On April 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers Topic 606” (“Topic 606”) using the modified retrospective method. There was no impact to the Company upon the adoption of Topic 606. Revenue is recognized when the entity transfers promised goods or services to the customer, in an amount that reflects the consideration which the entity 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 Accounts Receivable(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 generatesderives the majority of its revenue fromthrough sales of its products to a customer base, including hospitals, medical centers, doctors, pharmacies, distributors and wholesalers. The Company sells products directly to end users and to distributors. The Company also has entered into agreements to license its technology and products.

The Company also provides regulatory compliance testing and quality assurance services to medical device and pharmaceutical companies.

The Company recordsconsiders 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.

For all of its sales to non-consignment distribution channels, revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectabilitycontrol of the saleproduct is reasonably assured.

The Company requires all product sales to be supported by evidence of a sale transaction that clearly indicates the selling pricetransferred to the customer shipping terms and payment terms. Evidence of an arrangement generally consists of a contract or purchase order approved by the customer. The Company has ongoing relationships with certain customers from(i.e. when our performance obligation is satisfied), which it customarily accepts orders by telephone in lieu of purchase orders.

The Company recognizes revenue at the time it receives confirmation that the goods were either tendered at their destination,typically occurs when shipped “FOB destination,” or transferred to a shipping agent, when shipped “FOB shipping point.” Delivery to the customer is deemed to have occurred when the customer takes title to the product. Generally, 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.

The selling prices of all goods are fixed, and agreed  For product sales to with the customer, prior to shipment. Selling prices are generally based on established list prices. The right to return product is customarily based on the terms of the agreement with the customer. The Company estimates and accrues for potential returns and records this as a reduction of revenue in the same period the related revenue is recognized. Additionally, distribution fees are paid to certain wholesale distributors based on contractually determined rates. The Company estimates and accrues the fee on shipment to the respective wholesaleits value-added resellers, non-stocking distributors and recognizes the fee as a reduction of revenue in the same period the related revenue is recognized. The Company also offers cash discounts to certainend-user customers, generally 2% of the sales price, as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized. Additionally, the Company participates in certain rebategrants 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 incentives and other programs which provide discounted prescriptionsthat the Company may make available to qualified patients. The Company contracts withthese customers are considered to be a third-party to administer the program. The Company estimates and accrues for future rebates based on historical data for rebate redemption ratesform of variable consideration, and the historicalCompany maintains estimated accruals and allowances using the expected value of redemptions. Rebates are recognized as a reduction of revenue in the same period the related revenue is recognized.method.

The Company evaluateshas entered into consignment arrangements,in which goods are left in the creditworthinesspossession of new customers and monitorsanother party to sell. As products are sold from the creditworthinesscustomer to third parties, the Companyrecognizes revenue based on a variable percentage of its existing customers to determinea fixed price.  Revenue recognized varies depending on whether an eventa patient is covered by insurance or changes in their financial circumstances would raise doubt asis not covered by insurance. In addition, the Company may incur a revenue deduction related to the collectabilityuse of a sale at the time in which a sale is made. Payment terms on sales made in the United States are generally 30 to 60 days and are extended up to 90 days for initial product launches, payment terms internationally generally range from prepaid prior to shipment to 90 days.Company’s rebate program.

In the event a sale isSales to stocking distributors are made to a customer under circumstances in which collectability is not reasonably assured, the Company either requires the customer to remit payment prior to shipment or defers recognitionterms with fixed pricing and limited rights of return (known as “stock rotation”) of the revenue until paymentCompany’s products held in their inventory. Revenue from sales to distributors is received. The Company maintains a reserve for amounts which may not be collectible duerecognized upon the transfer of control to risk of credit losses.

In the event a sale is made to a customer under circumstances in which returns cannot be estimated, the Company defers recognition of the revenue until sell-through is confirmed.

Product license revenue is generated through agreements with strategic partners for the commercialization of Microcyn® products. The terms of the agreements sometimes include non-refundable upfront fees. The Company analyzes multiple element arrangements to determine whether the elements can be separated. Analysis is performed at the inception of the arrangement and as each product is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and recognized over the performance obligation period.

When appropriate, the Company defers recognition of non-refundable upfront fees. If the Company has continuing performance obligations then such up-front fees are deferred and recognized over the period of continuing involvement.distributor.

The Company recognizes royalty revenuesassessed the promised goods and services in the technical support to Invekra for a ten-year period as being a distinct service that Invekra can benefit from licensed products uponon its own and is separately identifiable from any other promises within the sale ofcontract. Given that the related products.distinct service is not substantially the same as other goods and services within the Invekra contract, the Company accounted for the distinct service as a performance obligation.

Revenue from consulting contracts is recognized as services are provided. Revenue from testing contracts is recognized as tests are completed and a final report is sent to the customer.

Disaggregation of Revenue

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

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 the number of days sales are 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 allowance for doubtful accounts represents probable credit losses of $16,000 and $17,000 at December 31, 2018 and March 31, 2018, respectively. Additionally, at December 31, 2018 and March 31, 2018 the Company had allowances of $1,834,000 and $1,275,000, respectively, related to potential discounts, returns, distributor fees and rebates. The allowances are included in Accounts Receivable, net in the accompanying condensed consolidated balance sheets.

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. The Company recorded reservesa provision to reduce the carrying amounts of inventories to their net realizable value in the amountsamount of $201,000$124,000 and $61,000$111,000 at December 31, 20172018 and March 31, 2017, respectively.

Reclassifications

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2018, presentation. These reclassifications have no impactrespectively, which is included in cost of product revenues on the Company’s previously reportedaccompanying condensed consolidated netstatements of comprehensive loss.

Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements (Note 11).

Adoption of Recent Accounting Standards

In March 2016 the FASB issued ASU No. 2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.

