Skyline Medical: FDA Approved, Little Competition And A Lot Of Room To Run

| About: Skyline Medical (SKLN)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Recently, I conducted an interview with Josh Kornberg, CEO, of Skyline Medical (NASDAQ:SKLN). This is the second interview I conducted with Mr. Kornberg. In the first interview, we covered a lot of the history of the company, and its major products and opportunities. In this interview, I built on the original interview in order to examine the company in greater depth.

Daniel Lauchheimer (DL): To start, the company has a new name -- what's the thinking behind that decision?

Josh Kornberg (JK): When I took over the company, I inherited some things, one being the name of the company. We spent months thinking about it, and came up with Skyline, which we think fits quite well with our company. The Company is based in Minnesota, which is known for its skyline, and because of the company's upwards trajectory.

DL: You recently formed a medical advisory board? What is the thinking there?

JK: We have three main goals with the advisory board

a. Support R&D -- one of the members of the advisory board is Dr. Carl Schwartz who is a dentist by trade, and successfully built out dental practices in the Midwest. We want to get involved in the dental area down the road, and therefore, we thought it appropriate to add someone with Dr. Schwartz's experience.

b. Facilitate Introductions -- We also added two surgeons that are in there that are well thought of, and can help with introductions to hospitals and ambulatory care centers.

c. Dealing With Large Purchasing Groups -- we also added James A. Fitzgerald Jr. -- founder and former CEO of HealthTrust Purchasing Group, a subsidiary of HCA (NYSE:HCA) one of the largest purchasing groups in the country. He brings a skill set that support how to deal with large purchasing groups, and navigating the complexities of that system.

Overall, I have been very impressed with the advisory board. They have taken a very proactive approach to working with the company, and have already added a lot of value.

DL: You released Q2 numbers yesterday (Aug 14, 2013). You reported very strong y/y growth -- 500%, but q/q you only grew 15%. Is there seasonality to your business? Should we expect higher q/q growth in the future?

JK: Next quarter and going forward, investors should see substantial increase in revenue growth. We spend a lot of time working on national contracts with hospital and surgical groups. A lot of these groups need to replace the Stryker Neptune System (NYSE:SYK), which has had a lot of problems, most significantly a Class I recall (recall resulting from patient death). Investors should continue to see very high margins, somewhere around 80%, which coupled with the revenue growth should directly benefit the stock price.

DL -- At the end of the first quarter you had $372,854 in cash on hand, but that number decreased to $137,066 -- how are you managing your liquidity?

JK -- We have a pretty substantial backlog (purchase orders) already executed, and more coming through, so those don't show up on revenue line item until we actually install the systems. In reality, when all the dust settles we have close to $1mm in actual cash.

DL: In your latest 10-Q you had outstanding options of 27mm, and warrants of 56mm with a weighted strike price of around 10 cents. All of these options are in the money, and if exercised would dilute common shares by about 66%. How should investors view that risk?

JK: Some of the warrants can expire because they have a cash component. So investors wouldn't necessarily see such a heavy dilution.

DL: Your stock price is off 15% today (Aug 15, 2013), why do you think the market has taken a dim view of the stock? Do you think it has to do with recent results?

JK: My personal view is that stock prices are irrelevant especially for an hour here and there. My goal is to grow the business, take market share, and make shareholders a lot of money. With that said, as a fiduciary I look forward to getting off this exchange, towards one with better liquidity, and plan to do that towards the end of the year.

DL: How big is your market?

JK: In the USA, very rough estimates peg the number of OR's at around 50,000, and the total number of procedures at 70mm. We have two revenue streams, the first from installing the equipment in the operating room, and secondly we provide the disposables that doctors need to replace between every surgery. So we get a one-time fee, and then have the benefit of the continuous revenue streams from performed procedures. I think we can estimate getting 5-10% of the total market.

DL: How many salespeople do you have on staff?

JK: We have 3 people in house who negotiate and sign with regional distributors. I am also part of the sales team, I go to the largest groups directly. The leader of this team has 30+ year history in experience in medical device sales.

DL: Do you have International expansion plans?

JK: We've done preliminary due diligence including talking to international distributors, but we don't plan on filing until September/October. Importantly, we need to protect our intellectual property, and before we make any major moves I need to make sure we have a secure environment to operate in.

DL: Any final comments?

JK: You see through filings and press releases, that the growth pace is extremely high in terms of installations, sales, and I am very happy where we are. I think the growth serves as a testament to the excitement hospitals have for our product, despite the presence of many alternatives.

Brief Comment

At the end of the interview I did a rough back-of-the-envelope calculation for the value of the company. Assuming a 5% adoption and 80% margins, on a fully diluted basis I calculated the company's worth $4/share -- giving it 15x upside to the current share price. See here for the work on how I got to that price. Obviously, the success of the company depends on many factors, and my quick calculation could have major holes, but I think even this rough calculation gives investors an interesting perspective on how to think about Skyline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.