Quick Pitch: Guardion Health Sciences (GHSI)

Large Asset Sale & Potential Large Capital Return

This is yet another ‘large asset sale + potential capital return’ setup that has recently appeared on my radar. The company involved is very tiny, yet liquidity has been quite decent lately ($110k+ avg. daily volume).

Guardion Health Sciences has agreed to sell its only operating asset, the nutritional supplement brand Viactiv, for gross proceeds of $17m. The transaction is very likely to close (expected in Q2’24) and will transform GHSI into a $24m net cash shell, compared to the fully diluted current market cap of $15m. While GHSI’s management has not indicated what they will do with these funds, the involvement of a successful micro-cap activist Bradley Radoff increases the odds of a shareholder-friendly outcome (e.g. liquidation or a large capital return).

The main risk is that management (owns only 1% of GHSI) will waste this cash on some kind of value-destructive acquisition or reverse merger given sizable NOLs ($43m as of Dec’22). However, as noted above, Radoff’s involvement and seeming influence on the company reduce this risk somewhat.

The 38% discount to pro-forma net cash provides a substantial margin of safety while waiting for further updates.

The recent positive developments within GHSI seem to have been influenced by the involvement of Bradley Radoff, who is currently the shareholder with a 20% stake. Radoff initially revealed a 9% stake in Nov’22. Shortly after the company had initiated a strategic review and a few months down the line, GHSI started exploring the sale of Viactiv or the entire company. In May’23 the CEO/President was replaced. Then chief accounting officer got changed in Aug’23.

While Radoff hasn’t made any public statements regarding GHSI, I am guessing these changes were at least partially driven by him. He has a strong track record of successfully advocating for shareholder-friendly capital allocation decisions in other companies:

  • Radoff disclosed a 4% stake in patent troll company VHC in Dec’22. Subsequently, in Mar’23, the activist entered into a cooperation agreement with management whereby the company agreed to pay out a special dividend of $1/share (vs. c. $1.4/share price at the time). Management also agreed to distribute 80% of future proceeds from the litigation between the company and Apple.
  • Radoff accumulated a 6% ownership stake in the health/wellness-focused multi-level marketing firm LFVN in May’23, pushing for improving company’s board of directors and implementing a “value-enhancing capital allocation framework.” Three months later, LFVN announced a $0.40/share special dividend (vs. $15/share price at the time).
  • In Nov’22, Radoff disclosed a 3% stake in SESN, a failed biopharma that was undergoing a reverse merger with Carisma Therapeutics. In tandem with another activist investor, they attempted to block the merger and pushed for a liquidation/capital return instead. Eventually, SESN/Carisma agreed to bump the special cash dividend from $0.12/share to $0.34/share as part of the merger consideration.

Radoff’s other activist campaigns include Newpark Resources, where he pushed the company to split its two business segments, and the company eventually launched a strategic review for one of its segments. Another one is Oha Investment Corporation where he successfully advocated for a merger back in 2019).

The pending asset sale is likely to close as expected by the second quarter. GHSI shareholder approval should pass easily given assets are getting sold at a premium to the company’s current market cap. The risk of the buyer walking away is also minimal. GHSI’s key asset is getting acquired by the US subsidiary of $1bn market cap Shenzhen-listed nutritional supplement manufacturer Xiamen Kingdomway. The buyer has made a number of similar acquisitions/investments in the US over the recent years, including Doctor’s Best (51% stake acquired in 2015, incremental 46% stake in 2016), PSupps Holdings (17% stake in 2017), Labrada Bodybuilding Nutrition (30% stake for $8m in 2017), and ZipFizz (acquired for $80m in 2018).

Brief background on Guardion Health Sciences: The company acquired Viactiv, a US-focused business providing supplements for bone health, immune health, and other applications, back in May’21 for $26m. In Dec’21, the company announced plans to wind down its remaining VectorVision medical device business (accounting for 4% of sales at the time) while stating that it might monetize wound-down segment’s IP rights. The company has raised funds several times since then, including a public offering in Feb’22 (common stock/warrants) and Nov’22 (redeemable preferred stock).

37 Comments

37 thoughts on “Quick Pitch: Guardion Health Sciences (GHSI)”

  1. To clarify regarding the $24m pro-forma net cash – I arrive at this figure by taking:
    + $7.7m cash as of Sep’23;
    + $17m sale proceeds;
    + $5.8m from warrant exercise (these have exercise price of $7.57/share);
    – and deducting $3m cashburn for 3 quarters, $2.6m in taxes, $1.4m in working capital.

