Executive Summary / Key Takeaways

• Sonoma Pharmaceuticals is leveraging its proprietary stabilized hypochlorous acid (HOCl) technology to drive significant revenue growth, particularly in the U.S. dermatology market, with recent quarterly revenues reaching a historical high of $5.6 million.
• The company's strategic pivot to a direct sales force in prescription dermatology, coupled with innovative distribution channels like mail-order pharmacies, is effectively mitigating "gross to net" challenges and enhancing profitability.
• HOCl's unique mechanism of action, offering anti-inflammatory and anti-infective properties without resistance issues, provides a strong competitive moat against older, less differentiated treatments in large addressable markets like acne and wound care.
• Despite a history of losses and a "going concern" warning, management's focus on cost control, strategic partnerships, and a clear path to an estimated $26 million annualized revenue run rate at profitability outlines a tangible goal for investors.
• Key risks include reliance on a few major customers, foreign currency fluctuations, and a substantial Mexico tax liability due in 2027, alongside the ongoing need for capital to sustain growth.

The Unseen Revolution: Sonoma's HOCl Core

Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA) stands at the forefront of a quiet revolution in healthcare, centered on its proprietary stabilized hypochlorous acid (HOCl) technology. Incorporated in 1999 and reincorporated in Delaware in 2006, Sonoma has evolved into a global healthcare leader, developing and producing HOCl products for a diverse range of applications, including wound care, eye care, dermatological conditions, podiatry, animal health, and non-toxic disinfectants. This foundational technology is the bedrock of Sonoma's strategy, offering clinically proven solutions that reduce itch, pain, scarring, and irritation safely, without damaging healthy tissue.

The company's strategic journey took a decisive turn by March 2014, when management committed to expanding its footprint in the prescription dermatology market through a direct sales force. This pivot was a response to the lucrative nature of the U.S. dermatology market and aimed to transition Sonoma from a company with predominantly international, lower-margin revenue to one with a higher concentration of U.S. revenue and attractive prescription dermatology margins. This strategic shift now underpins Sonoma's growth trajectory and its ambition to achieve sustained profitability.

The HOCl Advantage: A Technological Moat

At the heart of Sonoma's investment thesis lies its core technological differentiator: stabilized hypochlorous acid (HOCl). This active ingredient is a natural component of the innate immune system, formed and released by macrophages during phagocytosis. Sonoma's expertise lies in its ability to stabilize HOCl, creating products that are both highly effective and remarkably safe. The company's HOCl products are unique, combining anti-inflammatory and anti-infective properties that promote healing without inducing resistance, a critical advantage in an era of growing antimicrobial resistance.

The tangible benefits of Sonoma's HOCl technology are evident across its product portfolio. For instance, the Epicyn Antimicrobial Facial Cleanser, targeting the acne market, has demonstrated no resistance issues due to HOCl's unique mechanism of action, positioning it as a potentially superior alternative to older treatments like benzoyl peroxide and sulfacetamide, which are associated with side effects and resistance concerns. In wound care, Sonoma's HOCl products are more stable than similar market offerings, maintaining higher levels of hypochlorous acid throughout their shelf life. Furthermore, the company's Levicyn gel, indicated for atopic dermatitis, offers a compelling financial advantage, costing approximately $1.50 per gram compared to generic Clobetasol at $8-$8.50 per gram or newer non-steroidal options at $10-$13 per gram. This cost-effectiveness, combined with superior safety and efficacy, forms a powerful argument for insurance carriers and patients alike. Ceramax, another key product, boasts the highest concentration of ceramides, fatty acids, and cholesterol on the market, directly addressing the disrupted skin barrier common in inflammatory skin diseases.

Sonoma's commitment to innovation extends to its research and development initiatives. The company is actively pursuing an expanded FDA indication for its Loyon product to include psoriasis, leveraging compelling clinical data from its European sales. Recent R&D efforts have also led to the expansion of the Microcyn Negative Pressure Wound Therapy Solution product line and the launch of an intraoperative pulse lavage irrigation treatment in the U.S. These initiatives aim to broaden the application of HOCl technology, enhance product performance, and capture new market segments, directly contributing to Sonoma's competitive moat and long-term growth strategy.

