Executive Summary / Key Takeaways

• Sonoma Pharmaceuticals leverages its proprietary stabilized hypochlorous acid (HOCl) technology across diverse healthcare markets, including dermatology, wound care, and animal health, offering differentiated products with demonstrated safety and efficacy benefits over traditional alternatives.
• The company reported a significant improvement in financial performance for the fiscal year ended March 31, 2025, with total revenue increasing by 12% to $14.29 million and the net loss narrowing by 29% to $3.46 million, reflecting progress in its strategy to drive revenue growth and control costs.
• Key strategic initiatives, including successful transition to EU MDR, extensive UK regulatory clearances, relaunch of core U.S. prescription products, and new distribution partnerships with Medline and WellSpring, are aimed at expanding market reach and improving commercial execution.
• Despite recent progress, Sonoma faces substantial financial challenges, including a history of losses, negative operating cash flows (though improved in FY25), and a going concern disclosure, necessitating future capital raises and effective management of significant liabilities like the Mexican tax obligation.
• Sonoma operates in competitive markets against larger, well-resourced players like Perrigo (PRGO) and 3M Company (MMM), relying on its HOCl technology's unique properties (stability, antimicrobial efficacy without resistance) and targeted niche strategies to build market share, while navigating disadvantages in scale and financial resources compared to rivals.

The Enduring Promise of Stabilized HOCl

Sonoma Pharmaceuticals, Inc. is built upon a core technological foundation: performance-stabilized hypochlorous acid (HOCl). This isn't just another ingredient; HOCl is a naturally occurring molecule produced by the human immune system, playing a crucial role in fighting infection and promoting healing. Sonoma has spent over two decades developing the scientific knowledge and manufacturing expertise to produce HOCl solutions that are not only effective but also remarkably stable, a key differentiator in the market.

The tangible benefits of Sonoma's HOCl technology are central to its product value proposition. In wound care, its solutions cleanse, debride, and moisten wounds while effectively removing microorganisms, including antibiotic-resistant strains. Unlike some traditional antiseptics, HOCl is clinically proven to achieve rapid pathogen kill times, with claims of up to 99.99% reduction in bacteria within 30 seconds. Crucially, it does this safely, without damaging healthy tissue, reducing itch, pain, scarring, and irritation. This unique mechanism of action has shown no resistance issues in studies, offering a significant advantage over conventional antibiotics, particularly in dermatology for conditions like acne.

Sonoma's HOCl solutions are also noted for their stability, maintaining higher levels of the active ingredient over their shelf life compared to some competing formulations. This operational advantage can translate into reduced waste and potentially lower operating costs per unit compared to less stable alternatives. The company continues to invest in research and development, maintaining an active pipeline aimed at leveraging this core technology for new applications and seeking additional regulatory clearances to expand its market potential globally. The strategic intent behind this R&D is to build upon the inherent advantages of HOCl, such as its anti-inflammatory and anti-infective properties, to develop products that offer superior outcomes and safety profiles across various indications.

Evolution of Strategy and Recent Momentum

Sonoma's journey has seen a significant strategic evolution. Originally focused heavily on international markets with lower gross margins, the company, starting around 2014, made a deliberate pivot to prioritize growth in the higher-margin U.S. prescription dermatology market. This involved building a direct sales force and launching a portfolio of HOCl-based products targeting conditions like eczema, acne, and scarring.

While this strategic shift drove substantial top-line growth in the U.S. dermatology business, the company encountered challenges related to gross-to-net revenue realization, impacted by factors like insurance deductible resets and patient rebate usage. In response, Sonoma implemented tactics to better manage these dynamics, including exploring mail-order pharmacy programs to reduce retail substitution and improve rebate control, and focusing sales efforts on patients with favorable insurance coverage.

Building on this strategic foundation, the past year, particularly fiscal year 2025, has been marked by a series of initiatives aimed at strengthening the company's commercial position and expanding its reach. Sonoma successfully navigated the complex transition of its commercialized products in Europe to the new EU Medical Device Regulation (MDR), a significant regulatory hurdle. Concurrently, it secured extensive regulatory clearances in the United Kingdom from the MHRA, paving the way for the launch of its acne products through a major UK health and beauty retailer with over 1200 stores.

In the United States, Sonoma relaunched its core prescription eye care and dermatology products in December 2024, signaling a renewed push in these key markets. Strategic distribution partnerships have also been a focus, with new agreements announced with Medline Industries for U.S. wound care distribution (expanded to Canada and OTC in October 2024) and WellSpring Pharmaceutical for U.S. retail sales of Microcyn-based products (expanded in March and June 2025). These partnerships are critical to leveraging larger, established networks to drive product penetration and revenue growth.

