Soliton: A Reg A+, PR Machine With Lockup Expiry Next Week - $6 2-Week Price Target

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About: Soliton, Inc. (SOLY), Includes: ADOM, APEN, MBRX, MGEN, RIOT
by: White Diamond Research
Summary

Soliton is a Reg A+ IPO, which means they could not get institutional investors, so they had to raise money from crowdfunding.

SOLY has put out 17 PRs since March, fueling a rally with no substance in our opinion.

SOLY's first lock-up expiry is May 20th, and we believe it will be a bloodbath for the stock, similar to what happened to Reg A+ stock Adomani.

SOLY's tattoo and cellulite removal devices are still in the pilot stage, unproven with few studies done.

SOLY's biggest holder, Remeditex, has sold every significant position it has filed on sec.gov, and we doubt SOLY will be an exception.

Soliton (SOLY) had a recent Reg A+ IPO in February 2019, with an unproven device that is supposed to assist a laser with tattoo and cellulite removal. SOLY is a relentless PR machine that we believe will end very badly for shareholders who think they are holding a solid investment. The company has put out 17 PRs since the beginning of March. This PR campaign has worked, as the stock has risen from $4.99 on March 1st to a peak of $15, to over $10 today. We don't believe the PRs show any new important developments of the company. They just get people to buy shares.

Soliton posts on Twitter, Stocktwits and solicits Facebook fans in its PRs. The company is years from having an FDA approved product. Right now, they don't even have a finished product to submit to the FDA. The company claims in their PRs to have over 200K "fans". So what are these people fans of? Oh yeah, the stock! In our opinion, the company's real product is its stock.

We believe long term holders planning to hold through the company's May 20th lock-up expiry will have an unpleasant surprise coming. We predict the stock will fall to $5-$6 within two weeks.

Soliton's Upcoming Dilution And Stock Sales

The following are upcoming dilution and stock sale events for the company. As stated in the 10-K, the company had $5.9M in cash on 3/22/19, and 14.61M outstanding shares. Also stated in the 10-K:

  • There are 2.2M shares underlying outstanding options at a $1.75 per share exercise price.
  • There are 776K shares underlying outstanding warrants at a $1.75 per share exercise price.
  • On May 20th, (90 days after the IPO which occurred on 2/19/19), SOLY's largest shareholder, Remeditex Ventures, will be able to sell 2.2M shares of common stock that it purchased at $2 per share.
  • On May 20th, SOLY's CEO, Christopher Capelli, will be able to sell 13,440 shares which he bought for $1.75 per share.
  • The lock-up expiry is 180 days after the IPO, or August 20, 2019, where 7M shares will be able to be sold as stated in the Offering Circular.

At the current stock price, the company will likely sell more stock to raise money soon. It says that its cash will only last until February 2020. With all of these potential stock sellers lining up, including the company itself, we believe it will be a race by the insiders to be the first to sell SOLY stock.

May 20th - Soliton's First Lock-up Expiry Will Be A Bloodbath For The Stock

May 20th is the first lock-up expiry. The following are SOLY's major holders:

Source: Bloomberg

As shown above, the biggest holder by far is Remeditex Ventures, owning over half of the company.

From Soliton's Offering Circular dated February 12, 2019:

The foregoing lock-up does not apply to the 2,190,476 shares of common stock underlying our 10% convertible notes held by our major stockholder, Remeditex. The shares underlying the 10% convertible notes may be sold 90 days after our common stock is listed on Nasdaq.

SOLY was first listed on the Nasdaq on 2/19/19. 90 days later is 5/20/19.

Remeditex bought its SOLY shares for an average of $2 per share. From the offering circular:

As of June 30, 2018, we had convertible bridge notes outstanding with Remeditex Ventures LLC, our largest stockholder, in the amount of $8,400,000, consisting of $6,900,000 in principal amount of 8.25% convertible notes and $1,500,000 in principal amount of 10% convertible notes. Upon the closing of this Offering, these notes including the accrued interest will convert into 4,198,412 shares of common stock. Of the foregoing shares, 2,013,695 of these shares will be subject to the lock-up agreement. The remaining 2,184,717 shares underlying the 10% convertible notes may be sold 90 days after our common stock is listed on Nasdaq.

