Sonoma Pharmaceuticals, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

5. Discontinued Operations: Sale of Assets

5. Discontinued Operations: Sale of Assets

3 Months Ended

Jun. 30, 2020

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations: Sale of Assets

Note 5.

Discontinued Operations: Sale of Assets to Infinity Labs SD, Inc.

On June 24, 2020, the Company closed on an asset purchase agreement for the sale of its Micromed Laboratories division and testing facility, including all of Micromed’s assets, such as testing equipment, certain office furniture and customer list, with Infinity Labs SD Inc. (“Infinity”) for an aggregate purchase price of $850,000. On the closing date, the Company received $610,000 in cash from this sale which was adjusted for working capital, a credit of $100,000 for future testing services from Infinity over the next two years in lieu of cash, and $60,000 held in escrow for one year, subject to adjustment for certain indemnity claims or purchase price adjustments. The Company also retained its accounts receivables outstanding on the date of closing in the amount of approximately $81,000 and an insignificant amount of liabilities. As part of the transaction, Infinity also assumed the Petaluma lease for the office and lab space. The Company retained the warehouse space to store inventory and assets until it completes its move.

Accounting for the disposition

For accounting purposes, the Company determined that there was only one discrete component of the sale to Infinity. These components were the customer base and services to be provided.

Component of Sale

Methodology to Estimate Selling Price

Customer Base

Based upon revenues expected from a market participant to provide technical services at expected service levels

The Company determined an arm’s length selling price for each component of the sale and then allocated the net proceeds received to the components on a relative selling price basis. The Company estimated the selling prices of each component as described below:

Proceeds were allocated to the components of the sale based upon their relative selling prices are as follows:

Customer base	$	850,000
Less: Funds remaining in escrow		(60,000	)
Less: Services due from buyer		(100,000	)
Less: Working capital adjustment		(80,000	)
Total proceeds	$	610,000

Discontinued operations

As of June 24, 2020, the Company determined that the sale of its Micromed division to Infinity 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.

The carrying value of the assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of June 30, 2020 and March 31, 2020 were as follows:

		June 30, 2020		March 31, 2020
Assets
Accounts receivable (net)	$	–	$	89,000
Inventory		–		11,000
Operating lease, right of use		–		604,000
Total current assets of discontinued operations	$	–	$	704,000

Liabilities
Accounts payable	$	–	$	18,000
Operating lease		–		117,000
Total current liabilities of discontinued operations	$	–	$	135,000

Operating lease	$	–	$	511,000
Total Long-term liabilities of discontinued operations	$	–	$	511,000

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

	Three Months Ended June 30,
	2020		2019
Revenues	$	212,000	$	216,000
Cost of Revenues		53,000		143,000
Selling, general and administrative expenses		5,000		32,000
Income from discontinued operations before tax		154,000		41,000
Gain on disposal of discontinued operations before income taxes		795,000		–
Total income from discontinued operations, before tax		949,000		41,000
Income Tax benefit (expense)		–		–
Income from discontinued operations, net of tax	$	949,000	$	41,000