The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q as ofDecember 31, 2022 and our audited consolidated financial statements for the year endedMarch 31, 2022 included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onJuly 13, 2022 . This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "anticipate," "suggest," "estimate," "plan," "project," "continue," "ongoing," "potential," "expect," "predict," "believe," "intend," "may," "will," "should," "could," "would," "proposal," and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the risks described in our Annual Report on Form 10-K including: the impact of the Covid pandemic on the overall economy and our results of operations; our ability to become profitable; the impact of changes to reimbursement levels from third-party payors or increased pricing pressure due to rebates; the impact of the Invekra transaction on our business and results of operations; our dependence on third-party distributors; certain tax impacts of inter-company loans between us and our Mexican subsidiary; the progress and timing of our development programs and regulatory approvals for our products; the benefits and effectiveness of our products; the ability of our products to meet existing or future regulatory standards; the progress and timing of clinical trials and physician studies; our expectations and capabilities relating to the sales and marketing of our current products and our product candidates; our ability to compete with other companies that are developing or selling products that are competitive with our products; the establishment of strategic partnerships for the development or sale of products; the risk our research and development efforts do not lead to new products; the timing of commercializing our products; our ability to penetrate markets through our sales force, distribution network, and strategic business partners to gain a foothold in the market and generate attractive margins; the ability to attain specified revenue goals within a specified time frame, if at all, or to reduce costs; the outcome of discussions with theU.S. Food and Drug Administration , or FDA, and other regulatory agencies; the content and timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including demonstrating to the satisfaction of the FDA the safety and efficacy of our products; our ability to manufacture sufficient amounts of our products for commercialization activities; our ability to protect our intellectual property and operate our business without infringing on the intellectual property of others; our ability to continue to expand our intellectual property portfolio; the risk we may need to indemnify our distributors or other third parties; risks attendant with conducting a significant portion of our business outsidethe United States ; our ability to comply with complex federal and state fraud and abuse laws, including state and federal anti-kickback laws; risks associated with changes to health care laws; our ability to attract and retain qualified directors, officers and employees; our expectations relating to the concentration of our revenue from international sales; our ability to expand to and commercialize products in markets outside the wound care market; our ability to protect our information technology and infrastructure; and the impact of any future changes in accounting regulations or practices in general with respect to public companies. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law. Our Business We are a global healthcare leader for developing and producing stabilized hypochlorous acid, or HOCl, products for a wide range of applications, including wound care, animal health care, eye care, oral care and dermatological conditions. Our products reduce infections, itch, pain, scarring and harmful inflammatory responses in a safe and effective manner. In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. Our stabilized HOCl immediately relieves itch and pain, kills pathogens and breaks down biofilm, does notsting or irritate skin and oxygenates the cells in the area treated, assisting the body in its natural healing process. 16 Business Channels
Our core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid, or HOCl, solutions. We have been in business for over 20 years, and in that time, we have developed significant scientific knowledge of how best to develop and manufacture HOCl products backed by decades of studies and data collection. HOCl is known to be among the safest and most-effective ways to relieve itch, inflammation and burns while stimulating natural healing through increased oxygenation and eliminating persistent microorganisms and biofilms. We sell our products into many markets both in theU.S. and internationally. In international markets, we ship a variety of products to 55 countries. Our core strategy is to work with partners both inthe United States and around the world to market and distribute our products. In some cases, we market and sell our own products. Dermatology We have developed unique, differentiated, prescription-strength and safe dermatologic products that support paths to healing among various key dermatologic conditions. Our products are primarily targeted at the treatment of acne, the management of scars and eczema/atopic dermatitis. We are strategically focused on introducing innovative new products that are supported by human clinical data with applications that address specific dermatological procedures currently in demand. In addition, we look for markets where we can provide effective product line extensions and pricing to new product families. Inthe United States , we partner withEMC Pharma, LLC to sell our prescription dermatology products. Pursuant to our agreement with EMC Pharma, we manufacture products for EMC Pharma and EMC Pharma has the right to market, sell and distribute them to patients and customers for an initial term of five years, subject to meeting minimum purchase and other requirements. OnSeptember 28, 2021 , we launched a new over-the-counter product, Regenacyn® Advanced Scar Gel, which is clinically proven to improve the overall appearance of scars while reducing pain, itch, redness, and inflammation. On the same day, we launched Regenacyn® Plus, a prescription-strength scar gel which is available as an office dispense product through physician offices. OnOctober 27, 2022 , we launched two new over-the-counter dermatology products inthe United States , Reliefacyn® Advanced Itch-Burn-Rash-Pain Relief Hydrogel for the alleviation of red bumps, rashes, shallow skin fissures, peeling, and symptoms of eczema/atopic dermatitis, and Rejuvacyn® Advanced Skin Repair Cooling Mist for management of minor skin irritations following cosmetic procedures as well as daily skin health and hydration. OnJanuary 4, 2023 , we launched a line of office dispense products exclusively for skin care professionals, including two new prescription strength dermatology products, Reliefacyn® Plus Advanced Itch-Burn-Rash-Pain Relief Hydrogel and Rejuvacyn® Plus Skin Repair Cooling Mist. These products, along with Regenacyn® Plus Scar Gel, will be marketed and sold directly to dermatology practices
and medical spas.
