Sonoma Pharmaceuticals(SNOA) - 2025 Q4 - Annual Report

Part I Business Sonoma Pharmaceuticals develops and produces stabilized hypochlorous acid (HOCl) products for diverse healthcare applications, expanding global distribution and securing regulatory approvals to drive revenue - The company's core strategy is to work with partners in the United States and globally to market and distribute its products, which are sold in over 55 countries[21] - Key business channels include Dermatology, First Aid and Wound Care, Eye Care, Oral/Dental/Nasal Care, Podiatry, Animal Health, and Surface Disinfectants[22][30][35][37][39][41][44] - In August 2024, Sonoma entered a five-year distribution agreement with Medline Industries, LP for its wound care products in the U.S., later expanded to include Canada and OTC products[34] - The company partners with Compana Pet Brands for animal health products in the U.S. and Canada, and with Petagon for Asian and European markets[42][43] - The company is a global healthcare leader focused on developing and producing stabilized hypochlorous acid (HOCl) products for a wide range of applications[17] - Sonoma's business strategy involves selling products directly and through partners in over 55 countries, with a focus on expanding its distribution network and customer base[18][21] - Recent business updates include new FDA 510(k) clearances, expanded distribution agreements with Medline Industries and WellSpring Pharmaceutical, and the successful transition of European products to the new EU Medical Device Regulation (MDR)[23] - All products are manufactured at the company's facility in Zapopan, Mexico, which is certified under U.S. cGMP, ISO 13485, and Mexican Ministry of Health standards[75] Business Channels and Products Sonoma markets its HOCl-based products across diverse healthcare channels, primarily through partnerships for U.S. and international distribution Research and Development Research and development expenses, consisting mainly of clinical studies, personnel, and regulatory services, were slightly down in fiscal year 2025 compared to 2024 R&D Expense Comparison | Fiscal Year | R&D Expense | | :--- | :--- | | 2025 | $1.814 million | | 2024 | $1.871 million | Regulatory Approvals and Competition Sonoma holds multiple U.S. FDA and EU regulatory approvals for its HOCl products, competing with larger firms by leveraging the superior stability of its solutions - The company has obtained 22 U.S. FDA 510(k) clearances for its products as medical devices[78] - On January 29, 2025, Sonoma received an updated CE certificate under the new EU Medical Devices Regulation, covering all its commercialized products in Europe[79] - The company competes with large, well-established companies in dermatology, wound care, and other markets that have advantages such as greater name recognition, established distribution networks, and larger financial resources[92][96] - Sonoma believes its HOCl-based solutions are among the most stable available, which provides a competitive advantage over other HOCl products that may become unstable over short periods[91] Government Regulation The company's products are extensively regulated by the FDA in the U.S. and international authorities, requiring compliance with medical device regulations and healthcare laws - The company has received 22 510(k) clearances for its products as medical devices, which are classified as Class I, II, or III depending on risk[93][94] - A proposed FDA rule issued on November 30, 2023, may classify wound dressings with antimicrobials like HOCl into Class II, which would require new 510(k) applications and compliance with special controls[99][137] - In the EU, the company's products are classified as medical devices and must comply with the Medical Devices Regulation (MDR) to affix the CE marking for sale in the European Economic Area. The company has successfully transitioned its commercialized products to the new MDR[113][115] - The company is subject to various U.S. healthcare laws, including the Anti-Kickback Statute, False Claims Act, and HIPAA, which regulate financial arrangements with healthcare providers and protect patient information[106][108][109][110] Risk Factors The company faces significant risks including ongoing net losses, going concern doubts, reliance on key distributors, and international operational exposures to foreign exchange and regulatory challenges Risks Related to Our Business Key business risks include a history of financial losses, a going concern warning, heavy dependence on key customers and international operations, and challenges with Mexican tax laws - The company has a history of losses, with a net loss of $3.5 million in FY2025 and an accumulated deficit of $197.8 million. The audited financial statements express substantial doubt about its ability to continue as a going concern[122] - The company relies heavily on key customers. In FY2025, Customer B and Customer C represented 21% and 18% of net revenues, respectively. In FY2024, Customers A, B, and C represented 17%, 15%, and 14%, respectively[130] - A majority of business is conducted internationally, with approximately 82% of total revenue in FY2025 generated