Investing in start-ups or tests your ability to keep calm. The road to market and profitability is long and bumpy for start-ups. The closer you get to the magic point of first profits or break even, the more impatient investors seems. Rephrased: As you get closer often, the share paradoxically goes down.
Lately this is the case for Dignitana. In a presentation some months ago, Bill Cronin, the CEO guessed that the American subsidiary Dignitana Inc. would be profitable by the end of this year. Dignitana would follow in the first part of 2018.
This, of course, is a dangerous thing to say. The road is bumpy, and as they say in Game of Thrones, “The night is dark and full of terrors”. Especially for investors. Some time you get lucky and there is a tail wind. Mostly though, the opposite goes and there are setbacks and delays. Despite plans and hopes, setbacks and delays do occur in real life.
The current setback in Dignitanas case has been delays in deliverance from a major manufacturer of the Dignicap System. The manufacturer moved a plant and for two months, August and September, there were no production. Dignitana estimates that this delay will affect sales in Q3 and Q4 with approximately 4 million SEK.
When this came out, the share fell 18 % over a few days from 13.7 SEK to 11.2 SEK. Since then, the share have regained 0.7 SEK of the 2.5 SEK lost, but is still below 12 SEK.
It is a paradox, but actually, the production halt might positively influence cash flow and perhaps even probability in Q3. In the US business model, clinics lease the Dignicap system and the users pay per individual treatment. This is a business model that is very cash demanding since the company needs cash to produce the systems – and then it only comes back gradually via the monthly lease and the treatments.
If you sell system you get the money shortly after you have had the cost. In Dignitanas business model there is a much longer timespan between cost and a corresponding cash inflow. When cash outflow have been on halt for two months (and inflow from already delivered systems is unaffected) we have 10 months of cash outflow and 12 months of inflow.
In the Q2-report cash demanding expenses were; ‘personnel expenses’ 6.5 MSEK, ‘other external costs’, which I think mainly covers the production costs, 7.2 MSEK, and ‘goods for resale’ 0.9 MSEK. The operating income were 5.9 MSEK.
If costs in Q3 remain largely at the same level, a 25 % rise in operating income will make costs and income balance if there are no production costs. This is why it might have a positive effect on profitability as well in Q3. When production restarts and Dignitana steps up to deliver the missing systems in Q4 and Q1-18, the cost will of course rise again. The effect is of course only temporary.
What Dignitana loses is of course top-line; the lease and payments from a number of new clinics waiting to start treating patients. Clinics have signed contracts, currently there are 95 of these, but they will have to wait and cannot offer the patients this treatment because of the production halt. For Dignitana, this also delays the point where income covers the cost base.
Unless you fly from start-up to start-up in order to catch the point where they take off – which I find increasingly hard to predict – the only thing is to keep calm. Shares like Dignitana will take off eventually, but you might need to wait. The difficult part, of course, is to keep calm while waiting.