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Golden Star Resources: Betting against a history of disappointment

I have been slow getting to this write-up.  My plan was to write about how Golden Star had drilled a number of holes that extended the depth of their Wassa underground by 180 meters, that this would add a lot of resource to the mine, and that it was not priced into the stock.

But Golden Star beat me to the punch with this news release Friday.  The company announced that they had doubled the inferred resource at Wassa, adding 3.1 million ounces for a total of 5.2 million ounces.

The next step will be further infill drilling to upgrade the resource to measured and indicated, and a preliminary economic assessment of the extensions.

So that took some of the wind out of my sails.   The near-term story I was going to tell was kind-of squashed.  Nevertheless the big picture story is by no means finished.  In fact I think Golden Star is just getting started along a path to credibility.  I’m hopeful that the destination is growth, and a valuation in-line with other gold stocks.

History of Disappointment

Golden Star Resources has always been a very cheap gold stock.  The problem has been that this was well-deserved.

I’ve watched the company on and off for years.   They have always been one of the highest cost producers.  Cash costs typically exceeded $1,000/oz. This is what cash costs and all-in-sustaining costs (AISC) looked like from 2013 to 2015:

These kind of numbers made them bottom quartile in costs.

But that’s changing.  In the last two years Golden Star has gotten their costs down. With the transition to underground operations at both of their mines (Wassa and Prestea), costs are expected to come down even more.  ASIC in 2018 are expected to be between $850-$950/oz:

These new numbers don’t put Golden Star in the high cost bracket any more.  They are in line with the majority of producers.  Here is a brief list of other companies where estimates range from $850-$950/oz AISC or higher for 2018: Acacia Mining, Argonaut Gold , Detour Gold, Eldorado, IAMGold, Kirkland Lake, Klondex, Lea Gold, New Gold, OceanaGold, SEMAFO, Teranaga Gold, …  you get the picture.

While costs are trending towards the average, the valuation has not.  Golden Star trades at less than half the price to cash flow multiple as these other names.  If you start to factor in the potential growth it looks even cheaper.

So why the disconnect?

I think its just years of disappointment.  The market needs a lot of proof before they will re-rate the company.

Wassa and Prestea Underground

The bet here is that things are changing.   Golden Star has two underground mines that are ramping up, a tonne of exploration prospects both within these mines and in the surrounding land base, and the capacity to grow production within their existing asset base using little additional capital.

Golden Star operates two mine complexes, Wassa and Prestea.

Both of these mines started off mainly mining open pit ore but are transitioning to underground.  Wassa is ahead of Prestea, having begun underground production in early 2017.  Wassa has been ramping up since and is performing well.

I think that one of the problems Golden Star has had is that reserves for both Wassa and Prestea underground are limited.  Mineral reserves for Wassa are 742,000 ounces which they say is about a 5 year mine life.  Similarly Prestea has reserves 463,000 ounces, which works out to a 5.5 year mine life.

I’m not sure why the reserves at these mines is so limited.  Some of it is that underground mines often have smaller resources because drilling out too far ahead of the mining activities is expensive.  Golden Star has been hanging on by a thread for years, so these were likely costs they chose to to incur.  I also get the impression that there have been stability issues at Prestea that have only recently been corrected and allowed more drilling to take place.

While reserves are small, there is a much larger inferred resource for both mines.  With Friday’s press release, the Wassa inferred resource is up to 5.5 million ounces.  Prestea has 800,000 of measured and indicated and 868,000 ounces of inferred.

The small reserves and large inferred resource present an opportunity.

When you look at analyst estimates they, quite rightly, are basing their net asset value calculations primarily on known feasibility studies and preliminary economic assessments.

Take BMO for instance.  They have an NAV5 for Golden Star of $1.04.

I can reverse engineer that number (like I’ve done below).  To do so, I back-out total production from Wassa of a little over 1,000,000 ounces and 471,000 from Prestea (both the NAV0 and NAV5 match reasonably well, so I think I’m on the right track with these numbers).

Wassa has 5,000,000 inferred ounces.  Prestea has 1,600,000 measured, indicated and inferred ounces.  Very few (in the case of Wassa) to none (in the case of Prestea) of these ounces are included in the net asset value.  The inclusion of these ounces, if the company can successfully prove them up, represents a lot of upside for the stock.

What’s more is that Golden Star can add significant production within its existing mining infrastructure.  They have built their mine and milling capacity with expansion in mind.  The mine at Wassa has capacity for 4,000 tpd while the mill can handle up to 7,000 tpd.  At Prestea its even higher, with the mine at 1,500 tpd and the mill at 4,000 tpd.

Wassa could easily expand its mine rate by 30% before having to expand the shaft and decline.  Prestea could more than double production before having to do so.

