Gatekeeper Systems FINS Review (3 / 5)

Q3 2024

Jul 31, 2024

A pretty quiet quarter in the news department with only one news drop since their Q2. It has translated to a pullback in the share price, and what appears to be a pretty ho hum Q3 after starting the year like gangbusters with YTD share price appreciation so far of approx 40%.

A 2024 Wolf pick so expectations are high, but that also means I will be looking at these results with a more critical lens. Their January Q1 results translated into an upgrade to 3.75 stars. I was close to downgrading them at the end of March with the release of Q2. Can they escape a downgrade again? Given the headlines from last night, I doubt it. Full discosure - I have a position here and increased it in recent weeks. Let’s get into the details.

Balance Sheet:

Very strong current ratio of 6.4, slightly down from last quarter but still in extremely good financial shape with $9.25M in cash, $3.9M worth of receivables, $4.7M worth of inventory and $1.5M in other short term assets against just $2.9M of liabilities due within the next year. Gatekeeper continues to be debt free. I was slightly concerned with their A/R last quarter but they appear to have had a great collection month here with should translate to their cash flow statement. Even though the current ratio is slightly down, the overall balance sheet looks stronger to me as liquidity has improved pretty significantly QoQ.

$650k in a loan receivable is due from the CEO from tax remittances from his sizable $1.3M bonus paid out this year. Let’s get this cleaned up.

Cash Flow:

As I discussed last review, they have had some pretty wild swings within their working capital which has skewed operational cash flow, particularly when making comparisons to last year and this quarter will be no different.

Overall it looks tremendous with $6.1M of OCF generated through their first nine months compared to a piddly looking $563k at the same time last year. Nearly $700k per month for a company this size is great and $4.8M in OCF was achieved in this quarter alone thanks to the change in accounts receivables mentioned earlier. The gap to last year should probably be overlooked however due to the working capital changes they had then, particularly in payables.

Even after $1M spending in asset purchases, they have increased their cash position by 125% since the start of the year. Looking great thus far but this is not where I thought I’d have concerns.

Share Capital:

92.7M shares outstanding, 400k up from last quarter with more options being exercised. 850k of options were excercised post financials bringing to outstanding share count in the 93.5M range
6.1M options outstanding (as of today) all ITM including the 2.2M awarded this year
11.3% insider ownership (per YF) but no insider activity on the open market aside from 100k of insider selling back in Feb with proceeds used to exercise a similar amount of options and pocketing the difference.

Income Statement:

Cringe, here we go. Will cover the quarter and YTD separately.

$6.4M of revenue in Q3, up 8.8% from the comparable quarter last year. While I don’t think anyone was expecting to match off the last two quarters, it was 34% down on a QoQ basis. Gross profit also came in extremely soft, down 740 basis points from 49.6% to 42.2% resulting in 7.5% less gross profit dollars than last year on 9% more business. That stings, but it gets worse. Operational spending was up 26% compared to last year and spending was up in all three major buckets, G&A up 6%, Selling and Marketing up 60%, and R&D by 15%. Softer than expected revenue, and dismal performance on the margin and expense lines translated to an overall net loss of $416k in the quarter, compared to a $404k profit on the net income line or a $820k negative comparison and the worst profitability quarter they’ve have had in the last two years.

Things look better from a YTD perspective with 27% more revenue, and a more than 400 basis point improvement in margin to 48.2%. Operational spending however is now greater than their revenue increases with 29.4% more operational spending with G&A costs up by 20% and Selling and Marketing costs up by 50%. Fifty percent higher marketing costs to deliver 27% more revenue is poor conversion. Sometimes that takes some time but the numbers right now are what we have. They still look good from an overall profitability perspective with $3.2M of net income which is 50% greater than last year, but not nearly as exciting as their YTD numbers looked after Q2.

Overall:

So where does that leave us and what can we expect from the share price in the days and months ahead?

Unfortunately, leaving this turd in the punchbowl could not have occurred at a worse time. As a small cap stock, you never want to have your worst quarter in Q3. Now it will be a very long time until you report your annuals and investors will have this waft of shit lingering in the air until Christmas.

The other bad piece is technically the chart is in quite a precarious spot too, sitting right on top of .59 support which has been tested quite a bit in the last couple of months. On top of that is the gap up that happened from their Q1 release from 50 - 55 cents so I fear by the time they release their annuals, that gap and 48 cent support could be tested.

I’m not sure the commentary within the news release does enough to offset concerns. We knew the investment in people was coming, trying to go harder after the US market, but the news has lagged spending and they are already through 2/3rd of their Q4. Growing pains happen with stocks like these and hopefully this will be short lived. What won’t be short lived is the five month wait until their annuals. Not hesitating with the downgrade this time, a pretty sizable one all the way back to three stars.

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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 and I do so without compensation. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements.
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.