On April 1, 2017, the Company adopted ASU No. 2016-09. As a result of adopting ASU No. 2016-09, the Company has made an accounting policy election to account for forfeitures as they occur. This change has been applied on a modified retrospective basis, with no material impacts on the Company’s financial statements. The adoption of ASU No. 2016-09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid-in capital when the awards vest or are settled and recognize all previously unrecognized excess tax benefits and tax deficiencies upon adoption as a cumulative-effect adjustment to retained earnings. As of April 1, 2017, the Company recognized excess tax benefit of approximately $533,000 as an increase to deferred tax assets. However, the entire amount was offset by a full valuation allowance.  Accordingly, no cumulative-effect adjustment to retained earnings was recorded as of December 31, 2017.

Additionally,Subsequent Events

Management has evaluated subsequent events or transactions occurring through the adoption of ASU No. 2016-09 related todate the accounting for minimum statutory withholding tax requirements and cash paid by an employer when directly withholding shares for tax-withholding purposes had no impact on the Company's currentcondensed consolidated financial statements or on any prior period financial statements presented.were issued.

Adoption of Recent Accounting Standards

LeasesFinancial Instruments

In February 2016,On April 1, 2018, the Company adopted ASU No. 2016-01, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842)Instruments-Overall, which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for theaddresses certain aspects of recognition, measurement, presentation, and disclosure of leases for both lessees and lessors.financial instruments. The FASBCompany has continued to clarify this guidance and most recently issued ASU 2017-13Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases baseddetermined there was no material impact on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact that ASU 2016-02 will have on itsCompany’s consolidated financial statementsposition and related disclosures.results of operations upon adoption of this topic.

RevenueStatement of Cash Flows

In May 2014,On April 1, 2018, the FASB issuedCompany adopted ASU No. 2014-09,2016-15,Revenue from Contracts with CustomersStatement of Cash Flows (Topic 230) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. TheThis amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments of ASU 2014-09 were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which finalizes its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-10Identifying Performance Obligations and Licensing, which finalizes its amendments to the guidance in the new revenue standard regarding the identification of performance obligations and accounting for the license of intellectual property. In May 2016, the FASB issued ASU 2016-12Narrow-Scope Improvements and Practical Expedients, which finalizes its amendments to the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition. In December 2016, the FASB issued ASU 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which continues the FASB’s ongoing project to issue technical corrections and improvements to clarify the codification or correct unintended applications of guidance. In September 2017, the FASB issued ASU 2017-13,Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),which provides additional implementation guidance on the previously issued ASU 2014-09. The amendments are intendedpresentation and classification of specific cash flow items to makeimprove consistency within the guidance more operable and lead to more consistent application. The amendments have the same effective date and transition requirements as the new revenue recognition standard.statement of cash flows. The Company will adopthas determined there was no material impact on the new standard onCompany’s consolidated financial position and results of operations upon adoption of this topic.

On April 1, 2018, and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, the Company does not expect significant differences. However,adopted ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, which changes the Company’s analysis is preliminarypresentation of restricted cash and subject to change.cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company has not completed its assessmentdetermined there was no material impact on the Company’s consolidated financial position and results of multiple element arrangements and certain discount and trade promotion programs.operations upon adoption of this topic.

Business Combinations

In January 2017,On April 1, 2018, the FASB issued anCompany adopted ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this Update is to clarify, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluatinghas determined there was no material impact on the impactCompany’s consolidated financial position and results of adoptingoperations upon adoption of this guidance.topic.

Stock Compensation

In May 2017,On April 1, 2018, the FASB issuedCompany adopted ASU No. 2017-09,Compensation–StockCompensation-Stock Compensation (Topic 718):Scope of Modification Accounting, clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance isCompany has determined there was no material impact on the Company’s consolidated financial position and results of operations upon adoption of this topic.

Recent Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,Leases (Topic 842), which will require lessees to recognize a right of use asset and lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The amendment will be effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the Company on a prospective basis beginning on April 1, 2018, with earlyFASB issued ASU No. 2018-10,Codification Improvements to Topic 842, Leases and ASU No. 2018-11,Leases - Targeted Improvements.ASU No. 2018-10 provides certain amendments that affect narrow aspects of the guidance issued in ASU No. 2016-02. ASU No. 2018-11 allows entities the option to prospectively apply the new lease standard at the adoption permitted.date instead of recording the cumulative impact of all comparative reporting periods presented within retained earnings. The Company is currently evaluating the impact that ASU 2017-09No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 will have on its consolidated financial position, results of operations or financial statement disclosure. 

Reporting Comprehensive Income

In February 2018, the FASB issued ASU No. 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted for any interim period for which financial statements have not been issued. The Company does not believe that the adoption of this guidance will have a material impact on the Company's consolidated financial statements due to the presence of a full valuation allowance. However, the Company is in the process of evaluating the impact of this new guidance on the Company's consolidated financial statements and disclosures.

Stock Compensation

In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718 to include all share-based payment arrangements related disclosures.to the acquisition of goods and services from both nonemployees and employees. This amendment will be effective for annual and interim periods beginning after December 31, 2018. The Company is currently evaluating the impact ASU No. 2018-07 will have on its consolidated financial position, results of operations or financial statement disclosure.

Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Description of Sale to Invekra

On October 27, 2016, the Company, along with its Mexican subsidiary and manufacturer Oculus Technologies of Mexico, S.A. de C.V. (“OTM”), closed on an asset purchase agreement with Invekra, S.A.P.I. de C.V. (“Invekra”), an affiliate of Laboratorios Sanfer S.A. de C.V., for the sale of certain of its Latin America assets. Specifically, the Company agreed to sell certain patents, patent applications, trademarks and territory rights for Mexico, the Caribbean and South America, excluding the sale of dermatology products in Brazil, as well as to build and deliver equipment that Invekra will use to produce its own product.

The aggregate purchase price that Invekra will pay for the assets is $22,000,000, of which $18,000,000 was paid upon closing, $1,500,000 was paid on March 16, 2017 upon the delivery of certain equipment, and $2,500,000 is to be paid in Mexican currency in quarterly installments over a period of ten years from closing as consideration for the provision of certain services and providing technical assistance, calculated as three percent on net sales of certain products in Latin America, excluding Mexico. Because the $2,500,000 is to be paid in foreign currency, the Company may receive more or less than $2,500,000 due to currency fluctuations. During the nine months ended December 31, 2017, the Company recorded $39,000 of service revenue and $33,000 of interest income related to technical assistance which is reflected in the accompanying condensed consolidated statement of comprehensive (loss) income for the nine months ended December 31, 2017.

