Talk about a riches to rags story. At least that is true in terms of the interest I’ve had in Gatekeeper over the past few years going from a 2024 annual pick to the final line in my last review which stated “these guys are so far on the back burner right now, I can’t see the stove from here”.
You can read the full review of what I had to say about them in January after their Q1 below. The header image of the dumpster fire pretty much tells the story so maybe you do not need to click on it after all.
It’s disappointing to think about what might have been but that story is a common one in microcaps. In mid December of 2023 when it was selected as an annual pick, it traded at 43 cents - exactly what it closed at yesterday after doubling by April of 2024. I exited my position late last year so I still made out ok, but I was hoping for much more.
The headline numbers look dreadful but I have yet to dig into their actual financials. Let’s do that together now.
Balance Sheet:
Gatekeeper’s current strength is still possessing an incredible balance sheet. With deferred revenue removed their current ratio is a ridiculous 13.1 which is made up of $8.5M in cash, $2.6M in receivables, $5.6M worth of inventory and $1.2M in other current assets against a miniscule $1.36M in liabilities due over the next twelve months.
I’m not finding any aging detail on their receivables but since they are two thirds less than last year I’m not concerned. It is notable that inventory is up 20% on significantly less revenue so much less efficient from a turns perspective.
Gatekeeper has no debt but does have a $3M LOC available too them. No issues standout but sometimes you can have a balance sheet that looks too good and this might be one of those times.
Cash Flow:
Through their first six months, GSI has produced $1.9M of operational cash flow compared to $1.3M, an improvement of 46%.
Sometimes OCF can be a misleading metric and I’d argue that is the case here. Last year due to their growth they had the negative impact of working capital adjustments within their accounts receivables as they hadn’t collected on that revenue yet. Fast forward to this year and they have collected previous revenue but haven’t replaced it - that in turn buoy’s those working capital adjustments and makes their OCF look better on a worsening net income result. Their OCF for Q2 alone was about $340k.
Very little activity to speak of in the investing and financing sections so as a result their overall cash position has improved by 24% from the start of their fiscal year.
Share Capital:
94M shares outstanding with only 2.3% dilution over the past six quarters
5.2M options outstanding, with only 90k currently out of the money
11% insider ownership and insiders have been historically allergic to buying in the open market
Income Statement:
Second tough quarter in a row throughout the P&L with just $5.92M in revenue in Q2 compared to $9.86M, a drop of 40%, bringing their YTD total revenue to $13.2M, 33% less than last year at the halfway mark.
The story isn’t any better on the margin line with nearly 1300 basis points of gross profit rate erosion down to 38.8% in Q2 compared to 51.6% last year. Through two quarters it’s a 900 basis point drop to 41.2%. So on 33% less business YTD, they produced 45% less gross profit dollars.
Adding insult to injury on lower revenue and much lower gross profit, is increased spending, with their opex up 13% on a YTD basis. Q2 was only moderately better spending 9% more than last year.
This is the reverse uno card of a Wolf Trifecta - lower revenue, a significant worsening in gross profit rate, all while spending more. That all translates to a net loss of $619k against $3.6M in profit last year which even includes a $763k gain in foreign exchange. It’s a disaster from top to bottom.
Did I use the reverse uno card reference in the right context? Don’t answer, I don’t care.
Overall:
So where do we go from here?
If there is some encouragement from their press release it’s that without a $9M contract which was completed in the first half of last year, their other businesses would have improved by approximately 20% YTD. What they fail to mention is that additional business aside from that big contract comes with 40% of margin compared to 50%.
Down quarters come with the territory in lumpy revenue businesses but if you can’t count on relatively consistent margins and have sticky operational expenses that just increases the risk profile of a microcap. Their recurring business is growing, but it only currently represents about 7% of total revenues and it certainly doesn’t appear to be helping their margin levels.
They do have an excellent balance sheet to weather some tough times but as I mentioned sometimes a balance sheet can actually be too good - a statement rarely used in microcaps.
Other encouraging signs include some new contracts including a new $5M deal and a new deal and relationship formed with the TTC. But for a company that traded early last year at a 6 P/E is now unprofitable on both a Net Income and EBITDA TTM basis and trading over 1.25 on a P/S with declining metrics up and down the P&L. No thank you.
Gatekeeper stays in the ignore pile I’m afraid. Will maintain the 2.75 star rating due to the strength of the balance sheet and the fact they are not burning cash yet.
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Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from companies I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.
It's funny how some companies suddenly exclude large contracts from their ''regular business'' to show they're still growing. Yeah right lol
Heard about the TTC deal on CP24. Seemed like good coverage, but I guess it's not enough to outweigh the negatives.