GSN Digital Edition April 2016

Seeking to integrate detection
technologies, ETD/EDS firms
consolidate
By Adrian Courtenay
Three of the industry’s most significant
companies— Smiths, Safran’s
Morpho Detection, and Implant
Sciences Inc. — have all been in the
news lately. Smiths, headquartered
in the UK, announced Thursday
that it had purchased Paris-based
Safran’s Morpho Detection unit for
$710 million. OSI Systems and L3
were rumored to be among the bidders.
Implant Sciences, which is headquartered
in Wilmington, MA, also
is setting itself up for what it calls a
“strategic alternative.’” The strategic
alternative could be a sale, a merger
or other significant change in operations,
according to an 8-K filing
with the SEC on April 8.
The motivation to merge stems
in great measure for a desire to integrate
complementary technologies
into streamlined product offerings.
Smiths, according to industry
experts, is primarily interested in
Morpho’s broad range of EDS technologies,
including Computer Tomography,
Ion Trap Mobility Spectrometer
trace detection, X-ray
and X-ray Diffraction. Morpho’s
strength in tomography is complementary
to Smiths’ strength in X-
21
ray. Morpho does have an explosives
trace detection business, but
it has struggled significantly over
the past few years and is a shrinking
segment of the company’s revenues.
Implant Sciences has emerged as
the technology leader in the ETD
segment, winning a $163 million
ID/IQ (basically an open purchase
order) from the Transportation Security
Administration (TSA) and
an initial order for.1170 Implant
systems. The TSA
began installing the
systems in December.
Implant also
won a majority of
contracts in Europe,
which recently implemented
a mandatory
program to
strengthen airport explosives and
drug detection capabilities. Implant
Sciences is considered by industry
experts to be particularly attractive
to homeland security and defense
contractors because of its technology
and its close relationships with
security agencies in Europe, Asia
and the Americas.
Implant’s 8-K filing detailed significant
modifications to longstanding
credit agreements with its
financing partner, Platinum Partners,
including the elimination of a
blocking feature that prevented Platinum
from owning more than 4.99
percent of the company. If it wishes,
Platinum is now free to convert its
convertible debt into preferred and
common stock, which essentially
would make Platinum Implant’s
majority shareholder and in control
of any transformative event.
Estimating a selling price for Implant
if it goes down that road is difficult.
On the one hand, the company
is growing rapidly, with revenues
jumping 5x in the past two years. On
the other hand, its debt load is huge.
It’s borrowed money from Platinum
every year at 15 percent interest, and
has paid back very little of it. Platinum
also has had the
right to convert unpaid
interest into Implant
stock at a price as
low as 8 cents a share.
It also has two other
convertible tranches
at more than a dollar.
Platinum controls 57
percent of the company and appears
to be anxious to get its money out.
Eight years is a very long time for a
hedge fund to hold its position. Implant,
which declined to comment
on the negotiations with Platinum,
has two investment advisors, Noble
Financial Capital Markets and
Chardan Capital Markets, LLC, as
well as the law firm of Wilke, Farr
& Gallagher LLC, helping to look at
strategic initiatives.