Skyline Medical Inc (NASDAQ:SKLN) Just Made One Of The Smartest Moves We've Seen

We've put forward some great picks over the summer, and one of our best yet just paid out. We highlighted Skyline Medical Inc (NASDAQ:SKLN) as a company to keep an eye on towards the end of July, and the company is now up more than 50% from our pick date price, after a couple of solid rallies over the last forty eight hours. We think there will likely be a bit of a correction once these gains tail off and the shorter term interests take their profits off the table, but the fundamental drivers behind the latest gains hint at longer term strength post-correction.Here's why.For those not familiar with Skyline, it operates in the healthcare space with a primary interest sector waste management. We outlined the market in a little bit more detail in our previous piece, but to quickly reiterate, it has designed a system it calls Streamway, which creates a direct line from patient to drainage systems for bodily fluids. The current process calls for canisters as an interim to the process, and these canisters take up a lot of landfill space.So why is the company gaining strength?Skyline announced on August 30 that it had signed a letter of intent to enter into a joint venture with a company called Electronic On-Ramp, Inc. (EOR). The two companies are going to be working together to pick up government contracts in the healthcare space, with a specific focus on mobile operating rooms. EOR is going to kit out mobile rooms and use Skyline's Streamway tech in each. The Streamway is also going to serve as the anchor product, meaning it will play a pivotal role in the bids for the contracts that the two companies are joining forces to pick up.So there's a potential in-road to government contracts. Skyline could go after them itself – why is this partnership so valuable?Here's the interesting part.ERO is a Native American Indian, (8a) certified Small Disadvantaged Business owned by a Service Disabled Veteran. There are a number of diversity and equality related clauses built into the system that issues government contracts across a variety of public sector spaces (transport, health etc.,) and each of these is designed to ensure that the businesses they represent aren’t crowded out by big conglomerates. Essentially, they ensure these businesses get contracts that they might other wise not have got if the decision was made purely on price, economics of delivery, that sort of thing. It's a type of proactive diversity.The thing is, each of these three qualities falls under a different remit. The business is not just certified Native American Indian (which would boost its chances as a single quality considerably), but its also recognized Disadvantaged Small Business owned by a disabled veteran. If you were looking for a combination of qualities that would nit together to almost guarantee government contracts, this is it. Put EOR next to a big healthcare company, and even with higher cost of the former's contract to the government based on fewer economies of scale, in all likelihood EOR will pick up the contract.

"EOR's Partner contracts with the U.S. National Institutes of Health (NIH) and Department of Defense are expected to provide Skyline Medical with access to bid on procurement contracts for up to $550 million or more in federal funds budgeted for health, security, life safety systems support, humanitarian assistance and disaster preparedness."

The deal isn’t without its catches, however, and the company in turn isn’t without its risks. The arrangement relies on a shareholder meeting resulting in votes in favor for increase the number of authorized shares of common stock to 200 million from 100 million, and a a reverse stock split between one-for-two and one-for-25. We said it in our last look at the company, there's going to be a lot of dilution before the company can get a grip on its bottom line.However, this new agreement brings forward the company's plans to bid on governmental contracts by nearly two years, and vastly increases the chances of picking up the contracts by association.It's an interesting, and very smart, move by management.We're watching to see how it plays out. Stick with us for more top small cap picks by subscribing to our newsletter below!Disclosure: We have NO position in SKLN and have NOT been compensated for this article.