In connection with the asset purchase agreement, the Company agreed to provide the technology, know-how and assistance to Invekra to enable Invekra to manufacture on its own the products as currently produced by the Company (“Technical Services Arrangement”), and continue to supply product to Invekra for a two-year transition period from the Sale Date, subject to mutual extension (“Supply Agreement”). During the three and nine months ended December 31, 2016, the Company reported $465,000 of Latin America product revenue related to the Supply Agreement with Invekra. During the three and nine months ended December 31, 2017, the Company reported $772,000 and $2,095,000, respectively, of Latin America product revenue related to the Supply Agreement with Invekra.

The Company will provide product under the Supply Agreement at a reduced price from its current price list, while Invekra builds its own manufacturing line. At the conclusion of the transition period, the Company will cease to be a supplier of product to Invekra. The Company is uncertain as to the duration of the transition period or when Invekra will complete the build out of its manufacturing line. Pursuant to the Supply Agreement, the Company is subject to a potential penalty for failure to supply the products for a consecutive period of nine months. The penalty, if triggered, will require the Company to make a one-time payment of $2,000,000 to Invekra. The penalty decreases by 12.5% each quarter of the term of the supply period.

Discontinued operations

As of December 31, 2016, the Company determined that the sale of its Latin American operations to Invekra qualified as a sale of a component of its business and, as such, all such activity prior to consummation of the sale is required to be included in discontinued operations on the Company’s statement of operations. This includes the direct labor and materials for the product delivered to Invekra, the revenue on the sales to Invekra and the gain on the sale to Invekra, net of tax.

The operations of its Latin American business included in discontinued operations is summarized as follows:

Inventories net

Inventories consist of the following:

Legal Matters

TheOn March 17, 2017, the Company filed a lawsuit against Collidion, Inc. and several of its former employees, officers and directors, alleging the misappropriation of its confidential, proprietary and trade secret information as well as breach of fiduciary duties in the United States District Court for the Northern District of California, San Francisco Division. On September 26, 2018, the Company settled the lawsuit to the satisfaction of all parties. There has been no finding of wrongdoing against any party.

Aside from the lawsuit described above, on occasion, 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) income.loss.

Employment AgreementsMatters

Potential Severance Payments

As of December 31, 2017,2018, the Company had employment agreements in place with sixfour of its key executives. The agreements provide, among other things, for the payment of twelveup to eighteentwelve months of severance compensation for terminations under certain circumstances. With respect to theseThree of the employment agreements athave a provision for severance compensation. At December 31, 2017, aggregated annual salaries would be $1,167,000 and2018, potential severance payments to these key executives would be $1,417,000$704,000, if triggered.

Appointment of Chief Executive Office and Interim Financial Officer

On December 11, 2018, the Company’s Board appointed Mr. Frederick (Bubba) Sandford as its Chief Executive Officer and Interim Chief Financial Officer for an initial term of nine months, subject to a mutual extension of an additional three months. Mr. Sandford was appointed as a Class III director of the Board on December 14, 2018.

In connection with Mr. Sandford’s appointment as the Company’s Chief Executive Officer and Interim Chief Financial Officer, the Company entered into an employment agreement with him, in which the Company agreed to pay him a base annual salary of $350,000 per year. The Company also agreed to pay him a performance bonus of a maximum of 60% of his base annual salary for achieving certain agreed upon targets.

In addition, pursuant to the agreement, Mr. Sandford was granted 450,000 stock options to purchase the Company’s common stock, of which 400,000 stock options were treated as an inducement grant and 50,000 stock options were from the Company’s equity incentive plan. The Company granted the options on January 10, 2019 with an exercise price of $0.717 per share, and will become 100% exercisable nine months after date of grant and have a maximum term of ten years. Upon termination, the options are exercisable for up to twelve months from the termination date and in no event later than ten years from the grant date.

Resignation of Chief Executive Officer, President and Director and Chief Financial Officer and Secretary

On December 12, 2018, Jim Schutz and Robert Miller resigned from their positions as the Company’s Chief Executive Officer and President and Chief Financial Officer and Secretary, respectively. On the same date, Mr. Schutz also resigned from the Board.

In connection with Mr. Schutz’s resignation, the Company entered into a separation and mutual release agreement with Mr. Schutz on December 13, 2018, in which the Company agreed to pay him severance, consisting of $250,000, to be paid in two equal installments with the first half paid on December 14, 2018 and the second half to be paid with the next payroll after three months, $38,461 to compensate him for his unused paid time off, and continuation of dental, vision and health insurance until December 31, 2018. Mr. Schutz’s outstanding equity awards were accelerated to December 12, 2018 and remained exercisable until January 14, 2019. Mr. Schutz also agreed to aid with the transition for 30 calendar days. The options expired unexercised on January 14, 2019.

In connection with Mr. Miller’s resignation, the Company entered into a separation and mutual release agreement with Mr. Miller on December 13, 2018, in which the Company agreed to pay him severance, consisting of $225,000, to be paid in two equal installments with thefirst half paid on December 14, 2018and the second half to be paid with the next payroll after three months, $38,461 to compensate him for his unused paid time off, and continuation of dental, vision and health insurance until December 31, 2018. Mr. Miller’s outstanding equity awards were accelerated to December 12, 2018 and remained exercisable until January 14, 2019.The options expired unexercised on January 14, 2019.

