A few comments about margins:
The services segment is actually profitable, which many of you have probably noticed. It's done between 10-30% operating margins in each of the last fours years, though if you look at a longer time sample, it's normalized closer to a median of about 12%.
This is significant for a couple of reasons:
(1) Services has been relatively flat as a percentage of revenue in each of the past three years. I believe this segment could begin to start comprising a greater percentage of revenue as MESH/Freedom revenue continues to eclipse Enterphone revenue. A lot of these service contracts appear to be based on Enterphone, but hopefully new contracts from MESH/Freedom will be enough to offset that decline, allowing this profitable segment to become a greater contributor to the business mix. Of course, service contracts are only as good as the products they're based on and without increasing product sales, service contract revenue will decline. But things appear to be on the up-and-up on the product front, so hopefully we begin to see the benefit of this higher-margin segment soon.
(2) This segment also still carries heavy amortization (all of the company's amortization is from this segment) due to the old (impaired) service agreements acquired from Telus. The current annual amortization expense of 20,892 drops to 5,224 in 2015. That adds an additional 15,668 to this segment's profitability, bringing it's operating margin up from a normalized 12% to about 14% based on 2012 figures. This segment has no depreciation associated with it, and currently carries a normalized EBITDA margin of 15% plus.
As for MESH/Freedom gross margins, if you go back and read the 2009, 2010, and 2011 10-Ks, management indicates a target margin range for MESH of 50-60%. Given they started talking about this range before Freedom was even released, I think it's safe to say the contribution of Freedom to this segment should make this gross margin range even higher over time.
Taken altogether, in a couple years, we could be looking at a business with a core revenue segment posting 60%+ gross margins and a complementary services segment doing 15%+ EBITDA margins. I think this makes way for a clear path to profitability and no more need to pursue heavily dilutive equity financing.
The company's margin structure is actually very solid when looking at it on a gross margin basis. We've just got to continue to grow revenue against relatively fixed costs to get above the current wall of operating expenses that is currently standing between us and profitability.
Annualizing 4Q12 SG&A and R&D expense levels, if the company can do 5mm in revenue and 60% gross margin, you're looking at an oh so slight EBITDA loss of 57k. But at 65% gross margin, that jumps to a gain of 193k. At 70% (really assuming here Freedom packs a lot of margin), you get up to an annual EBITDA gain of 443k. If you assume stock-based compensation (included in EBITDA but a cash inflow on the cash flow statement) and investments in working capital (not accounted for in EBITDA but a cash outflow on the cash flow statement) roughly offset each other, the aforementioned numbers should almost mirror the company's cash from operations. 193k-443k per year in cash from operations may not fully satisfy the company's financing needs, but it could come pretty close and help ease the need for equity financing. In addition, with numbers like that, we could perhaps instead opt for some decent-rate debt to finance operations.