In
Our consumer products are available through Amazon.com, our website and third-party distributors.
We sell dermatology products inEurope ,Asia , andBrazil through a distributor network. In these international markets, we have a network of partners, ranging from country specific distributors to large pharmaceutical companies to full-service sales and marketing companies. We work with our international partners to create products they can market in their home country. Some products we develop and manufacture are private label while others use branding we have already developed. We have created or co-developed a wide range of products for international markets using our core HOCl technology. 17 First Aid and Wound Care
Our HOCl-based wound care products are intended for the treatment of acute and chronic wounds as well as first- and second-degree burns. They work by first removing foreign material and debris from the skin surface and moistening the skin, thereby improving wound healing. Second, our HOCl products assist in the wound healing process by removing microorganisms. Since HOCl is an important constituent of our innate immune system and is formed and released by the macrophages during phagocytosis, it is advantageous to other wound-irrigation and antiseptic solutions, as highly organized cell structures such as human tissue can tolerate the action of our wound care solution while single-celled microorganisms cannot. Due to its unique chemistry, our wound treatment solution is much more stable than similar products on the market and therefore maintains much higher levels of hypochlorous acid over its shelf life. Inthe United States , we sell our wound care products directly to hospitals, physicians, nurses, and other healthcare practitioners and indirectly through non-exclusive distribution arrangements. InEurope , we sell our wound care products through a diverse network of distributors. To respond to market demand for our HOCl technology-based products, we launched our first direct to consumer over-the-counter product inthe United States inFebruary 2021 . Microcyn® OTC Wound and Skin Cleanser is formulated for home use without prescription to help manage and cleanse wounds, minor cuts, and burns, including sunburns and other skin irritations. Microcyn OTC is available without prescription through Amazon.com, our online store and third-party distributors. InMarch 2021 , we received approval to market and use our HOCl products as biocides under Article 95 of the European Biocidal Products Regulation inFrance ,Germany andPortugal . The approval applies to our products MucoClyns™ for human hygiene to be marketed and commercialized by us, MicrocynAH® for animal heath marketed and commercialized through our partner,Petagon Limited , and MicroSafe for disinfectant use to be marketed and commercialized through our partner, MicroSafe Group DMCC.
In
In
Eye Care Our prescription product Acuicyn™ is an antimicrobial prescription solution for the treatment of blepharitis and the daily hygiene of eyelids and lashes and helps manage red, itchy, crusty and inflamed eyes. It is strong enough to kill the bacteria that causes discomfort, fast enough to provide near instant relief, and gentle enough to use as often as needed. Inthe United States , our partner EMC Pharma is selling our prescription-based eye care product through its distribution network. OnSeptember 28, 2021 , we launched Ocucyn® Eyelid & Eyelash Cleanser, which is sold directly to consumers on Amazon.com, through our online store, and through third party distributors. Ocucyn® Eyelid & Eyelash Cleanser, designed for everyday use, is a safe, gentle, and effective solution for good eyelid and eyelash hygiene. In international markets we rely on distribution partners to sell our eye products. OnMay 19, 2020 , we entered into an expanded license and distribution agreement with our existing partner,Brill International S.L . for our Microdacyn60® Eye Care HOCl-based product. Under the license and distribution agreement, Brill has the right to market and distribute our eye care product under the private label Ocudox™ inItaly ,Germany ,Spain ,Portugal ,France , and theUnited Kingdom for a period of 10 years, subject to meeting annual minimum sales quantities. In return, Brill paid us a one-time fee, and the agreed upon supply prices. In parts ofAsia , Dyamed Biotech markets our eye product under the private label Ocucyn. 18 Oral, Dental and Nasal Care
We sell a variety of oral, dental, and nasal products around the world.
