Sonoma Pharmaceuticals (SNOA)

Summary

Potential catalyst: We expect a press release to be issued which will follow up on an 8K notice issued by Sonoma on the 30th January in connection with a new distribution agreement with a US company, providing an additional source of fixed revenue for the company. This offers the opportunity for a short term play.

Gross undervaluation: Based exclusively on Sonoma's financial situation, we believe that the company is undervalued by every financial metric. The most significant indicator of undervaluation is that the company has an enterprise value of -$463,000, despite having seen significant growth in their Q3 2024 report, which also swung net loss to just $610,000 shy of net profit.

Low downside risk: Sonoma has closed above $2.50 every single day for the last several months. Consequently, we are confident that this is the price floor. We believe there is relatively little downside risk.

Low float: With a tiny float of just 921,000, changes in demand will greatly impact the share price. This means that a significant increase in buy demand can have a proportionally greater impact on the share price, potentially leading to large squeezes and very high upside.

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This is not financial advice. Please conduct your own due diligence before making any investment decisions. Affiliates of Montgolfier Stocks currently own positions in $SNOA, and have not been paid or solicited by anyone to conduct research.

Abstract

This due-diligence report is a research project compiled by affiliates of Montgolfier Stocks. In this case, this ticker was found by 43Weeks 30 from the r/pennystocks discord server.

Our aim is to provide free and high quality, in-depth, and sourced analysis on potentially grossly undervalued stocks. We aim to be completely transparent in our activities and research, so feel free to ask any questions and pose any criticisms. We view peer review as essential.

This report serves as a hub for information on this potential play, which readers can use to inform their decision making. We strongly encourage all readers to conduct their own due-diligence before making an investment decision.

1. Introduction

Sonoma Pharmaceuticals offers the opportunity to invest in a company that has the potential to be both a short-term and long-term play.

In the short-term, we expect an upcoming catalyst which may cause a significant run-up in the share price; on the 30th January (AH), Sonoma filed an 8K with the SEC announcing they had entered into a new distribution agreement with a US company. Despite not issuing a press release, algorithms picked up on this and the share price increased by a high of 60 cents at AH open. As 8K notices are usually accompanied alongside press releases, we expect that a press release will be issued in the coming days which may cause a breakout.

Given the extremely low float of just 925,000 shares the squeeze potential could be huge.

In the long-term, Sonoma is set to continue its organic growth, which has already seen revenues increase by 33.3% from 6 months ending September 2023 to 6 months ending September 2024.

Regardless, Sonoma is currently trading at below its fair price, shown by a negative enterprise value of -$261,000. Its financials are incredibly promising and further provide evidence for strong organic growth, with possible swing to profitability in H1 2025. There is subsequently no valid reason for Sonoma to have a negative equity value currently.

When considered alongside the stock trading sideways for 2 months (never closing below $2.5), we believe that there is very little downside risk in this stock. In our conclusion this stock is very low risk, yet potentially very high reward.

2. Potential Catalyst

2.1 Explanation

On January 30th 2025 at 16:01 (AH), Sonoma Pharmaceuticals filed an 8-K form with the SEC, explaining that they had entered into a Master Supply Agreement with Wellspring Pharmaceutical Corporation, who will become the exclusive distributor for Sonoma products in the United States.

The initial term is set for a minimum of 2 years, and will be automatically renewed for three consecutive years, provided that neither companies decide to terminate the agreement. Under the agreement, Wellspring will send purchase orders for Sonoma products to be delivered on a monthly rolling basis. This offers another opportunity for revenue expansion in the United States, suggesting another possible source of rolling revenue, further strengthening the companies' financial position.

Unusually, this filing was not accompanied alongside a press release. Consequently, we believe that the press release is yet to be released. It is most likely to be released in the pre-market of the 31st January 2025, although it could also be released at some point next week.

Given that the share-price ran to a high of $3.19 from $2.615 at market close, this suggests that certain algorithms picked up on the 8K filing.

The press-release may attract retail investors, leading to a run-up in the share price. Given the low-float, this could lead to a squeeze in the short-term.

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WARNING: Whilst we believe the PR may lead to a run-up in the share price, there is equally a high chance it won't . Regardless of this potential catalyst, we maintain our thesis that Sonoma is an undervalued company.

2.2 Counterargument

That being said, there has not been significant precedent within company history for the consummation of a Material Definitive Agreement to lead to a major run-up. In addition, the share-price has closed more times than not lower than what it opened at.