What this means is that if Golden Star is successful in turning inferred ounces into reserves, the cost of bringing those into production will be minimal.  They should be able to ramp to double their current production without having to put out a lot of capital.

First Quarter Results

Golden Star provided first quarter production numbers on Wednesday night.  Wassa exceeded the expectations of most analysts, producing 35,506 ounces at 4.54g/t grade.  Grade had been an issue during the ramp of the underground at Wassa.  In the third quarter grade averaged 2.6g/t, well below the 4g/t feasibility grade.  The fourth quarter improvement to 4.04g/t, followed by this latest news is evidence that Wassa is on track.

The Prestea underground is earlier in the ramp.  The mine just reached commercial production (defined as 60% of capacity) in February.  They are having problems typical to a new start.  In the first quarter they were only producing from a single stope, and the models of that stope were a little off the mark, which led to more dilution (lower grade).  They say they’ve reviewed the stope model, figured out what was wrong with it, and expect better grades when they start mining a second stope in mid-April.

The second and third quarter numbers will have to be watched carefully for progress from Prestea.


Apart from getting Prestea up to plan, the big news will be exploration results.  The company  is spending $6.6 million in 2018, split between Wassa, Prestea and new targets around the Prestea and Wassa complexes.

The drilling at Wassa will be focused on filling in the areas between existing drill holes. In the section below the pink area represents the original 2,000,000 ounce inferred resource.  The step out to 18900N is where they drilled the extension that added another 3,000,000 ounces.  You can see the large gaps that need to be filled to clean up the resource.  Doing so will upgrade the inferred resource to measured and indicated and to reserves.

To facilitate drilling they have created an exploration drift extending from the mine to facilitate the drilling.  I believe this is the line extending from the mine to the north just above the pink inferred resource box in the map above.  Therefore the drilling meters planned at Wassa are a little deceiving, because they can drill a lot more holes from closer to the ore from this drift, so I expect them to accomplish a lot in those 11,000m they have planned.

The opportunity at Prestea is a little less clear.  Prestea is about a year behind and so the company is just now starting to evaluate how they might expand production in the coming years.  Drilling this year will infill the existing inferred resource and more importantly focus down plunge on the West Reef (the green lines are the drill holes).  Good results there will add new resource that could expand operations at the mine.  Prestea is very high grade (14g/t or so) and the mill only operates at 600 tpd, so it doesn’t take a lot of new ore to add significantly to the mine.

There are a few other exploration prospects that Golden Star will spend about $1.4 million on in 2018:

All of these are quite early stage and I don’t know much about them yet.  The most advanced appear to be Father Brown and Subriso West, which have a combined inferred resource of 476,000 ounces.  Father Brown has an underground grade of 6g/t which sounds promising.


Friday’s price action not withstanding, I’m not expecting an overnight success with Golden Star.  It is more likely to be months of positive results that slowly build back the company’s reputation.

But I think that the outcome will be worth it.  Especially if gold prices can stick to the current $1,300 level or move higher.

The BMO estimate I pointed to has an NPV5 of $1.04 USD on the stock.  Even after Friday’s move, that’s a significant discount to the current price of 66c.  That estimate is done at 2018 gold averaging $1,280, dropping to $1,200 in the long term.  It includes minimal tonnage from Wassa and Prestea exploration.  It includes no ramp of production to 4,000 tpd at Wassa or 1,500 tpd at Prestea.  So there are lots of ways that number can move higher.

It’s a simple play.  Cheap on comps, cheap on net asset value, a good chance to ramp significant growth over the next couple of years, and in a commodity environment that, in my opinion, is more likely to go up than down.


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.


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.


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 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 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 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 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 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.


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.


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.

Week 349: Company updates, a couple new positions but mostly sitting pat

Portfolio Performance

Thoughts and Review

I’ve been slow on the updates.  This is the second time in a row that its been 8 weeks between them.

I’m slow because my portfolio has been slow.  I still have a high cash level.  I took advantage of the stock decline in February, but not enough to have much of an impact on my results.  Since then I sold down a few positions and so I’m back to a high cash level.

Portfolio Additions

I’ve already written about my new positions in DropCar and Precision Therapeutics, as well as reestablishing a position in Radcom and Silicom.

In addition I took a position in Sonoma Pharmaceuticals and Foresight Autonomous.

I’ve got something written up about Sonoma that I will put out in a couple of days, so I’m not going to talk about them right now.

Foresight Autonomous

My position in  Foresight Autonomous is small (less than 1%), so I’ll just mention the thesis briefly.

The company is developing automobile detection systems (called advanced driver automation systems or ADAS).  They have had successful trials with Uniti Sweden, and three successful pilots with Chinese companies.

