Sonoma Pharmaceuticals(SNOA) - 2026 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Presents Sonoma Pharmaceuticals' unaudited condensed consolidated financial statements and detailed notes on accounting policies, liquidity, and revenue Item 1. Unaudited Financial Statements Presents Sonoma Pharmaceuticals' unaudited condensed consolidated financial statements and detailed notes on accounting policies, liquidity, and revenue Condensed Consolidated Balance Sheets Total assets increased to $14,594,000 by June 30, 2025, driven by current assets, while liabilities rose, slightly decreasing stockholders' equity Condensed Consolidated Balance Sheets | Metric | June 30, 2025 (Unaudited) | March 31, 2025 | | :-------------------------------- | :-------------------------- | :------------- | | Total Assets | $14,594,000 | $13,693,000 | | Total Liabilities | $10,538,000 | $9,282,000 | | Total Stockholders' Equity | $4,056,000 | $4,411,000 | | Cash and cash equivalents | $3,605,000 | $5,374,000 | | Accounts receivable, net | $2,602,000 | $2,232,000 | | Inventories, net | $3,802,000 | $2,915,000 | | Prepaid expenses and other current assets | $2,868,000 | $1,915,000 | | Accounts payable | $2,046,000 | $953,000 | | Accrued expenses and other current liabilities | $1,836,000 | $2,224,000 | Condensed Consolidated Statements of Comprehensive Loss Net loss increased to $1,241,000 for Q2 2025 despite 18% revenue growth, influenced by higher operating and other expenses Condensed Consolidated Statements of Comprehensive Loss | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $4,015,000 | $3,391,000 | | Cost of revenues | $2,551,000 | $2,085,000 | | Gross profit | $1,464,000 | $1,306,000 | | Total operating expenses | $2,559,000 | $2,479,000 | | Loss from operations | $(1,095,000) | $(1,173,000) | | Net loss | $(1,241,000) | $(1,143,000) | | Net loss per share: basic and diluted | $(0.76) | $(1.34) | | Comprehensive loss | $(435,000) | $(2,024,000) | - Revenues increased by 18% to $4,015,000 for the three months ended June 30, 2025, compared to $3,391,000 for the same period in 2024[10] - Net loss increased to $1,241,000 in Q2 2025 from $1,143,000 in Q2 2024[10] Condensed Consolidated Statements of Cash Flows Net cash and cash equivalents decreased by $1,769,000 in Q2 2025, mainly due to increased cash used in operating and investing activities Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash used in operating activities | $(2,015,000) | $(912,000) | | Net cash used in investing activities | $(106,000) | $(5,000) | | Net cash (used in) provided by financing activities | $(58,000) | $636,000 | | Effect of exchange rate on cash and cash equivalents | $410,000 | $(258,000) | | Net decrease in cash and cash equivalents | $(1,769,000) | $(539,000) | | Cash and cash equivalents, end of period | $3,605,000 | $2,589,000 | - Net cash used in operating activities significantly increased to $2,015,000 in Q2 2025 from $912,000 in Q2 2024, driven by net loss and increases in accounts receivable, inventories, and prepaid expenses[13][97] Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity declined to $4,056,000 by June 30, 2025, primarily due to net loss, partially offset by foreign currency and stock compensation Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Balance, March 31, 2025 | Balance, June 30, 2025 | | :-------------------------------- | :---------------------- | :--------------------- | | Additional Paid-in Capital | $206,593,000 | $206,673,000 | | Accumulated Deficit | $(197,806,000) | $(199,047,000) | | Accumulated Other Comprehensive Loss | $(4,376,000) | $(3,570,000) | | Total Stockholders' Equity | $4,411,000 | $4,056,000 | | Net loss | - | $(1,241,000) | | Foreign currency translation adjustment | - | $806,000 | | Employee stock-based compensation | - | $57,000 | Notes to Condensed Consolidated Financial Statements Provides details on organization, liquidity, accounting policies, and going concern risk, including revenue recognition and inventory valuation Note 1. Organization and Recent Developments Sonoma Pharmaceuticals specializes in HOCl products globally and recently completed a 1-for-20 reverse stock split - Sonoma Pharmaceuticals, Inc. develops and produces stabilized hypochlorous acid (HOCl) products for wound care, eye care, dermatological conditions, podiatry, animal health care, and as non-toxic disinfectants, selling in 55 countries[18] - A 1-for-20 reverse stock split was effective August 29, 2024, reducing common stock outstanding from 21,174,693 to 1,058,447 shares[19] Note 2. Liquidity and Financial Condition Persistent net losses and