Business Channels and Performance

Sonoma operates across several distinct business channels, all underpinned by its HOCl technology:

• Dermatology: This remains a key focus area. Products target a range of conditions, from acne and eczema to scar management and post-procedure care. The relaunch of prescription and office dispense products in the U.S. in late 2024, alongside the launch of new products like Lumacyn Clarifying Mist and Podiacyn, indicates a multi-pronged approach to capture market share. International efforts continue through distributors in Europe and Asia.
• First Aid and Wound Care: Offering solutions for acute and chronic wounds, burns, and surgical irrigation. The expansion of the Negative Pressure Wound Therapy Solution line and the new Medline distribution agreement are central to growth in this channel.
• Animal Health Care: Leveraging HOCl for topical animal wound and skin care. Partnerships with Compana Pet Brands in the U.S./Canada and Petagon in Asia/Europe drive sales in this segment.
• Eye Care, Oral/Dental/Nasal Care, Podiatry, and Surface Disinfectants: These channels represent further applications of the HOCl technology, contributing to revenue through direct sales and international distribution partners.

Financially, the company demonstrated notable progress in the fiscal year ended March 31, 2025. Total revenue increased by 12% to $14.29 million, up from $12.74 million in the prior year. This growth was primarily driven by strong performance in Europe (up 15.5% to $5.52 million) and Latin America (up 71.6% to $2.96 million), the latter attributed mainly to increased manufacturing orders. U.S. revenue, however, saw a decrease of 14.7% to $2.61 million, primarily due to fluctuations in demand for OTC animal health products. Asia and Rest of World revenues remained relatively stable.

Gross profit kept pace with revenue growth, increasing by 15% to $5.47 million, maintaining a consistent gross profit margin of 38% compared to 37% in the prior year. Operating expenses saw a slight decrease, with R&D down 3% to $1.81 million and SG&A down 3% to $7.36 million, reflecting ongoing cost containment efforts. The net loss for FY 2025 improved significantly, decreasing by 29% to $3.46 million from $4.83 million in FY 2024. The EBITDA loss also improved by 17% in FY 2025 compared to FY 2024. This improvement was aided by an increase in other income/expense, net, driven by favorable exchange rate fluctuations and the recognition of employee retention credits.

Competitive Landscape and Positioning

Sonoma operates in highly competitive global markets across its various channels. In dermatology and wound care, it faces competition from a wide array of products, including established prescription drugs like corticosteroids and antibiotics, as well as advanced wound care technologies and traditional antiseptics. Larger pharmaceutical and medical device companies such as Perrigo and 3M Company, along with niche players like NovaBay Pharmaceuticals (NBY), are key rivals.

SNOA's core competitive advantage lies in its proprietary, stable HOCl technology. While some competitors like NBY also offer HOCl-based products, Sonoma emphasizes the superior stability and consistent effectiveness of its formulations. This technological edge provides tangible benefits, such as rapid, broad-spectrum antimicrobial action without contributing to antibiotic resistance, and a strong safety profile that allows for use on sensitive tissues and as an adjunct to other treatments where side effects are a concern. This differentiation supports a strategy focused on premium positioning, particularly in the prescription dermatology market.

However, Sonoma faces significant competitive disadvantages, primarily related to scale and financial resources. Larger competitors like PRGO and MMM possess extensive name recognition, established relationships with healthcare professionals and payors, vast distribution networks, and significantly greater financial capacity for R&D, marketing, and acquisitions. These advantages allow them to offer broader product lines, potentially bundle products, and exert pricing pressure or offer rebates that can challenge smaller players.

Sonoma's strategy to counter these disadvantages involves focusing on its technological niche, seeking regulatory clearances for specific, differentiated indications, building targeted sales forces (like the historical U.S. derm team), and leveraging partnerships with larger distributors (Medline, WellSpring) to access wider markets without incurring the full cost of building those channels internally. While Sonoma's gross margins in its core U.S. businesses are generally high (historically cited at 80%+), its overall profitability lags significantly behind larger, diversified competitors like PRGO and MMM, which benefit from economies of scale and established market positions. Sonoma's ability to capture market share and improve its financial standing depends heavily on effectively communicating the unique benefits of its HOCl technology and executing its partnership and direct sales strategies to overcome the scale advantages of its rivals.

Outlook and Strategic Trajectory

Sonoma's outlook is centered on leveraging its recent regulatory successes and strategic partnerships to drive continued revenue growth and make further progress towards profitability. The successful EU MDR transition and UK MHRA clearances provide a stable base and expansion opportunities in key international markets. The new distribution agreements with Medline and WellSpring are expected to enhance market access and sales volume in the critical U.S. market, particularly for wound care and retail products. The relaunch of core U.S. prescription products signals a renewed focus on driving growth through its direct and office dispense channels.