$8,400,000/4,198,412 = $2 per share. And as it again states above, 2,184,717 shares may be sold 90 days after the Nasdaq listing, which is May 20th. At $2 per share, even if the stock goes to $6, that would be a whopping 200% gain for Remeditex.

Remeditex Previous Large Positions In Microcap Medical Stocks Were All Quickly Sold

Will Remeditex sell its shares or is it a believer of Soliton and will be a long-term holder? It's clear to us that Remeditex will probably sell its shares as soon as it can. We can predict what Remeditex will do by looking at what it has done with similar positions in the past.

On the SEC website here, it shows Remeditex has six SC 13G and SC 13D filings. All have been positions in microcap medical companies, like SOLY.

Starting with the filing on the bottom:

On 9/19/16, Remeditex filed that it owns 295,210 shares, or 6.6%, of Venaxis. Venaxis merged with Bioptix (BIOP) and changed its name to Bioptix in December 2016.

On 11/1/16, Remeditex filed that it increased its position in Venaxis to 328,011 shares or 7.3% of the company.

Later, BIOP became the cryptocurrency company Riot Blockchain (RIOT) in October 2017. Remeditex never became a holder of RIOT, as it filed on 4/5/17 that it sold all of its shares of BIOP. Remeditex held this position for less than 7 months after its first filing.

On 1/9/17, Remeditex filed that it owns 1,309,392 shares, or 12.2%, of Apollo Endosurgery (APEN), a medtech company. On that day, APEN share price closed at $15.61. Today, APEN trades at around $3.50. Remeditex isn't currently listed as one of the major holders of APEN so we can assume it sold all of its shares.

On 2/17/17 Remeditex filed that it owns 2,706,563 shares, or 12.7%, of Miragen Therapeutics (MGEN). On that day, MGEN share price closed at $11.80. Today, MGEN trades at around $3. Remeditex isn't currently listed as one of the major holders of MGEN so we can assume it sold all of its shares.

On 4/3/19 Remeditex filed that it owns 8,581,373 shares of Soliton. On that day, SOLY share price closed at $9.00.

There you have it! Remeditex has dumped every position that it has filed that it held on sec.gov. And they were smart decisions, as they all turned out to be dogs and are trading at a fraction today of what they traded at when Remeditex had its position. Will Remeditex follow this pattern and dump its entire position of SOLY? We believe it will.

Soliton Is Still Just A Concept Company

In reality, Soliton is still just at the concept level. There are few studies on the device to evaluate. They are testing a rapid acoustic pulse ("RAP") device licensed from MD Andersen to remove tattoos and cellulite. This RAP device is far from even being fully built. Soliton is preparing three generations of RAP. Stage one is it needs the go ahead from the FDA to try out the concept. It's currently going through that stage which was submitted in March and is expected to take about four months for the FDA decision. Generation 2 of the RAP will be tested by a group of dermatologists who will give advice to Soliton on how to build on and improve the device. Once that is done, it will need FDA approval again for Generation 2. Then Generation 3 of the RAP will be for a nationwide launch and will have an industrial design and aesthetic improvements. Soliton expects the national launch to be in the first half of 2021. But these medical trials and device adjustments usually take longer than expected. Each RAP generation will cost the company millions of dollars to develop.

If the RAP ever does get marketing approval, the company will then have to pay for a sales force and marketing to compete with all the other tattoo and cellulite removal devices on the market. As the company only had $5.9M on March 22, there will be much dilution before it ever makes it to market - and we doubt it ever does.