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    • I think your cash burn assumptions are too optimistic. Cash burn last year was about $1m / quarter but I think the business they are selling is actually profitable with a TTM gross profit of about $5m. Strip that away and overhead is probably closer to $2m / quarter. ARCA Biopharma is one of the leanest shells I’ve come across lately and even they have over $6m in overhead costs.

      Also, the sale proceeds are gross, I would expect to pay another ~5% in transaction fees and costs. And 10% is placed in an escrow account, that probably also deserves a haircut.

      On the other hand, given the accumulated losses on the balance sheet I don’t think they have to pay many taxes over the sales proceeds (but maybe I am missing something that you have seen) and a large part of the working capital liabilities are probably going to be sold as part of the transaction.

      My ballpark estimate:

      +7.7 cash
      +17.2 * 93% sales proceeds(adjusted for transaction fees and a small haircut on the escrow)
      +5.8 warrants
      – 5m cash burn (q4 1m, q1, q2 2m)
      – 0.7 pro forma current liabilities

      Which is also about $24m but a different calculation 🙂

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  2. Tax on any gain on the sale proceeds — assume this can be shielded by the NOLs, right?

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  3. Thanks for the idea DT.

    It would be helpful for the Quick Pitches to have the same headline information as the portfolio ideas, i.e.:
    Current Price:
    Target Price:
    Upside:
    Expected Timeline:

    Is this the main reason for this idea being a ‘Quick Pitch’ and not a ‘Portfolio’ pick?

    “The main risk is that management (owns only 1% of GHSI) will waste this cash on some kind of value-destructive acquisition or reverse merger given sizable NOLs ($43m as of Dec’22)”

    If management had material ownership would you ‘upgrade’ this idea to be included in the ‘Portfolio’?

    Thanks

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    • This one is a quick pitch, cause the market cap is only $8m and liquidity is limited, so would probably be actionable only for a limited number of subscribers.

      I like the setup and have a small position. But my confidence is not that high – specifically because I have no clue what management will do with all that cash pile. I am only guessing that Raddoff has a significant influence on the board and will pressure the company not to make any value-destroying capital allocation decisions.

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      • Thanks DT.

        How exactly can Raddoff keep them in check? Literally what is the process for board proposals and having them resolved/rejected ? If you have any good info sources I’d like to learn how the process works in detail.

        Do you have info on Raddoff’s track record? I’m wondering what the frequency of his wins are. I was looking at EMKR where he is a material owner and that looks to have wrong, and I think he started reducing his holding (but I’m not sure of the reliability of TIKRs ownership data).

        Thanks

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      • From what I’ve seen, there is not a lot of general information available on Radoff online, but you can check his track record through his 13D filings. This will also help you get a broader picture on how the activism works. I don’t have the percentage of wins, but I’ve ran through a decent number of his campaigns and he does seem competent. Regarding EMKR, he reduced the position by 2%, but only after he had already installed three of his nominees after winning the proxy campaign along with several other activists. This seems like a success, but the remaining play there is all about executing a turnaround.

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      • I noticed that EMKR tanked. From TIKR:
        * EMCORE CORP FILES NON-TIMELY 10-Q WITH U.S. SEC – SEC FILING

        * EMCORE CORP: ANTICIPATES DISCLOSING THAT CO’S LIQUIDITY CONDITION CAUSES SUBSTANTIAL DOUBT TO EXIST ABOUT CO’S ABILITY TO CONTINUE AS A GOING CONCERN

        Radoff reduced his stake by 20% per TIKR.

        Meanwhile Archon Capital Management LLC has stepped up buying a further 5m shares to end up owning ~16% of shares outstanding. From their site they say “We invest in companies who prioritize purpose-driven cultures and employee growth and engagement.” That sounds great a great philosophy as an employer from but from an investor.

        Will be interesting to see where EMKR ends up and despite given the previously promising signs in Jan-24.

        Apologies for posting about a ticker only loosely related to the pitch.

  4. One thing to note is that this is a relatively small position for Radoff with his top 2 holdings being worth $46m.

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  5. For those using IB, they restrict your account once you go over 1 or 2% and the restriction can only be lifted for a 2 week window upon request and review.

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    • FWIW, they usually auto-refresh those restriction lifts. I.e. apply once and then every two weeks you get a message stating that your restrictions have been lifted .. again.

      But super annoying that they do this stuff in the first place. Happens all over the place.

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      • I have had that sh1t happen to me with IB and I find it very stressful. They took a week to lift the restrictions in one case and I lost quite a lot waiting to trade out of position.

