Recent trading in shares of Implant Sciences (IMSC.PK) suggests that investors are optimistic about the impression the company's Explosive Trace Detection technology has left on Transportation Security Administration (TSA) officials. Last month, the company reported that its benchtop ETD product, the QS-B220, was well received and had successfully entered the last phase of testing in the Transportation Security Laboratory (TSL), the testing arm of the TSA.
After receiving certification readiness testing from the TSL, the product has moved into its final independent validation testing for TSA qualification, which will allow the B220 to be used in TSA-governed air cargo screening. The announcement and anticipated approval come none too late, as the TSA set a December deadline earlier this year for implementation of laws requiring all cargo aboard international passenger flights to be screened for explosives. TSA certification will mark a major milestone for IMSC, as the approval is the last barrier to penetrating a lucrative but entry-resistant market. Investors, therefore, have been anxious for news on the TSA's final determination.
In an August 21 press release regarding the certification process, Implant Sciences' CEO Glenn Bolduc said:
While the next few weeks will be a quiet period during the final stage of testing, we remain confident in our system's performance and are hopeful that we will have good news to report to our shareholders by the end of our fiscal first quarter (ended September 30, 2012).
Expressing a deadline for a value-driving event as explicitly as Bolduc does is uncharacteristic from a publicly-traded company unless management has a fair degree of certainty in the catalyst - in this case, a TSA qualification. Encouraging his remarks, no doubt, is confidence in COO Bill McGann, who has an extensive history with the TSA/TSL after pioneering the explosive trace detection field in the '90s. McGann worked previously for Ion Track Instruments, an early developer of ETD technology that became GE Ion Track after it was purchased by General Electric (GE) in 2002. Implant Sciences has likely been in constant contact with the TSA during the testing process, and Bolduc's remarks point to a probable approval at the end of this month.
In anticipation, Implant Sciences is positioning for a robust launch of the QS-B220 in domestic, TSA screening settings. The company joined The International Air Cargo Association (TIACA) in late August in order to more accurately penetrate the newly-opened market; networking and knowledge-exchange are hallmarks of these business organizations and TIACA is home to some of the largest airlines, airports and freight companies in the world. In a related press release, management pointed out that the QS-H150, IMSC's handheld ETD device, is already in use throughout Europe and Asia in freight screening, but, I add, is notably more prevalent in security indications abroad than domestically due to stringent TSA requirements. In fact, the company reported at the end of August that it had sold a number of QS-H150 devices, "for use at a major public sporting event taking place in London, England." Although the company did not release details on the client or the date of the purchase, this sounds remarkably like the largest international sporting event of the last four years - the Olympics. Implant Sciences already has history with the event; its ETD devices were used at the 2008 Beijing Olympics for site security. Implant Sciences has made the most sales headway in the international markets, but expects to see a major uptick in domestic sales of the company's products if - or after - the TSA certifies the ETD system.
I discussed Implant Sciences' recent debt conversion in another article, so I won't go into the detail here, but I will note that as the company's primary debtor turns into a major shareholder, so too is management moving towards larger stakes in the company. The board approved an increased option plan in early September, which allows management to exercise a significant number of options within 60 days of September 7th. While dilutive, the options and increased interest in becoming larger IMSC shareholders demonstrate that management sees much greater upside potential in the company. The additional options are exercisable at $1.40, a slight discount to the company's current share price, which may indicate that directors expect imminent price increases with the anticipated growth trajectory.
Implant Sciences' most recent press release introduces Mr. Jimmy Mo as its new Southeast Asia Sales Manager. While the hiring illustrates expansion of Implant Sciences' sales force, it is more important to note Mo's background. Mr. Mo previously worked for GE Ion Track, which, if you'll recall, Bill McGann helped develop before its acquisition by General Electric. The potential of IMSC's technology and the prospect of again working with Mr. McGann were enough to draw Mr. Mo away from his prior job at Control Screening, a private X-Ray and ETD detection company. The industry veteran also spent time at two other competing security companies, American Science and Engineering (ASEI) and Astrophysics, Inc, both of which develop and sell screening technology similar to IMSC.
Implant Sciences is on the verge of what may be its biggest development catalyst yet. TSA product certification at the end of the month will lead to a broad new market domestically, in turn aiding revenue generation and long-term profitability. Contracts through the TSA are likely to be large and long-lasting, as the administration is slow to change, and air cargo screening, which will be required by law on December 3, creates a substantial new market for ETD screening products like the QS-B220. Although there are explicit risks investing in such a micro-cap company the upside potential from the near-term catalyst and growth drivers into the end of the year should be enough to offset any reticence.
Disclosure: I am long IMSC.PK.
Additional disclosure: I will not alter my position with respect to Implant Sciences in the next 72 hours.