In late 2020, we launched a HOCl-based product in the dental, head and neck
markets called Endocyn®, a biocompatible root canal irrigant. In the
In international markets, our product Microdacyn60®Oral Care treats mouth and throat infections and thrush. Microdacyn60 solution assists in reducing inflammation and pain, provides soothing cough relief and does not contain any harmful chemicals. It does not stain teeth, is non-irritating, non-sensitizing, has no contraindications and is ready for use with no mixing or dilution. InNew Zealand andAustralia , our partnerTe Arai BioFarma Ltd. markets our oral product under their label Oracyn®Oral Care . Our partner, Dyamed Biotech, is seeking regulatory clearance to market Oracyn®Oral Care in parts ofAsia . OnJanuary 18, 2022 , we partnered withAnlicare International to seek regulatory clearances for our dental and oral products inChina andMacau . Our international nasal care product Sinudox™ based on our HOCl technology is intended for nasal irrigation. Sinudox Hypotonic Nasal Hygiene clears and cleans a blocked nose, stuffy nose and sinuses by ancillary ingredients that may have a local antimicrobial effect. Sinudox is sold through Amazon inEurope . InNew Zealand andAustralia , our partner Te Arai markets our nasal product under
their label Nasocyn® Nasal Care. Animal Health Care MicrocynAH® is a HOCl-based topical product that cleans, debrides and treats a wide spectrum of animal wounds and infections. It is intended for the safe and rapid treatment of a variety of animal afflictions including cuts, burns, lacerations, rashes, hot spots, rain rot, post-surgical sites, pink eye symptoms and wounds to the outer ear of any animal. For our animal health products sold in theU.S. andCanada , we partnered withManna Pro Products, LLC to bring relief to pets and peace of mind to their owners. Manna Pro distributes non-prescription products to national pet-store retail chains, farm animal specialty stores, inthe United States andCanada , such as Chewy.com, PetSmart, Tractor Supply,Cabela's , PetExpress, andBass Pro Shops . OnAugust 2, 2022 , we announced the launch of a MicrocynVS® line of products exclusively for veterinarians for the management of wound, skin, ear and eye afflictions in all animal species. We grantedDV Medical Supply Inc. the non-exclusive right to distribute and sell MicrocynVS products in veterinarian clinics and practices throughoutthe United States . For the Asian and European markets, onMay 20, 2019 , we partnered withPetagon, Limited , an international importer and distributor of quality pet food and products for an initial term of five years. We supply Petagon with all MicrocynAH products sold by Petagon. OnAugust 3, 2020 , Petagon received a license fromthe People's Republic of China for the import of veterinary drug products manufactured by us. This is the highest classification Petagon and Sonoma can receive for animal health products inChina . Surface Disinfectants In-vitro and clinical studies of HOCl show it to have impressive antipruritic, antimicrobial, antiviral and anti-inflammatory properties. HOCl has been formulated as a disinfectant and sanitizer solution for our partner MicroSafe and is sold in numerous countries. It is designed to be used to spray in aerosol format in areas and environments likely to serve as a breeding ground for the spread of infectious disease, which could result in epidemics or pandemics. The medical-grade surface disinfectant solution is used in hospitals worldwide to protect doctors and patients. InMay 2020 , Nanocyn® Disinfectant & Sanitizer received approval to be entered into theAustralian Register of Therapeutic Goods, or ARTG for use against the coronavirus SARS-CoV-2, or COVID-19, and was also authorized inCanada for use against COVID-19. Nanocyn has also met the stringent environmental health and social/ethical criteria of Good Environmental Choice Australia, or GECA, becoming one of the very few eco-certified, all-natural disinfectant solutions inAustralia . 19
Through our partner MicroSafe, we sell hard surface disinfectant products into
OnJuly 31, 2021 , we granted MicroSafe the non-exclusive right to sell and distribute Nanocyn inthe United States provided that MicroSafe secureU.S. EPA approval. In April of 2022, MicroSafe secured the EPA approval for Nanocyn® Disinfectant & Sanitizer, meaning that it can now be sold inthe United States as a surface disinfectant, and it was subsequently added to theEPA's list N for use against COVID-19. InJune 2022 , the EPA added Nanocyn to List Q as a disinfectant for Emerging Viral Pathogens, including Mpox. We intend to build upon this ground-breaking approval by securing further approvals of this nature. Nanocyn is a hospital-grade disinfectant and manufactured by us using our patented HOCl technology. Nanocyn is currently sold by MicroSafe inEurope ,
theMiddle East andAustralia . Additional Information Investors and others should note that we announce material financial information using our company website (www.sonomapharma.com), our investor relations website (ir.sonomapharma.com),SEC filings, press releases, public conference calls and webcasts. The information on, or accessible through, our websites is not incorporated by reference in this Quarterly Report on Form 10-Q.
