Posts from the ‘Sonoma Pharmaceuticals (SNOA)’ Category

Jul 20

Week 366: The Wishy Washy Portfolio

Portfolio Performance

Thoughts and Review

I’ve done a lot of flip-flopping over the last 6 weeks. I couldn’t get comfortable with certain oil producers, I couldn’t get comfortable with oil servicers and I couldn’t get comfortable with the copper stocks. I also owned and then sold Cameco and Energy Fuels before settling on buying the debentures for Energy Fuels.

These transactions weren’t trades. I don’t really trade in my portfolio. But I often buy into ideas that I am not completely committed to. Having a position clarifies my conviction. If I don’t have it, I’ll sell a few days later.

As it turns out it probably wasn’t a bad idea to step away from these ideas. The oil servicers, which I will talk about below, have done little. Copper stocks, which I talked about here, have done even worse. Cameco has floundered.

What I have added and stuck with over the last 6 weeks is RumbleOn and Smith Micro, both of which I have already talked about, GeoPark, which I’ll talk about another time, and Overstock, which I’ll talk about right now.

Overstock

When I first wrote about blockchain I said I found it interesting because: “it’s a way of dis-embodying trust into technology. The middle man disappears. The skim shrinks. Everyone (other then the middle man) benefits.”

Since that time crypto has gone to the moon and crashed again. While its easiest to base an opinion on the latest bitcoin price, I don’t think that is necessarily correct. I still think the premise of what blockchain promises has value. It just has to find ways of being integrated into applications that have broad usage. If I were to bet, I would say that the current lull in sentiment will pass and that blockchain will come back into vogue in some new form relatively soon.

So let’s talk about Overstock.

I bought the stock two weeks ago after tZero announced that they had received a $100 million letter of intent (LOI) from GSR Capital.

Like most things with Overstock, its a fuzzy data point. First, its an LOI, which doesn’t really mean anything is certain. Juniors on the Canadian venture exchange love to use LOI’s to put out big numbers and generate big hype (coincidentally I will talk about a situation like that shortly!). The deals often don’t amount to anything.

Second, GSR Capital looks a bit sketchy. This post from CoBH kind of makes that point. Of course you can dig in the other direction and find less bearish takes on what GSR is doing.

I’ve always thought of Overstock as a stock that has an asset value with a huge standard deviation. You can create a legitimate case that the stock is worth $30 or $80. There is that much uncertainty about outcomes.

It’s all about buying it at the right place within that band.

Being able to buy the stock in the low $30’s (I got a little at $31, more at $32 and the rest at $33), especially after there was incrementally positive news, seemed like a reasonable proposition to me.

The GSR investment, if it is followed through, represents the first time in a while that something Byrnes has hinted at actually happened. So I’m getting it at the bottom of the band and with a positive data point to boot.

When I sold Overstock in January and February it was because the projections Byrne had made a quarter before were not coming to fruition.

He had said the stock lending platform had billions of inventory and would start making money shortly. But in the tZero disclosures in December there was no mention of the stock platform at all!
He had talked about partners knocking at the door. But all that materialized was Siebert and a couple of other tiny acquisitions.
He talked about the mysterious man in the room and one other big opportunity he had. This turned out to be De Soto, a very interesting idea but something that he himself has said that he only “thinks” can make money.

Byrne also talked at length about the Asian money that was interested in tZero. That was another strike out. Until the GSR investment. Now its not. So something actually panned out.

Its clear that the advanced state of tZero that was described at the end of last year was exaggerated. It also seems likely to me that Byrne was not entirely aware of the state of the software. Witness that the CEO of tZERO was replaced by Saum Noursalehi, who was moved over there to add a “Silicon Valley” mindset to tZero:

But I think this is going to become an innovation game. I think that by putting Saum there, I mean he’s extraordinarily able as an executive anyway, but in terms of managing innovation, Saum and I have a decade’s history of working together on [O lab] And other things that have changed our company and I don’t think anyone I’ve met in New York was going to be able to compete with what I know Saum has in mind.

tZero was supposed to offer a stock lending platform and would be on-loading inventory they had accumulated. That didn’t happen and they are now in the business of licensing it out. The software also probably wasn’t all that functional; on the first quarter call Noursalehi said they were (only now) building out the functionality to allow you to carry the digital locate receipts for intra-day periods. That this wasn’t available in the original software is odd.