The stock trades at a $110 million market capitalization.  That’s not really cheap but I think the potential here is significant if they can land a deal with a large car companies.

Foresight also has a 35% interest in Rail Vision.   Rail Vision provides detection systems for rail systems.  Rail Vision was looking to IPO last fall at a $100 million valuation.

Worth noting is that this article said that Foresight’s technology has tested better than Mobileye.  Mobileye was bought out for $15 billion.

Good News from existing positions

While my portfolio has only benefited at the margins, there were a number of positive news events over the last couple of months that do bode well for the stocks I own.

Vicor gave a very positive outlook on their fourth quarter conference call.  They are making progress on the 48V servers, automotive and high end power on package applications.  It seems very likely that they are working with a large FPGA producer (maybe Nvidia?) for high end power converters on the the chips.

Gran Colombia is doing very well at both of their mines.  They provided a February update on Tuesday.  They are on track to do more than 200,000 ounces if they can keep up the mining rate from the first two months of the year.

The next day the company amended terms to the debt exchange deal.  The 2018 debentures will be redeemed, not refinanced.  It means more shares and less debt.

The amendment doesn’t change my opinion on the stock.    With the new terms they will have about $95 million of debt and 54 million shares outstanding.  It doesn’t really impact the enterprise value much, with less debt there is somewhat less leverage to the price of gold but also less interest charges.

DropCar announced they are going to be doing maintenance and cleaning on the Zipcar fleet (transport,prep, cleaning, maintenance) in New York City.

The stock only moved a little on the news but it seems pretty significant to me.  Zip Car has 3,000 cars in NYC according to their website.

While I’m not sure how b2b revenues on a per car basis compare to the consumer business, 3,000 cars is a lot of cars.   Compare this to the 1,500 consumer clients they have right now.

The only question is what sort of revenues do they get on a per car basis for the B2B business?  I need a bit more detail from the company on this.  I suspect there are a lot of investors feeling the same way.

I wasn’t thrilled to see the $6 million private placement.  It conveniently gets Alpha Capital Anstalt their position back without breaching the 10% rule (its a convertible preferred sale).  But I still think the business could have legs. The recent Zipcar deal suggests that is the case.  So I’ll hold on.

Precision Therapeutics (formerly Skyline Medical) has been announcing all sorts of news with respect to its Helomics joint venture.

I honestly don’t know what to make of this.  I bought the stock because it looked like Streamway sales were going to launch, but all the news is about precision medicine, which is maybe (??) a bigger deal, but I don’t really know.

Some have pointed to Helomics revenue being in the $8 million range (which I’m not sure if it is), and that Helomics has spent over $50 million in research over the past 5 years (which appears to be the case based on the past capital raises).  If either of these points are accurate then Helomics is potentially more valuable than the single digit million valuation that Precision paid for the first 25%.

But I’m not going to lie, I don’t really understand the precision medicine area very well.

If anything, the company seems to be prioritizing the precision medicine business and I would think, given that the Streamway business is not profitable, that would put Streamway on the block.   If I’m right about the value in Streamway, then my original reason for buying the stock will work out, and maybe even sooner than I had hoped.

R1 RCM reported fourth quarter results at the beginning of March.  They see revenue at $850-$900 million in 2018 versus $375 million of revenue in 2017.  They are expecting adjusted EBITDA of $50-$55 million this coming year.

EBITDA is going to be depressed by the continuing onboarding of Ascension, new customers Intermountain Health and Presence Health, and the Intermedix acquisition.

In 2020 once the onboarding of Ascension is complete the company expects $200 million to $250 million of EBITDA.   At $7.70, which is after the big move over the last month, that puts them at a little under 7x EBITDA.  That’s still not super expensive and the path to get there seems straightforward so I’m holding on for now.

Gold stocks suck right now but I am adding.  In addition to Gran Colombia, I’ve added positions in Roxgold and Golden Star Resources this week.  Neither is reflected in my portfolio below, which is as of the end of last week.  Taken collectively, gold is my largest position right now.

My thought is simply that this trade war stuff seems to be real and and getting more so, and how is that not bullish gold and gold stocks?  Meanwhile I am picking these stocks up at discounts to where they were 6-12 months ago.  And we just had the takeover of Klondex at a pretty fair valuation.  It seems like a decent set-up.

I sold Essential Energy this week (this was after the portfolio date so its still in the list of stocks below).  I listened to their fourth quarter conference call.  Its hard to get excited about their prospects.  Drilling activity in Canada just isn’t coming back.  I’m going to stick with names like Cathedral and Aveda that have more US exposure.

I also sold Medicure this week after the news that Prexarrtan won’t be launching on the original time line.  I may be jumping the gun, after all Medicure has 3 other drug launches in the next year or so.  But Prexarrtan was the first and without it I don’t see much of a catalyst for the stock in the near term.