        They lifted restrictions for 2 weeks, but unfortunately I didn’t get any subsequent notification saying they retained the removal of restrictions. They wanted me to prove once again that I wasn’t an affiliate on a fortnightly basis even though I owned a fraction of 1% of shares outstanding.

        When you say “happens all over the place” do you mean it happens with other brokers? I figured my solution was to find another broker for US nano caps, but the alternate brokers I found had poor OTC coverage so it didn’t take. Do you have any broker recommendations for non US persons to trade US nano caps/OTC stocks?

        Other than that I have an issue with IB withholding tax on a Canadian liquidation even through the distribution was below the paid-up capital. Errors happen, but I’ve sent them several messages and been on 2 live chats over 3 weeks just trying to get them to respond.

        Markets are hard enough to navigate without regulatory and administrative hurdles!

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      • Schwab could be a possibility. Less annoying and has much lower commissions.

  6. Recommendation of the Board

    On March 13, 2024, the Board unanimously adopted a resolution that it was advisable and in the best interests of the stockholders to dissolve the Company and wind up its affairs in order to maximize stockholder value pursuant to the Plan of Dissolution. The Board recommends that stockholders vote “FOR” the Plan of Dissolution proposal. Approval of the Plan of Dissolution proposal will constitute the required stockholder approval to dissolve the Company and to approve the Plan of Dissolution.

    https://www.sec.gov/Archives/edgar/data/1642375/000149315224010143/formpre14a.htm

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  7. So this one now got a lot more interesting given the intention to dissolve and liquidate. Please point out where I have made a mistake/there is disagreement over my assumptions. I’m sure I’ll make some errors, but better I feel stupid here than lose my shirt:

    Cash +7.66 m at 30-Sep-23

    Sales Proceeds +17.2m

    Let’s assume they are a little short on the working capital target of 3.677m to the equivalent of the amount capped on the upside from the buyer i.e., -0.225m

    Warrants, there is where I might be wrong. Based on the proxy it now seems as thought the company needs to cash them out, and they have guided to -5.1m. It also says “Such warrant holders are also able to exercise their warrants in exchange for common stock of GHSI. Any such exercise would decrease the aforementioned liability of the Company, but would result in dilution to the common stock held by all other stockholders.” But I’ll assume they’ll take the cash out option.

    3 Q’s of cash burn as it looks like everything indicates this gets done by end of Q2, so that’s -3m assuming 1m per Q. (Perhaps the burn can be deduced from the expectation of the working capital residual?)

    I’m then going to assume it still costs them 0.25m for Q3 and Q4 2024 respectively to wind things down in terms of staff costs and other internal costs, so -0.5m

    Severance/Termination costs; the executives will get, I believe: Hall: 370k; Sheehan: 117k; Cox: 244k for a total of -0.731m

    Not sure what the other (9?) employees will get, but I assume they don’t get 6 to 12 months salary and other bonuses etc., but I’ll assume they will cost as much as the 3 execs in aggregate , so another -0.731m

    Then using SIOX as guidance, I’ll assume another -2.0m for liquidation costs.

    All that gets me to 12.57m and I assume 1.275238m shares outstanding for a per share liquidation value of $9.86.

    Please let me know where I am wrong/you disagree. Given the low absolute values, this one could swing wildly but I rather be conservative than aggressive.

    Also, typically, how long is it between the announcement of the prelim 14A and the definitive?

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    • Not a big difference but one note so far is according to page 40 of the last filing: ceo 713k, cco 183k, cao 263k.

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      • Ah, it is all right there in the table, I just missed it!
        Thanks for pointing it out. It actually makes a big difference assuming my other assumptions are reasonable because the MOS appears to be getting quite small here.
        Whatever my errors, it is utterly egregious that the exec team are getting near 1.2m in compensation on a 17.2m sale. I guess since they don’t own much stock this is their way of cashing out. It seems like to persuade them to liquidate the activist conceded to a massive payday for the CEO.

    • So based on this math, less than 10% upside left compared to where it is trading in after market? something seems off right? I haven’t gone through yet to do my own analysis so can’t opine with confidence.

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    • There are 769,351 warrants with a weighted average exercise price of $7.57 according to the last 10-Q. Shouldn’t the warrant liability equate to the value above $7.57? If that was the case, $5.1mm / 769,351 = $6.63. $7.57 exercise price + $6.63 = $14.20. Does the $5.1mm warrant liability on pg. 27 mean management is expecting $14.20/share in distributions?

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      • If only that were true .. What is means is that the company probably has to pay $5.1m to warrant holders to cash them out on the theoretical value of their warrants. Just read the sections above and below it:

        “If GHSI warrant holders exercise their respective put rights triggered by the Transaction being deemed a fundamental transaction under our Series A Warrants, we will be obligated to pay such exercising holders cash, which would reduce the amount each GHSI stockholder would receive from a liquidating distribution.”