They are also only in the process of building out the token lending platform, which is to say there is nothing operational yet (one of the first major red flag I mentioned from the tZERO memorandum last December was that the security token trading system was described as something that still needed to be built!).

Of course the sale of the e-commerce platform, which was supposed to be done by February-March, is ongoing and now more of a “souffle”.

So there are lots of negative spins you can make here. On the other hand they are forging ahead with the tZero platforms, they have over $250 million of cash on the balance sheet and another $320 million from the tZero token offering (if you count GSR and all the executed SAFEs), and the sale of e-comm is still ongoing, so there is the potential for a positive resolution there.

There is also the initiatives to transform e-comm into something that is growing. While these are still in the early stages it seems to be working. So that’s just another probability to add to the list.

Most importantly, at a little over $30 buck a lot less of the positive potential is priced into the stock then at $80.

Look, Overstock is what it is: a stock with a lot of optionality, a lot of uncertainty, operating in an brand new industry that I don’t think any of us know how it will play out in the next 5 years.

So speculators pretend that the price of bitcoin is somehow a proxy for the state of blockchain. It’s probably not. I didn’t buy Overstock as a quick trade to capture a short pop on speculation of GSR. I actually think at $33 it represented a fair value for all the risks and rewards. So I’ll see wait for the next data point how and evaluate from there.

Wanting to Buy Oil Services but can’t

I’m not a trader. When I get into a stock its with the intent of sticking with it for 6, 12 or 18 months or however long I need to in order for the idea to play out.

So when you see me in and out of a stock in a short time frame it usually has nothing to do with trading. Its just indecision.

Such has been the case with the oil services stocks where I’ve been in, out, back in and back out again.

What’s going on? I’m being torn between two sides.

The bull side is simply this: oil is up, growth in production needs to come from the US, and oil servicers should benefit. The stocks are extremely cheap if their businesses are on a growth path.

The bear side is that all of the on-shore servicers are exposed to the Permian, Permian capacity constraints are going to kick in this summer, and volume and pricing of drilling and completion services are going to get squeezed.

I should probably just walk away from the idea. The stocks don’t act well. Considering that this should be a bull market, the action is even worse.

What keeps me interested is just the absolute valuations. Below are 5 companies with average EBITDA multiples for 2018 and 2019 (these prices are from a week or so ago but I don’t think anything has moved much since then so I haven’t updated them).

Seems cheap? That’s what I thought.

But when I buy any of these stocks, all I do is fret about them.

The problem is the Permian. RBN put out a really good piece describing how the infrastructure bottleneck in the Permian is likely to play out, and what the alternatives now. Unfortunately it’s behind a pay wall.

The issue is that there isn’t enough pipeline capacity to get the oil out and new pipeline capacity won’t be finished until the second half of next year. So you have about a year of constrained takeaway.

Source: PLG Consulting

As RBN pointed out the alternatives to pipelines have their own constraints. Rail can only carry as much as the available tankers and loading capacity. This is less than 100 thousand barrels a day.

Trucking is theoretically unlimited but the logistics of bringing in trucks and truckers caps it in reality. A single truck can carry about 180 barrels a day. So for every 10,000 barrels a day of production you need to add 100 to 150 trucks and drivers.

The Permian accounts for about 50% of activity in the United States onshore. As an oil servicing business its hard to avoid the Permian. Exposure of the companies I’ve looked at varies from 30-60%. Solaris has about 60% of their fleet in the Permian.

But just how much of a hit will these companies take? That is the other big question.

