allocating resources based on financial data presented on a consolidated basis. The measures of profitability and the significant segment expenses reviewed by the CODM are consistent with these financial statements and footnotes.

Recent Accounting Standards

The Company has evaluated all the recent accounting standards and determined that none are material to it.

NOTE 4 –Accounts Receivable

Accounts receivable, net consists of the following:

NOTE 5 –Inventories

Inventories, net consists of the following:

NOTE 6 –Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

NOTE 7 –Property and Equipment

Property and equipment, net consists of the following:

Depreciation expense amounted to$139,000 and $138,000 for the years ended March 31, 2026 and 2025, respectively.

NOTE 8 –Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

NOTE 9 –Debt

Financing of Insurance Premiums

On February 1, 2026, the Company entered into a note agreement for $277,000 with an interest rate of 7.47% per annum with final payment on November 1, 2026. This instrument was issued in connection with financing insurance premiums. On February 2, 2026, the Company made an initial payment of $28,000. The note is payable in nine monthly installment payments of principal and interest of $28,000, with the first monthly installment beginning March 1, 2026. At March 31, 2026, the outstanding principal on the note amounted to $222,000.

On February 1, 2025, the Company entered into a note agreement for $274,000 with an interest rate of 7.97% per annum with final payment on November 1, 2025. This instrument was issued in connection with financing insurance premiums. On February 5, 2025, the Company made an initial payment of $28,000. The note is payable in nine monthly installment payments of principal and interest of $28,000, with the first monthly installment beginning March 1, 2025. At March 31, 2025, the outstanding principal on the note amounted to $220,000.

NOTE 10 –Leases

The Company’s operating leases are comprised primarily of facility leases. Balance sheet information related to the Company’s leases is presented below:

Other information related to leases is presented below:

As of March 31, 2026, the annual future minimum lease payments of the Company’s operating lease liabilities were as follows:

NOTE 11 –Commitments and Contingencies

Legal Matters

The Company may be involved in legal matters arising in the ordinary course of business including matters involving proprietary technology. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which the Company is or could become involved in litigation may have a material adverse effect on its business and financial condition of comprehensive loss.

Employment Agreements

At March 31, 2026, the Company had an employment agreement in place with one of its key executives. This executive employment agreement provided, among other things, for the payment of up to twenty-four months of severance compensation for terminations under certain circumstances.

As of March 31, 2026, with respect to this agreement, aggregated annual salaries was $475,000 and potential severance payments to these key executives is $1,425,000, if triggered.

Mexico Tax Liability

Since 2004, the Company loaned substantial amounts to its Mexico subsidiary Oculus Technologies of Mexico, S.A. de C.V. at various interest rates to fund their operations. As of March 31, 2026, our Mexico subsidiary owes approximately $12,300,000 in principal, $10,400,000 in technical assistance payments and $32,200,000 in accrued interest. The intercompany loans mature in 2032 and were extended 5 years during the current fiscal year. There is no guarantee that the Company’s Mexican subsidiary will be able to pay any or all of the amounts due. If the Company forgives the debt or if it convert the debt to equity, it would be subject to Mexico income tax at 30%, or approximately $16,500,000, as well as Mexican withholding tax of 15%.

In addition, any interest paid to a foreign lender is subject to Mexico withholding tax of 15%. The Company has interest owed on its intercompany technical assistance agreement and royalty withholding of 10% on its technical assistance agreement. This would amount to approximately $5,600,000 in Mexico withholding tax at March 31, 2026, if all of the interest and technical assistance were to be repaid. In general, the Company can then claim a credit for these withholding taxes on their U.S. income tax return. However, because of its substantial U.S. net operating losses, the Company is prevented from claiming any credit on any withholding tax for U.S. income tax purposes.

NOTE 12 –Stockholders’ Equity

Authorized Capital

Effective August 29, 2024, the Company increased its authorized shares from 24,000,000 to 50,000,000 shares of common stock with a par value of $0.0001 per share.

Additionally, the Company is authorized to issue 714,286 shares of convertible preferred stock with a par value of $0.0001 per share.

Description of Common Stock

Each share of common stock has the right to one vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board of directors.

Description of Series B Convertible Preferred Stock

On October 18, 2016, the Company’s board of directors approved, and the Company entered into, a Section 382 rights agreement, or the Rights Agreement, with Computershare Inc., or the Rights Agent. The Rights Agreement provides for a dividend of one preferred stock purchase right, or a Right, for each share of common stock, par value $0.0001 per share, of the Company outstanding on November 1, 2016, or the Record Date. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series B Preferred Stock, par value $0.0001 per share, or the Preferred Stock, for a purchase price of $10.00, subject to adjustment as provided in the Rights Agreement.