Strategic Execution and Operational Achievements

Sonoma's strategic pivot to dermatology has been meticulously executed. The company expanded its direct sales force from an initial 10 representatives to 30 sales reps and five managers, creating an experienced national dermatology sales team. This expansion was partially funded by the divestiture of Latin American business assets, demonstrating a disciplined approach to capital allocation.

A significant operational challenge for Sonoma, akin to many U.S. pharmaceutical companies, has been "gross to net issues" stemming from a complex managed care environment and high patient rebate usage, particularly exacerbated by annual insurance deductible resets. To counter this, Sonoma implemented a multi-pronged strategy:

• Insurance Reimbursement Advocacy: Engaging consultants to make financial and clinical arguments to insurance carriers, highlighting the cost-effectiveness and benefits of its products.
• Mail-Order Prescription Program: Establishing a direct-to-patient mail-order delivery service to reduce product substitutions at retail pharmacies and gain better control over rebate costs. This program rapidly scaled, accounting for over 40% of unit sales by September 2018, with a target of 60% of U.S. prescriptions by the end of 2018. This initiative directly addresses the issue of wholesalers managing inventory levels without the company's input, which previously led to discrepancies between prescriptions filled and units shipped.
• Sales Force Optimization: Refining the sales force strategy to target doctors and patients with favorable insurance coverage, ensuring a focus on profitable prescriptions.

These operational adjustments have been critical in improving U.S. dermatology net profitability.

Beyond the U.S., Sonoma has forged strategic international partnerships. A notable collaboration is with U.SK, a division of NC Group, the largest pharmaceutical company in Brazil, for the commercialization of seven dermatology products. This partnership provides access to U.SK's extensive sales force of over 70 representatives calling on 7,000 dermatologists in Brazil, promising significant revenue growth. Other key alliances include a distribution agreement with Medline Industries, LP, for wound care products in the U.S. and Canada, and a Master Supply Agreement with WellSpring Pharmaceutical Corporation for Microcyn-based products in large U.S. retail chains. The company also expanded its regulatory footprint by registering its manufacturing facility and listing a Microcyn-based facial spray under the FDA's MoCRA in October 2025, enabling broader commercialization of cosmetic products in the U.S.

Financial Performance and Path to Profitability

Sonoma Pharmaceuticals has demonstrated significant top-line growth, with recent financial results highlighting the effectiveness of its strategic initiatives. For the three months ended September 30, 2025, total revenue reached a historical high of $5.60 million, marking a substantial 57% increase compared to the same period in the prior year. Similarly, for the six months ended September 30, 2025, total revenue grew by 38% year-over-year to $9.62 million. This growth was broadly distributed, with U.S. revenue surging by 115% for the quarter and 86% for the six-month period, European revenue increasing by 43% and 30% respectively, and Asian revenue up by 36% and 37%.

Gross profit also saw healthy increases, rising by 56% to $2.12 million for the quarter and 34% to $3.58 million for the six months ended September 30, 2025, driven by increased revenue and an improved product mix. The gross profit margin for the quarter was 38%, and 37% for the six-month period. Despite this robust revenue growth, the company reported a net loss of $534,000 for the quarter and $1.77 million for the six months ended September 30, 2025. The accumulated deficit stood at $199.58 million as of September 30, 2025.

Operating expenses reflect the company's investment in growth and product development. Research and development expenses increased due to efforts supporting new product releases, while selling, general, and administrative expenses rose with ongoing initiatives to boost revenues across all regions. Other income, net, for the six months ended September 30, 2025, included $323,000 from employee retention credits, partially offsetting exchange rate fluctuations.

Liquidity remains a critical focus. As of September 30, 2025, cash and cash equivalents were $3.04 million, down from $5.37 million at March 31, 2025.

Net cash used in operating activities for the six months ended September 30, 2025, was $2.65 million. The company has financed operations through existing cash, proceeds from common stock sales (including $170,000 net in October 2025), and employee retention credits. Management acknowledges "substantial doubt about the Company’s ability to continue as a going concern" due to its history of losses and accumulated deficit, indicating the ongoing need for additional capital. However, management believes it has access to various capital resources and is actively seeking new institutional investors. The company's financial goal is to achieve EBITDA profitability, with an estimated annualized revenue run rate of $26 million at that point.