accumulated deficit raise substantial doubt about the company's ability to continue as a going concern Liquidity and Financial Condition | Metric | June 30, 2025 | March 31, 2025 | | :----------------- | :------------ | :------------- | | Accumulated deficit | $199,047,000 | $197,806,000 | | Working capital | $8,259,000 | $8,552,000 | | Net cash used in operating activities (3 months) | $2,015,000 | $912,000 (for 3 months ended June 30, 2024) | - The company's history of losses and current financial condition indicate substantial doubt about its ability to continue as a going concern within one year[22] Note 3. Summary of Significant Accounting Policies Outlines key accounting policies, including estimates, net loss per share, revenue recognition, inventory valuation, and segment reporting - The company computes basic and diluted net loss per share by dividing net loss by the weighted-average number of common shares outstanding, excluding anti-dilutive securities[24][25] - Revenue is recognized when promised goods or services are transferred to the customer, reflecting the consideration expected in exchange, including direct sales, distributor sales, consignment, and technology licensing[27][28][30][31] - Inventories are stated at the lower of cost (standard cost approximating FIFO) or net realizable value, with provisions for excess and obsolete inventory[35][36] Note 4. Condensed Consolidated Balance Sheet Details inventories, which increased to $3,802,000, and operating leases, which significantly rose due to new facility agreements Inventories, net | Inventories, net | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Raw materials | $1,755,000 | $1,395,000 | | Finished goods | $2,351,000 | $1,818,000 | | Less: allowance for obsolete and excess inventory | $(304,000) | $(298,000) | | Total inventories, net | $3,802,000 | $2,915,000 | Operating Leases | Operating Leases | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Operating lease right-of-use assets | $536,000 | $84,000 | | Operating lease liabilities – current | $96,000 | $58,000 | | Operating lease liabilities – non-current | $440,000 | $27,000 | - The weighted-average remaining lease term for operating leases is 53.3 months, with a weighted-average discount rate of 10.7% as of June 30, 2025[42] Note 5. Commitments and Contingencies Discusses potential legal matters and executive employment agreements, including $1,519,000 in potential severance payments - Potential severance payments to key executives amount to $1,519,000 if triggered, based on aggregated annual salaries of $675,000[44] Note 6. Debt Details a $274,000 note agreement at 7.97% interest, with outstanding principal decreasing to $139,000 by June 30, 2025 Debt Metric | Debt Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Outstanding principal on note | $139,000 | $220,000 | | Interest rate | 7.97% per annum | 7.97% per annum | Note 7. Stock-Based Compensation Stock-based compensation expense decreased to $57,000, with $233,000 in unrecognized costs for stock options as of June 30, 2025 Stock-Based Compensation | Stock-Based Compensation | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Stock-based compensation expense | $57,000 | $107,000 | | Unrecognized compensation costs (stock options) | $233,000 (as of June 30, 2025) | - | | Weighted-average amortization period | 1.33 years | - | Stock Option Activity | Stock Option Activity | Number of Shares | Weighted Average Exercise Price | | :-------------------------------- | :--------------- | :------------------------------ | | Outstanding at April 1, 2025 | 73,081 | $43.27 | | Options granted | 9,000 | $2.85 | | Options exercised | (8,500) | $2.68 | | Options forfeited | (1,074) | $79.15 | | Outstanding at June 30, 2025 | 72,507 | $42.47 | | Exercisable at June 30, 2025 | 39,177 | $73.86 | Restricted Stock Award Activity | Restricted Stock Award Activity | Number of Shares | Weighted Average Award Date Fair Value per Share | | :-------------------------------- | :--------------- | :----------------------------------------------- | | Unvested restricted stock awards outstanding at April 1, 2025 | 45,000 | $2.68 | | Restricted stock awards granted | 60,500 | $2.85 | | Unvested restricted stock awards outstanding at June 30, 2025 | 105,500 | $2.78 | Note 8. Income Taxes The effective tax rate was (0.06)% for Q2 2025, resulting in a $1,000 income tax benefit due to a U.S. valuation allowance - The effective tax rate for the three months ended June 30, 2025, was (0.06)%, primarily due to a valuation allowance against deferred tax assets in the U.S[52][53] Income Tax | Income Tax | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Income tax benefit (expense) | $1,000 | $(146,000) | Note 9. Revenue Disaggregation Total product revenue increased to $4,015,000, with growth in the U.S., Europe, and Asia, but a decline in Latin America Revenue Source | Revenue Source | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Human Care | $3,555,000 | $2,992,000 | | Animal Care | $460,000 | $399,000 | | Total Product | $4,015,000 | $3,391,000 | Geographic Region | Geographic Region | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | United States | $1,005,000 | $642,000 | | Europe | $1,468,000 | $1,288,000 | | Asia | $662,000 | $477,000 | | Latin America | $564,000 | $880,000 | | Rest of the World | $316,000 | $104,000 | | Total | $4,015,000 | $3,391,000 | Note 10. Significant Customer Concentrations Major customers, including Customer C (19%) and Customer B (14%), represent significant concentrations of revenue and accounts receivable Major Customer Revenue (% of net revenue) | Major Customer Revenue (% of net revenue) | For the Three Months Ended June 30, 2025 | For the Three Months Ended June 30, 2024 | | :---------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Customer A | 10% | *% | | Customer B | 14% | 26% | | Customer C | 19% | 18% | Major Customer Accounts Receivable (% of net accounts receivables) | Major Customer Accounts Receivable (% of net accounts receivables) | June 30, 2025 | June 30, 2024 | | :----------------------------------------------------------------- | :------------ | :------------ | | Customer A | *% | 16% | | Customer B | *% | 17% | | Customer C | 14% | 11% | | Customer D | 13% | 17% | Note 11. Subsequent Events Management identified no material subsequent events through the financial statement issuance date - No subsequent events or transactions requiring disclosure were identified through the date the condensed consolidated financial statements were issued[57] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Sonoma Pharmaceuticals' financial condition and operational results for Q2 2025, covering business, revenue, expenses, and liquidity Our Business Sonoma Pharmaceuticals is a global leader in HOCl products for diverse healthcare applications, sold in 55 countries - Sonoma Pharmaceuticals is a global healthcare leader specializing in stabilized hypochlorous acid (HOCl) products for wound care, eye care, dermatological conditions, podiatry, animal health care, and non-toxic disinfectants[61] - The company's products are clinically proven to safely reduce itch, pain, scarring, and irritation without damaging healthy tissue, and are sold in 55 countries[61] Business Channels Leverages HOCl expertise across dermatology, wound care, eye care, animal health, and disinfectants, using direct sales and global partnerships - The company's core market differentiation is based on being the leading developer and producer of stabilized hypochlorous acid (HOCl) solutions, with over 20 years of scientific knowledge and manufacturing experience[62] - In Dermatology, the company relaunched direct sales of prescription and OTC products in the U.S. in December 2024 and January 2024, respectively, and expanded distribution agreements with WellSpring Pharmaceutical Corporation[65][66][67] - For First Aid and Wound Care, new applications like intraoperative pulse lavage irrigation treatment were launched in the U.S. in November 2023, and a distribution agreement with Medline Industries, LP, was established in August 2024, expanding to Canada in October 2024[72][74] - In Surface Disinfectants, Nanocyn received EPA approval for use against COVID-19 in April 2022 and was later added to EPA Lists G and H for other pathogens, also achieving Green Seal Certification[83] Results of Operations Total revenue increased 18% to $4,015,000, with gross profit up 12% but margin down, and mixed trends in operating expenses Revenue Total revenue grew 18% to $4,015,000, driven by strong growth in the U.S., Europe, Asia, and Rest of World, despite Latin America's decline Geographic Revenue | Geographic Region | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | $ Change | % Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | United States | $1,005,000 | $642,000 | $363,000 | 57% | | Europe | $1,468,000 | $1,288,000 | $180,000 | 14% | | Asia | $662,000 | $477,000 | $185,000 | 39% | | Latin America | $564,000 | $880,000 | $(316,000) | (36%) | | Rest of the World | $316,000 | $104,000 | $212,000 | 204% | | Total | $4,015,000 | $3,391,000 | $624,000 | 18% | - The increase in U.S. revenue was primarily due to human health care and over-the-counter