Other Matters

Sale of Unregistered Shares

On October 4, 2018, the Company sold 113,000 shares of common stock, at a price of $2.39 per share, through its At Market Issuance Sales Agreement with B. Riley FBR, Inc. for gross proceeds of $270,000 and net proceeds of $262,000 after deducting commissions and other offering expenses. This sale exceeded the aggregate market value of the Company’s securities sold during the period of twelve calendar months prior to the sale of one-third of the aggregate market value of its common stock held by non-affiliates, and thus, the 113,000 shares of common stock were unregistered. The Company could be liable in the event claims or suits for rescission are brought and successfully concluded for failure to register these securities or for acts or omissions constituting offenses under the Securities Act, the Securities Exchange Act of 1934, or applicable state securities laws. The Company could be liable for damages and penalties assessed by the SEC and state securities regulators. Accordingly, at December 31, 2018, the Company recorded a $270,000 liability in the accompanying condensed consolidated balance sheet.

Nasdaq Listing

On January 4, 2019, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market LLC, notifying the Company that, for the previous 30 consecutive business days, the Company failed to comply with Nasdaq Listing Rule 5550(a)(2), which requires the Company to maintain a minimum bid price of $1.00 per share for its common stock.

In accordance with Listing Rule 5810(c)(3)(C), Nasdaq has granted the Company a period of 180 calendar days, or until July 3, 2019, to regain compliance with the Rule. The Company may regain compliance with the Rule at any time during this compliance period if the minimum bid price for its common stock is at least $1.00 for a minimum of ten consecutive business days.

The letter has no effect on the listing or trading of the Company’s common stock at this time. However, there can be no assurances that the Company will be able to regain compliance with Listing Rule 5550(a)(2). In the event the Company does not regain compliance with the Listing Rule prior to the expiration of the compliance period, the Company may be eligible for additional time. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse split, if necessary. If the Company meets these requirements, Nasdaq will inform the Company that it has been granted an additional 180 calendar days. However, if it appears to the Staff of Nasdaq that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice that our securities will be subject to delisting.

Authorized Capital

TheAt the annual meeting, the Company’s stockholders approved an amendment to its Restated Certificate of Incorporation, as amended, to increase the number of authorized common stock, $0.0001 par value per share, from 12,000,000 to a total of 24,000,000 shares. Effective September 13, 2018, the Company filed a certificate of amendment with the Secretary of State of the State of Delaware in order to effect an increase of the total number of shares of common stock authorized for issuance to 24,000,000. Additionally, the Company is authorized to issue up to 12,000,000 shares of common stock with a par value of $0.0001 per share and 714,286 shares of convertible preferred stock with a par value of $0.0001 per share.

At Market IssuanceSale of Common and Preferred Stock Units

On December 8, 2017,November 16, 2018, the Company entered into an At Market Issuance Sales Agreement,a placement agency agreement with B. Riley FBR,Dawson James Securities, Inc. (“B. Riley”) under whichwith respect to the Company may issueissuance and sell sharessale of its common stock having an aggregate offering price of up to $5,000,000 from time7,300,000 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, shares of Series C convertible into shares of common stock, together with one half of one warrant to time through B. Riley acting as its sales agent. The Company will pay B. Riley a commission ratepurchase one share of common stock at an exercise price equal to 3.0%$1.00 per whole share, in a public offering. The public offering price for each unit was $1.00. The warrants offered in the public offering are Series C warrants and will terminate on the fifth anniversary of the date of issuance. Each full warrant will entitle the holder to purchase one share of common stock at an initial exercise price of $1.00 per share.

The closing of the offering occurred on November 21, 2018 and at such closing the Company sold 4,564,400 shares of common stock, 9.65 shares of Series C (convertible into 965,000 shares of common stock) and 2,764,700 warrants for gross proceeds of $5,530,000. The net proceeds to the Company from the sale of anythe shares of common stock, or preferred stock, and the warrants was $4,742,000, after deducting placement agent commissions and other estimated offering expenses payable by the Company.

Pursuant to the placement agency agreement, the Company agreed to pay Dawson James Securities, Inc. a cash fee equal to 8% of the aggregate gross proceeds raised in this offering. The Company also agreed to pay fees and expenses of the placement agent, not to exceed $167,500, and to issue to Dawson James Securities, Inc., on the closing date, a unit purchase option for the purchase of up to 276,470 units, equal to 5% of the aggregate number of units sold through B. Riley as agent. Forin the public offering, with an exercise price of $1.25, or 125% of the price per unit. The Benchmark Company, LLC provided certain financial advisory services. As compensation for services provided, the Company made a cash payment of $74,000 and on November 16, 2018 issued 68,750 common stock purchase warrants. The common stock purchase warrants have an exercise price of $1.00 per share, become exercisable on the 180th day after the date of issuance and expire on November 16, 2023.

During the three months ended December 31, 2017,2018, investors who participated in the Company sold 228,000transaction converted 8.10 shares of Series C into 810,000 shares of common stock for gross proceeds of $1,034,000 and net proceeds of $968,000 after deducting commissions and other offering expenses.stock.

Common Stock Issued to Services ProviderProviders

During the nine months ended December 31, 2017, theThe Company entered into an agreement with Actual, Inc., a firm that providesfor certain marketing and branding consulting services. In connection with the agreement, the Company pays a portion of the service fees in common stock. On July 27, 2017, the Company issued 2,570 shares of restricted common stock valued at $6.74 per share, and on August 22, 2017, the Company issued 3,133 shares of restricted common stock valued at $5.53 per share. The aggregate fair market value of the common stock issued in July and August was $35,000. The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. On December 1, 2017,July 12, 2018, the Company issued 5,47917,741 shares of restricted common stock valued at $5.02$2.48 per share. The aggregate fair market value of the common stock issued was $27,000.$44,000. The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, during the three and nine months ended December 31, 2017, the Company recorded $28,000 and $62,000, respectively, of expense related to common stock issued. During the nine months ended December 31, 2018, the Company recorded $44,000 of expense related to common stock issued. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of comprehensive (loss) incomeloss.

