China update.
Wu-Han is opening next week. I understand business is accelerating in China and March was an all-time record. REMI records net income from this business on their income statement. I expect this to grow, but the licensing costs, design and building of new studios are expensed as they occur, so earnings will not shoot up unless they stop building studios. I expect REMI to more fully open up their revenue and earnings numbers for China when they get more active on the IR front later in the year.
Franchise + Distributor business.
This is REMI’s bread and butter, and the CEO said these businesses were trending well. For those who don’t know the business well, these are the primary numbers making up earnings at the moment. I expect breakeven to maybe 1c per quarter from these businesses for the next few quarters, with some variability on the bottom line according to how China is tracking and a few extra costs here and there.
Repeating myself here but - So, as it stands, we have China stake worth 40-45c per share right now. IDG-Accel is the major partner along with David Lok who runs the China business. IDG does the advertising and will provide cap’ markets expertise when this business is IPOed on the Hong Kong stock exchange. This is IDG’s usual playbook. Take positions in non-listed companies, help build them, and then cash out with a big IPO. [they were one of the early investors in FaceBook] So, this is how REMI shareholders will receive a payday from the China business. The CEO has a 25% stake in REMI, so he has a big incentive to distribute the cash to shareholders because he is one of them. I have no idea what the IPO price will be, but with a business building a valuable brand with China’s rich and famous growing the top line at 100%, I would suggest the PE will be very high and we can expect over a dollar per share of special dividends. Given that REMI is 45c right now, that is quite nice! Of course, there is uncertainty as to exactly when this will happen (my guess sometime late 2015 to mid-2016), but I am confident it will happen.
So at the moment we have a company with 20 million shares out, very low OpEx, a 25% insider stake, and two growing businesses. The price is undervalued, but given the illiquidity, lack of market knowledge of the company, almost non-existent IR, the CEO’s previous missteps, and the uncertainty of the timing of few moving parts (China IPO), I think the market is in wait and see mode.
The two developments which I believe are going to have a huge effect on this company are the introduction of the Condor Scanner and their development of a searchable 3D veneer database.
Condor
The Condor, even if mildly successful, and I have no reason to see why they won’t sell a good number of them, is likely to have a very large impact on REMI’s revenues and gross margins. Note, REMI does not make any money directly from the sale of the Condor, although it does have a 6% equity stake in it, which appears on the income statement. Rather, it makes money from the Condor increasing the pool of dentists with access to their veneers and increasing gross margins on their existing veneer sales.
For revenue, once a dentist buys the Condor, there is a preinstalled app which allows a scan to be performed and the patient can have REMI’s veneers pre-fitted. This is a great money-maker for the dentist. A small amount of training in fitting these veneers is necessary, and this will be organized by the distributor. Once the Condor is bought, the dentist effectively has an entirely new business - (a veneer business). The CEO has met all four of the four largest dental distributors in the world. They are very interested and awaiting the Condor’s completion. The CEO thinks it will be shipping by September.
The Condor very quickly pays for itself for a dentist because of the HD color image allowing greatly enhanced diagnostic ability and therefore more profitable procedures. As an example, the CEO demonstrated it to groups of dentists and asked them to look at the image and tell them what they see. Instant and accurate diagnosis occurred. For example, one dentist said there is an infection there, another dentist said that patient needed a crown. A crown is about 1000 Euros, and one month rental of the Condor is 320 Euros. One extra diagnosis has paid for 3 months of the Condor.
In terms of gross margins, the Condor will be used in existing REMI franchises, eliminating the need for a physical cast of the teeth to be sent via Fedex, and rather sent by internet. This will also occur for all China studios. The CEO expects margins to move to the high 80s once this system is fully operational across all of its business lines. REMI thus becomes a very low overhead, high operating leverage veneer printing machine.
Competition to the Condor.
The Condor has a jump on the competition for a couple of different reasons. The entire basis of its design is radically different from that of 3M and Sirona etc. Competitors use a projection-based model to scan and produce a color image of the mouth. This means the scanner projects a reflection of the mouth. Competitor’s systems are hardware based, not software based, so the equipment is much larger, including the scanner itself. Second, projection based systems are hampered by any saliva in the mouth, which means the mouth often requires powdering. Once you powder, then many parts of the image will longer display in color, but will become black and white. Finally, the true cost of the cheapest alternative, the 3M scanner, is a lot higher than it first appears. The 3M scanner has an additional minimum program usage charge of around 200 dollars per month. So what originally cost 12,000 USD quickly becomes more expensive the longer it is used (200*12=2400 USD per year extra to 12,000 USD after 5 years. The Condor is 12,500 Euros to buy or it can be leased at 320 Euros per month. The CEO expects most dentists to lease it.
The Condor films and turns what is sees into a 3D model using two cameras on the scanner. It uses an accelerometer measuring the distance the dentist moves his hand and also a gyroscope measuring how it turns in the mouth [as used in Apple iPad].
General Market for an affordable dental scanner.
Dental scanners have been around for a few years, but their cost and lack of quality have restricted adoption to just tech geek dentists. The dental labs have always been keen on dentists having them because a scanner saves them a lot of money on logistics in terms of the pick up and delivery of physical impressions, but dentist have never had any great incentive. The Condor gives them a chance to become more profitable through improved diagnostics and the chance to have their own veneer business.
3D database.
Currently veneers must be ‘designed’. This takes a lot of time and expense. REMI, though its years of designing and building veneers, now has a massive 3D database of every conceivable type and design of veneer. This is a rather fortuitous development, as the CEO did not build this with this idea in mind. However, it has occurred to the company that this database is worth a lot of money to dental labs and any dentist specializing in veneers. REMI has hired programmers to put computers through database to reference the veneers sideways, up-down, by thickness etc. to make a searchable veneer database. This will be put on the cloud.
Any lab needing to mill any veneer can now access this database and automatically find suitable designs for the teeth parameters they are given. So they have to spend time and money designing the veneer themselves. Most labs now use milling machines, so the veneer can be instantly ground out.
The Condor scanner will also have a teaser version of this software on it.
Labs and high-user dentists will subscribe to this database per use or monthly. So this will be a complete B2B approach with 100% margin.
This idea is in earlier form than the scanner, but it is in motion now
Other notes.
Prior to joining REMI, the CEO worked in three different dental visual technology companies. Their SmileMe App is starting to sell and some distributors have been signed. This earns money for REMI through the sale itself and driving more veneer sales. The CEO is meeting with Excelsior on June 11th for what is hopefully the final signing off of the debt. I understand Excelsior has an audit coming and this has prompted them to meet and get it done. Toward the end of the year, once the Condor is fully launched, the CEO will engage an IR firm to tell the story of REMI’s business assets.
I expect breakeven to 1c for the 4q, and then continued 1c rapidly rising as the Condor hits the market and more practically, once it is utilized in REMI’s existing business lines.
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