Competitive Landscape and Positioning

Sonoma Pharmaceuticals operates in a competitive healthcare landscape, vying with larger, diversified players such as Johnson & Johnson (JNJ), 3M Company (MMM), AbbVie (ABBV), and Smith & Nephew (SN). These industry giants possess extensive distribution networks, vast R&D budgets, and established market dominance. Sonoma, in contrast, is a niche player, leveraging its specialized HOCl technology to carve out a distinct position.

Sonoma's competitive advantage is rooted in its HOCl technology, which offers superior antimicrobial properties and a favorable safety profile compared to many alternatives. For instance, in the acne market, Epicyn's HOCl solution presents a non-resistance alternative to older, side-effect-prone treatments. In wound care, Sonoma's products are designed for expedited healing and pathogen targeting, potentially offering better outcomes in chronic wounds than some traditional dressings. The company's strategy of offering high-efficacy, non-steroidal, and often more affordable solutions, such as Levicyn gel, provides a compelling value proposition, particularly in cost-sensitive segments.

However, Sonoma faces inherent disadvantages due to its smaller scale. This can lead to higher operational costs and limits its market reach compared to its larger rivals. [Competitive Landscape Analysis] The company's "gross to net issues" and lack of control over wholesaler inventory levels highlight vulnerabilities in its distribution model. Sonoma's strategic response, including the shift to mail-order pharmacies, directly addresses these operational inefficiencies and aims to mitigate the pricing power and broad distribution advantages of larger competitors. While direct quantitative comparisons of market share with all niche competitors are challenging to ascertain, Sonoma's consistent growth in prescription units and dollars, coupled with its technological differentiation, suggests effective penetration in its targeted segments.

Outlook and Risks

Sonoma's outlook is firmly focused on achieving EBITDA profitability, driven by continued revenue growth and disciplined cost management. Management anticipates sustained growth in sales representative productivity, bolstered by new product launches like Epicyn in the U.S. and Gramacyn in Brazil. The animal healthcare and acute care businesses are also expected to contribute to this growth. Cash operating expenses are projected to remain flat to down, ranging from $4.3 million to $4.6 million quarterly, excluding the June quarter, which is crucial for reducing EBITDA losses.

The company is actively pursuing new product approvals and expanded indications, such as for Loyon in psoriasis, which could unlock significant market opportunities. Strategic partnerships, like the one with U.SK in Brazil, are expected to be key drivers of international revenue. The success of the mail-order prescription program is also a critical assumption, with expectations for it to handle a significant portion of U.S. prescriptions.

Despite the positive outlook, several risks warrant investor attention. The "going concern" warning, stemming from a history of losses and a substantial accumulated deficit, underscores the ongoing need for capital. The company's reliance on a few key customers for a significant portion of its revenue presents a concentration risk. Fluctuations in foreign currency exchange rates, particularly for the Mexican Peso and the Euro, introduce unpredictability. Furthermore, a substantial Mexico tax liability due in 2027 poses a financial obligation, though management believes it has sufficient assets to cover it. The ability to secure additional capital on commercially acceptable terms, especially if the U.S. economic climate deteriorates, remains a key uncertainty.

Conclusion

Sonoma Pharmaceuticals is a company in transition, leveraging its unique stabilized HOCl technology to establish a strong foothold in specialized healthcare markets, particularly dermatology. The strategic shift towards a direct sales force, coupled with innovative distribution and a robust product pipeline, is yielding tangible results in revenue growth and improving operational efficiency. While the company faces the inherent challenges of a smaller player in a competitive landscape and the ongoing need to achieve sustained profitability, its technological differentiation, strategic partnerships, and focused execution provide a compelling narrative for long-term investors. The path to an estimated $26 million annualized revenue run rate at profitability is clear, contingent on continued operational discipline, successful product launches, and effective capital management. Sonoma's journey is a testament to the power of specialized innovation in carving out a valuable niche within the broader healthcare industry.