Whilst the past does not always repeat itself, it is a useful indicator for what we can expect:

3. Financials

3.1 Financial Summary

Whilst like most growth-stage pharmaceutical companies Sonoma Pharmaceuticals is not currently profitable, the company is incredibly unique in that it is moving closer and closer towards profitability as growth continues to scale. Similarly, the company has little-to-no-debt, another aspect which sets Sonoma apart from its market peers.

For example, the Q3 report showed a decrease in net loss from $1,484,000 in the sixth months ending September 30 2023 to just $610,000 in the sixth months ending September 30 2024. This is attributed to positive revenue growth from $2,731,000 to $3,579,000, driven by increased global demand for Sonoma products, such as in Latin America where revenues grew by 80% due to an increase in manufacturing orders .

This shows that Sonoma Pharmaceuticals is commercially scalable, which also offers the opportunity for a potentially lucrative long-term investment as well as a short-term play. This is reflected by an astounding 90% improvement in net-loss per share from $5.75 to $0.59 in the sixths months ending September 30 2023 compared to the sixth months ending September 30 2024.

Despite these incredibly positive developments showing growth and potential for further growth, the share-price remained stagnant.

Consequently, we believe Sonoma is already trading below its fair market cap based on its financials. This is further evidenced through a negative enterprise value of -$261,000, implying that the current share-price is trading below the fair value.

3.2 Financial Indicators

LITTLE-TO-NO DEBT: Additionally, Sonoma Pharmaceuticals has very little debt. In the 6 months ending September 30 2024, it had accrued just $82,000 in short-term debt. This represents a 74.61% decrease in debt from the 6 months ending September 30 2023, where there was $323,000 in short-term debt. The company has good financial health, and has been able to pay off its debt. It has also not accrued anymore debt, which may otherwise way the company down in the future.

VERY LOW ENTERPRISE VALUE: In our view, it is incredible that Sonoma is trading at an equity value of -$436,000. This negative figure means that the market cap of this company is trading below its total cash and cash equivalents.

Usually a negative enterprise value indicates that whilst a company has a strong financial position, the market is not confident in them as their growth may be stagnating.

However, in the case of $SNOA, this can simply not apply. Their financials show strong revenue growth and organic growth in multiple markets across the world. Gross profits are improving whilst net loss is decreasing and EPS is swinging drastically towards profitability.

3.3 Fair Value

If we were to take the most conservative scenario and assume that there were to be an enterprise value of $0, the minimum price we should expect Sonoma to trade at is $2.98. In reality, companies with good financial health that are experiencing growth, tend to have a multimillion enterprise value. Consequently, if Sonoma were to trade at a multimillion enterprise value the share-price would easily run past $3.

Whilst we do not set price targets, we are confident that the current share-price is an undervaluation by every financial metric.

4. Market Technicals

4.1 Low Float

Following a reverse-stock split in August, there are now a total of 1,340,000 outstanding shares. According to Yahoo finance, there is a very low float of just 942,500. This falls in line with our calculations.

This very low float means that changes in demand have a proportionally greater impact on the share price. Consequently, sudden buying demand is more likely to cause a squeeze in the share price, offering higher upside potential.

Whilst there is very little institutional holding, it has been increasing over recent quarters. However we are not ascribing significant weight to this as it is still negligible in comparison to the overall outstanding shares.

In contrast, the free float is 942,500 according to Yahoo Finance. This is due to the equity incentive plan, which awards employees with shares. This is also due to large purchases from a certain retailer, Gottfurcht Grant. He purchased what became 433,273 shares following the RS split in August. He purchased the shares in May and June, when shares traded at around $3.

He began to file several 144 forms in late December and early January 2025, selling a total of 133,917 shares. This means that he now owns 299,356 shares, or 22.3% of the total outstanding shares. As he owns more than 10%, he is treated as a 'major shareholder' and consequently is excluded from the float.

Whilst some may be worried that he may continue to dump shares, he will have to provide 1 day notice as per US securities law for the sale of shares by a 10%+ shareholder for a market value of more than $50,000.

4.2 Low Downside Risk

Since early December, $SNOA has traded consistently and securely at around $2.50 by the point of market close. Consequently, we believe that there is no evidence to indicate that the share price will fall below this. As a result, we feel secure in our entry at around this value as we believe that there is little downside.

In the same time period, there have been random spikes in the share price, simultaneously never falling below $2.50 following the retreat from these spikes.

About Montgolfier Stocks

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