Portfolio Composition

Click here for the last eight weeks of trades.  NOTE: I didn’t go back far enough in my trade search.  These are the trades from Jan 15th to Jan 29th that I had previously missed.

Prices below are as of Friday, March 16th.


Adding Silicom after the Collapse

What a terrible piece of news.

Silicom ran up to almost $80 on expectations of a major cloud player using their 100G switch fabric NIC card in their next-gen cloud architecture.  The run rate on the contract was supposed to exceed $75 million in 2019.

Silicom had about $125 million of revenue in 2017 so clearly the deal was a game-changer.  When the company announced last week that the customer was pulling the pin on the product, the stock tumbled.

It actually tumbled for some time before the announcement, which is pretty sketchy.  Clearly someone knew something.

Others might steer clear of a stock that behaved like that.  But I’m willing to take a chance.

I found it hard to come up with what the numbers will look like without the cloud deal because Silicom has been tight-lipped about it on the calls.  Needham seems to think that Silicom has recognized $30 million of revenue from the cloud customer so far, though I’m not sure if they are including the first quarter in that estimate.

My best guess is that the run rate ex-cloud deal is around $100 million.  The stock has about a $240 million enterprise value at the current level.  So its at 2.5x revenue.  Maybe trading at a 10x EBITDA multiple, maybe a little less?

I’m okay with those multiples because there’s still is a lot of room for growth.  The company put out a press release later in the week where they outlined that they were “close to several major, strategic new SD-WAN and NFV-related vCPE Design Wins from major telcos”.  They expected the first to materialize in the “near term. ”

They said that each potential win would ramp to $10 million plus revenue run rate.

In the same press release they announced a dividend cut, saying they would need cash to ramp these customers.

A cynical take is that the press release was manufactured to justify the dividend cut.  After all it’s possible that Silicom had already procured inventory from the cloud player and will now have to write it down.

That’s a possible scenario, but I’m not convinced its the right one.  For one, inventories were only $7 million higher at year end than the previous year and were actually down sequentially in the fourth quarter.   This with revenue that has ramped from $25 million a quarter to $30 million plus over the last year. There’s not a lot of evidence of an unusual inventory ramp.

Second, they have $35 million of cash on hand at the end of the year.   So you’d need a big write-down to deplete that.

Third, to think Silicom ramped inventory in the last two months on a product that they described in February as having “no general availability to customers” and that was still experiencing a “customer challenge” that kept the design from being finalized, doesn’t make a lot of sense to me.

There could be a write-down coming, but I doubt it’s too much.

My guess is it’s exactly what Silicom said in their press release: that these are big potential wins and that Silicom “must make sure that we have all the financial resources to fulfill demanding supply commitments once these potential wins reach their full deployment run rate”.

These are potential telco wins after all.  I know from my experience with Radcom just how important cash levels are to telcos looking to make large purchase orders with small suppliers.

If anything I suspect that Silicom was planning a secondary on the announcement of their first big telco win.  But the cancellation of the cloud deal and collapse of the share price makes that far less desirable.  So they are saving money where they can.

If that’s the case, then I think that when such a win is announced, the stock will move back into the $40’s.   At the current price I’m willing to take the plunge and see if that’s the case.

Vicor: finally the results we’ve been waiting for

The long wait for Vicor to post a step change in results is over.  With the release of the fourth quarter there was an end to the delays and they put out some solid concrete numbers.   To be sure, the fourth quarter itself was not very good (this was expected), but guidance and color around what to expect next quarter and beyond was very positive.

Here’s a summary

  • Backlog at the end of the fourth quarter sat at $73 million compared to $60 million at the end of the third quarter
  • Bookings grew 11% sequentially to $71 million
  • Bookings thus far in the first quarter were $55 million (through 8 weeks of a 13 week quarter)
  • They expect sequential bookings improvement throughout the year

As is typically the case, Vicor gave hard data on the next quarter but you had to piece together the long-term picture from circumstantial evidence and color.   This quarter we got to extrapolate from their comments on facility expansion.

Vicor  has a 240,000 sq. ft. facility in Andover, MA.  They said on past calls that they can produce $400-$600 million of revenue from Andover.  In the fourth quarter updated/reiterated that this number at $500 million.

In the past Vicor has talked about adding capacity by purchasing or leasing additional space nearby.  From the second quarter call:

…we’re also actively looking for incremental space nearby, not far away from the Andover facility, to further expand capacity in about 1-year time frame

On the third quarter call they hinted that this plan might be evolving as they were leaning towards building their own facility.  Last week  they confirmed this was the case, and in the process gave us a hint about where revenue might eventually go:

…we’ve had a change of plans regarding that. What we concluded after investigating certain options in the neighborhood of our existing Federal Street facility is that a building of the order of 80,000 to 100,000 square feet would not serve our long-term needs. So we were able to secure a deal with a partner to help our short-term capacity requirements to give us some breathing room for breaking ground on larger lot with considerably more room for expansion. So we’re looking at options for as much as 250,000 square feet, which would be equivalent in terms of capacity to our Federal Street building.