from sales outside the United States, exposing the company to various international risks[131] - The company faces risks related to Mexican tax law, which prevents the deduction of intercompany interest expense and requires withholding tax on payments. As of March 31, 2025, its Mexican subsidiary owes approximately $45.9 million in principal, technical assistance payments, and accrued interest to the parent company[127] Risks Related to Our Common Stock Risks for common stock include price volatility, impact of operating results, anti-takeover provisions, potential dilution from future issuances, and delisting risk from Nasdaq non-compliance - The trading price of the common stock is volatile and depends on factors like operating results, financial situation, and market conditions[187] - Anti-takeover provisions, such as the ability of the Board to issue preferred stock without stockholder approval and limitations on calling special meetings, may make a takeover or change in management difficult[190][194] - Future issuance of capital stock to raise funds will result in dilution to existing stockholders. The company is authorized to issue up to 50 million shares of common stock[192] - Failure to maintain compliance with Nasdaq's continued listing requirements, such as the minimum bid price, could result in the delisting of the common stock[196] Unresolved Staff Comments Not applicable. The company has no unresolved staff comments - Not Applicable[197] Cybersecurity The company manages cybersecurity risks through management assessments, an outside IT consultant, and reliance on established third-party software providers, with active Board oversight and no material past incidents - Cybersecurity risk management involves assessments by management, an outside consultant, and secure third-party software[198] - The Board of Directors, as a whole, oversees the company's cybersecurity risks, with management keeping them apprised of threats and mitigation strategies[200] - The company is not aware of any cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[199] Properties As of March 31, 2025, Sonoma Pharmaceuticals leases a corporate office in Boulder, Colorado, and a manufacturing facility and warehouse space in Zapopan, Mexico, which management believes are adequate for the company's needs for at least the next 12 months Leased Properties as of March 31, 2025 | Location | Purpose | Rent per month | | :--- | :--- | :--- | | Boulder, CO | Principal executive office | USD 3,680 | | Zapopan, Mexico | Office, manufacturing | MXN 209,811 | | Zapopan, Mexico | Warehouse | MXN 213,625 | Legal Proceedings The company may be involved in legal matters in the ordinary course of business, which management currently believes are insignificant and not expected to have a material adverse effect on the company's business or financial condition - The company may be involved in ordinary course legal matters, but management currently considers them insignificant[202] Mine Safety Disclosures Not applicable. The company has no mine safety disclosures - Not applicable[203] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on The Nasdaq Capital Market under the symbol "SNOA", with approximately 61 holders of record as of June 10, 2025, and no intention to pay cash dividends in the foreseeable future - Common stock is traded on The Nasdaq Capital Market under the symbol "SNOA"[205] - As of June 10, 2025, there were approximately 61 holders of record of the common stock[206] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[207] Selected Financial Data As a smaller reporting company, Sonoma Pharmaceuticals has elected scaled disclosure and is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide information for this item[210] Management's Discussion and Analysis of Financial Condition and Results of Operations For FY2025, total revenue increased 12% to $14.3 million, driven by international growth, leading to a narrowed net loss and reduced operating cash outflow, despite ongoing going concern doubts Results of Continuing Operations In FY2025, total revenue grew 12% to $14.3 million, driven by strong international sales offsetting U.S. decline, with gross profit increasing and operating expenses decreasing, leading to an improved loss from operations Revenue by Geographic Region (in thousands) | Region | FY 2025 | FY 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | United States | $2,611 | $3,058 | $(447) | (15%) | | Europe | $5,523 | $4,781 | $742 | 16% | | Latin America | $2,962 | $1,726 | $1,236 | 72% | | Asia | $2,317 | $2,298 | $19 | 1% | | Rest of the World | $875 | $872 | $3 | 0% | | Total | $14,288 | $12,735 | $1,553 | 12% | Gross Profit Analysis (in thousands) | Metric | FY 2025 | FY 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenues | $8,823 | $7,990 | $883 | 10% | | Gross Profit | $5,465 | $4,745 | $720 | 15% | | Gross Margin | 38% | 37% | - | - | - Selling, General and Administrative (SG&A) expenses decreased by 3% to $7.36 million in FY2025 from $7.58 million in FY2024, due to ongoing cost containment efforts[222] Net Loss and EPS | Metric | FY 2025 | FY 2024 | | :--- | :--- | | Net Loss (in thousands) | $(3,457) | $(4,835) | | Net