According to the company’s themselves, they are insulated. They talk up their long-term contracts, how they are dealing with the stronger operators in the region, and how these operators have secured takeaway capacity and hedged their exposure and thus will be able to keep drilling.

But are they really? I don’t trust them. We won’t really know until the second quarter calls start hitting and they have to fess up about the state of their operation.

So what do you do?

For now I’m back out. I think.

The only exceptions are a couple of non-Permian related servicers that I own. Cathedral Energy, which I don’t believe has as much exposure to the Permian (though they do have some), and Energy Services of America, which is a pipeline builder in the Marcellus/Utica that has a host of their own problems but the Permian is not one of them.

RumbleOn

I was worried that my lead touch was failing me. I am resigned to the fact that I take positions in stocks where I will have to endure months of it doing nothing or going down before it actually begins to move as I suspect it should.

RumbleOn moved as soon as I bought it and before I was even able to get a write-up out.

<sarcasm>Fortunately</sarcasm>, that situation was rectified as the company offered a little over 2 million shares at $6.05.

In retrospect, the entire move to the mid-$7’s and back to $6 was probably bogus. I don’t understand all the in’s and out’s of these share offerings enough to be able to tell you why, but I’ve been held hostage to enough of them to know that this sort of activity seems to be part of the process.

So what do I think of the move to raise cash? I don’t see it as a big deal either way. I had thought they might use their recently created credit facility to bridge the gap to profitability. I figured given the management holdings they’d be reluctant to dilute. But whatever. If the business works the 2 million shares is not going to matter much to where the price goes.

I used the opportunity to add more.

Mission Ready

I have been patiently waiting for 9 months for something to happen with Mission Ready. I haven’t said much (anything?) about the company since I wrote about them last September. That is because essentially nothing has happened.

Nine months with no news (after announcing a massive LOI) is pretty ridiculous. There is a valid argument that I should have walked away. But something about the company made me think its more than just a hyped up press release with nothing behind it. For sure, the stock price has held up incredibly well since September considering that nothing has happened. So I have stuck it out.

Now maybe we get some news? The stock is halted.

Is this the big one? And is the big one a rocket or a bomb? No idea. But I am excited to find out.

Gold Stocks

Back in May when I last talked about the gold stocks I own I wrote:

…these stocks are more of a play on sentiment. I think all I really need on the commodity side is for gold not to crash.

I should have knocked on wood.

That said, the gold stocks I own have held up pretty well. Wesdome is up a lot. Gran Colombia is up a little (albeit it was up a lot and has given back most of those gains). Roxgold is roughly flat, as is Golden Star. Jaguar Mining is down a bit. Overall I’m up even as the price of gold is down over $100.

I still like all of these names. But whereas my original thesis on each name was based on the micro – I simply thought each stock was cheap given its cash flow and exploration prospects, I am actually getting more bullish on the macro. Even as gold has fallen.

This tariff thing is becoming the shit show I thought it would be. I expect further escalation before any agreement.

There are a lot of US based commentators that think other countries will be rational and give in to their demands. I really don’t buy that. I think its got to get worse before that happens.

I’m Canadian. So I am on the other side of the tariffs being introduced. My visceral reaction when I hear of a new tariff being introduced against Canada or I hear Trump make some inaccurate or at least unbalanced comment about Canadian subsidies, is “screw them – I would rather go into a recession than give in to that BS”.

Now you might say that is an irrational response, that it is not reasonable, and point out all the reasons it is wrong. Sure is. Doesn’t matter.

If that’s my response, I bet that is also the response of a lot of other Canadians, and of a lot of other citizens of other countries. We would rather see our government’s stand up for us then be pushed around.

You don’t think that all the other foreign leaders don’t realize that? Look at what Harper just said: that Trudeau is manipulating the NAFTA negotiations because he can gain political points. Maybe, maybe not. It wouldn’t be that surprising. Does Trudeau get more votes next year if he can say he stood up for Canadians or if he says he buckled under because it was the right thing to do? You think the European leaders look stronger if they give into US demands? Same thing for China.

