Implant Sciences: Oh So Close

| About: Secure Point (IMSCQ)
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The Transportation Security Administration announced March 5 a solicitation for new Explosive Trace Detectors for passenger/baggage screening.

Implant Sciences is one of just 3 suppliers eligible to participate in the solicitation, and the only U.S. vendor. The company's technology has been praised by the TSA.

The recent disappearance of a Malaysia Airlines flight has heightened airline security concerns.

Three significant events occurring within just the past week indicate that Implant Sciences Corp.'s (IMSC) future will be decided shortly, with the chances better than 50-50 that it will become a highly profitable player in the critical explosive trace detection market (ETD).

On March 5th, the TSA issued a solicitation (number HSTSO4-O9-R-CT2075) for desktop Explosive Trace Detectors, a tool to screen passengers and passenger baggage for minute traces of chemicals on people, clothes and luggage that could indicate the presence of a bomb. Though technology incorporated into the latest ETD products has improved significantly over the past two years, the TSA - for budgetary and other reasons -- had not ordered new ETDs in at least 18 months. Now the agency is on the cusp of purchasing large volumes of the latest products, and has told IMSC's CEO Glenn Bolduc that the company's B220 desktop trace detector is a new standard for the industry and the platform for the next 10 years. This is what Implant has worked for since beginning the implementation of its plan five years ago to jettison non-core businesses and focus completely on explosive trace detection.

On the same day, March 5, IMSC announced that the TSA and the Canadian TSA (CATSA) together had visited Implant's new manufacturing facility six weeks earlier, presumably to determine if the company could produce whatever number of chemical detectors the two agencies ordered. The agencies offered positive feedback on the company's production capabilities, stating, according to which monthly can produce 100 B220 desktop units, according to CEO Bolduc.

Finally, the tragic disappearance of Malaysia Airlines Flight MH370 on March 7 has heightened concerns about airline security.

The TSA has deployed thousands of ETD units across 489 commercial airports, so the improvements in ETD technology to stay steps ahead of terrorist bomb makers suggest that, over time, virtually all older units will be replaced. In addition, the TSA has been the subject of embarrassing publicity when some of its passenger screening units "undressed" people. Consequently, the agency is highly motivated to purchase the best, least intrusive technology, which Implant is noted for. There are three firms from which the TSA may purchase ETD products, Implant being the only U.S. company.

Implant can participate in the solicitation, but it has one more hurdle to pass before the TSA can purchase the company's detectors - fully achieving what the TSA calls "qualified," a level reached at the completion of field tests. Implant's B220 at this moment is installed at two U.S. airports undergoing final qualification field tests, which should be completed within 30 to 60 days. The field tests are a follow up to an arguably more rigorous testing process the B220 was put through at the TSA's Transportation Security Integration Facility (TSIF) laboratory at Washington, D.C.-area Reagan Airport. The units passed this segment of the qualification process with flying colors and were "approved," effectively the final step before full qualification and eligibility for purchase by the TSA. Generally speaking, if a product passes the TSIF lab's demanding test, it passes field testing. Not always, of course, but often enough that Implant has prepared its manufacturing facility for a significant ramp up in orders from the TSA, the Canadian TSA and governments and the private sector worldwide, which effectively use TSA's test results as their own.

"Qualification" should be a bonanza for the small company. Implant's management suggests that worldwide, the overall size of the market is approximately $300 million annually and growing. Even a slice of the market would be significant to a company that over the last few years has averaged annual sales of less than $6 million, not including a one-off sale to India. If Implant, with TSA qualification, captured only 10 percent of the market, and it's aiming for much more; the company would have annual sales of $30 million.

Nothing is guaranteed, of course. Investors are clearly frustrated with the length of the qualification process, and where the stock is today. Part of that is naiveté on the part of many investors as to how fast the TSA would move, and how fast orders would follow. They confused hope with reality. They believed that somehow IMSC was in control of the process, which distinctly was not the case. The U.S. government demands a thorough, honest, open purchasing process. Though slow, that's a good thing, and all that Implant and its competitors could ask for.

Part of investor impatience is management's responsibility for failing to manage expectations. Shareholders, rightly or wrongly, feel they were given encouragement, if not assurances, that sales into the cargo screening market would generate revenue faster than it has to date. Ditto Stac approval in Europe. Mr. Bolduc's retreat from his FY14 revenue estimate of $17 to $24 million also disturbed shareholders. Investor attitude at this point is, stop talking and show me the money!

Another misstep by management in the eyes of some shareholders is the awarding by the board of directors of stock options to themselves at a lowly 79 cents. To shareholders who bought at $1.80 down through 80 cents, it's like awarding a student an A for C work in terms of the stock price. Other shareholders feel any incentive to get the stock price up is a good thing, and that the options at 79 cents suggests that TSA order are expected soon.

No doubt some of the high powered ETD executives that CEO Bolduc has attracted to Implant are as frustrated as shareholders, since they also hold options between $1.14 and $1.40. Darryl Jones, Bill McGann and other executives didn't join IMSC for a weekly paycheck. Dr. Jones joined IMSC in May 2012, from Morpho Technology, a major competitor, where he was Vice President, Global Product Management. Dr. McGann, considered the father of ETD, sold his company to GE (NYSE:GE), where he became Chief Technology Officer at GE Security. He joined IMSC in April 2012. They and others joined Implant Sciences because they wanted to be part of a small, dynamic, innovative company developing the best ETD technology in the world. And to grab the brass ring, the big payoff that successful high tech companies deliver. That's what IMSC investors want too.

Disclosure: I am long IMSC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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