Results of Continuing Operations
Comparison of the Three and Nine Months Ended
Revenue The following table shows our consolidated total revenue and revenue by geographic region for the three and nine months endedDecember 31, 2022 and 2021: Three Months Ended December 31, (In thousands) 2022 2021 $ Change % Change United States$ 761 $ 933 $ (172 ) (18% ) Europe 1,104 731 373 51% Asia 514 664 (150 ) (23% ) Latin America 384 273 111 41% Rest of the World 181 301 (120 ) (40% ) Total$ 2,944 $ 2,902 $ 42 1% Nine Months Ended December 31, (In thousands) 2022 2021 $ Change % Change United States$ 2,603 $ 3,872 $ (1,269 ) (33% ) Europe 3,117 2,419 698 29% Asia 1,952 1,810 142 8% Latin America 1,827 1,356 471 35% Rest of the World 759 873 (114 ) (13% ) Total$ 10,258 $ 10,330 $ (72 ) (1% ) 20 The decrease inUnited States revenues of$1,269,000 for the nine months endedDecember 31, 2022 compared to the same period in the prior year is primarily the result of transitioning our prescription dermatology business to our partner, EMC Pharma. Converting our prescription dermatology business to a distribution model resulted in a reduction of revenues, however we also eliminated significant expenses related to that line of products including a direct sales force. The decrease is also partially due to a decline in sales of our over-the-counter animal health care products and an overall retail market slowdown. The decrease inUnited States revenues of$172,000 for the three months endedDecember 31, 2022 compared to the same period in the prior year is due to a decline in sales of our over-the-counter animal health care products and an overall retail market slowdown. The increase inEurope revenue for the three and nine months endedDecember 31, 2022 was caused by an increase in demand for our wound care products as well as the introduction of several new products intoEurope . The decrease inAsia revenue for the three months and the increase for the nine months endedDecember 31, 2022 is due to lumpiness in ordering with increased orders in the first quarters and lower orders in the second quarter. Revenues from our international distributors tend to be choppy due to customers placing larger but less frequent orders to benefit from quantity discounts and reduced shipping costs when ordering sufficient quantities to fill standard sized shipping containers. The increase inLatin America revenue for the three months endedDecember 31, 2022 was caused by timing of orders coming in later in 2022 compared to same quarter 2021. The increase inLatin America revenue for the nine months endedDecember 31, 2022 was primarily the result of service revenue from selling machinery to a customer for$750,000 , which management expects to be a one-time event. The increase was partially offset by a decline in manufacturing for
one of our customers.