My point is we are all going to stand up for ourselves. It won’t be until we all see (including the US) what it feels like to be sinking in the boat that we reconsider. Right now this is a matter of principle and what is rational is irrelevant.

I expect the trade war to escalate. And gold to eventually start going up.

DropCar, Sonoma

I sold out of both DropCar and Sonoma Pharmaceuticals.

DropCar has been a disaster. When I wrote the stock up I said it was highly speculative, even for me. But I have to admit I didn’t expect it to crash and burn so quickly.

I don’t like selling a stock just because its just dropping. If there is a negative data point that comes out, then sure I’ll dump it in a heart beat. But random drops are frustrating and I often will hold through them.

But the DropCar collapse was too much and I reduced my position in April. That turned out to be a good idea. I sold the rest of the stock after the first quarter conference call. It was just such a bad call.

During the Q&A they were asked about gross margins. They could have provided a long-term speculative answer, talking about how margins are being pressured because of their growth and the drivers they are hiring, and how long term they expect margins to settle in the mid-teens or low twenties.

They didn’t have to be specific, they just had to spin it positively. Instead they basically deferred the question. We aren’t going to talk about that. You can maybe get away with that answer when things are going well, but when you just announced a negative gross margin quarter you just can’t.

Anyways, I sold.

The other stock I sold was Sonoma Pharmaceuticals. Sonoma had what was just a really bad quarter. Sonoma had been growing consistently for a number of quarters and much of my thesis here was simply a continuation of that trend. That didn’t happen.

The problem is if they don’t grow they are going to have to raise cash again. They have a limited run way. The company kind of implied on the call that this was a blip, but it wasn’t enough to convince me with certainty. So I figured I better sell and wait to see what the next quarter brings. If they are back on track, I will add it back. There is still a lot I like about the story.

Portfolio Composition

Click here for the last six weeks of trades. Note that I added Energy Fuel stock to the practice portfolio because I couldn’t add the debentures (a limitation of using the RBC practice portfolio). Also note that Atlantic Coast Financial was taken over and my shares converted but this didn’t happen in the practice portfolio (they just stay halted in the RBC practice portfolio). That’s another change I will have to manually make before the next update.

Apr 5

8 Comments

Sonoma Pharmaceuticals: A Simple Bet on Rising Revenues

Note: I wrote this post up a few days ago but kept postponing the final edit. In the mean time this news came out (this morning). I haven’t really dug into it yet, I’m not entirely sure if this is a brand new product or a gel reformulation of their existing scar treatment product. But anyways, its constructive to the story as they added another product for their sales team to sell.

On to the post.

I’ve had Sonoma Pharmaceuticals on my watchlist for a couple of years now. I hadn’t paid it much attention, but I saw a couple of articles about the stock on Seeking Alpha over the last 6 months (here and here) and they kept me watching the stock. They were interesting, but not compelling enough to buy.

More recently when I saw that Daniel Ward had been accumulating a large position I got more interested.

Still I waited. I saw the company was short of cash and there would probably be a raise coming sooner or later. When that day came, I took a position.

Capitalization

After the capital raise Sonoma has about 6 million shares outstanding. At $4 that gives the company a market capitalization of $24 million.

There are a bunch of warrants and options outstanding but they are well out of the money. There are 1.3 million warrants priced at between $5 and $6.50. There are another 1.4 million stock options priced on average at $12.

The company has no debt and after the recent share offering closes they should have about $13 million of cash.

Burning Cash

Sonoma is not a profitable company yet. They burn cash. They are using about $2.3 million of cash each quarter. With the recent raise they would have enough to get them through 5-6 quarters at the current burn rate.

I think they are going to start using less cash as time goes on. The company has been growing its dermatology revenues like a weed. If this continues then they should close the gap to break even over the next 18-24 months.

