Guardion Health Sciences Has Enough Cash For Now, But Be Wary Of Further Dilution

Edward Vranic, CFA profile picture
Edward Vranic, CFA
5.75K Followers

Summary

  • Guardion Health Sciences has had two major dilutions since its IPO in April, causing the stock price to tank about 95% in just a few months.
  • With the capital raises, the company appears to have enough cash runway through the end of 2020, but it also has dilutive warrants which can be exercised on a cashless basis.
  • The company's financials look weak, so investors should treat this stock as nothing more than a trading vehicle until a point in time where revenue looks to be gaining real traction.

I have previously written two articles about the dangers of investing in Guardion Health Sciences, Inc. (NASDAQ:GHSI) over the summer shortly after its IPO in April at $4.00. The stock has cratered an impressive 95% in several months of being a publicly traded company amid predictable dilutions. The latest offering has caused GHSI's shares outstanding to explode to 75 million from 21 million since its debut. That does not include warrants, which can be executed on a cashless basis and cause the share count to increase to over 100 million shares. The Board recently approved an increase in the authorized share count to from 90 million to 250 million to make room for the possibility of warrant exercise. Buying in, even at these levels, is highly risky and should be viewed only as a short-term trade, because there doesn't appear to be any predictable timeline for when the company is cash flow-positive and, therefore, self-funding.

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GHSI is a typical startup company in the medical device and health sciences space with minimal revenue and heavy cash burn. One has to question why these types of companies are so eager to list publicly just to see their stock price tank. The venture capital market must have dried up for Guardion, which left highly dilutive public offerings as the only option. That is apparent when reviewing GHSI's Q3 financial press release, where two of its main highlights included capital raises in August and October.

While the raises killed the stock price and any hopes of the stock returning to its IPO price anytime soon, they did shore up the balance sheet. The company had $5 million in net cash as of September 30, 2019, and when including the $7.2 million in net proceeds from the October raise, it claims to have enough funds to last at least through the end of 2020. Based on the burn rate of about $2 million to $2.5 million per quarter, that appears to be a reasonable statement.

However, even when excluding the dilutive risk of the cashless exercise of warrants, one has to wonder if the $16 million market cap based on Friday's closing price of $0.22 is justified - even if that has dropped from an $80 million market cap at the time of the IPO. CEO Michael Favish stated:

We are pleased with the progress we made in the third-quarter, which was highlighted by revenue growth in our flagship medical food Lumega-Z. As a result of the recent commercial introduction of the VectorVision CSV-2000 device to the marketplace in September 2019, we anticipate positive momentum from this business in 2020.

While it's true that Lumega-Z saw an increase in revenue, the total revenue for the company's medical foods division was only $112,957 (compared to $86,082 in Q3 2018). Total company revenue actually declined 45%, from $294,230 to $161,162, for Q3. Total net loss for GHSI was $2.4 million for the quarter. The company said it was optimistic for 2020 and explained the revenue decline by saying the market is anticipating the new version of its VectorVision product. But the older version of the product wasn't exactly setting the world on fire.

In the end, GHSI is a medical device and health sciences company that doesn't have much market share, while revenue has been headed in the wrong direction in 2019. The annual revenue run rate is generously around $500,000, which means at a $16 million market cap, its revenue multiple is 32. The company's expenses are more than 10 times its revenue. Unless there is a significant uptake in revenue for 2020, it does not look hopeful that GHSI will be cash flow-positive then or anytime soon, which means a dilutive capital raise will likely occur once again in the latter half of 2020.

Based on the numbers, GHSI did not look ready to become a publicly traded company. My assessment of the situation is that management was desperate to find funding to keep Guardion operating as a going concern by any means necessary. When dollars from the venture capital market dried up, it resorted to the IPO. The two capital raises that played a role in seeing GHSI tank 95% in several months show that management does not have the bargaining power to show concern about the stock price. Its prime motivation is to keep the company afloat at any cost. If management is unwilling or unable to defend the stock price, then shareholders need to be unwilling to show any faith in GHSI.

The market should view this stock as nothing more than an expensive trading vehicle, with the risk of cashless warrants being exercised and hitting the market at any time to help make the vulture financiers whole. The Board has been complicit in these actions by approving the increase in authorized shares from 90 million to 250 million, as well as approving a possible future reverse split. If an investor buys and holds onto GHSI for longer than a year with no trading of any spikes, it is almost a guarantee that they will be in a losing position by the time that year is up.

This article was written by

Edward Vranic, CFA profile picture
5.75K Followers
I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and writing skills across a variety of industries and to take advantage of any story-based trading opportunity that may arise. My passion and greatest depth of knowledge is on Canadian small cap stocks and I consider my blog posts to be some of my best work. I am interested in any freelance opportunities that may arise outside of Seeking Alpha on Canadian or American listed stocks.
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Disclosure: I/we 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.

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