So the circumstantial evidence that we got is that while they have a $500-$600 million revenue facility, they have decided to forego a 100,000 square foot addition via an existing nearby building in favor of building another $500-$600 million facility.  They are taking this course of action because they think they would outgrow the smaller facility.


The reason I have been in Vicor is because of the potential for big revenues as they ramp product for 48V servers, for automotive, and for high-end FPGA’s that utilize power on package technology.  They have always been vague about how big these opportunities might be.  With the fourth quarter results we started to get some sense of that size.

To be honest, the opportunity needs to be big, because the stock isn’t particularly cheap.   At a $27 share price the enterprise value is about $1 billion.  Trailing twelve month revenue is $227 million and EBITDA is non-existent.

Looking forward, if we get 50% growth in 2018 and if gross margins improve to 50%, I estimate that EBITDA should be around $70 million if most of the gross margin falls to the bottom line.  That gives Vicor a 13.5x EBITDA multiple.

Vicor starts to look cheap if you think they can get to $500 million plus of revenue.  Again, assuming a modest increase to operating expenses (I’m guessing $140 million annualized), and an uptick in gross margins to 52%, I come up with $135 million of EBITDA, which would give Vicor a forward multiple of 7.5x.

Of course if you start factoring in the second facility, you are looking at $1 billion plus revenue and then the stock clearly has further to run.

So that’s the potential trajectory.  It’s actually always been the big picture that I have hoped would play out.  With the fourth quarter numbers and first quarter guidance, that picture is a little less presumed and a little more expected.   Its still a long way from being a sure thing, but its moving in the right direction.  And that’s why you have gotten the move in the stock that you have.

Betting on Forced Selling and Ramping Growth at DropCar

This idea is bound to generate a lot of skepticism.  Its the kind of wildly unprofitable, clever but challenging, just getting off its feet sort of business that a lot of readers are going to recoil at and probably tell me why it’s an inevitable zero.

And that’s okay because that is definitely a potential outcome here.

I got this idea from @teamonfuego on twitter so hat tip to him.  I don’t think he owns it any more though.

Here’s the story

DropCar is actually two businesses.  It is DropCar, which is a start-up valet and parking service, and it is WPCS International, which operates a communications infrastructure installation business.

These two businesses came together via a reverse merger.  DropCar took a little under 85% of the capitalization while WPCS took 15%.  The transaction closed at the end of January.


DropCar is a fairly recent start-up.  The company was formed in 2015.  They operate exclusively in New York City.  There are lots of articles available explaining the business and how the service works (here, here and here for starters).

DropCar offers a basic car garage alternative, a hourly chauffeur service, a premium service and a B2B service.

The basic service, which they call STEVE (they use people’s names for each of their offerings, I guess to mimic that its like a virtual valet or chauffeur), allows you to have your car parked at one of their garages, and when you need your car you arrange a pickup and a driver will bring it to your door.  Similarly, you arrange a driver to meet you to take your car back to the garage.  The service goes for $379 per month.

With the hourly service, the driver comes to your door but stays with the car through your travels and drives you around, eventually dropping you off and taking the car back to the garage.  The cost of this service is $15 per hour.

The new premium service was launched in January.  For a higher monthly fee ($499 per month), you get all the benefits of STEVE along with a maintenance and care program.

The B2B service arranges pick-ups of vehicles for maintenance by dealerships, fleet leasing centers or other auto-care facilities.  DropCar has a reasonably sizable list of New York based dealers that have offered this service: Mercedes of Manhattan, Lexus of Manhattan, Jaguar, Land Rover of Manhattan, Porsche and Toyota.

DropCar is also trying to develop a critical mass of drivers wherby they can leverage their model to participate into the new “flat fee service” option being offered by dealerships. This is where consumers pay a subscription fee on a monthly basis.  Its early, but it’s in the trial stage by by many dealerships (other articles here and here).  DropCar would be like the delivery man for these services, picking up and dropping off cars and bringing them in for maintenance when required.

They are also looking to leverage the data they collect.  They began to hint at in this recent excerpt of a January press release:

Not only does it harvest an increasingly valuable trove of big data (e.g. consumer auto-related data), but it proactively benefits from best-of-breed sources such as Google and Waze. Along these lines, DropCar management eventually plans to monetize its software/middleware platforms and big data harvests through licensing agreements.

