Novan Inc

Novan Inc (NASDAQ: NOVN) is a development-stage biotechnology company. The key products are SB204, SB206, SB208 and SB414.

Investment Highlights - Novan Inc – Expensive at USD 1.27

• The Company had been following a pattern of reporting a net loss of at least around six times its total revenue.
• The Covid-19 pandemic may postpone targeted development milestones of its lead product, SB206.
• The stock had reached its 52 weeks high of USD 1.45 on 15 January 2021 and currently trading close to it, which indicates that the stock price could decline in the near term.
• From a technical standpoint, the Company is trading at 14-day RSI of ~73.37, indicating a further downside potential in the stock.

Key Risks

• The Company may witness disruption in its product development milestones due to Covid-19 pandemic.
• The Company is exposed to compliance risk.
• The R&D cost may increase, which can bring down the margin levels.

Recent Developments

On 21 December 2020, the Company had announced that it had entered into Master Services Agreement (MSA) with Catalent to develop an intranasal formulation of berdazimer sodium used in its Covid-19 program.

On 15 December 2020, the Company announced that it had completed a total of 525 patients enrollment out of the expected target of approximately 850 enrollments regarding B-SIMPLE4 pivotal phase 3 clinical study of SB206.

Financial Highlights (for Q3 FY20 ended on 30 September 2020 as on 30 October 2020)

(Source: Company result)

• The revenue of the Company remained flat during Q3 FY20 compared to Q3 FY19. The Company had reported USD 1.32 million of total revenue during Q3 FY20.
• The Company had reported a net loss of negative USD 8.4 million for Q3 FY20 compared to negative USD 9.5 million during Q3 FY19.
• The Company had Cash & Cash Equivalent of USD 43.1 million as of 30 September 2020, while it was USD 13.7 million as of 31 December 2019.
• The Company had positive working capital of USD 36.7 million as of 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company had started B-SIMPLE4 pivotal phase-3 clinical study of its lead product, SB206 for the treatment of molluscum. The enrollment for the same is on the expected lines, and it is estimated to be completed by the first quarter of FY21. The topline efficacy result was targeted to be completed by the second quarter of FY21. The Company had commenced exploratory work to evaluate NITRICIL™ for antimicrobial indications related to companion animal health. On the technical front, the Company is trading at a 14-day RSI of 73.37, indicating a downside potential in the stock price. The stock made a 52-week low and high of USD 0.21 and USD 1.45, respectively.

Based on its low profitability and valuation method discussed above, we have given an "Expensive" stance on Novan Inc at the closing market price of USD 1.27 (as on 15 January 2021), while we will keep a track on the development of its lead products and revisit our stance accordingly.

Universal Security Instruments Inc

Universal Security Instruments Inc (AMEX: UUU) is the US-based manufacturer and distributor of security and safety devices.

Investment Highlights - Universal Security Instruments Inc – Expensive at USD 5.72

• The Company was suspicious of unusual trading activity, and the trading was halted on 29 December 2020 by the New York Stock Exchange.
• The gross margin of the Company during Q2 FY21 was 32.6%, which was slightly lower than its industry median of 35.0%.
• On the leverage front, the Company had a higher Debt/Equity of 0.48x during Q2 FY21 compared to its industry median of 0.34x.
• From the technical standpoint, 14-day RSI stood at ~55.47 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The Company is increasingly exposed to foreign exchange risk for overseas operations.
• The current wave of Covid-19 virus could impact the staff and customer base.
• The consumer confidence may be hampered due to the recessionary economic conditions.

Recent Developments

On 03 December 2020, the Company entered into an agreement with DPW Holdings that DPW would purchase a 9.9% equity interest in the Universal Security Instruments.

Financial Highlights (for Q2 FY21 ended on 30 September 2020 as on 09 November 2020)

(Source: Company result)

• The Company had achieved a 78% growth in total revenue to USD 6.46 million during Q2 FY21 compared to USD 3.62 million during Q2 FY20.
• The Company had delivered a net income of USD 725,845 during Q2 FY21, while it had reported a net loss of negative USD 700,814 during Q2 FY20.
• The Company had around USD 146,393 of cash and cash equivalent as of 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

The Company had reached its 52-week high price of USD 13.94 on 29 December 2020 due to the unusual trading activity. The above chart had reflected a closing price of the stock and hence its 52-week high price of USD 13.94 did not appear in the chart.

Conclusion

The Company had clarified that it is unaware of any undisclosed material change or development which had driven the recent increase in its share price and volumes on 29 December 2020. The Company had reported higher sales during Q2 FY21 driven by the shipping delivery to a large national retailer, and it would continue to generate sales during Q3 FY21. The sales growth was also driven by the sale of two products to a large national retailer which purchased certain model as a 450 store test which is to be completed by the end of FY21. The Company had anticipated generating sales growth during Q3 FY21 as well.  On the technical front, the Company is trading at a 14-day RSI of 55.47, indicating a downside potential in the stock price. The stock made a 52-week high and low of USD 13.94 and USD 0.30, respectively.

Based on its overstretched stock price, we have given an "Expensive" stance on Universal Security Instruments Inc at the closing market price of USD 5.72 (as on 15 January 2021) while we will evaluate support from upcoming catalysts and revisit our stance accordingly.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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