By Steven Ralston, CFA
Progress at Guardian 8 Holdings (GRDH) is exceeding our expectations. Therefore, our price target has being raised primarily due to greater than expected progress in terms of sales and gross margin in the latest reported quarter and the aggressive availability of Instructor Certification courses, which we expect is a precursor of future sales demand. Having sold out the initial production run of G8 Pro V2s in September, the first tranche of 1,800 units for an open order for 10,000 units is currently in production. Management continues to build awareness and promote adoption of the G8 Pro V2 by attending investor conferences and security industry trade shows. 2014 is expected to be a breakout year as Guardian 8 generates significant revenues from its first product. In addition, management has been successful in obtaining capital (through private placements and the exercise of warrants) and aspires to up-list GRDH to NASDAQ.
Management continues to cultivate interest in the G8 Pro V2 through exhibitions at national and regional trade shows and with direct contact with the security departments of major corporations. Recently, Guardian 8 attended the 59th annual ASIS conference in Chicago (September 24th - 27th) and the 6th annual LD Micro Investor conference in Los Angeles (December 3rd - 5th). At ASIS, the company garnered over 200 qualified prospects from North America, Latin America, Africa, Israel and Asia. In addition, Guardian 8 offered training classes on September 27th. The three-day LD Micro investor conference focuses on small and micro-cap stocks. A record 1,300 people attended the 2013 event.
In August, Guardian 8 initiated its training program with a class and the completion of the training manual. An additional class was conducted at the ASIS conference in September and then another class was held in Southern California. In October classes were scheduled in Waterbury, CT; Newark, NJ; Dallas/Ft. Worth and St. Louis MO. By the end of the month, the company had certified over 50 Senior Master Trainers who are capable of instructing security employees at other companies. Instructor Certification training was again available in Ft. Lauderdale, FL; Atlanta, GA; Philadelphia, PA and Washington DC/Baltimore during November and in the Los Angeles area in December. The training course can be purchased on the company’s website at a cost of $179 per person.
On November 14th, Guardian 8 Holdings reported financial results for the third quarter ending September 30, 2013. Guardian 8 generated revenues of $22,527 from the sales of newly produced units of the Pro V2 device, confirming the transition from a development stage company to an operating entity. Despite many test and evaluation trial units having been dispersed but not been yet recognized as revenue, sales were over twice our expectations of $9,765. Also impressive was that the gross margin improved 687 basis points from the preceding sequential quarter to 74.6%. General and administrative expenses increased 27.1% sequentially to $860,148, primarily due to the company’s growing sales and marketing effort, along with research and development costs. The net loss for the quarter was $877,979 (or $0.03 per diluted share) compared to a loss of $702,495 (or $0.02) in the preceding quarter (second quarter of 2013). During the quarter, financing activities provided $1,765,556 ($49,340 from the sale of common stock, $37,500 from the conversion of warrants and $958,933 from the issuance of notes payable. Subsequently, on November 21st, Guardian 8 announced the closing of a $1,984,500 private placement through Finance 500 Inc., the proceeds of which are earmarked for bolstering the company’s sales effort for the Pro V2 and developing the consumer model for personal defense.
Our price target 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. We have examined the valuation progression of the stock of TASER International (TASR:NASDAQ) during its formative years, which appears to be relevant to Guardian 8. Not only do both TASER and Guardian 8 operate in the protection-safety industry and focus on self-defense devices, but also TASER began as a single product company and evolved through the development and introduction of next generation devices.
We expect the valuation of Guardian 8 to be similar to TASER’s. Guardian 8‘s revenue profile is expected to exhibit dramatic growth through management’s execution of its strategy to market the company’s novel defense device, which targets an unaddressed need of the security guard industry. We expect Guardian’s stock to trade initially in a price-to-sales valuation range between 3.0 and 11.0. If and when the company’s sales exceed $5.0 annually, the stock valuation range is expected to expand to a higher premium multiple that is usually afforded small-cap companies that exhibit rapid sales growth and that operationally cross the breakeven point to profitability, which is also supported by the analysis of TASER’s historical valuation profile.
Since Guardian 8 has the potential and is expected to generate meaningful revenues beginning in the fourth quarter of 2013, our price target is based on a price-to-sales ratio valuation using estimated revenues for 2014. At a P/S ratio of 11.0 on next year’s projected sales of $4.3 million, our price target is $0.90.
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By Steven Ralston, CFA