Failed Model

DropCar is not the first to try this sort of business.  They were preceded by Luxe and Valet Anywhere.  These companies did not fare well.

Historically, companies such as Luxe, which closed operations in July 2017 and subsequently sold their technology to Volvo in September 2017, as well as Valet Anywhere, which closed operations in July 2016, have unsuccessfully tried to build similar on-demand service models.

DropCar differentiates itself from these failed attempts in a few respects. They say the mistakes of their predecessors was due to:

  1. use of expensive in-city garages
  2. parking-only focus
  3. low valet utilization rates tied to only servicing consumers (B2C)

DropCar is trying to correct these mistakes by arranging garage space at the edges of cities, providing higher margin services like the usage of the personal valet and the business to business solution (B2B) being offered to dealerships and fleet owners, and trying to integrate all the services at a scale where they can efficiently utilize their drivers.

I don’t believe that DropCar is primarily interested in the consumer business, though that is the easiest and therefore has been the first to ramp.  I think the B2B business will eventually be the better opportunity.  In the latest update the company said the following:

In anticipation of a substantial enterprise expansion, DropCar recently converted a large portion of its seasoned valets into field management roles. While this transition momentarily tempered valet-base expansion, it enables DropCar to efficiently absorb the anticipated demand surge in 2018 from Tier-One automotive OEMs, dealerships and concierge service subscribers.

Its also clear that this is going to work better in some cities then others.  New York City is ideal.  The company identified Los Angeles, San Francisco, Chicago, Dallas, Miami, Boston, Washington DC, and Philadelphia as US expansion destinations. Globally they see Beijing, Shanghai, Tokyo, Singapore, London, Paris and Rome as possible expansions.  But I don’t expect the business to be able to scale like an Uber, because many cities aren’t big enough or are too sprawled out to make the service effective.  Luckily the stock is cheap enough that it doesn’t have to.

Rising Revenue but no Profitability

DropCar is growing, but they are not profitable.   Below on the financials from the prospectus for the first 9 months of the last two fiscal years.

The company was actually closer to profitability in 2016 then in 2017. Gross margins have shrunk in 2017 and expenses, particularly G&A expenses, have risen.

You can spin the gross margin decline two ways.  Either its evidence of a soon-to-be failed model, or it is evidence that they are ramping up for growth.  I’m betting on the latter.  Below is an excerpt from the prospectus (my highlight):

DropCar increased its valet workforce by 75 employees to 110 full time employees, or a 214% increase during the nine months ended September 30, 2017 as compared to September 30, 2016. This increase is based on increased demand in valet services, as well as anticipated growth in the next three to six months.

Similarly, the rise in G&A can be explained by expansion and costs associated with the reverse merger.  About $850,000 of the year over year increase was attributed to payrolls, another $900,000 to merger related legal fees, $410,000 due to advertising and recruiting and $650,000 due to stock options.

Current Revenue Run-rate

According to a recent company update, the consumer subscriber base is currently more than 1,400, which is up from 500 at year end 2016 and 1,000 at the end of June.  Automotive movements were also up significantly:

Overall consumer automotive movements exceeded 28,000 during the fourth quarter of 2017, up from approximately 10,700 in the fourth quarter of 2016. Quarterly enterprise movements have eclipsed 5,700 versus approximately 2,000 a year ago.

Based on the monthly rate of the base consumer business ($379 per month) and the current user count, the revenue run rate from the consumer business is $6.3 million.  I’m not sure what the revenue is from the B2B business.  The best I can do is extrapolate from their summer presentation. In it they said they had an overall $5 million revenue run rate from about 1,000 subscribers. This implies the B2B business was around $800,000 at the time.  Assuming some growth to the B2B, I’m going to guess that the run rate of the entire business is about $7.5 million right now.

WPCS: Merger and Business

The reverse merger with WPCS International seems to  have been initiated by a large holder of DropCar, Alpha Capital Anstalt.  Presumably DropCar agreed to go public because of the access to capital, which they will undoubtedly need more of.  I’m not sure why they decided to go the reverse merger route instead of an IPO.  That is always something to be wary of and if anyone can shed light on this it would be appreciated.

WPCS has operated an unprofitable communications installation business for some time.  They upgrade cabling and wireless infrastructure for institutions like hospitals, schools and government offices.

The business did $16.7 million of revenue in fiscal 2017 and $14.5 million in 2016.   It consumed $1.3 million of cash flow in 2017 and $2.6 million in 2016.

In a comparable company analysis performed as part of the merger agreement, Gordian found a fair value based on revenue of $10-$11 million and based on EBITDA of around $4 million.

This analysis was based on Argan, Ballantyne Strong, Dycom Industries, MYR Group, TESSCO Technologies, and Vicon Industries.

Alpha Capital Anstalt Forced Selling

Here’s what really got me digging into the idea.