Sale of Common Stock

Maxim Group LLC

On December 15, 2023, the Company entered into an Equity Distribution Agreement (as amended, the “Maxim ATM Agreement”), with Maxim Group LLC (“Maxim”) pursuant to which the Company may offer and sell, from time to time, through Maxim, as sales agent or principal, shares of its common stock, $0.0001 par value per share. Subject to the terms and conditions of the Agreement, Maxim will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of the Nasdaq Capital Market to sell shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. Under the Agreement, Maxim may sell shares by any method deemed to be an “at the market” offering as defined in Rule 415 under the U.S. Securities Act of 1933, as amended, or any other method permitted by law, including in privately negotiated transactions. Maxim’s obligations to sell shares under the Agreement are subject to satisfaction of certain conditions, including customary closing conditions for transactions of this nature. The Company will pay Maxim a commission of 3% of the aggregate gross proceeds from each sale of shares and has agreed to provide Maxim with customary indemnification and contribution rights.

In connection with the Agreement, from May 13, 2024 to November 20, 2024 the Company sold 816,894 shares of its common stock for gross proceeds of $3,325,000 and net proceeds of $3,079,000 after deducting commissions and other offering expenses paid by the Company.

Ladenburg Thalmann & Co. Inc.

On September 26, 2025, the Company entered into an At Market Issuance Sales Agreement (the “Agreement”), with Ladenburg Thalmann & Co. Inc. (“Ladenburg”) pursuant to which the Company may offer and sell, from time to time, through Ladenburg, as sales agent or principal, shares of its common stock, $0.0001 par value per share. Subject to the terms and conditions of the Agreement, Ladenburg will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of the Nasdaq Capital Market to sell shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. Under the Agreement, Ladenburg may sell shares by any method deemed to be an “at the market” offering as defined in Rule 415 under the U.S. Securities Act of 1933, as amended, or any other method permitted by law, including in privately negotiated transactions. Ladenburg’s obligations to sell shares under the Agreement are subject to satisfaction of certain conditions, including customary closing conditions for transactions of this nature. The Company will pay Ladenburg a commission of 3% of the aggregate gross proceeds from each sale of shares and has agreed to provide Ladenburg with customary indemnification and contribution rights. From October 8, 2025 to March 31, 2026 the Company sold 149,292 shares of its common stock for gross proceeds of $518,000 and net proceeds of $427,000 after deducting commissions and other offering expenses paid by the Company.

NOTE 13 –Stock-Based Compensation

2016 Stock Plan

On September 2, 2016, upon recommendation of the board, the stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan is effective as of September 2, 2016 and has a ten year term.

The 2016 Plan provides for the grant of options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.

Options issued under the 2016 Plan generally have a ten-year term.

In accordance with the 2016 Plan, the stated exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue Code.

Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2016 Plan. No participant in the 2016 Plan can receive more than 11,112 option grants, or other awards with respect to more than 13,334 shares in the aggregate in any calendar year.

The board has authorized 2,222 of the Company’s common stock for issuance under the 2016 Plan, in addition to automatic increases provided for in the 2016 Plan through April 1, 2026. The number of shares of the Company’s common stock reserved for issuance under the 2016 Plan will automatically increase, with no further action by the stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 8% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding year, or (ii) an amount determined by the Company’s board of directors. During the year ended March 31, 2019, the board of directors approved an increase of 243 shares authorized for issuance. During the year ended March 31, 2020, the board of directors approved an increase of 5,266 shares authorized for issuance. During the year ended March 31, 2022, the board of directors approved an increase of 8,372 shares authorized for issuance. During the year ended March 31, 2025, the board of directors approved an increase of 62,429 shares authorized for issuance. During the year ended March 31, 2026, the board of directors approved an increase of 130,741 shares authorized for issuance.

At March 31, 2026 there were 31,777 shares available for future issuance.

2021 Stock Plan

On September 21, 2021, upon recommendation of the board, the stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan is effective as of September 21, 2021 and has a five year term.

The 2021 Plan provides for the grant of options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.

Options issued under the 2021 Plan generally have a ten-year term.

In accordance with the 2021 Plan, the stated exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue Code.

Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2021 Plan.

The board has authorized 50,000 shares of the Company’s common stock for issuance under the 2021 Plan.

At March 31, 2026 there were 800 shares available for future issuance.

2024 Stock Plan

On August 23, 2024, upon recommendation of the board, the stockholders approved the Company’s 2024 Equity Incentive Plan (the “2024 Plan”). The 2024 Plan is effective as of August 23, 2024 and has a five year term.

