ASX small cap investors don’t tend to handle complexity well.

The folks at Hydrix (ASX:HYD), then, have quite the task ahead of them: convincing small cap investors that not only is the business model not as complicated as it looks, but that on revenue alone its worth much more than the $8m the market cap it has wallowed near since March.

Hydrix is the new iteration of Panorama Synergy, a company that was trying to turn University of Western Australia (UWA) IP around a very complicated and cutting edge type of computer chip into products people wanted to buy, and ST Synergy before that.

In 2017, it bought engineering services company Hydrix and did an about face: revenue first, cutting edge tech second, with some venture investing somewhere in the middle.

Chairman Gavin Coote reckons they’ve actually done a pretty good job in the last two and a half years, given his “shoestring” budget, scrutiny from the market, and short time frame.


All science, no money

Panorama listed in 2001 as ST Synergy, a software company. It got into ‘light’-based computer chips in 2004, when scientists were suggesting using photons in so-called optical chips might be the solution to constant buffering which made online videos unwatchable in the dark days before Netflix.

Many interesting, but financially irrelevant, scientific announcements later and a name change to Panorama Synergy, a deal was struck in 2010 with UWA for micro-electromechanical system (MEMS) technology, a kind of chip that uses miniature mechanical devices rather than silicon-based electrics.

Come 2017, it was still haemorrhaging money and did not have a software business or a photon-based computer chip that could make Netflix or online sports watchable.

It did have a grant for a device that could detect insecticide levels on the interior of aircraft, and was getting excited about a handheld device that could measure protein levels in grain.

Coote was part of a board reshuffle in March that year. They approached Hydrix to look into whether there was any money in the MEMS (there wasn’t), then bought it.

Today Coote is pitching a three-pronged business plan that investors hope will end almost two decades of unfulfilled blue sky promises.


The triumvirate

Hydrix the services business is what is making the money. It provides design, engineering and regulatory services and advice to budding health, defence and industrial companies.

In spite of COVID-19 it should deliver just shy of $15m in revenue for fiscal 2020, up 15 per cent on last year. It hit a maiden operating profit for one quarter last year and was forecasting champagne and caviar by the end of 2020.

It pulled guidance for a full-year 2020 cash operating profit in early April, but after cost cutting and steadying confidence, Coote believes the company will come very close to the original forecasts.

The venture business takes equity stakes alongside or instead of cash from promising clients.

Hydrix built Micro-X’s (ASX:MX1) lightweight xray machine, a device that has generated millions of dollars worth of orders this year alone.

While the Micro-X stock is currently near all-time lows, Coote laments the missed opportunity they could have had to take a stake when that company is finally noticed by investors.

Memphasys (ASX:MEM) is another Hydrix has worked with, providing engineering services for its sperm separator, and hip replacement surgery tech company Gyder. This time it did take equity.

Memphasys stock has risen from sub-1c in late-2018, around when Hydrix began working with it, to 5.4c.

The other corner of the business is the ‘build’ side, where Hydrix uses its in-house talent to build or improve upon bought-in technologies that, they hope, will make the company’s fortune.


Blue sky thinking keeps things interesting

While the services company chugs along making money and the equity stakes build up, the third arm is where the old blue sky ideals of ST and Panorama are stored to keep things a bit interesting.

In 2019, Hydrix bought the distribution rights for eight countries in Asia, including Australia, to the Guardian, a heart attack alert system that is implanted into the body and runs off the same electrical probe that is wired into the bosom of an at-risk patient as a pacemaker.

Coote says the value lies in the cardiac death rate: one in 10 people die from their first heart attack, and of the survivors your chance of dying from another is one in five.

Survivors, then, are understandably likely to jump on anything that can reliably tell them whether the chest twinge is a possible fatal blow or too much chilli. Smart watches and chest monitors can only say so much.

The FDA has given the device its blessing, but not the brand new battery the developer AngelMed has put in the Guardian 2.0. The US company promises that sanction will come in early 2021.

Hydrix originally expected revenue from the Guardian in 2021 of $15m.

COVID-19 shutdowns of hospitals and budget cuts have put a stop to that idea, but Coote is still convinced that interest is here to stay.

Singaporean cardiologist Leslie Lam is keen to be the first to put the five devices he’s ordered into patients while, according to Coote, Australian cardiologists are interested in taking it off-label and putting it not into people who have already had a heart attack, but people who are are risk of them such as those with diabetes or obesity issues.


The revenue possibilities are big 

At $10,000 a pop, Coote and his fellow directors are staring wonderingly at the possible revenue. If just 1 per cent of the 430,000 people who suffered heart attacks in 2017-18 in Australia were convinced to get a monitor implanted into their body, that’s $43m in sales.

But this is still just forecasting. They are allowed to start putting the device inside people under authorised prescriber early access schemes — where doctors sponsor the device — but only Lam in Singapore has volunteered to do so yet.

Once the anticipated FDA approval comes through for the new and improved battery next year, it’ll be easier to start selling, but that also depends on hospitals reopening and clearing a backlog of elective surgeries from COVID-19 this year.

The other side of the ‘build’ strategy is Hydrix’s plans to build a software system that can deliver the data from the monitor to cardiologists and make sense of the information.

Cootes hopes the clients in the services part of the business might consider white labelling that software for their own technology.

With a market cap of $8m but expected revenue of almost double that, Hydrix shareholders and the board are allowed to feel a smidge frustrated.