Originally I bought some shares of DropCar when the stock spiked on Tuesday.  I unfortunately bought into the spike at $3.15, and that was a mistake.  I briefly looked like a genius as the stock rose to $3.50 but that quickly turned into a fool.

I wasn’t planning on buying more, but as I dug into what happened on Friday and then Tuesday, I came upon this disclosure from Alpha Capital Anstalt.

As part of the terms of the merger, DropCar needed to raise at least $4 million in capital.  Alpha stepped up  and provided the liquidity for the raise.  However this took Alpha above their maximum allowable ownership, as this disclosure notes:

All of the foregoing securities issued to Alpha contain a 9.99% “blocker” provision designed to prevent Alpha from being a beneficial owner of more than 9.99% of the Issuer’s Common Stock.

I haven’t found it yet, but I bet they had something like a 30 day grace period before they had to get their stake down below 10%.

This is essentially what occurred on Friday the 16th, Tuesday the 20th and Wednesday the 21st.  There were two 13-D forms (here and here) issued by Alpha where they disclosed that they had reduced ownership significantly, eventually down to 9.9%.  In the second it was noted they were no longer in breach of the terms:

Does not include shares underlying the Series H-3 Convertible Preferred Stock nor the four classes of Warrants that Alpha Capital Anstalt (“Alpha”) can beneficially control under a contractually stipulated 9.99% ownership restriction. The full conversion and/or exercise of Alpha’s securities would exceed this restriction.  Alpha’s ownership is now below 10%.

It is likely not a coincidence that the share dump by Alpha corresponded with high volumes and wild price swings in DropCar on the 16th, 20th and 21st:

In my opinion its unlikely that any of the prices we’ve seen since the closing of the merger agreement (January 31st) are particularly reliable indicators of the business’s value.

The stock began to tank from $4.50 down to $2.50 almost immediately after the merger closed.  I think its possible that Alpha began selling as soon as they could, knowing that they had to get their stake down to below 10%.  I think it’s also possible that other investors gamed the stock, knowing that Alpha was going to be a forced seller regardless of price.  I did find reference to the disclosure about the blocker as early as February 5th, though there was more implied language of it much earlier in the prospectus, which was available back in December.

Who knows what really happened.  Nevertheless it seems a reasonable bet it had little to do with the fundamentals.


Like many of the stocks I take a chance on, DropCar is no sure thing.  There are failed precedents, they are losing money, and while the Alpha pre-merger capital raise brought in $4 million in cash, that is still likely only enough to get them through this year.

What I like about the stock is that the top line is growing and there is evidence it will grow further.   In particular, the company is expecting a surge in the B2B business.  From the recent company update (my highlight):

In anticipation of a substantial enterprise expansion, DropCar recently converted a large portion of its seasoned valets into field management roles. While this transition momentarily tempered valet-base expansion, it enables DropCar to efficiently absorb the anticipated demand surge in 2018 from Tier-One automotive OEMs, dealerships and concierge service subscribers.

Following the merger there are 7.8 million shares outstanding (from here). The market capitalization is around $20 million at the current price ($2.50).  If I’m right about the current revenue run rate ($7.5 million) then the company is trading at a little over 2x DropCar’s current revenue run rate.  Given the growth rate, that’s not particularly expensive.

As I pointed out above, the WPCS business could be worth anywhere from $4-$10 million in its own right. I would imagine that gets divested at some point to bring in more cash.  There is also the $4 million of cash on the balance sheet,though this is going to get burned through this year.

But here’s where it gets really interesting. In the merger prospectus Gordian performed a similar competitive valuation analysis for DropCar to what I showed earlier with WPCS.  Here is the valuation table they came up with:

As you might expect, the valuations are quite different depending on whether you look backwards or forwards.

The forward numbers are pretty interesting.   In particular I believe you can back out 2018 guidance from this analysis.

It looks like Gordian (presumably under DropCar’s advisement) is estimating 2018 revenue at more than $19 million, or more than triple current revenue and a 400% increase over 2017 (please refer to my note below, its really important to see how I got this number).  I don’t usually bold things in these posts but that is a big number and I think its worthy of attention, both to consider and also to verify that I haven’t screwed something up.