The 2024 Plan provides for the grant of options, including incentive stock options as defined in Section 422 of the Internal Revenue Code to employees, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, non-employee directors, advisors and consultants.

Options issued under the 2024 Plan generally have a ten-year term.

In accordance with the 2024 Plan, the stated exercise price of an employee incentive stock option or a non-statutory stock option shall not be less than 100% of the estimated fair market value of a share of common stock on the date of grant. An employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company shall not be eligible for the grant of an employee incentive stock option unless such grant satisfies the requirements of Section 422(c)(5) of the Internal Revenue Code.

Shares subject to awards that expire unexercised or are forfeited or terminated for any other reason will again become available for issuance under the 2024 Plan.

The board has authorized 50,000 shares of the Company’s common stock for issuance under the 2024 Plan, in addition to automatic increases provided for in the 2024 Plan through April 1, 2029. The number of shares of the Company’s common stock reserved for issuance under the 2024 Plan will automatically increase, with no further action by the stockholders, at the beginning of each fiscal year by an amount equal to the lesser of (i) 5% of the outstanding shares of the Company’s common stock on the last day of the immediately preceding year, or (ii) an amount determined by the Company’s board of directors. During the year ended March 31, 2026, the board of directors approved an increase of 81,713 shares authorized for issuance.

At March 31, 2026, there were 49,713 shares available for future issuance.

Stock-Based Compensation

The Company issues service-based stock options to employees. The Company estimates the fair value of service option awards using the Black-Scholes option pricing model. Compensation expense for stock option awards is amortized on a straight-line basis over the awards’ vesting period. Compensation expense includes the impact of forfeitures as they are incurred.

The expected term of the stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by SEC Staff Accounting Bulletin No. 110 for “plain vanilla” options. The expected stock price volatility for the Company’s stock options was determined by using an average of the historical volatilities of the Company. The Company will continue to analyze the stock price volatility and expected term assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

The fair value of employee stock options was estimated using the following weighted-average assumptions:

During the years ended March 31, 2026 and 2025, the Company incurred $255,000 and $224,000, respectively of stock-based compensation expense. All stock-based compensation expense incurred is included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive loss.

At March 31, 2026, there were unrecognized compensation costs of $225,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 1.5 years.

Stock-Based Award Activity

Stock-based awards outstanding at March 31, 2026 under the various plans are as follows:

Stock options award activity is as follows:

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock, or $2.13 and $2.19 per share at March 31, 2026 and 2025, respectively.

Restricted stock award activity is as follows:

A tax benefit of $44,000 has been recognized relating to stock-based compensation as a result of non-qualified stock options and restricted stock exercised during the year ending March 31, 2026.

The Company issues new shares of common stock upon exercise of stock options or release of restricted stock awards.

**NOTE 14 –Income Taxes **

The income tax provision is based on the following net taxable loss before income taxes, which are from domestic and foreign sources:

The federal, state and foreign income tax provisions are summarized as follows:

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for continuing operations is as follows:

The tax effects of temporary differences that give rise to significant components of our deferred tax assets and liabilities consist of:

As of March 31, 2026, we have net operating loss (“NOL”) carryforwards for federal, state and foreign income tax purposes of approximately $95,500,000, $42,500,000 and $1,800,000, respectively. Due to the Tax Cuts and Job Act, federal NOL generated after March 31, 2018 have an indefinite life. Federal NOL generated on and before March 31, 2017 began to expire in 2024, if not utilized. State NOLs will begin to expire in the year 2026, if not utilized. Foreign NOLs will carry forward for 10 years.

As of March 31, 2026, we had federal and California research and development credit carryforward of approximately $905,000 and $790,000, respectively. The federal research and development credits began to expire in 2024 while the California research and development credits have no expiration date.

Section 382 of the Internal Revenue Code limits the use of the federal net operating losses in certain situations where changes occur in stock ownership of a company. If the Company should have an ownership change of more than 50% of the value of the Company's capital stock, utilization of the carryforwards could be restricted. The Company is not aware of any changes in ownership that would result in a change in control under Internal Revenue Code section 382.

The Company, after considering all available evidence, fully reserved against all deferred tax assets in the U.S. since it is more likely than not such benefits will not be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit.

The Company has filed tax returns for federal, state and foreign jurisdictions. The Company’s evaluation of uncertain tax matters was performed for tax years ended through March 31, 2026. Generally, the Company is subject to audit for the years ended March 31, 2025, 2024 and 2023. The Company has elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continues to reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit as well as its outstanding income tax assets and liabilities. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments to result in a material change to its financial position.