        “GHSI currently estimates that the liability to the Company associated with these warrants based on information available to the Company as of the date of this proxy statement is approximately $5,100,000. [..] To the extent that this obligation is triggered and exercised by the warrant holders, the Company would need to make such payments out of the its available cash and/or the Transaction proceeds, and any such payments will reduce the amount each GHSI stockholder would be able to receive from any liquidating distributions.”

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      • The warrants need to be cashed out first but I think this could be the basis for share distributions (per management’s estimate):

        $14.20/share distribution * 1,275,238 shares outstanding = $18,108,380
        $18,108,380 – $5,100,000 warrant liability = $13,008,380
        $13,008,380 – $100,000 contingency for remaining costs (est.) = $12,908,380
        $12,908,380/1,275,238 shares outstanding = $10.12/share

        The priority of payments is vague and unclear in pg. 27 of the proxy so I’m using the last paragraph in page 36 as a guidance.

        “… we currently plan to distribute, in an initial distribution (with potential subsequent distributions thereafter), a portion of the net proceeds from the Transaction, and possibly including a portion of the Company’s cash on its balance sheet, subject to the Company’s obligations to warrant holders (see the Risk Factors subsection entitled If GHSI warrant holders exercise their respective put rights triggered by the Transaction being deemed a fundamental transaction under our Series A Warrants, we will be obligated to pay such exercising holders cash, which would reduce the amount each GHSI stockholder would receive from a liquidating distribution) and a contingency reserve for remaining costs and liabilities [my $100K estimate is purely arbitrary], after the filing of the Certificate of Dissolution with the Delaware Secretary of State.”

        I doubt that they could place substantial costs (eg. management payout) between the payment of the warrant and the shares but I could be wrong. Other factors that could swing distributions is the working capital target.

  8. Although, GHSI setup has worked out nicely thus far and is up +22% since the write-up levels, I have to admit that I have skipped-over this warrant ‘cash out’ clause in the fillings when researching the case. With this large liability, I do not see much further upside left in the liquidation scenario. Given the small company size, $1m swing in costs can significantly impact any further returns.


    My calculations:

    $7.7m in cash as of Sep’23;
    $17.2m in sale proceeds;
    Less $5.1 warrant cash-out;
    Less $1m for transaction-related fees, $2m for cash burn, and $3m for severance and other liquidation expenses;
    Less $1m reserved for contingent liabilities;
    This leaves $12.8m, or approximately $10/share.

    While this might seem like a 10% upside, any of the expense items could easily be larger than my estimates and a $1m swing in costs will impact the total return by 10%.

    Now regarding warrant liability. You can find this ‘right to cash out’ defined here (https://www.bamsec.com/filing/149315222005264/2?cik=1642375). Basically, the value of the warrant will be calculated using Black & Scholes formula with 0% risk-free rate and 100% implied volatility. Using these figures, I arrive close to the indicated $5.1m liability.

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    • Hmmm…
      “Doctor’s Best has represented to GHSI in the Purchase Agreement that it will be able to fund the cash purchase price at closing. In order to mitigate any risk associated with Doctor’s Best’s ability to fund the closing purchase price, GHSI and Doctor’s Best agreed in the Purchase Agreement, among other things, that Doctor’s Best would deliver (i) at signing, a consent of MUFG Union Bank to the transaction with MUFG Union Bank’s approval of the draw to fund the purchase price (the “MUFG Consent”) in a form satisfactory to GHSI, and (ii) a weekly certificate (in the form attached as Exhibit D to the Purchase Agreement) during the interim period from the signing of the Purchase Agreement to the closing of the Transaction pursuant to which the Chief Financial Officer of Doctor’s Best must certify that Doctor’s Best has adequate capacity under its credit facility to fund the purchase price (the “Weekly Certificate”). Doctor’s Best failed to deliver the MUFG Consent at signing, but has since delivered a MUFG Consent on February 29, 2024. Doctor’s Best failed to deliver the first Weekly Certificate when required but has complied with its obligations since that time.

      Further, Doctor’s Best has indicated to GHSI’s management and advisors that it may utilize cash from its parent-group entities in China in order to fund the purchase price. Approvals from or registration with appropriate government and regulatory authorities may be required with respect to remitting cash out of China and/or converting any cash from China into United States dollars. Doctor’s Best is required to pay the cash purchase price at closing in order for the Transaction to be completed, subject to a thirty (30) day cure period. As a result of its potential financing uncertainty, if Doctor’s Best is unable to obtain or utilize its financing options in the United States, its ability to pay the cash purchase price may be delayed or inhibited. Under the Purchase Agreement, if GHSI terminates the Purchase Agreement due to Doctor’s Best’s failure to fund the cash purchase price at closing, then the parties are obligated to release $1,700,000, representing the full amount held in escrow, plus any interest and earnings accrued thereon, to GHSI.”