Hidden Growth

Sonoma operates 3 segments. Only one of these segments is growing quickly. The growth is hidden by the other two slower growing segments, and by poor comps created by the prior sale of other businesses.

In October 2016 Sonoma sold its Latin American business for $19.5 million. The business made up 30% of revenue at the time.

As part of the agreement, Sonoma agreed to continue manufacturing the products sold until Invekra S.A.P.I. de C.V. of Mexico establishes their own facility. Gross margins on this manufacturing business are only about 6%.

The consequence has been a double whammy. The revenue comps have looked bad because of the revenue loss. And margins looks bad because of the manufacturing agreement.

They also have a lower margin, low growth international business. They sell both dermatology and animal health products through this segment.

To be honest, there isn’t a lot of information on the international business. I know that in general they sell their derm products abroad and the list of countries is long, but I haven’t been able to pin down where sales come from and which products are the drivers.

The international business is expected to grow modestly going forward, in the 5-10% range.

The High Growth US Dermatology Business

Sonoma sells 6 products in its US dermatology segment. The four established products (Ceramax, Mondoxyne, Celacyn and Alevicyn) have shown significant sales growth over the last couple of years.

Overall U.S dermatology has been growing like crazy. Year over year gross revenue (before returns and rebates) was close to 100% in the fourth quarter.

The growth has been due to both price increases and script increases. Below is script growth for each of the 6 products over the last few years.

I’m going to dig in a bit further to each of these products next.

Celacyn

This is a prescription hypochlorous acid-based scar management gel. It softens, flattens and reduces the redness of scars.

Sonoma launched Celacyn in the fall of 2014. There are only two prescription scar treatments on the market. The other product is RECEDO. Sonoma estimates that the market share is about 60/40 in favor of RECEDO right now.

The company has talked about how the scar market is a big market. While I couldn’t find a number for the total addressable market (TAM) applicable to Celacyn, the global scar market is extremely large, at $16 billion and growing at a 10% annual rate.

I also found a quote from the company saying that the addressable market for Celacyn is “62 million scars formed annually”. So the TAM is big.

According to this paper, the scar management market is seeing acquisitions. In March 2017, Hologic Inc., announced the acquisition of Cynosure Inc., to expands its business in medical aesthetic market. The acquisition was at 3.3x sales.

Prescriptions of Celacyn were pretty flat last year. But the company has been putting through price increases which has brought sales up. Based on company data (which I believe comes from teh Symphony database) the average price per script was $200 in Q4 2017 vs $133 in Q4 2016 and $102 in Q1 2016.

According to this blog post, which admittedly is a couple of years old, Celacyn at the time was “the low cost provider compared to competing products sold for wholesale acquisition cost (WAC), or the price paid by the wholesalers, in excess of $200 and ranging up to $800.” Just from a few Google searches, it looks like RECEDO retails right now at $314 per bottle.

So I’m going to say the move to $200 per script is just catching up and the company has saw better leverage to price then volume over the past couple of years.

Ceramax

Ceramax manages skin irrations, rashes, and inflammation. It is FDA approved as a “skin barrier repair product” for eczema and atopic dermatitis.

Sonoma launched Ceramax in May 2016. It was an acquired drug (US License) from the Lipogrid Company of Sweden.

Sales have had a bit of an uneven trajectory. Scripts jumped from 1,908 to 2,382 yoy in the fourth quarter. But in the third quarter sales were down year over year, from 1,410, to 2,12. Still its a new product, and the trend is clearly up.

There has also been price increases. When they launched in the second quarter of 2016 Ceramax, the average price was $225 per script. That has increased to $314 per script in the fourth quarter.

Sonoma seems pretty optimistic about the outlook for Ceramax. In the last call they said:

Ceramax was our fastest seller in December due to several factors. First, Ceramax has the highest concentration of ceramides, fatty acids and cholesterol that our skin craves, on the market today. Second, everyday dermatologists see patients with inflammatory skin diseases and every inflammatory skin disease patient has disrupted skin barrier in some way, shape or form. We think the sky is the limit with this product. Third, we have a great rebate program for Ceramax, meaning, we go out of our way to make it affordable to every patient. And then finally, the winter months in North America bring on winter itch and Ceramax has great clinicals in addressing itch.