The decrease in Rest of World revenue for the three and nine months ended
Cost of Revenue and Gross Profit
The cost of revenue and gross profit metrics for the three and nine months ended
Three Months Ended December 31, (In thousands, except for percentages) 2022 2021 Change % Change Cost of Revenue$ 2,113 $ 1,699 $ 414 24% Cost of Revenue as a % of Revenue 72% 59%
13%
Gross Profit$ 831 $ 1,203 $ (372 ) (31% ) Gross Profit as a % of Revenue 28% 41% (13% ) Nine Months Ended December 31,
(In thousands, except for percentages) 2022 2021 Change % Change Cost of Revenue$ 6,645 $ 6,433 $ 212 3% Cost of Revenue as a % of Revenue 65% 62% 3% Gross Profit$ 3,613 $ 3,897 $ (284 ) (7% ) Gross Profit as a % of Revenue 35% 38% (3%
)
The decrease in gross profit margin for the three months endedDecember 31, 2022 was primarily the result of lower manufacturing levels and higher costs of materials and transportation. The decrease in gross profit margin for the nine months endedDecember 31, 2022 was primarily due to higher costs of materials and transportation. 21
Research and Development Expense
The research and development metrics for the three and nine months ended
Three Months Ended December 31, (In thousands, except for percentages) 2022 2021 Change % Change
Research and Development Expense $ - $ 26$ (26 ) (100% ) Research and Development Expense as a % of Revenue 0% 1% (1% ) Nine Months Ended December 31, (In thousands, except for percentages) 2022 2021 Change % Change
Research and Development Expense $ 6$ 121 $ (115 ) (95% ) Research and Development Expense as a % of Revenue 0% 1% (1% )
For the three months ended
Selling, General and Administrative Expense
The selling, general and administrative expense metrics are as follows:
Three Months Ended December 31, (In thousands, except for percentages) 2022 2021 Change % Change Selling, General and Administrative Expense (SG&A)$ 2,665 $ 2,135 $ 530 25% SG&A Expense as a % of Revenue 91% 74%
17% Nine Months Ended December 31, (In thousands, except for percentages) 2022 2021 Change % Change Selling, General and Administrative Expense (SG&A)$ 7,030 $ 6,603 $ 427 6% SG&A Expense as a % of Revenue 69% 64%
5% The increase in Selling, General and Administrative expense for the three and nine months endedDecember 31, 2022 was$530,000 and$427,000 , respectively, and was the result of closing down ourWoodstock, GA facility and moving finance and operations to ourBoulder, CO headquarters. Management expects the expenses related to the consolidation of ourWoodstock, GA office into ourBoulder, CO office to be primarily one-time expenses. Additionally, the quarter endingDecember 31, 2022 included a settlement of a long-term contract that resulted in an additional$350,000 of expenses recorded during the period. Management expects this to be a one-time event. 22
Interest Income (Expense), net
Interest (expense) income, net for the three and nine months endedDecember 31, 2022 was$1,000 and$4,000 , respectively, compared to$3,000 , and$(1,000) for the three and nine months endedDecember 31, 2021 , respectively. Other (Expense) Income, net Other (expense) income for the three and nine months endedDecember 31, 2022 was$(73,000) and$(327,000) respectively, compared to$11,000 and$542,000 , respectively, for the three and nine months endedDecember 31, 2021 . The decrease in other income (expense) relates primarily to the recognition of PPP loan forgiveness in the amount of$723,000 in the prior year and, to a lesser extent, to exchange rate fluctuations. Income taxes
Income tax expense for the three and nine months ended
Net Loss
The following table provides the net loss for each period along with the computation of basic and diluted net loss per share:
Three Months Ended Nine Months Ended December 31, December 31, (In thousands, except per share data) 2022 2021 2022 2021 Numerator: Net loss$ (1,939 ) $ (944 ) $ (3,843 ) $ (2,142 ) Denominator: Weighted-average number of common shares outstanding: basic 3,107 3,080 3,104 2,507 Weighted-average number of common shares outstanding: diluted 3,107 3,080 3,104 2,507 Net loss per share: basic$ (0.62 ) $ (0.31 ) $ (1.24 ) $ (0.85 ) Net loss per share: diluted$ (0.62 ) $ (0.31 ) $ (1.24 ) $ (0.85 )
Liquidity and Capital Resources
We reported a net loss of$1,939,000 and$3,843,000 for the three and nine months endedDecember 31, 2022 . AtDecember 31, 2022 andMarch 31, 2022 , our accumulated deficit amounted to$188,206,000 and$184,363,000 , respectively. As ofDecember 31, 2022 , we had cash and cash equivalents of$2,634,000 compared to$8,529,000 onDecember 31, 2021 . Since our inception, substantially all of our operations have been financed through sales of equity securities. Other sources of financing that we have used to date include our revenues, royalty payments from licensing our products, as well as various loans and the sale of certain assets to Invekra, Petagon, and Microsafe. 23 The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the nine months endedDecember 31, 2022 and 2021 as well as balances of cash and cash equivalents and working capital: Nine Months Ended December 31, (In thousands) 2022 2021 Net cash provided by (used in): Operating activities$ (3,711 ) $ (2,853 ) Investing activities (176 ) (38 ) Financing activities (883 ) 7,174
Effect of exchange rates on cash 8 26 Net change in cash and cash equivalents (4,762 ) 4,309
Cash and cash equivalents, beginning of the period
$ 7,298 $ 13,824 (1) Defined as current assets minus current liabilities
Net cash used by operating activities during the nine months endedDecember 31, 2022 was$3,711,000 , primarily due to a net loss of$3,843,000 , and a decrease in deferred revenue of$1,204,000 offset by$569,000 of stock based compensation. Net cash used by operating activities during the nine months endedDecember 31, 2021 , was$2,853,000 , primarily due to a net loss of$2,142,000 and forgiveness on PPP loans of$723,000 .
