Borislav Tonev

Implant Sciences Corporation (OTCMKTS:IMSC) Grows on Expected TSA Deal

by Borislav Tonev July 31, 2014

On October 18, 2013, the United States Transportation Security Administration (TSA) put Implant Sciences Corporation (OTCMKTS:IMSC, IMSC message board)'s SQ-B220 explosives and narcotics detector in the “Qualified” section of the Air Cargo Screening Technology List. This was, without a doubt, a major milestone for the company. It meant that their benchtop detector had been put through its paces and it had passed the test with flying colors.

There is, however, one, even bigger landmark that IMSC has yet to reach – an actual deal with the TSA. Lots of people say that this will happen very soon and as a result, the stock is climbing the chart at a rapid rate. IMSC hasn't registered a red sessions since last week and yesterday, it managed to log a 52-week high of $1.32 per share. The cumulative dollar volume over the last two trading days amounts to more than $1.5 million and the stock currently stands at $1.28 per share which means that the market cap is hovering around $81 million. Lots of people are excited about the rumor, but aren't they overlooking something?

The answer can actually be found in the previous sentence. As of right now, nothing is official and the TSA deal is just a rumor which means that an investment in IMSC is rather risky. Then again, penny stock investors have never really been renowned for their hatred towards gambling and it should be noted that if an agreement is indeed in the works, the people who are jumping in right now might just have the edge later on. But are things really so simple?

A potential contract with TSA will undoubtedly give the company a massive push in the right direction and it will probably result in more than a few green sessions for the stock. There can be no guarantees, however, that it will solve all the problems. And there are a few of them.

The latest 10-Q, for example, shows that on March 31, IMSC had:

  • cash: $276 thousand
  • current assets: $4.7 million
  • current liabilities: $62 million
  • quarterly revenues: $2.7 million
  • quarterly net loss: $4.9 million

A closer look at the report reveals that the company's revenue stream is not as consistent as shareholders would have hoped. Quarterly revenues, for example, have more than doubled year over year, but when you check out the sales figures for the nine months ended March 31, 2014 and compare them to the results of the corresponding period of 2013, you'll see that there's been a 26% drop. And although they have managed to reduce the costs to some extent, profitability is nothing more than a distant dream.

Then we come to the biggest problem – the liabilities. Because of the constant losses, IMSC have been forced to fund their operations through numerous credit facilities and through the issuance of notes. A large portion of the Management Discussion section of the 10-Q is devoted to the company debt and the problems related to paying it off. IMSC have managed to renegotiate the terms of some of the agreements and they have persuaded the creditors to extend the maturity dates, but they do say in the report that they might still have some trouble sticking to the contracts.

Perhaps more worryingly, some of the debt is convertible into common stock. In January, DMRJ Group, LLC, one of IMSC's biggest creditors, took advantage of this and they converted $197 thousand worth of accrued interest into 2,468,319 shares. The conversion rate comes in at $0.08 per share which means that DMRJ could, theoretically, be looking at profits of around 1,500%.

If the conversion of debt continues, the effects on the ticker's behavior could be quite severe. That's why, considering all the risks carefully and doing a lot of due diligence is absolutely essential.

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