To some degree its a seasonal product, so we should expect sales to trend down in the first quarter.

Its tough to get an exact figure on the market size because all the reports are expensive and I’m not paying $4,000, but its easy to glean that ballpark, its a big market. According to one older study I found, globally the market is around $800 million with the US accounting for $600 million of that market. I’ve seen estimates suggesting it could grow to over $2 billion by 2021.

Mondoxyne

Mondoxyne is a prescription oral tetracycline antibiotic used for the treatment of certain bacterial infections, including acne. It works by slowing the growth of bacteria which helps the immune system catch up. The sell it in 50mg, 75mg and 100mg bottles.

Mondoxyne is a cheap alternative to other brands. This post says that Mondoxyne is similarly priced to generics and far below branded products.

Sonoma acquired Mondoxyne in 2015. Since that time they have had a lot of success growing the brand.

Quarterly scripts have increased from 222 in the first quarter of 2016 to 1,733 in the fourth quarter last year. Price growth has been very modest, and prices actually appear to have declined from $595 to $459 sequentially in the fourth quarter. I’m guessing this would be due to mix, selling more 50mg bottles?

Alevicyn

Alevicyn is a prescription hypochlorous acid based atopic dermatitis product line. It reduces itch and pain associated with various skin conditions.

Alevicyn is the their largest revenue product. Revenue was up from $1.1 million to $1.6 million year over year in the fourth quarter, or about 50% growth.

The growth is coming from unit growth, up 17% year over year in Q4, from 4,204 to 4,930, and from price increases. Using Sonoma’s data I estimate that the price per script was $100 in Q2 2016, rising to $150 in Q4 2016 and to $200 in Q4 2017.

Much like Celacyn it appears that the price increases are just catching up to the competition. On the August 2017 call the company said:

“Our price per gram of product is currently well below that of our competitors. For example, Topicort, a solid branded mid-potency topical steroid for the treatment of atopic dermatitis, sells for $4.50 per gram; a comparable generic sells for $2.67 per gram; and our Alevicyn gel sells for $1.11 per gram”

In many cases Alevicyn competes against corticosteroids that go for $100 to $800 per script.

In November and December, the FDA approved expanded antimicrobial language for Alevicyn.

According to this report from Stonegate capital, the addressable market for Alevicyn is between $500-$600 million.

Sebuderm

Sebuderm is a prescription topical gel used as an alternative to corticosteroids for the management of the burning, itching and scaling experienced with seborrhea and seborrheic dermatitis.

Sebuderm was launched just over a year ago and scripts have been growing significantly. In the fourth quarter scripts were 1,206 up from 948 the prior quarter.

There is not a lot on the size of the market, but Sonoma did say that “25% of the general population has seborrheic dermatitis” earlier this year.

Worth noting is that in the same press release Sonoma commented on the products efficacy. They announced the results of a study that showed an improvement in appearance and symptoms “from baseline was 33% at day 14 and 52% at day 28…[and] 62% through day 28.”

Loyon

Loyon is a prescription liquid for managing erythema, itching for seborrhea and for seborrheic dermatitis. They have some pictures in their last presentation showing Loyon being used on peeling skin around the hairline, where it clears it up after about 7 days.

Loyon is the most recent launch. It was launched in September after receiving FDA approval in March.

Loyon can also be used for psoriasis but it isn’t approved yet. They are in the queue requesting approval from the FDA. On the last call they said:

In Europe, it’s currently being sold in Germany and the U.K. for broader indications than we got in the U.S. to start. They have a psoriasis indication in Germany and the U.K. We took their clinical data, got back into the FDA queue and it is very, very compelling clinical data. So we have our fingers crossed that we’ll get that. Bob, are we saying within the next 12 months?

