Interesting where the share price is sitting right now.Record...

Interesting where the share price is sitting right now.

• Record $12.2m+ Arcemy sales revenue (expected to be recognised this FY?) vs. none last year and $635k total revenue
• Positive operating cashflow last quarter (first time since listing)
• $4.8m in the bank as of last quarter
• Historically around $6m fixed operating costs (partially offset by some R&D offset) which has been relatively stable over the last few years, although might increase with the expanded US sales operations and indirectly through overall growth
• Effectively 19x revenue on last year for 2x market cap

What is a bit difficult to ascertain is COGS:

• In FY23 that COGS was approximately 50%, based on revenue being chiefly contract manufacturing
• COGS in each year varies as follows: 2019: 300%, 2020: 24%, 2021: 55%, 2022: 73%, 2023: 52%.
• It is tricky to reconcile cash flow statements with the Annual Reports due to timing factors (e.g. revenue recognition, inventory built in advance)
• Profitability on Arcemy sales is especially tricky, as the varied nature of each implementation seems to drive considerable variation in revenue per sale, even where the same product is implemented

On the face of it, if all $12.2m revenue lands in FY24 we might expect on historical COGS somewhere between $3.3 and $5.8m GP, which might mean just breaking even or a net loss of circa $3m. On the other hand, we could be looking at much improved profitability based on some pretty loose inferences from the September quarterly cash flow which might even land us a modest profit for the year.

The investment thesis for me from here rests on:

• What gross profit can we sustain as we seek to scale the pipeline
• What kind of pipeline can we maintain in future years for system sales: will we be able to see continued growth (either by expansion with existing customers, or new customers), or will we saturate the potential market and/or be displaced by competition and/or substitution
• What sort of ARR growth will we see from licensing and support, in addition to growth in replacement parts and additional value add services, and what profitability will we see on this ARR
• Can growth be achieved from profits or will a further raise and dilution be necessary for the next stage
• What are the chances of a windfall order

Let's say we hit $25m revenue in FY25, manage to keep net profit around 40%, and manage to keep fixed costs to around $7m, we might be looking at an EBITDA around $2.5m, and at a relatively generous 10x multiple that's a $25m market cap aka around where we are now. Fortunately given the upwards trajectory story that would paint and comparable valuations (including us right now), we might hope to see around 2-2.5x that based on investor aspiration and expected growth, e.g. $50-65m market cap. And as alluded above, if we can reasonably build in ARR of 10-15% of sales at much higher profitability, you could be looking at $50-70m+ market cap just there off the $5-7m and growing EBITDA before expected growth factors in. And all of that's before the potential of value add services to customers (though we may potentially be forfeiting this particular value chain to the implementation partners who are purchasing Arcemy systems). Or we might suddenly land an order for 25-50 systems.

But it's really going to depend on continued positive results and a strategic narrative around how we are going to drive and deliver that growth.