animal health care products[85] - Latin America revenue decreased by $316,000 primarily due to timing of customer orders for overflow manufacturing[87] Cost of Revenue and Gross Profit Cost of revenues rose 22% to $2,551,000, increasing gross profit by 12% to $1,464,000, but reducing gross profit margin to 36% Cost of Revenue and Gross Profit | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | $ Change | % Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Cost of Revenues | $2,551,000 | $2,085,000 | $466,000 | 22% | | Cost of Revenue as a % of Revenues | 64% | 61% | - | - | | Gross Profit | $1,464,000 | $1,306,000 | $158,000 | 12% | | Gross Profit as a % of Revenues | 36% | 39% | - | - | - The increase in gross profit was primarily due to increased revenue and overall product mix[88] Research and Development Expense Research and development expenses increased 26% to $594,000, driven by enhanced product development for new releases Research and Development Expense | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | $ Change | % Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Research and Development Expense | $594,000 | $470,000 | $124,000 | 26% | | Research and Development Expense as a % of Revenues | 15% | 14% | - | - | - The increase in R&D expenses was primarily due to increased product development to support new product releases[89] Selling, General and Administrative Expense Selling, general and administrative expenses decreased 2% to $1,965,000, reflecting ongoing cost containment efforts Selling, General and Administrative Expense | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | $ Change | % Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Selling, General and Administrative Expense | $1,965,000 | $2,009,000 | $(44,000) | (2%) | | Selling, General and Administrative Expense as a % of Revenues | 49% | 59% | - | - | - The decline in SG&A expenses was a result of ongoing efforts to contain expenses[90] Other (Expense) Income, net Other (expense) income, net, shifted to a $(147,000) expense, influenced by exchange rates and employee retention credits Other (expense) income, net | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Other (expense) income, net | $(147,000) | $176,000 | - The current period's other expense primarily relates to exchange rate fluctuations, offset by $323,000 in employee retention credits[91] Income Tax Benefit (Expense) An income tax benefit of $1,000 was recorded, a shift from a prior-year expense, due to an increase in Mexico's deferred tax asset Income Tax Benefit (Expense) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Income tax benefit (expense) | $1,000 | $(146,000) | - The income tax benefit in the current period was related to an increase in the Mexico deferred tax asset[92] Net Loss Net loss increased to $1,241,000, but net loss per share improved to $(0.76) due to higher weighted-average shares outstanding Net Loss | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net loss | $(1,241,000) | $(1,143,000) | | Weighted-average shares outstanding: basic and diluted | 1,641,000 | 851,000 | | Net loss per share: basic and diluted | $(0.76) | $(1.34) | Liquidity and Capital Resources Net loss and accumulated deficit persist, with cash and working capital declining, necessitating additional capital for operations Sources of Liquidity Operations have historically been financed by equity sales, revenues, and loans, with recent funding from cash, stock sales, and employee retention credits - Substantially all operations since inception have been financed through sales of equity securities, revenues, loans, and asset sales[95] - Since July 1, 2024, financing has included cash on hand, $2,238,000 from common stock sales, and $619,000 from employee retention credits for 2020 and 2021[96][100] Cash Flows Net cash used in operating activities significantly increased to $2,015,000, while investing and financing activities also shifted to cash usage Cash Flow Activity | Cash Flow Activity | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash used in operating activities | $(2,015,000) | $(912,000) | | Net cash used in investing activities | $(106,000) | $(5,000) | | Net cash (used in) provided by financing activities | $(58,000) | $636,000 | | Net change in cash and cash equivalents | $(1,769,000) | $(539,000) | | Cash and cash equivalents, end of the period | $3,605,000 | $2,589,000 | | Working capital, end of period | $8,259,000 | $8,176,000 | - Net cash used in operating activities increased due to net loss, and increases in accounts receivable ($216,000), inventories ($652,000), and prepaid