Noticeable Drawbacks To Soliton's Tattoo Removal Device

SOLY's RAP device is not original or new technology. This peer reviewed publication, for example, describes accelerated tattoo removal using acoustic shock wave therapy in conjunction with a picosecond laser. These published results seem to be comparable to SOLY's unpublished results. For example, it showed 80% clearance of the tattoo with acoustic shock wave therapy plus the picosecond laser, versus 60% clearance with the picosecond laser alone. SOLY's results showed 72% clearance with RAP device + laser compared to 40% with laser alone. SOLY's study results are only shown on its website, and not in a peer reviewed journal, which makes the data less legitimate.

The adjuvant shock wave therapy in this publication was done using the off-the-shelf ZWave device from Zimmer. By the way, Zimmer also recommends using ZWave for cellulite treatment. So, what exactly is new or original in SOLY's RAP technology?

SOLY shows how RAP is used with lasers. But the problem is, this is an additional expense for the aesthetic clinic. Most cosmetic surgeons aren't going to want to pay for an additional device if they don't have to. And so far, it appears that short pulse lasers, called picosecond lasers, are very effective in removing tattoos. From Soliton's clinicaltrials.gov page, it shows that it did a study with a dermatology clinic called SkinCare Physicians in Chestnut Hill, Massachusetts. This clinic is using a state of the art tattoo removal laser called PicoSure. It's a picosecond alexandrite laser which was FDA approved in 2013. The following is a picture of a tattoo removal from their website. It looks like the tattoo completely disappeared. If it ain't broke, why try to fix it?

Source: Skincarephysicians.net

Noticeable Drawbacks To Soliton's Cellulite Removal Device

SOLY's RAP device belongs to the ESWT (Extracorporeal Shock Wave Therapy) field. This recently published review of noninvasive technologies for cellulite looks at the safety and efficacy of ESWT together with the other commonly used therapies, such as cryolipolysis, RF( radio frequency), LLT ( low level laser therapy), HIFU ( high intensity focused ultrasound), and WBV (weight reducing body vibration). SOLY will have a tough time proving its RAP technology in this crowded cellulite space.

The article concludes its review of clinical evidence with the statement that "comparing the effectiveness of these methods was too hard". Then further on the review questions the clinical value proposition of these treatments by concluding:

"…some methodological faults in studies, such as lack of an end-point for cellulite severity or absence of clinical statistical analysis, make it very difficult to obtain confirmed results and it seems there is no definitive treatment method for cellulite".

It is worth mentioning that the application of ESWT for cellulite may have some side-effects on embryos development, as shown in a recent publication in the Nature Journal which is a highly respected publication.

Overall, discussion of cellulite application for RAP is speculative and premature, because the technology is still in early development. On 5/13/19, SOLY filed on sec.gov their cellulite removal study presentation with their acoustic subcision device. At the end of the presentation, the summary says it all:

Source: SOLY Presentation filing

As illustrated in the summary above, this is still only a concept device. Much more studies need to be done to see if it's viable or even has a practical application. Right now, there is only "potential", which hardly justifies SOLY's market cap of over $100M.

Soliton Geared Up Its PR Campaign Ahead Of the May 20th Lock-up Expiry

Soliton issued a PR on 4/9/19 saying:

"Soliton Completes Cellulite Clinical Trials".

We already knew the company thought the results were good, from the offering circular it says:

The initial testing has proved promising resulting in continuing discussions regarding a larger collaborative fat reduction clinical trial.

Then, the company issued a PR on 4/15/19 saying:

"Soliton announces Cellulite trial results to be presented at National Aesthetics Conference on May 11, 2019".

As it says in the offering circular, this is just a proof of concept clinical trial, why would they need to present it at a conference? Aren't conference presentations for actual large trials for scientists to learn and discover something new? May 11 is just nine days ahead of the May 20th lock-up expiry. Just a timing coincidence? We doubt it.

Then, the company issued a PR on 4/18/19 saying:

"Soliton to be Featured on Yahoo Finance's 'The First Trade' Show on May 13, 2019, to Discuss Cellulite Trial Results".