While the company does not provide specific forward-looking revenue guidance, the stated focus on increasing revenues and continuing progress towards profitability remains the overarching goal. Management commentary has historically indicated that achieving profitability would require reaching an annualized revenue run rate in the $26 million range, significantly higher than the current $14.29 million. The timing of reaching this goal is dependent on the successful execution of its growth strategies across its diverse channels, particularly the rapid growth of its higher-margin dermatology business.

Cost containment remains an important aspect of the strategy, with ongoing efforts to manage operating expenses. The company expects to recognize approximately $350,000 in income related to employee retention credits in fiscal year 2026, which will provide a modest boost to its financial results. Capital expenditures are expected to be non-material in FY 2026, suggesting a focus on optimizing existing manufacturing capabilities in Mexico rather than significant expansion.

The strategic trajectory involves continuing to seek new regulatory clearances, developing its active pipeline, and expanding its international presence through partners. The evaluation of additional studies for certain international products to meet EU MDR requirements highlights the ongoing effort to maintain and expand market access. The success of these initiatives, coupled with effective management of its distribution channels and cost structure, will be crucial in translating the potential of its HOCl technology into sustained financial improvement and ultimately, profitability.

Risks and Challenges

Despite the positive momentum in revenue growth and loss reduction in FY 2025, Sonoma faces significant risks that could impact its future performance and investment thesis.

• Going Concern Uncertainty: The company's history of net losses and accumulated deficit, coupled with the need for future capital raises to fund operations and growth initiatives, casts substantial doubt on its ability to continue as a going concern. There is no assurance that necessary financing will be available on favorable terms, if at all.

• Dependence on Partners and Key Customers: A significant portion of revenue relies on third-party distributors and a small number of key customers. The loss of a major customer or the failure of partners to effectively market and distribute products could severely impact revenues.
• Regulatory Risks: The company is subject to extensive and evolving regulations globally. Delays or failures in obtaining new clearances (like the potential impact of the proposed FDA rule on HOCl classification), maintaining existing approvals (EU MDR compliance), or complying with manufacturing and promotional regulations could restrict market access or lead to costly enforcement actions and recalls.
• Manufacturing and Supply Chain: All products are manufactured at a single facility in Mexico. Difficulties in manufacturing processes, quality control, or obtaining raw materials could lead to production delays, lot failures, or inability to meet demand.
• Intellectual Property: Protecting its proprietary HOCl technology through patents, trademarks, and trade secrets is critical. Inability to maintain protection or facing infringement claims could erode its competitive advantage.
• Competitive Pressures: Operating against larger, better-resourced competitors with established market positions, broader product lines, and greater financial power for pricing and marketing poses a continuous challenge to market share growth and profitability.
• Reimbursement and Market Acceptance: Commercial success, particularly for prescription products, depends on adequate coverage and reimbursement from third-party payors. Increasing cost containment measures and patient price sensitivity can impact demand and net revenue realization.
• International Operations and Currency Risk: A majority of revenue is generated outside the U.S., exposing the company to risks from political/economic instability, changes in foreign regulations, and adverse foreign currency exchange rate fluctuations.
• Mexican Tax Liability: The substantial intercompany debt and related accrued interest and technical assistance payments owed by the Mexican subsidiary, along with complex Mexican tax laws preventing interest deduction and limiting U.S. foreign tax credits, represent a significant potential tax liability due in 2027. While management believes assets are sufficient, this poses a material financial risk.

Conclusion

Sonoma Pharmaceuticals presents an investment case centered on its differentiated, stabilized HOCl technology and a strategic pivot towards higher-margin markets like U.S. dermatology, complemented by a global distribution network. The fiscal year 2025 results, showing solid revenue growth and a notable reduction in net and EBITDA losses, provide evidence that the company's strategy to increase sales and control costs is yielding positive results. Recent regulatory successes in Europe and the UK, coupled with new distribution partnerships in the U.S., lay a foundation for potential future growth and improved commercial execution.

However, the path to sustained profitability remains challenging. The company's history of losses and ongoing need for external financing, highlighted by the going concern disclosure, underscore the significant financial hurdles ahead. Navigating complex international tax obligations and competing effectively against larger, more financially powerful rivals will require continued strategic discipline and successful operational execution. While the unique properties of its HOCl technology offer a competitive moat, translating this into consistent, profitable growth at scale is the critical task for Sonoma Pharmaceuticals. Investors should closely monitor the company's ability to execute on its commercial partnerships, achieve further regulatory milestones, manage its cost structure, and secure necessary funding to assess its long-term viability and potential.