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  9. $3 – $5 initial distribution according to the definitive proxy, with no additional information about holdbacks / contingencies / subsequent distributions.

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    • While not stated I believe further payments would follow unless management is very enterprising: “…the Board anticipates that the amount of an initial distribution to stockholders from the Transaction would range from approximately $3.00 to $5.00 per share of common stock. Subsequent distributions would be made in such amounts and at such times as determined by the Board in its sole discretion in accordance with the Plan of Dissolution.”

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    • The proxy also includes updated cash and net-proceeds. Using figures from dt’s mid-march comment, the updated liquidation scenario now looks like this:

      + $6.4m cash as of Dec’23;
      + $16.0m net sale proceeds;
      – $5.5 warrant liability;
      – $1m cashburn for two quarters
      – $3m severance and other liquidation expenses;
      – $1m reserved for contingencies;
      = $11.9m or $9.3/share.

      $9.3/share is probably the most optimistic case as it will take a couple of years to liquidate fully and there might be additional expenses till that happens. While there seems to be plenty of capital left for further distributions beyond the initial $3-$5/share, the proxy itself looks very suspicious without any information on what assumptions were used to arrive at the initial distribution figures. No idea why management was reluctant to share this info, which is pretty standard for votes on liquidation.

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      • Frankly this looks pretty bad to me. As far as I can see all cash they expect to get will be in by the time the transaction closes (including most of the escrow) yet they still only distribute $5m? If there are no contingencies and you’ve made an adequate reserve, why wouldn’t you distribute all excess cash immediately? There’s an enormous delta between the estimates here and the initial distribution.

        The best explanation I can come up with is that they somehow need to keep $5m on the balance sheet while winding down the $400k / year ocular products segment but that would seem very strange to me.

        The complete lack of disclosure is also worrying. No mention of an aggregate distribution range, no table with a low / high case and some numbers backing up the estimates, no mention of the size of the contingency reserve, etc.

        I would be very careful with sticking to the initial estimates we made here. The easiest explanation here is that costs / contingency reserves are much larger than we expected. And let’s not forget that these guys weren’t geniuses to begin with ..

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      • I don’t own GHSI because I don’t trust the buyer. They missed several milestones in reporting cash balances IIRC. Thats not to say the sale doesn’t likely close, just that the downside if it doesn’t close is likely very substantial. They had to go to China to get a deal this good, if the buyer drops out they are likely to take much less. I’m not sure I’d be interested unless it drops a lot more.

    • Further gains are likely to be limited, require a significant time for return of capital, and there is still a small tail risk that deal doesn’t happen. Company has already said there are zero other bidders around to replace Kingdomway if they can’t or won’t close.

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    • A quick note here: The sale of Viactiv has been approved, but the company failed to get sufficient votes to approve the liquidation plan, so the meeting has been adjourned to May 31. As a reminder, the company needs to obtain approval from a majority of its outstanding shares for the proposal to pass. About 50.8% of outstanding shares voted in favor of the Viactiv sale, and about 49% of total shares outstanding voted to adjourn the meeting, so most likely the company just needs a tiny nudge here to get over the 51% approval threshold for liquidation resolution to pass. Currently, the stock trades slightly above the low range of the expected liquidation distributions.

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      • One particular worry here is that the company is very clear about “maintaining the flexibility to abandon the dissolution if an alternative transaction proposal becomes available that would be a better result for our stockholders.”. Now, imho these guys are a bunch of clowns and this is them basically saying “we are desperately looking for some crappy merger so we can continue milking this cash pile”. Caveat emptor.

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      • The sale of Viactiv was approved on May 31. Subsequently, management decided to approve the liquidation plan for the company. However, as the Writser pointed out, they strangely maintain the language about a potential abandonment of this path: “such decision is subject to the Company’s ability to abandon or delay the Plan of Liquidation and Dissolution in the event that the Board of Directors determines that another transaction would be in the best interests of the Company’s stockholders.”

        Anyways, with the stock price at $10/share, it’s simply not worth waiting for a potential $1 distribution over the next 2-3 years. If anyone is still involved here, I believe it’s time to close the books.

        https://www.bamsec.com/filing/149315224022933?cik=1642375

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