The Company entered into an agreement with The Benchmark Company, LLC for certain finance related consulting services. In connection with the three andagreement, the Company pays a portion of the service fees in common stock. On July 31, 2018, the Company issued 6,881 shares of restricted common stock valued at $2.18 per share. The aggregate fair market value of the common stock issued was $15,000. The Company has determined that the fair value of the common stock was more readily determinable than the fair value of the services rendered. Accordingly, during the nine months ended December 31, 2017.2018, the Company recorded $15,000 of expense related to common stock issued. The expense was recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of comprehensive loss.

On April 1, 2017, the Company adopted ASU 2016-09 and, as a result, made a Company-wide accounting policy change with respect to accounting for forfeitures. The Company applied a modified retrospective approach for adoption of the new policy and accordingly recorded an $11,000 increase to opening accumulated deficit at April 1, 2017. In accordance with the adoption of the accounting policy, the Company no longer estimates forfeitures based on historical experience and no longer reduces compensation expense based on the expected forfeitures. Beginning April 1, 2017, the Company will record forfeitures as they occur and will reduce compensation cost at the time of forfeiture.

The weighted average grant date fair values of options granted during the nine months ended December 31, 2018 and 2017 was $6.01.$2.20 and $6.01, respectively. During the three months ended December 31, 2018, the Company did not grant any stock options.

Share-based awards compensation expense is as follows:

At December 31, 2018, there were unrecognized compensation costs of $976,000 related to stock options, which is expected to be recognized over a weighted-average amortization period of 1.31 years. At December 31, 2017, there were unrecognized compensation costs of $2,636,000 related to stock options, which is expected to be recognized over a weighted-average amortization period of 2.20 years.

At December 31, 2018, there were unrecognized compensation costs of $78,000 related to restricted stock, which is expected to be recognized over a weighted-average amortization period of 1.49 years. At December 31, 2017, there were unrecognized compensation costs of $178,000 related to restricted stock, which is expected to be recognized over a weighted-average amortization period of 1.66 years.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

Stock-Based Award Activity

On April 1, 2017, pursuant to “evergreen” provisions in the 2011 Stock Incentive Plan and the 2016 Stock Incentive Plan, the number of shares authorized for issuance in the 2011 Plan increased by 643,383 shares and the number of shares authorized for issuance in the 2016 Plan increased by 343,137 shares.

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 $5.45$0.71 per share at December 31, 2017.2018.

Restricted stock award activity is as follows:

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

The Company did not capitalize any cost associated with stock-based compensation.

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

The Company issues new shares of common stock upon exercise of stock based awards.

The Company has completed a study to assess whether a change in control has occurred or whether there have been multiple changes of control since the Company’s formation through March 31, 2017.2018. The Company determined, based on the results of the study, no change in control occurred for purposes of Internal Revenue Code sectionSection 382. The Company, after considering all available evidence, fully reserved for these and its other deferred tax assets since it is more likely than not such benefits will not be realized in future periods. The Company has incurred losses for both financial reporting and income tax purposes for the year ended March 31, 2017.2018. Accordingly, the Company is continuing to fully reserve for its deferred tax assets. 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. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.

As a result of certain realization requirements of Accounting Standards Codification Topic 718,The Company only recognizes tax benefits from an uncertain tax position if it is more likely than not that the Company’s deferred tax assets and liabilities do not include certain deferred tax assets at December 31, 2017 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting purposes. Equityposition will be increasedsustained on examination by approximately $533,000 if and whenthe taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such deferreda position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. To date, the Company has not recognized such tax assets are ultimately realized.benefits in its consolidated financial statements.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending March 31, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate.Act. The Tax Act reduces the federal corporate income tax rate from 35% to 21 percent21%, effective January 1, 2018, which the Company expects will positively impact its future effective tax rate and after-tax earnings in the United States. The Company recognized a decrease related to its federal deferred tax assets and deferred tax liabilities, before the valuation allowance. Because a change in the valuation allowance completely offsets the change in deferred taxes, there was no impact on the consolidated financial statements related to the rate change.

The Company may also be affected by certain other aspects of the Tax Act, including, without limitation, provisions regarding repatriation of accumulated foreign earnings and deductibility of capital expenditures. However, these assessments are based on preliminary review and analysis of the Tax Act and are subject to change as the Company continues to evaluate these highly complex rules as additional interpretive guidance is issued. The Company is also in the process of determining the impacts of the new Global Intangibles Low-Taxed Income (“GILTI”) tax law and has not yet included any potential GILTI tax or elected any related accounting policy.

Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, both of the tax benefits recorded by the Company for the fiscal year ended March 31, 2018 represent provisional amounts based on its current best estimates. Any adjustments made to those provisional amounts will be included in income from operations and recorded as an adjustment to tax expense through the fiscal year ending March 31, 2018.  Section 152019. The recorded, provisional amounts reflect assumptions made based upon our current interpretation of the Internal Revenue Code stipulates that our fiscal year ending March 31, 2018, will have a blended corporate tax rate of approximately 30 percent, which is based on the applicable tax rates before and after the Tax Act, and may change as the number of daysCompany receives additional clarification and guidance in the year.  The reductionform of the corporate tax rate to 21% will cause the Company to reduce its deferred tax asset, consisting primarily of net operating loss carry forwards, research and development tax credit carry-forwards and stock based compensation and adjust the valuation allowance against the deferred tax asset from approximately $42 million as of March 31, 2017 to approximately $28 million.  The effect of this discrete event has no effect on the basic condensed consolidated financial statements for the three and nine month period ended December 31, 2017.

The changes included in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in responsetechnical corrections to the Tax Act or any updates or changes to estimatesregulations issued by the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments within one year after the enactment date of the Tax Act.U.S. Treasury.

The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease within twelve months of March 31, 2018. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.

The Company generates product revenues from products which are sold into the human and animal healthcare markets, and the Company generates service revenues from laboratory testing services which are provided to medical device manufacturers. Additionally, the Company provides technical services to Invekra.

