Implant Sciences (IMSC.PK) announced some good news for shareholders and the company alike on Wednesday morning that demonstrates extensive confidence from its biggest debt-holder. The DMRJ Group holds all $27.5M of IMSC's debt, due September 30, of which $23 million is in the form of a revolving line of credit. Wednesday's agreement extends the due date of IMSC's indebtedness to March 31 of next year, but more importantly reconstitutes $12M of IMSC's line of credit into a senior convertible secured note, essentially convertible into IMSC common stock at $1.09 per share. The deal demonstrates confidence on behalf of the DMRJ Group, which has been a long-time backer of Implant Sciences and is now increasing its potential equity stake in the company. In fact, DMRJ's Managing Director David Levy said as much in Wednesday's press release:
Implant Sciences continues to solidify its position as an emerging leader in the Explosives Trace Detection market. The Company has attracted top industry talent, built an international sales presence and is moving through the regulatory process. Renegotiating a portion of our line of credit with Implant Sciences into a term loan that is convertible into equity in the Company clearly shows our confidence in the continued success of Implant Sciences.
DMRJ sees the opportunity to become a major shareholder as a much more lucrative position than as a debt holder. Although prior maneuvers demonstrated as much (earlier debt-to-equity conversions), the venture capital firm's interests are now directly in line with those of shareholders, and investors see the importance. IMSC was up 9% in afternoon trading on Wednesday.
In 2008, Implant Sciences entered into the first debt agreement with DMRJ that originally consisted of a senior secured convertible note and warrants to purchase common stock. In 2009, a $3M line of credit was added, opening up a more substantial avenue for IMSC to obtain necessary development capital, which was increased later that year to $5M. Again, in early 2010, DMRJ doubled the amount borrowable under the line of credit to $10M and pushed back all due dates to September of 2010. After subsequent increases to $15M and then $23M by February of 2012, the line of credit was extended and all debts were slated to come due in September of this year. Today's announcement, however, not only converts that debt but delays repayment another six months to allow IMSC time for a major domestic launch.
While IMSC has been gaining market traction abroad in security indications, its biggest potential market may exist domestically in transportation and cargo facilities. Implant Sciences develops explosive trace detection devices for use in security and screening. The technology, available in the handheld Quantum Sniffer H-150 and the benchtop QS-B220 unit, improves on other systems by reducing the cost of ownership and risk of radiation exposure. Existing products on the market use a small amount of radioactive material in the detection process, making field repair near-impossible and long-term or repeated use a risk in the eyes of the public. The final catalyst for a major domestic debut is around the corner with a certification from the Transportation Safety Administration's (TSA) testing lab. Recently IMSC announced, "[the QS-B220 completed] certification readiness and verification testing and has now been accepted into final validation testing with the TSL," which will allow the TSA to use the product in regulated transportation settings, from airports to cargo facilities. Legislation set to go into effect on December 3 should not be lost on IMSC investors either - it requires all cargo on international passenger flights to be screened for explosives. Final TSA certification should come before the end of the year, making the Quantum Sniffer systems obvious as security organizations cast about for new technology to assist in increased regulation for explosive detection.
As I noted in a previous article, the parent company of the DMRJ Group is a very successful U.S. hedge fund. Platinum Partners has had annualized returns of 20% since inception in 2003 due to a strategically diverse investing approach. According to an article from HedgeFundsreview.com, "Over the years Nordlicht [chairman and Chief Investment Officer] has shown a knack for identifying unconventional investment opportunities and devising strategies to capture profits with significant downside protection." To say that Implant Sciences is a result of this approach would be a stretch, but as the parent company of IMSC's debtor - and now future shareholder - Platinum Partners certainly has a stake in DMRJ's investment strategies.
Disclosure: I am long IMSC.PK.