Blis Technologies is a Dunedin-based company with a staff of only 25 and a focus on the development and marketing of oral probiotic products.
Their products focus on introducing "good" bacteria into your mouth with the aim of killing off "bad" bacteria and, more importantly, stopping them from coming back. (My apologies to any scientists reading this, for my simplified technical explanation.)
Blis first listed in August 2000 and had racked up close to $35 million in accumulated losses by mid-2018.
Nonetheless, Blis turned a maiden profit in the 2018-19 financial year and is on track to increase profitability further in 2019-20. This brings new meaning to a certain advertising catchphrase professing that "good things take time", but Blis does appear to have made significant progress over the last two years.
A company announcement in early April affirmed an expected Ebitda (earnings before interest, tax, depreciation and amortisation) of around $2.1m for the 2019-20 financial year, significantly up on last year's $0.4m. The forecast increase is driven by a 20 per cent growth in revenue since the last financial year as demand for its products increases.
As always with a small company turning towards profitability, the numbers look small. But two years of sustained performance growth drives credibility and is worthy of attention, regardless of size.
So what has changed at Blis?
The Covid-19 factor
The very recent past has seen a clear benefit from the Covid-19 crisis. I've written in a previous column about the "flight to healthcare" as investors see benefits from holding shares in companies focused on wellbeing in the current crisis.
Blis has delivered returns of around 20 per cent for investors so far in 2020, a good performance even in the context of broad rises in all healthcare-related shares. It's an exalted position indeed, with a return performance comparable to Fisher & Paykel Healthcare and a2 Milk, and well above sector stablemate Ebos.
Based on company announcements made in February and last month, it's likely that the Covid-19 crisis has added about $1-$1.2m to Blis' revenue for 2019-20, in addition to already forecast growth.
Science & revenue
Even without Covid-19, however, the company was on a growth track, as it turned its attention to commercialisation of its science-based R&D pipeline, with a forecast (excluding Covid-19) of 11 per cent revenue growth over 2018-19.
Blis has a strong science-based heritage, through the research of professor John Tagg. The company is well-regarded in dental circles, with ongoing growth in research highlighting the value of probiotics.
Wellington dentist John Taylor-Smith says "there is a clear theoretical benefit to probiotics, with a particularly positive impact on throat infections".
Taylor-Smith goes on to say that an adult's risk of tooth decay is partly genetic, set early in childhood and is hard to change, with regular flossing and brushing having a strong positive result. "The introduction of probiotics to at-risk individuals can only support the process of improving oral bacteria."
Chief executive Brian Watson describes that scientific culture as a strength for Blis; but like any strength it can also be a weakness. "We had to build on our science heritage to open up new markets."
The maiden profit in 2018-19 was driven by careful revenue growth and market planning, coupled with effective management to maintain costs at stable levels. Watson explains that "research and development remains a focus for Blis; it's critical for us to strike the right balance between investing in the longer term and current commercial realities".
There have been plenty of technology-based small-cap companies on the NZX that have not got this balance right. Time will tell if Blis has better success.
Over the years, Blis has tended towards maintaining a presence in each element of its supply chain, from production through to sales from its own website. Recently, though, there's been a greater focus on creating partnerships to augment Blis' own capability, especially as the company looks to meet the significant increase in demand for its products.
Those partnerships include new suppliers of raw ingredients (both within and outside New Zealand), an expansion into contract manufacturing arrangements and new distribution partnerships to facilitate sales in different global markets.
"We want to address those supply chain risks so that we can continue to sustain future growth" says Watson.
It's great that Blis has managed to keep pace with demand increases through expansion of its supply chain partnerships. But with that comes new risks associated with quality control and supply chain planning. How those risks play out is simply down to how well Blis implements their supply chain changes. There will be some early insight into that in Blis' next annual report, likely to be released to the market this month.
Second, there is a real question whether the level of revenue growth seen during the last three months (the "Covid-19 period") can be sustained. Anecdotally, the company has had positive feedback from its distributors, although everyone (including the company) will be looking to have that anecdotal evidence supported with some hard data.
It's worth noting that the company was already projecting revenue and profitability growth well before the Covid-19 crisis. So even if the "froth" caused by the virus does not sustain itself, there is still good solid underlying growth for the company to work with.
For the quarter to December 2019 (ie, pre Covid-19), the company reported a 43 per cent rise in revenue compared with the December 2018 quarter, with full-year revenue then expected to be 11 per cent up on 2018-19. Covid-19 has added even more, to a total of 26 per cent revenue growth from 2018-19.
Third, the after-effects of Covid-19 will continue to impact economies in the markets where Blis sells its products. Like most other companies, it will be affected by an overall reduction in discretionary income among customers, affecting demand for its products.
For Blis, the extent of that impact remains uncertain; the 2008 global financial crisis had a more limited impact on health consumables than other sectors.
Brand-building and awareness has been ongoing for Blis throughout most of its existence. A strong brand helps Blis to weather any downturn in consumer spending as customers "recognise" Blis products and continue to purchase even as discretionary income slides.
The scale of investment achievable by Blis in its own brand can only be small compared to larger companies. Therefore, it faces some key questions about the tradeoff between building "presence" across markets through distribution arrangements and investing in its own brand to heighten consumer awareness.
In a perfect world, both actions should result in sustaining the growth that Blis has so carefully nurtured to date. But it is not a perfect world — this tradeoff will require further balanced decision-making for Blis to chart its way through a future recessionary world.
It is always hard to gain effective analyst research and coverage as a small-cap company. Larger brokerage firms simply don't have the analyst resource to focus on the "small end", as most of their clients chase a piece of the larger organisations that comprise the NZX50. But it does not mean that there is no opportunity for those prepared to find it.
Performance sustainability counts for plenty in creating credibility worthy of analyst research. On that front at least, Blis might attract a little more interest in future.