Net cash used by investing activities was
Net cash used by investing activities was
Net cash used by financing activities was
Net cash provided by financing activities was
We expect revenues to fluctuate and may incur losses in the foreseeable future and may need to raise additional capital to pursue our product development initiatives, to penetrate markets for the sale of our products and continue as a going concern. We cannot provide any assurances that we will be able to raise additional capital. Management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, we cannot provide any assurance that new financing will be available on commercially acceptable terms, if at all. If the economic climate in theU.S. deteriorates, our ability to raise additional capital could be negatively impacted. If we are unable to secure additional capital, we may be required to take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our continued efforts to commercialize our products, which is critical to the realization of our business plan and our future operations. These matters raise substantial doubt about our ability to continue as a going concern. 24
Material Trends and Uncertainties
We are exposed to risk from decline in foreign currency for both the euro and theMexico peso versus theU.S. dollar. Most recently there has been a sharp decline in the euro versus theU.S. dollar which has impacted our financial results. As we have previously discussed in our annual report on Form 10-K filed with theSEC onJuly 13, 2022 , we face a substantialMexico tax liability, intercompany debt, unpaid technical assistance charges and accrued interest. These amounts are not due until 2027. At this time, management believes there are sufficient assets on the balance sheet to more than cover any tax obligation without interrupting our operations or business. We have engaged tax professionals to review all options to limit our exposure to these amounts and to proceed in a manner that is most advantageous to us. As the pandemic continues to impact economies worldwide, we are closely watching inflation, increased volatility within financial markets, shipping costs, supply chain issues and labor costs. At this time, we have seen an increase in shipping costs however, the overall impact of these issues has been minimal. The potential impact to our business operations, customer demand and supply chain due to increased shipping costs may ultimately impact sales. We continue to evaluate our end-to-end supply chain and assess opportunities to refine the impact on sales. Currently, our customers pay for most of the shipping expenses necessary to get products to their home countries, including increased shipping costs, if any. We have not yet faced labor shortages however it is possible we may have difficulties retaining and finding qualified employees in a tight labor market in the future. Furthermore, overall inflation tendencies may put pressure on our product pricing and/or costs.
We also closely monitor overall economic conditions, consumer sentiment and the
prospect of a recession in
OnAugust 16, 2022 , theU.S. government enacted the Inflation Reduction Act. The Inflation Reduction Act introduced a new 15% corporate minimum tax, based on adjusted financial statement income of certain large corporations. Applicable corporations would be allowed to claim a credit for the minimum tax paid against regular tax in future years. The minimum tax impact applies starting in 2023. The Inflation Reduction Act also includes an excise tax that would impose a 1% surcharge on stock repurchases. This excise tax was effectiveJanuary 1, 2023 .
The Company is currently evaluating the effect of the Inflation Reduction Act on its consolidated financial statements.
Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance related to our deferred tax assets, valuation of equity and derivative instruments, debt discounts, valuation of investments and the estimated amortization periods of upfront product licensing fees received from customers.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 25
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