The following table showspresents the Company’s disaggregated product revenues by geographic region:

In connection with the Company’s sale of its Latin America business to Invekra, product related revenues were reclassified from continuing operations to discontinued operations. The amounts were classified in the prior periods as Latin America sales. The amounts reclassified are as follows:

The Company’s service revenues amounted to $196,000$235,000 and $187,000$196,000 for the three months ended December 31, 2018 and 2017, respectively. During the three months ended December 31, 2018 and 2016, respectively. 2017, the Company recorded service revenue related to technical services provided to Invekra in the amount of $14,000 in each period.

The Company’s service revenues amounted to $609,000$813,000 and $638,000$609,000 for the nine months ended December 31, 2018 and 2017, respectively. During the nine months ended December 31, 2018 and 2016,2017, the Company recorded service revenue related to technical services provided to Invekra in the amount of $42,000 and $39,000, respectively.

For the three months ended December 31, 2018 one customer represented 14% of net revenue. For the three months ended December 31, 2017, one customer represented 21% of net revenue, one customer represented 16% of net revenue, one customer represented 14% of net revenue and one customer represented 12% of net revenue.

For the threenine months ended December 31, 2016,2018, one customer represented 22%, one customer represented 16%, one customer represented 13%17% of net revenue and one customer represented 10% of net revenue.

For the nine months ended December 31, 2017, one customer represented 21% of net revenue, one customer represented 16% of net revenue, one customer represented 13% of net revenue and one customer represented 12% of net revenue. For the nine months ended December 31, 2016, one customer represented 27% of net revenue. 

At December 31, 2017,2018, one customer represented 36%, one customer represented 17%, and one customer represented 15%12% of the net accounts receivable balance. At March 31, 2017,2018, one customer represented 26%, one customer represented 12%36%, and one customer represented 10%18% of the net accounts receivable balance.

Stock Issued to Independent Directors and Chief Executive Officers

On January 2, 2018, the Company granted discretionary stock bonuses to all directors of the Company, including its Chief Executive Officer and Director, Jim Schutz, for their services in connection with the turn-around of our Company and in an effort to increase the stock ownership of the Board in the amount of $100,000 or 17,211 shares of common stock at $5.81 per share, each, which shares are immediately vested upon grant. In addition, on January 2, 2018, the Company’s Board of Directors awarded an additional stock bonus of $50,000 or 8,606 shares of common stock subject to the same conditions to its long-standing director Jay Birnbaum for his 10 years of services and longevity on our Board. The stock awards include a 40% tax gross up paid in cash or approximately $180,000 to the directors and $40,000 to the Chief Executive Officer.

None.

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, 20172018 and our audited consolidated financial statements for the year ended March 31, 20172018 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 28, 2017.26, 2018.

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: 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; the vulnerability of our Petaluma facility to extremesevere weather events; 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 related to the use of our cash reserves; 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 expansion of our sales force and distribution network; 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 product candidates for clinical trials and 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; our expectations about the outcome of litigation and controversies with third parties; 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; and the impact of the Sarbanes-Oxley Act of 2002 and 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 specialty pharmaceutical company dedicated to identifying, developing and commercializing unique, differentiated therapies to millions of patients living with chronic skin conditions. We offer early-intervention relief with virtually no side-effects or contraindications. We believe our products, which are sold throughout the United States and internationally, have improved patient outcomes for more than fivenine million patients globally by treating and reducing certain topical skin diseases including acne, atopic dermatitis, scarring, infections, itch, pain and harmful inflammatory responses.

We are focused on the development Our vision is to be a catalyst for improved care and commercialization of therapeutic solutions in medical dermatology to treat skin conditions, such as acne, atopic dermatitis and scarring. These diseases impact millions of patients worldwide and can have significant, multi-dimensional effects on patients’ quality of life, including their physical, functional and emotional well-being.increased access for all patients.

Some of our key products in the United States are:

Our key product outside the United States is:

As of December 31, 2017,To date, we have obtained 20 clearances from the21 U.S. Food and Drug Administration, or FDA, that permit us to sell ourclearances permitting the sale of products as medical devices for Section 510(k) of the Federal Food, Drug and Cosmetic Act in the United States.

Outside the United States, we sell products for dermatological and advanced tissue care with a European Conformity marking, (known as Conformité Européenne, or CE) coveringCE. These CEs cover 25 of our products andin 48 countries with various approvals in Brazil, China, Southeast Asia, South Korea, India, Australia, New Zealand, and the Middle East.

Our StrategyBusiness Channels

Our strategycore market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. HOCl is known to in-license, acquire, developbe among the safest and commercialize unique, affordablemost-effective ways to relieve itch, inflammation and differentiated therapies that we believe advance the standard of care for patients with dermatological diseases. The key components of our strategy are to:burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms.

Our core market includes patients who suffer from various skin diseases, including dermatoses, acne, scarring, skin-barrier and scaly skin conditions. Our secondary market includes eye-hygiene and acute care markets. These conditions impact patients worldwide who have had to live with less than optimal solutions or ones that come with significant side effects. Skin conditions can have significant, multi-dimensional effects on quality of life, including on patient’s physical, functional and emotional well-being.

We have also built on our HOCl technology foundation by adding two complementary technology platforms: Lipogrid® Skin Barrier solutions and Exuvimax Skin de-scaling solutions. Lipogrid is a lipid structural matrix of solid lipid particles and vesicles containing phospholipids, ceramides, fatty acids and cholesterol-type stabilizers that deliver building blocks to the dermis and protect the skin. Exuvimax contains a combination of dicaprylyl carbonate (Cetiol® Oil) and dimethicones that provide a patented formulation designed for a very effective but safe keratolytic effect which is the shedding of the top layer of skin. Our product Loyon® is based on the Exuvimax technology and its key benefit is to remove scale and therefore allow the topical treatments to work more effectively and faster on the underlying condition.

Dermatology

In the United States, we sell into dermatology markets with a sales team that visits or calls dermatologists. Our dermatology products are primarily purchased by distributors, wholesalers, and pharmacies.

Although specific customer requirements can vary depending on applications, customers generally demand quality, innovation, affordability and clinically-supported efficacy. We have responded to these customer demands by introducing new products that treat persistent and common dermatological afflictions, as well as promote healing and improve results for patients opting for cosmetic dermatology procedures. 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 future, to increase market penetration beyond marketing to core dermatologists, we are also evaluating how our products fit into the aesthetic dermatologists and plastic surgeons practice.