On July 4, 2025, the One Big Beautiful Bill Act as enacted, making permanent and expanding several corporate tax provisions originally introduced under the Tax Cuts and Jobs Act of 2017. The key changes include, immediate expensing of research and experimentation costs, restoration of EBITDA-based interest deductibility under §163(j), and extension of 100% bonus depreciation through 2030. The Company has evaluated the impact of these provisions and determined there will be no impact on near-term cash flows.

During the year ended March 31, 2026 and 2025, the Company made income tax prepayments in the amount of $1,120,000 and $19,000, respectively.

NOTE 15 –Employee Benefit Plan

The Company has a program to contribute and administer a qualified 401(k) plan. Under the 401(k) plan, the Company matches employee contributions to the plan up to 4% of the employee’s salary. Company contributions to the plan amounted to an aggregate of $117,000 and $88,000 for the years ended March 31, 2026 and 2025, respectively.

NOTE 16 –Revenue Disaggregation

The Company generates product revenues from products which are sold into the human and animal healthcare markets..

The following table presents the Company’s disaggregated revenues by source:

The following table shows the Company’s revenues by geographic region:

NOTE 17 –Subsequent Events

At-the-Market Sale of Common Stock

During April 2026, the Company sold 23,781 shares of common stock for gross proceeds of $56,000 and net proceeds of $55,000 after deducting offering expenses.

Dawson James Securities, Inc.

On April 24, 2026, the Company entered into an Underwriting Agreement with Underwiter. Pursuant to the terms of the Underwriting Agreement, the Company agreed to issue and sell to the Underwriter an aggregate of 2,962,962 units, each unit consisting of one share of common stock, par value $0.0001 per share or, in lieu of common stock, if purchasing common stock would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of the outstanding common stock, a pre-funded warrant, together with one warrant to purchase one share of common stock at an exercise price equal to $1.35 per share, in a public offering. The public offering price for each unit was $1.35.

Pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option (the “Over-Allotment Option”) to purchase up to 444,444 additional shares of common stock and/or 444,444 warrants to purchase an aggregate of 444,444 shares of common stock.

Pursuant to the Underwriting Agreement, The Company agreed to pay the Underwriter an aggregate fee equal to 7.5% of the gross proceeds of the offering. The Company also agreed to pay the Underwriter a non-accountable expense allowance equal to 1% of the public offering proceeds, and expenses related to the offering up to $75,000, and to issue to Dawson James Securities, Inc. or its designees a warrant for the purchase of up to 5% of the aggregate number of securities sold in the offering (the “Underwriter’s Warrant”). The Underwriter’s Warrant is exercisable for a period commencing six months following the closing of the offering and ending on the third anniversary of the closing date, with an exercise price equal to 110% of the public offering price.

The shares of common stock or pre-funded warrants, the warrants, the Underwriter’s Warrant and the shares issuable upon exercise of the warrants and/or the pre-funded warrants were offered to the public pursuant to the Company’s registration statement on Form S-1 and an accompanying preliminary prospectus (File No. 333-295171), which was declared effective by the Securities and Exchange Commission on April 23, 2026, and a final prospectus filed with the Securities and Exchange Commission on April 27, 2026.

The closing of the offering occurred on April 27 and 28, 2026, including full exercise of the Over Allotment Option, and the Company issued and sold (i) 1,650,716 shares of common stock, (ii) 1,312,247 pre-funded warrants to purchase 1,312,247 shares of common stock, and (iii) 3,407,404 warrants to purchase 3,407,404 shares of common stock, at an exercise price of $1.35 per share, expiring on the fifth anniversary of the date of issuance. The net proceeds to the Company from the sale of the shares of common stock, the pre-funded warrants, and the warrants are expected to be approximately $3.5 million, after deducting the underwriting discount, non-accountable expense allowance and other estimated offering expenses. The Company will receive additional proceeds from the warrants to the extent such warrants are exercised for cash.

The Underwriting Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. In addition, pursuant to the terms of the Underwriting Agreement, the Company and its executive officers and directors have entered into agreements providing that the Company and each of these persons may not, without the prior written approval of the Underwriter, subject to limited exceptions, offer, sell, transfer or otherwise dispose of the Company’s securities until 90 days following the closing of the offering.

On April 28, 2026, the Company entered into warrant agency agreements with Computershare, Inc. and Computershare Trust Company, N.A., which will act as warrant agent for the Company in connection with the pre-funded warrants and the warrants issued and sold in the offering. As of May 1, 2026, all pre-funded warrants were exercised in full for nominal cash proceeds to the Company.

In connection with the offering, the Company received gross proceeds of $4,000,000 and the Company sold and net proceeds of $3,574,000 after deducting commissions and other offering expenses paid by the Company.