On May 9th, the company tweeted:

Because SOLY "fans" need to be told when to buy the stock by the company.

And they put out a PR here.

So it isn't enough that the company presented the results at the conference, the company also set it up to present it on a Yahoo Finance show. Isn't this backwards? Shouldn't a medical company first present good data, then shows will invite the CEO on to discuss it?

Soliton reminded SOLY traders about being on the Yahoo Finance show twice and had everything all planned out way in advance ahead of the May 20th lockup expiry.

Soliton's Founder And Executives Have Been Involved In Other Failed Companies

Soliton wasn't able to impress institutions with its technology, so it had to do a Reg A+ IPO and crowdfund to retail investors. It's rare for a Reg A+ company to be in healthcare because it's such a capital intensive industry.

Soliton's founder is Walter V. Klemp, who is also the founder and CEO of Moleculin Biotech (MBRX). MBRX is a failed cancer biotech. Klemp and other Soliton executives have worked together on other failed companies in the past, similar to Soliton, like zit-zapping device company Zeno Corp.

From his Bloomberg bio page, the following are the companies Klemp has founded:

  1. Moleculin Biotech - Klemp is the founder and still CEO of this failed biotech. Today, only having a market cap of about $53M. MBRX IPOed in June 2016 at $6 per share. Today, it is at just above $1 per share. On April 22, MBRX rallied to over $3 solely from a PR announcing a conference call to discuss a "significant discovery for lung cancer." Before the call happened, the company quickly did an equity raise at $1.60 per unit, creating many bagholders. That call turned out to be unfounded hype, there wasn't any significant discovery, and the stock fell back to just above $1 where it trades today.
  2. Klemp was the CEO of LumaTherm, formerly Tyrell. The company developed Zeno, a hand-held medical device that zaps acne with a heat shock. Zeno was FDA approved, and there were high hopes for the device. As stated here:

Tyrell has changed its name to Zeno Corp. To better align itself with its zit-zapping product.

Zeno was a recipient of Allure Magazine's Best of Beauty Breakthrough award.

But Zeno became a commercial flop and got discontinued by the manufacturer. As shown here, Zeno Corporation had several venture capital funding rounds between 2005 and 2010, raising a total of $55M. Today, the company seems to have shut down. From that page:

Source: crunchbase.com

Myzeno.com and zenocorp.com don't exist. The phone number doesn't go anywhere. The company's last tweet was on 6/28/12:

Source: Twitter

SOLY's CFO, Lori Bisson, was also the CFO of Zeno Corp from 2005-2008. The COO of SOLY, Joe Tanner, was also the COO of Zeno Corp from 2004-2011.

This article published on 9/9/08 said:

The first FDA-approved device of its kind, Zeno has revolutionized the over-the-counter acne treatment industry by offering a quick, safe and effective means of making blemishes disappear.

This management team came up with a "revolutionary device" that was supposed to make pimples disappear. Now, they have come up with a potentially revolutionary device to make tattoos and cellulite disappear. What are the chances that SOLY will succeed when Zeno didn't?

SOLY's Chief Science Officer, Dr. Christopher Capelli, serves as VP of Technology Based ventures at the MD Andersen Cancer Center. It says in his Bloomberg bio:

As a businessman, he is directly involved in the start-up of numerous venture-capital backed biomedical company ventures.

SOLY is just one of Dr. Capelli's many business ventures.

Soliton Beginnings Are Similar To Failed Former High-Flyer Adomani

Although they are in different industries, Soliton's IPO and beginnings are eerily similar to Adomani's (ADOM). Let's take a look at their similarities:

Source: Bloomberg

Stocks ADOM and SOLY have very similar beginnings. Will SOLY end up the same way as ADOM? Only time will tell, but if there's anything we know about the stock market, it's that history repeats itself.

Disclosure: I am/we are short 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.

Additional disclosure: Additional disclosure: whitediamondresearch.com/...