(***Let me explain how I came up with my more than $19 million estimate.  First, I think they have their mean and median columns mixed up in the table above.  You can’t make sense of the numbers if the higher multiples are giving lower valuations.  As well, the revenue numbers only line up if you switch the mean and median columns of the Comparable Company Values.  For example, looking at the 2018 revenue line item, 80.7/4.08 is $19.77 million of revenue.  Similarly, 53.5/2.73 is $19.6 million of revenue.  So about the same, as you’d expect.  But if you lined up the mean and median columns you’d get 53.5/4.08 and 80.7/2.73, in which case the revenues wouldn’t match up.  Therefore I think the columns are flipped in the Comparable Company Values rows and that’s how I came up with the $19 million number.***)

Like I mentioned above, I don’t think the current price is necessarily reflecting anything other than the forced selling of Alpha. On top of that you have a stock that just went public via a reverse merger with a kinda crummy little communications business that nobody cared about.  You have very few followers other than some day traders that are hitching themselves to the ride up and down and don’t really care about the business one way or the other.  And you have a market capitalization that is tiny enough to be ignored by any fund.  So there’s no interest in the stock yet.

If, and this is a big if, DropCar can get to the kind of revenue number that Gordian’s projections assume, that’s going to change.  There is no way this should be a $20 million company if it can grow revenue like that.  Its got to be WAY higher.

If they don’t grow revenue then it’s probably a zero.  So that’s the risk and the reward. Its the kind of situation that is either going to crash and burn or go through the roof.  Just the sort of option I like.


Gran Colombia’s Debenture Redemption looks favorable

On Thursday Gran Colombia announced the warrant terms of a $152 million USD senior secured note offering.  Attached to the notes the company is offering 124 warrants priced at $2.20 per share per $1,000 of note principle.

Dilution amounts to 18.8 million shares.  This compares to 72.2 million shares that would have been issued under the existing 2018, 2020 and 2024 debentures if they were fully converted (the table below is from the third quarter MD&A filing).

I think the deal, if it is approved, is pretty positive.  Consider:

Under the prior share structure, a $2.50 share price translated into a market capitalization and enterprise value of about $230 million (~92 million x 2.50 = $230 million).

Under the new notes, and considering redemption of all of the existing debentures at par, the share count is roughly 39 million and the market capitalization is $97.5 million (39 million x 2.50).  The enterprise value is $202 million (97.5 million + $150 million (x 1.25 CAD/USD exchange) – $45 million (assuming in the money warrant conversion of the 18.8 million warrants) – $9 million).

Debenture Holders can participate

As a debenture holder (I own both the stock and some of the X and V debentures) I’m interested in what my options are with the debentures.

The terms gives existing debenture holders the right to participate in the offering:

Existing holders of the Company’s Outstanding Debentures that are eligible to participate in the Offering may (subject to complying with certain procedures and requirements) be able to do so by directing some or all of the redemption proceeds from their current debentures into Units on a dollar-for-dollar basis.

I’m not entirely sure how to read this.  Does it mean that existing debenture holder gets preference to convert their debentures into new notes or is this just on a best efforts basis where an over-subscription to the notes would mean partial allocation?

I’m hopeful that I can direct my debentures into the new notes, but I’m not counting on it.

Its still cheap on Comps

Gran Colombia continues to compare favorably to other gold producers.

One of the quick scans I like to do compares companies on a simple EV/oz produced basis.  I’ll do the comparison and then weed out why some companies trade at lower multiples than others.  Usually there are good reasons.

At $1,400/produced-oz Gran Colombia trades at one of the lowest multiples of the group.  Only the really poor operators that are cash flow negative at current prices (an Orvana Gold for example) are cheaper.   Most of the companies I compare to are in the $4,000 – $6,000 per produced-oz range.  Even the lower tier companies like Argonaut Gold or the struggling one’s like Klondex trade at over $2,000 per produced-oz.

Its still cheap on Cash flow

Even forgetting that it is a gold stock, Gran Colombia remains reasonably priced as a business.

On the third quarter conference call Gran Colombia reiterated guidance for $16 million USD of free cash flow in 2017.   In the fourth quarter they produced 51,700 ounces versus an average of 40,700 ounces per quarter in the first three quarters.

The indication after the strike at Segovia was that new agreements with artisanal miners should lead to more processed ore at the plant.  Based on this and progress at the Segovia mine, my expectation is that 2018 free cash guidance will exceed 2017.

I suggested in my original post on Gran Colombia that I thought $20 million USD of free cash flow was not an impossible goal.  I still think that’s possible.  Assuming the note and debenture deals go through, the market capitalization of the company will be a little under $100 million CAD at current prices.  Even though the stock has climbed since my original post, this still means the stock is at less than 4x free cash flow.


Eventually the note offering and debenture redemption should be positive for the stock.  But it might take a few months.

What’s tricky is that at $2.40 the stock price is right about where the debentures convert.  It isn’t really in anyone’s interest (other than the current debenture holders, though even that is debatable) to see the stock price rise too much above the convert price until the deal is done.

I’ve been adding to Gran Colombia all the way from $1.40 to $2.20.  I see no reason to take any off the table yet.  The company is doing everything right so far.  Hopefully with the new capitalization and simpler structure the market will continue to recognize this.