We seek to extend and expand our strong ongoing relationships with customers through new products, sales of existing products, ongoing training and support, and distribution of skincare products. We primarily target practitioners through office visits, workshops, trade shows, webinars and trade journals. We also market to potential patients through brochures, workshops and websites. In addition, we offer clinical forums with recognized expert panelists to promote advanced treatment.

Eye Care and Advanced Tissue Care

Our plan iseye care and advanced tissue care products provide patients similar benefits to evolvethose in dermatology. We support the eye care and advanced tissue care markets with a dedicated in-house sales force and through an inside call center. We have also entered into a leading dermatology company, providing innovativestrategic partnerships with respected and cost-effectiveinfluential physicians and surgeons to promote our products. Our eye care products include prescription and dispensing solutions prescribed mainly by ophthalmologists and optometrists supported by pharmacies and, in some cases, sold through wholesale networks. Our tissue care products are primarily purchased by hospitals, physicians, nurses, and other healthcare practitioners.

Animal Health Care

Our animal health care products provide similar benefits to patients, while generating strong, consistent revenue growththose in human dermatology. For our animal health products, we partnered with Manna Pro Products, LLC to bring relief to pets and maximizing long-term shareholder value.peace of mind to their owners. Manna Pro distributes non-prescription products to national pet store retail chains, farm animal specialty stores, farm animal veterinarians, grocery stores and mass retailers in the United States and Canada. Through Manna Pro, we primarily target marketing efforts to veterinarians through trade shows and to customers through social media.

Additional Information

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

Results of Operations

Comparison of the Three Months Ended December 31, 20172018 and 20162017

Revenues

Total revenues for the three months ended December 31, 20172018 of $4,843,000$5,280,000 increased by $1,482,000,$437,000, or 44%9%, as compared to $3,361,000$4,843,000 for the three months ended December 31, 2016.2017. Product revenues for the three months ended December 31, 20172018 of $4,647,000$5,045,000 increased by $1,473,000,$398,000, or 46%9%, as compared to $3,174,000$4,647,000 for the three months ended December 31, 2016.2017. This increase wasa primarily the result of strong growth in product revenue of $94,000, or 3%, in the United States, growth of product revenue of $157,000, or 20%, in Latin America, and growth of product revenue of $147,000, or 15%, in Europe and Latin America.the Rest of World.

Product revenues in the United States for the three months ended December 31, 20172018 of $2,883,000$2,977,000 increased by $1,212,000,$94,000, or 73%3%, as compared to $1,671,000$2,883,000 for the three months ended December 31, 2016.2017. This increase was mostly the result of highera $205,000, or 95%, increase in sales of our animal health care products, an increase of $120,000, or 26%, in sales of our acute care products, and a decrease of $231,000, or 10%, in sales of our dermatology acute care and animal health care products.

Product revenue in Europe and the Rest of the World for the three months ended December 31, 2017 of $992,000 decreased by $46,000, or 4%, as compared to $1,038,000 for the three months ended December 31, 2016. This decrease was the result of lower sales in the Middle East, mostly offset by increases in Europe, China, Singapore, and India.

As a result of the asset purchase agreement and arrangement we entered into on October 27, 2016 with Invekra, we expect our revenues in Latin America will decrease significantly. We will continue to supply Invekra with product at a reduced price until they set up their manufacturing facility. We expect our revenues in Latin America will decrease significantly once Invekra has set up their manufacturing facility. During the three months ended December 31, 2017,2018, we reported $772,000$715,000 of Latin America product revenue related to Invekra.  Invekra as compared to $772,000 during the three months ended December 31, 2017. Additionally, we reported $214,000 of Latin America product revenue related to dermatology products sold in Brazil.

Product revenue in Europe and the Rest of the World for the three months ended December 31, 2018 of $1,139,000 increased by $147,000, or 15%, as compared to $992,000 for the three months ended December 31, 2017. This increase was mostly the result of increases in Europe and India, partly offset by decreases in the Middle East, the Far East and New Zealand.

The following table shows our product revenues by geographic region:

In connection with our sale of our Latin American business to Invekra, product revenues and cost of revenues reported in the prior period were reclassified from continuing operations to discontinued operations as follows:

Service revenues for the three months ended December 31, 20172018 of $196,000$235,000 increased by $9,000,$39,000, or 5%20%, when compared to $187,000$196,000 in the prior period. The increase was primarily the result of higher volume of laboratory tests and services in the United States. Additionally, during the three months ended December 31, 2018, we recorded service revenues wasrevenue related to an increasetechnical services provided to Invekra in our lab services business.the amount of $14,000.

Gross Profit

For the three months ended December 31, 2017,2018, we reported total revenues of $4,843,000$5,280,000 and total cost of revenues of $2,475,000,$2,433,000, resulting in total gross profit of $2,368,000$2,847,000 or 49%54% of total revenues, compared to a gross profit of $1,706,000$2,368,000 or 51%49% of total revenues, for the same period in the prior year. The decrease in gross profit, as a percentage of revenue, was primarily due to the lower profitability in Latin America related to the higher sales to Invekra at a very low profit, partly offset by higher margins in the United States caused by the strong growth of the more profitable dermatology product lines. As dermatology product revenues increase as an overall percentage of our product revenues, we expect our margins will improve due to higher gross margins associated with our dermatology products.

For the three months ended December 31, 2017,2018, we reported product revenues of $4,647,000$5,045,000 and cost of product revenues of $2,308,000,$2,269,000, resulting in product gross profit of $2,339,000,$2,776,000, or 50%55% of product revenues, compared to product gross profit of $1,698,000,$2,339,000, or 53%50% of product revenues, for the same period in the prior year. The decreaseincrease in gross profit as a percentpercentage of revenue, percentageproduct revenues was primarily due to the lower profitabilitya decrease in Latin America related to the higher sales to Invekra at a very low profit, partly offset by higher marginsrebate costs in the United States caused by the strong growth of the more profitable dermatology product lines.current period.

