GelTech Solutions (OTCQB:GLTC), founded in 2006, manufactures some environment-friendly products like FireIce and Soil2O. It is not a penny stock by Seeking Alpha's definition, but barely. The main reason I am discussing a company as small as this, and trying to see what Alpha I can find in it, is because GelTech is the registered Assignee of 3 patents, two of which are granted already, and one, which looked the most interesting to me, is pending approval. See screenshot below of my search.
The industry is very niche and the company has been trying to establish itself in the market since its inception. It is in a very nascent stage, and is currently involved in the marketing of the two products I just mentioned.
GelTech's current market price is $1.04 and current market capitalization $30.58 million. It has had a history of experiencing sudden spikes in its stock price. Recently it rose from $0.419 in February to around $1.70 in March, but then fell to $0.85 in the next few days. It surged to $1.20 the next day, and has been trading around $1.00 since then. This is still a return of more than 100% in the last two months. But its last 52-week range is $0.21-$1.75. This volatility might be due to the low volume of trading. The company suspects this stock movement was due to some stock manipulation and has hired a counsel to investigate this. This raises a question about the fair value of the stock. Let's have a look at the recent earnings and fundamentals to know more about its financial performance.
For the quarter ended on 31st December 2012, the company reported a reduction in its revenue by more than 55% as compared to same quarter last year. Its R&D expense was less than the previous year, indicating low probability of new products getting developed. The company reported a net loss of around $1.4 million, which meant a net loss per share of $0.05.
The company has not been able to report profits since its inception. Therefore its fundamental ratios like return on assets, return on equity etc. is of little significance. The only thing which can be considered positive for the company is its high gross profit margin, which is more than 84%. The total debt of the company is around 7.5 times that of the cash it is holding. With a negative operating cash flow, the company might not be able to sustain for long and will have to issue more debt in the near future. This will further leverage the company making it more unsustainable.
But any young and growing company initially has weak fundamentals and earnings. The question is whether the company has any growth potential in the future to give returns to its investors. In general, it seems to be a small, legitimate company with very poor fundamentals that is just waiting for something to happen to boost itself up to the next stage. Being in the sector it is, this "something", if it does happen, will usually take the form of a governmental contract.
GelTech's major products
FireIce is one of the patent pending fire suppressing products of the company. The company claims that the product fights fire efficiently and effectively without harming the environment. The product uses water and increases its firefighting ability. The company further believes that its products are non-toxic to wildlife and aquatic species because of its ability to break down harmlessly over time in the soil. It claims that the product is very safe and uses very little water as compared to other products.
The product recently has seen some success. It has been included on the United States Forest Service (the "Forest Service") Qualified Products List (the "QPL List") since March 2011. I have given the screenshot from the US Forest Service website below-
According to a company's press release, FireIce was successfully used by the US Forest Service to control timber fire in Washington State.
The company also announced the successful completion of the three month pilot program with Con Edison (NYSE:ED) to use FireIce to combat manhole fires. The product saw some setback as well. The company previously signed a 10- year distribution agreement worth $87.9 million to sell FireIce in China, but there has been a trademark issue, and the company won't be able to sell its products in China for some time now.
Overall FireIce seems to be a promising product for the company that has been gaining acceptability. But the revenue that the company generates in future will be dependent on the status of the patent. There has been no information about the timeframe of the grant of patent to GelTech. But when the patent is granted, it will prove to be a boom for the company's growth prospects.
Soil2O is another product for the company. It is a non-toxic soil conditioner and a dust abatement product. The company claims that Soil2O products stop all types of particulate matter from entering the air and water. It further claims to reduce water consumption up to 50% and promote healthy root development in plants.
Geltech has recently announced that the company assisted a large private international company to help them mitigate dust from haul roads. GelTech's Soil2O Dust Control product was chosen over two other competing products in side by side testing. This might result in a profitable collaboration for the company in future.
Although the sales of Soil2O products were down during the three months ended December 31, 2012, the company in its quarterly report claims to have reasonable market for these products. It is confident about the good growth forecast for the products because of the increased federal regulations for airborne particulate matter and severe drought conditions in some parts of the US in 2012. These factors might drive the demand of the product in future.
Insiders are buying
As it is evident from the screenshot given below, the insiders have been buying the shares of the company in the last few months.
The latest trading involves buying of 26400 shares at the stock price of around $0.934 in March 2013. This indicates that the insiders are expecting the stock to rise in future, giving them substantial returns.
Change in management
Michael Reger has recently been appointed as the Chief Operating Officer of the company. He has been a significant shareholder of the company since its inception. His extensive knowledge of the industry and managerial skills might prove to be invaluable for the company in future. Jerome Eisenberg has also been appointed the executive chairman and chairman of GelTech Solutions Board of Directors. The company hopes to rapidly move along its growth path with its new management.
It is a young company, which has been releasing new products to match the growing need of being environmental-friendly. The future of the company depends on the acceptability of its products by major government services departments and large corporate institutions. This will be possible only when the company is granted the patent for FireIce. Its Soil2O products' revenue has fallen recently, but the company expects the sales will pick up. The stock has also been very volatile recently. It is not really possible to determine the fair value of the stock right now, because of the negative cash flows. But there will be some intangible valuation involved when the patent for FireIce will be granted. If FireIce keeps gaining popularity, then the patent grant could be an opportunity to invest in the stock.
Disclosure: I am long OTCQB:GLTC. 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.