expenses ($819,000), partially offset by an increase in accounts payable ($1,026,000)[97] - Net cash used in financing activities was $58,000 in Q2 2025, primarily from principal payments on short-term debt, contrasting with $636,000 provided in Q2 2024 from common stock sales[99] Material Trends and Uncertainties Faces uncertainties including customer concentration, foreign currency risk, a substantial Mexico tax liability, and global economic conditions - The company relies on certain key customers for a significant portion of its revenues, which may fluctuate[101] - Exposure to foreign currency devaluation for the Mexico Peso and Euro versus the U.S. dollar poses an unpredictable risk[102] - A substantial Mexico tax liability, including intercompany debt and unpaid technical assistance charges, is due in 2027, though management believes sufficient assets exist to cover it[103] - The recently enacted U.S. tax reform legislation (OBBBA) is anticipated to have an insignificant impact on deferred tax assets, liabilities, and income taxes payable[105] Use of Estimates Financial statements rely on management estimates and assumptions, particularly for deferred tax asset valuation allowances, which may differ from actual results - Significant estimates and assumptions, such as the valuation allowance for deferred tax assets, are required in preparing consolidated financial statements[106] Off-Balance Sheet Transactions The company has no off-balance sheet arrangements with a material effect on its financial condition or liquidity - The company has no off-balance sheet arrangements that are material or reasonably likely to become material[107] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sonoma Pharmaceuticals is exempt from providing quantitative and qualitative market risk disclosures - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[108] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2025, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including CEO and CFO, concluded disclosure controls and procedures were effective as of the reporting period end - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2025[109] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the first quarter of fiscal year 2026 - No material changes in internal control over financial reporting occurred during the first quarter of fiscal year 2026[110] Inherent Limitations on Effectiveness of Controls Control systems provide only reasonable assurance due to inherent limitations, not absolute certainty of objective achievement - Control systems provide only reasonable, not absolute, assurance due to inherent limitations[111] PART II - OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, senior security defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The company may face legal matters, including proprietary technology disputes, which could materially affect financial condition despite current insignificance - The company may be involved in legal matters, including proprietary technology, which management currently deems insignificant but could have a material adverse effect[113] Item 1A. Risk Factors No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended March 31, 2025 - No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended March 31, 2025[114] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were issued during the quarter ended June 30, 2025, or through August 7, 2025 - No unregistered securities were issued during the quarter ended June 30, 2025, and through August 7, 2025[115] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the quarter ended June 30, 2025 - No defaults upon senior securities occurred during the quarter ended June 30, 2025[116] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to Sonoma Pharmaceuticals, Inc - Mine Safety Disclosures are not applicable to the company[117] Item 5. Other Information No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2025 - No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2025[118] Item 6. Exhibits Lists all exhibits filed with Form 10-Q, including organizational documents, equity plans, various agreements, and certifications - The exhibit index includes organizational documents, equity incentive plans, and various agreements such as supply, distribution, and license agreements[120][121][123] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are filed herewith[125] Signatures The report was signed by Amy Trombly, President and CEO, and Jerome Dvonch, CFO, on August 7, 2025 - The report was signed by Amy Trombly, President and CEO, and Jerome Dvonch, CFO, on August 7, 2025[128]