GRDH: Guardian 8 continues to lay the foundation for growth

Zacks Small Cap Research

By Steven Ralston, CFA

OTC:GRDH

Guardian 8 Holdings (GRDH) is the developer and manufacturer of the G8 Pro V2, a non-lethal security device designed for use in the professional security industry. Though the sales cycle for the adoption of ENLs is progressing at a slower pace than originally anticipated, we are optimistic in the ultimate commercial success of the Pro V2. Management’s commitment is unwavering as demonstrated by related-party financings and management’s participation in the convertible debenture private placement in early June. We maintain our Outperform rating and price target of $0.90.

During the first half of 2014, Guardian 8 Holdings established relationships with Securitas USA and Platinum Event Services of Dallas. Securitas-USA manages the security programs for 350 North American hospitals, which employ almost 3,000 security officers. Platinum Event Services offers a comprehensive menu of security services for events, conventions and property security. The Pro V2 ENL security devices allows Platinum to deepen its portfolio of offerings by providing an option between unarmed security officers only equipped with night sticks and security officers carrying firearms, which involves more expense and higher risk of liability. In addition, the incident reporting and communication capabilities of the Pro V2 not only provide documentation of an event, but also enhance the deterrent aspect of the effort to de-escalate situations.

In mid-April 2014, Guardian 8 announced that a globally recognized family theme park placed an initial order for G8 Pro V2 units, along with certification training for the theme park’s security personnel. Though the theme park operator was unnamed for reasons of confidentiality, the adoption trend of the Guardian 8’s Enhanced Non-Lethal device, the G8 Pro V2, is clearly emerging. 

Both the Securitas USA and family theme park deployments of the G8 Pro V2 are a direct result of the alliance with California Association of Licensed Security Agencies, Guards and Associates (CALSAGA). In January 2014, the company signed a two-year agreement under which CALSAGA’s 90,000+ membership has the opportunity to purchase package deals of a Pro V2 unit, holster and instructor course training at an attractive bundle price point.

Since Guardian 8’s inception, operations have been financed through the issuance of stock, convertible & non-convertible term notes and bank lines of credit. Until the sales of its products and training services can satisfy the company’s cash requirements, management expects to raise the necessary funds through stock offerings, note issuances and bank financings.

In late May-early June, Guardian 8 Holdings issued $7,000,000 of 8% Convertible Senior Secured Debentures due of November 30, 2015 through two private placements. The convertible debentures were placed with 17 accredited investors, including all seven current board members. Net proceeds were initially used for repayment of short-term debt (including the line of credit with Cornerstone Bank of Overland Park, KS that helped finance the company’s initial production order for Pro V2). The remaining working capital will be used for domestic and international sales and marketing efforts, the acquisition of additional inventory and R&D towards the development of a consumer ENL device. 

Our price target for Guardian 8 Holdings is based on price-to-sales (P/S) valuation methodology. Guardian 8 is a small-capitalization company, currently with negative profitability, but with an expected sales profile that should grow and expand over time as the company’s initial product begins to be deployed within the private security industry. Since Guardian 8 has the potential and is expected to generate meaningful revenues, our price target is based on a price-to-sales ratio valuation using estimated 2015 calendar revenues. At a P/S ratio of 11.0 on projected sales of $3.9 million, our price target remains $0.90.

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