Summary Stock is down nearly 50% in the last few weeks, as a massive share offering well below where the stock was trading sparked selling. The technology has a large addressable market. Data is solid and applications for approval are with the FDA. Shares are going to rebound.
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Prepared by Stephanie of team BAD BEAT Investing Soliton's (SOLY) stock has gotten crushed in the last few weeks. We see this massive consolidation as an opportunity. The primary reason for the massive fall was a controversial common stock offering. Before discussing the offering, a brief introduction to the name, which is down over 40% in a few weeks, is warranted. Take a look at the stock, which has been hammered: This seems to be an opportunity in our opinion. The company is pretty much pre-revenue here. It is an aesthetics company trying to commercialize its technology. The company is developing a breakthrough technology that dramatically accelerates the removal of tattoos. The devices use very high energy, in the range of 3,000 volts at nearly 3,000 amps, to form acoustic shockwaves at 100 times per second. The technology is also used for the treatment of cellulite. The company has reported positive trial data and has been working with the FDA for approval. We think a trade is setting up here following recent events, even if it is a reversion to the mean. The science looks solid with a large addressable market.
The play Recommend a two tranche purchase. Target entry 1: $7.65-$7.80 (40% of position) Target entry 2: $7.10-$7.20 (60% of position) Target exit: $9.50 in the short term (2-3 weeks), $12 in the medium term (3-6 months). Stop loss for traders: $6.60
Discussion First, let us address the $35 million elephant in the room. A cursory glance at the balance sheet shows the company was running out of cash. It had just enough cash based on its historical burn rate to get toward the end of 2020. This was insufficient and it was obvious a capital raise was needed. What drove the stock to get crushed, and what really irked many shareholders, was that the stock was trading in the low teens, only for a $35 million equity offering to be put out there for the largest shareholder at a massive discount of $8.30. This was painful and led to massive selling. Shares are only now starting to recover in the mid-$7 range. We believe there will be some positive upside here. Some good things have been happening. First, the company filed for special 510k notification with the FDA for its Generation 2 Rapid Acoustic Pulse, or RAP, device and received FDA clearance in early March. The special 510k filing designated the device as an accessory to the 1064 Q-switched laser for tattoo removal on the arms, legs, and torso in Fitzpatrick Skin Type I-III individuals.
Clinical trials have demonstrated that using the company's RAP device in conjunction with a Q-switched laser allows for multiple laser passes in a single treatment session, resulting in accelerated tattoo fading in comparison to traditional laser treatments. It is a bit of an improvement. The Generation 2 RAP device delivers the same tattoo removal therapy as the Generation 1 device, but is slightly modified for improved ease of use in the physician's office. The Generation 2 RAP device has the same underlying technology as the RAP device that will be used in the U.S. commercial launch. Only the tattoo removal indication was reviewed by the FDA in the submission and cleared for marketing. A similar technology was utilized in the company's cellulite trials and other proof-of-concept trials. Let us be clear here. This new RAP indication is bullish, as cellulite affects up to 90% of women with over $1 billion spent annually on treatments in the U.S. The company could receive an FDA clearance for this cellulite indication as early as the fourth quarter of 2020, possibly in the first quarter of 2021. Shares could begin to rally in anticipation of this event. While the company is focused on advancing the cellulite indication in the near-term, the keloid and hypertrophic scar indication is an exciting potential expanded indication longer term.
Clinical results from its 12-week keloid and hypertrophic scar proof-of-concept study, which was completed in January, were very encouraging, demonstrating approximately 30% average reduction in scar volume in the single initial treatment. The overall average reduction in both the volume and the height of the scars after 12-week follow-up visits further appear to show the potential efficacy of its RAP device with treatment of keloids and hypertrophic scars. RAP devices may have a positive impact on other fibrotic disorders. The same mechanism of action and work to reduce keloid and hypertrophic scars may be far reaching and important for such indications as capsular contraction, Peyrone's disease, and even liver fibrosis.
Most recently, the company submitted another 501k to the FDA. Just last week, ahead of the 4th of July holiday weekend, the company submitted for pre-market clearance with the FDA for its second generation RAP device for the reduction in the appearance of cellulite. The 510 filing is based on results from Soliton's pivotal cellulite clinical trial, which were recently presented in an oral presentation via the American Academy of Dermatology (AAD) 2020 VMX Virtual Conference on June 12, 2020.
The reason we are bullish here is because of the trial results and the addressable market. The RAP device demonstrated an average reduction of 32.5% in the Cellulite Severity Score and strong patient satisfaction demonstrated by 91.9% of subjects agreeing or strongly agreeing their cellulite appeared improved. Again, that is over 9 out of 10 participants reporting their cellulite improved.
Further, there was a 1.16 mean change in the Cellulite Severity Score for all patients with a primary endpoint target of a 1.00 mean change. It is also a pretty painless experience. The treatment was well tolerated by the trial subjects, with an average pain score of 2.4 out of 10.
The RAP device was previously cleared by the FDA as an accessory to a 1064 nm Q-switched laser for tattoo removal of black ink. The treatment is far better than the standards of care. They require only one treatment session per patient; the RAP device has the potential to offer patients a non-invasive treatment to reduce the appearance of cellulite, in addition to tattoo removal.
Some risks should be noted here. The type of technology itself is not brand new. The shockwave treatments for a variety of conditions have been around for some time. While the range and amplification which Soliton uses is novel, the overall tech is not fresh. While the target markets of tattoo removal and cellulite treatment are definitely large, the present COVID-19 crisis could delay such aesthetic procedures. Many patients are actively avoiding contact with medical facilities while this thing goes on. Further, out-of-pocket expenses like this may be on hold while so many remain out of work, and it will take many months for the economy to get fully back on track. We should also mention the cash burn. The company raised $35 million in its controversial offering. It really hammered the share price. But we see the stock clawing back. Soliton saw a cash burn of $11 million in 2019. We think cash burn will ramp as Soliton ramps up sales and marketing spend to advertise its new treatments. We think there is money for at least two years here, but a future capital raise is not out of the question. That said, if revenues start to come in in 2021, then the cash burn rate could slow, delaying an offering.
Take home We have a stock that has been beaten down nearly 50%. Yet, the science remains the same and the company is awaiting approval from the FDA. The recent offering was a huge hit to the stock and shareholders. But new money should consider a position here for a few weeks to months. The addressable market is sizable and the data is strong. The company will soon move from pre-revenue to revenue generating. While cash burn remains a concern as does end user delays in seeking treatment thanks to COVID, shares seem like they are offering an opportunity here.
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Disclosure: I am/we are long SOLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.