Loss per Share | $(2.79) | $(10.63) | Liquidity and Capital Resources As of March 31, 2025, the company had $5.4 million in cash and $8.6 million in working capital, with reduced operating cash outflow, but its history of losses raises substantial doubt about its going concern ability, necessitating future capital raises Cash and Working Capital (in thousands) | Metric | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,374 | $3,128 | | Working capital | $8,552 | $8,829 | Summary of Cash Flows (in thousands) | Activity | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Net cash used in Operating | $(88) | $(2,398) | | Net cash used in Investing | $(80) | $(2) | | Net cash provided by Financing | $3,030 | $1,676 | - The company's history of losses and uncertainty about future funding indicate substantial doubt about its ability to continue as a going concern. The financial statements do not include adjustments that might result from this uncertainty[231] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sonoma Pharmaceuticals has elected scaled disclosure and is not required to provide the information for this item - The company is a smaller reporting company and is not required to provide information for this item[239] Consolidated Financial Statements and Supplementary Data The consolidated financial statements for FY2025 and FY2024 are presented, with the auditor's report expressing substantial doubt about the company's going concern ability due to losses and negative cash flows, reflecting decreased total assets and increased total liabilities - The report from the independent registered public accounting firm, Frazier & Deeter, LLC, includes a paragraph expressing substantial doubt about the Company's ability to continue as a going concern[244] Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2025 | March 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $12,648 | $12,548 | | Total Assets | $13,693 | $14,740 | | Total Current Liabilities | $4,096 | $3,719 | | Total Liabilities | $9,282 | $8,603 | | Total Stockholders' Equity | $4,411 | $6,137 | Consolidated Statements of Comprehensive Loss Data (in thousands) | Account | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Revenues | $14,288 | $12,735 | | Gross Profit | $5,465 | $4,745 | | Loss from Operations | $(3,710) | $(4,701) | | Net Loss | $(3,457) | $(4,835) | | Comprehensive Loss | $(5,110) | $(4,140) | - Revenue is disaggregated by product type and geography. In FY2025, Human Care products generated $12.1 million and Animal Care products generated $1.7 million in revenue[363] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[364] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2025, following successful remediation of prior material weaknesses through staffing and process improvements - Management concluded that disclosure controls and procedures were effective as of March 31, 2025[366] - Management concluded that internal control over financial reporting was effective as of March 31, 2025, based on the 2013 COSO framework[367] - The company has taken several remediation measures to address previously identified material weaknesses, including hiring an experienced CFO and Controller, separating duties, and enhancing training. These weaknesses are now considered remediated[368][369] Other Information On June 12, 2025, the Compensation Committee granted 13,500 Restricted Stock Units (RSUs) to each of three executive officers, vesting on the third anniversary or upon a change of control - On June 12, 2025, the Compensation Committee granted 13,500 Restricted Stock Units (RSUs) to each of the CEO, CFO, and another executive officer[371] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance, including the code of business conduct and procedures for nominating directors, is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the registrant's 2025 proxy statement[374] - The company has adopted a Code of Business Conduct applicable to all officers, directors, and employees, which was updated on November 5, 2024[376] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[379] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as matters related to equity compensation plans, is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[380] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[381] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2025 definitive proxy statement - The information required by this item is incorporated by reference from the 2025 Proxy Statement[382] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the report, referencing consolidated financial statements under Item 8 and providing a detailed index of exhibits including corporate governance documents, material contracts, and certifications - The consolidated financial statements are referenced under Item 8 of Part II of the report[385] - A list of exhibits is provided, including the Restated Certificate of Incorporation, Bylaws, material contracts such as distribution agreements with Medline and WellSpring, equity incentive plans, and Sarbanes-Oxley certifications[388][389][390] Form 10-K Summary None. The company did not provide a Form 10-K summary - None[393]