Loyon is already widely used in Europe. They bought the US license for the product from a German company. On the fiscal second quarter call they said that European sales (in Germany in the U.K) are about $10 million. In Europe Loyon is approved for psoriasis. In the US its competing against two older legacy products.

Breakeven

Sonoma does better than average job of explaining what it will take for the company to reach break even. On slide 25 of their February slide deck, they show where they are now on a per salesperson basis and where they need to get to in order to break even.

Increasing the number of prescriptions per sales rep is not as daunting as it appears. Last May CFO Robert Miller said that the more experienced 17 sales reps that had been with company 1-2.5 years did around 815 scripts per quarter.

With new products and extensions added since that time, getting all 30 reps up to 900 scripts per quarter should be an achievable task. At least that’s what I’m betting.

To help growth they have been trying to add a new product or line extensions every six months. In the fourth quarter of 2017 they launched Loyon. In early 2018 they have new line extensions for Ceramax.

The rest of the increase is going to come from price increases and mix improvements. From the above table it looks like Sonoma is betting they can raise the average net per script about 30% from the last quarter’s average.

I’m less certain about how easily they can do this. There is evidence anecdotally that many of their products are cheap compared to the competition. But I have a difficult time knowing when they hit the ceiling on price increases.

Sonoma also provides a detailed rundown of what it will take for company wide break even on the following slide of their presentation.

The key number is the $4.158 million of net revenue. Sonoma grew the US dermatology segment at 78% year over year last quarter. The quarter before that was 53%, and before that was 74%.

Presumably they are going to see growth slow as the initial ramp from the new reps begins to level off. Nevertheless, I am willing to bet they can reach breakeven in about 8 quarters. That would require year over year growth of net revenue from dermatology (assuming no growth outside of derm) of 40% on average.

Conclusion

With a market capitalization of $24 million, cash of $13 million and their derm segment growing at 50-70% I am betting Sonoma has bottomed.

I think that we are inflecting to where derm is big enough to overwhelm the lower growth segments. And where the market starts focusing on this growth more than the cash drain.

I’m also betting that as the company gets closer to break-even, they can get revalued more conventionally on a revenue multiple.

I mentioned above this research paper, which noted that scar management “has been experiencing a number of acquisitions and collaborations”. They point to the acquisition of Cynosure by Hologic, which was acquired at an enterprise value of $1.4 billion, net of cash. This works out to 3.3x sales.

Sonoma trades at 0.6x revenue including cash. Looking at some similarly sized competitors, Novabay Pharmaceuticals trades at 3.3x revenue and grew revenue of their only product, Avenova, at 50% year over year.

Novabay used $3.3 million in the first 9 months of the year.

Novabay seems like a particularly good comparison because the stock moved from $2 to $4 as the company demonstrated growth and began to close the gap to break even. I think Sonoma is in a similar spot to that now.

I have owned Novabay in the past and followed the company for a couple of years now. Using that experience as a roadmap, the trajectory for Sonoma is going to entirely depend on quarterly revenues going forward. If the company can maintain its growth momentum the stock price should do well.

Even tiny competitor Wound Management, which grew revenues 14% year over year in 2017, trades at 1.2x sales.

It will help that analyst estimates for the company are not that aggressive. Revenue for next year is expected to come in at $19 million which is less than 10% overall growth.

For the next quarter (fiscal Q4) the average estimate is $4.49 million. The fiscal fourth quarter is always seasonally down from the previous quarter. Backing out the derm numbers from the first quarter forevast implies expectations of about $1.7 million from dermatology sales. This would be a 41% year over year increase and a 40% sequential decrease.

This doesn’t seem like a high hurdle.

Bottomline Sonoma is a pretty simple bet. Beaten down and bottomed out. Continue the sales momentum and bridge the gap to breakeven. Hopefully if that happens the stock gets revalued closer to 3x revenue.