For the three months ended December 31, 2017,2018, we reported service revenues of $196,000$235,000 and cost of service revenues of $167,000,$164,000, resulting in service gross profit of $71,000, or 30% of service revenues, compared to service gross profit of $29,000, or 15% of service revenues, compared to service gross profit of $8,000, or 4% of service revenues, for the same period in the prior year. The increase in service gross profit was primarily related to higher service revenue in the current period and the mix of tests and services performed.

Research and Development Expense

Research and development expenses for the three months ended December 31, 20172018 of $349,000 decreased$451,000 increased by $138,000,$102,000, or 28%29%, as compared to $487,000$349,000 for the three months ended December 31, 2016.2017. The decreaseincrease is largely due to a decreaseprimarily the result of higher salaries and benefits in spending onthe current period and product development and clinical studies.related studies performed in the current period.

Selling, General and Administrative Expense

Selling, general and administrative expenses for the three months ended December 31, 20172018 of $5,219,000 increased$4,746,000 decreased by $435,000,$473,000, or 9%, when compared to $4,784,000$5,219,000 for the three months ended December 31, 2016.2017. The increase fordecrease is primarily the three months ended December 31, 2017 was primarily due to higher salesresult of lower stock compensation costs of $649,000, and marketing expenseslower legal costs of $99,000, offset by $475,000 of severance costs incurred related to our growing dermatology sales force.the resignation of the Company’s former Chief Executive Officer and Chief Financial Officer.

Interest Expense

Interest expense for the three months ended December 31, 20172018 of $11,000, increased$7,000 decreased by $11,000,$4,000 when compared to $11,000 for the three months ended December 31, 2016.2017. The increasedecrease in interest expense relates primarily to capital leases.leases and insurance premiums financed.

Interest Income

Interest income for the three months ended December 31, 20172018 of $14,000$37,000 increased by $8,000$23,000 when compared to $6,000$14,000 for the three months ended December 31, 2016.2017. The increase is primarily due to interest income earnedreported related to a discount on increased cash and cash equivalent balances.deferred revenue from our agreement with Invekra.

Other Income

Other incomeexpense for the three months ended December 31, 20172018 of $10,000 decreased$22,000 increased by $272,000$12,000 when compared to $282,000other expense of $10,000 for the three months ended December 31, 2016.2017. The increase in other incomeexpense relates primarily to fluctuationfluctuations in foreign exchange in the prior period.and state franchise taxes.

Net Loss Income from Continuing Operations

Net Loss from continuing operations for the three months ended December 31, 20172018 of $3,187,000 increased $3,950,000,$2,298,000 decreased $889,000, when compared to income from continuing operationsnet loss of $763,000$3,187,000 for the three months ended December 31, 2016.2017. The increasedecrease in net loss from continuing operations is primarily due to $4,040,000a decrease of income tax benefit recorded inoperating losses, caused by lower stock compensation expenses of $692,000, higher sales and gross profitability, offset by severance costs incurred related to the prior period as a resultresignation of the transaction with Invekra.Company’s former Chief Executive Officer and Chief Financial Officer.

Income from Discontinued Operations, net of Tax

The following summarizes operations of our Latin American business included in discontinued operations:

Comparison of the Nine Months Ended December 31, 20172018 and 20162017

Total revenues for the nine months ended December 31, 20172018 of $13,003,000$14,588,000 increased by $4,207,000,$1,585,000, or 48%12%, as compared to $8,796,000$13,003,000 for the nine months ended December 31, 2016.2017. Product revenues for the nine months ended December 31, 20172018 of $12,394,000$13,775,000 increased by $4,236,000,$1,381,000, or 52%11%, as compared to $8,158,000$12,394,000 for the nine months ended December 31, 2016.2017. This increase was primarily the result of strong growth in product revenue of $364,000, or 5%, in the United States, growth of product revenue of $910,000, or 43%, in Latin America, and growth of product revenue of $107,000, or 3%, in Europe and the Rest of the World.

Product revenues in the United States for the nine months ended December 31, 20172018 of $7,010,000$7,374,000 increased by $2,269,000,$364,000, or 48%5%, as compared to $4,741,000$7,010,000 for the nine months ended December 31, 2016.2017. This increase was mostly the result of highera $636,000, or 97%, increase in sales of our animal health care products, an increase of $85,000, or 6%, in sales of our acute care products, and a decrease of $357,000, or 7%, in sales of our dermatology and acute care products, partly offset by a decline in sales of $149,000 related to our animal health care products.

Product revenue in Europe and the Rest of the World for the nine months ended December 31, 2017 of $3,289,000 increased by $337,000, or 11%, as compared to $2,952,000 for the nine months ended December 31, 2016. This increase was mostly the result of increases in Europe, Hong Kong, Singapore, New Zealand and India partly offset by a decrease in the Middle East and China.

As a result of the asset purchase agreement and arrangement we entered into on October 27, 2016 with Invekra, we expect our revenues in Latin America will decrease significantly. We will continue to supply Invekra with product at a reduced price until they set up their manufacturing facility. We expect our revenues in Latin America will decrease significantly once Invekra has set up their manufacturing facility. During the nine months ended December 31, 2017,2018, we reported $2,095,000$2,543,000 of Latin America product revenue related to Invekra.Invekra as compared to $2,095,000 during the nine months ended December 31, 2017. Additionally, we reported $462,000 of Latin America product revenue related to dermatology products sold in Brazil.

Product revenue in Europe and the Rest of the World for the nine months ended December 31, 2018 of $3,396,000 increased by $107,000, or 3%, as compared to $3,289,000 for the nine months ended December 31, 2017. This increase was mostly the result of decreases in the Middle East, partly offset by increases in Europe.

The following table shows our product revenues by geographic region:

In connection with our sale of our Latin American business to Invekra, product revenues and cost of revenues reported in the prior period were reclassified from continuing operations to discontinued operations as follows: