The Metals Company — All set for a pivotal year

The Metals Company (NASDAQ: TMC)

Last close As at 19/04/2024

USD1.69

0.03 (1.81%)

Market capitalisation

USD539m

More on this equity

Research: Metals & Mining

The Metals Company — All set for a pivotal year

The global electric vehicle transition requires significant volumes of battery materials (see Edison’s note on critical minerals) and The Metals Company’s (TMC’s) deep-sea concession is a proven resource. The key to transforming this resource into a commodity or commercial production is an exploitation licence, which requires the International Seabed Authority (ISA), the governing body, to put in place the required legislation. The meeting to enact this regulation is scheduled for July 2023.

David Larkam

Written by

David Larkam

Analyst, Industrials

Metals & Mining

The Metals Company

All set for a pivotal year

FY22 results

Metals and mining

29 March 2023

Price

US$0.9

Market cap

US$226m

Net cash ($m) at 31 December 2022

46.8

Shares in issue

265.5m

Free float

49.2%

Code

TMC

Primary exchange

Nasdaq

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(30.6)

18.0

(57.9)

Rel (local)

(30.6)

12.4

(51.4)

52-week high/low

US$2.7

US$0.6

Business description

The Metals Company is a deep-sea minerals exploration company focused on the collection, processing and refining of polymetallic nodules, containing nickel, copper and cobalt, found on the seafloor in the international waters of the Clarion Clipperton Zone, 1,300 nautical miles off the coast of Southern California.

Next events

Q223 results

Date to be confirmed

Analyst

David Larkam

+44 (0)20 3077 5700

The Metals Company is a research client of Edison Investment Research Limited

The global electric vehicle transition requires significant volumes of battery materials (see Edison’s note on critical minerals) and The Metals Company’s (TMC’s) deep-sea concession is a proven resource. The key to transforming this resource into a commodity or commercial production is an exploitation licence, which requires the International Seabed Authority (ISA), the governing body, to put in place the required legislation. The meeting to enact this regulation is scheduled for July 2023.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/21

0

(108)

(52.7)

0.0

N/A

N/A

12/22

0

(154)

(64.1)

0.0

N/A

N/A

12/23e

0

(50)

(14.9)

0.0

N/A

N/A

12/24e

71.7

(59)

(12.1)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY22 results: Losses reflect increased investment

TMC reported a loss before tax of $171m in FY22, up from $141m ($154m from $108m underlying, excluding exceptional items and share-based payments). This reflects increased one-offs, most notably $69.9m for partner Allseas’ stock vesting as relevant milestones were achieved, and higher levels of operational activity. 2022 included extensive sea trials as TMC develops its nodule collection system and builds its resource library, particularly environmental, ahead of its application for an exploitation licence. FY22 year-end net cash was $46.8m, down from $84.9m.

FY23: Prospects, liquidity and forecasts

The key event in 2023 is the ISA meeting in July when regulations regarding the award of commercial exploitation licences in the deep sea are due to be enacted. In the meantime, TMC continues to work on the required documentation to support an application for such a licence later in the year. Since the year end the company has raised an additional $30m and has a further untapped equity facility. This will support liquidity, assisted by the lack of major operating expenses such as further sea trials or capital spend in the year. We also note management comments that it believes it has sufficient liquidity for at least the next 12 months. We have raised our FY23e operational costs for the year, resulting in an increased loss, before share-based charges, from $40m to $50m, and forecast year-end net cash of $26.8m.

Valuation: Waiting for the catalyst

Our valuation, based on risked stages of the NORI-D project, remains unchanged from our initiation note. Key is the de-risking of the project, primarily the award of an exploitation licence. Our valuation using long-term metal prices (below current prices) at the current stage of development is $244–484m, which rises to $552–1,182 (at long-term metal prices) on the award of an exploitation licence. The ISA’s anticipated adoption of mining regulations in July 2023 provides a critical stepping stone on this path.

FY22 results overview

Profit and loss

The company reported a loss before tax of $171m in FY22 versus a loss of $141m in FY21. The increased loss was primarily due to the higher levels of offshore activity, in particular the Q4 in-situ pilot tests with associated monitoring vessel. The loss included $69.9m in vesting stock and the third payment of $8.7m in respect of the successful sea trials of the Hidden Gem and the nodule recovery system. There was a $17.1m charge for share-based payments. The reported loss per share for the year was 71c up from 69c in FY21.

Cash flow and balance sheet

Operating activities consumed c $67m of cash while the PIPE financing raised c $30m, leading to a net reduction in cash of c $38m. Net assets declined from $92.8m to $41.5m, largely due to the reduction in cash and an increase in payables. Year-end net cash was $46.8m, down from $84.9m in FY21.

Liquidity

Post the year end, the company raised a $25m unsecured credit facility with the parent of Allseas Investments and received $5m from Low Carbon Royalties, along with the initial 35% equity stake. In addition, the company has a $30m approved at-the-market equity programme, which remains untapped (and arguably unattractive at the current market price).

Management commented that, ‘we believe that existing liquidity will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from today’. It supported this by noting that, if necessary, it could reduce costs to c $5m a quarter, primarily to fund central costs and assisted by there being no major sea trials/campaigns planned.

Key events in 2022

The most significant event in 2022 was the Q4 sea trials in-situ in NORI-D. These provided positive tests for the nodule collector equipment and riser system. In total, 4,500 tonnes of nodules were collected with 3,000 tonnes raised 4.3km from the seabed to the surface production vessel. While this validated the system, further upgrades are required to meet the planned collection rates. The ‘virtual twin’ monitoring system was also tested successfully.

Q123 corporate update

TMC completed two financing transactions in Q123, as summarised above. Management also continues to develop its plans to bring in best-of-class third parties to provide the required expertise and build on its ‘asset light’ plan. These included the following in Q123:

Nodule processing non-binding memorandum of understanding (MoU) signed with Pacific Metals Co (PAMCO) of Japan. PAMCO is a nickel-focused business, the key smelting business producing ferronickel used in the manufacture of stainless steel, while the ferronickel slag business treats and recycles the slag produced in the steel-making process. PAMCO will use its expertise and existing processing capacity to evaluate the feasibility of processing 1.3Mt of wet polymetallic nodules per year from 2025 onwards, in line with TMC’s expectations for Project Zero. The expectation is that this will lead to a volume processing agreement in due course. This does not replace the discussions with Epsilon Carbon announced last year but, in our view, provides a more experienced partner with the required processing capacity in place and hence is likely to provide greater certainty for processing the initial nodule production.

Bechtel, a multibillion-dollar global expert in infrastructure project development and execution, has been engaged to support the commercial contract application for the NORI–D project. Bechtel will bring together a number of earlier studies undertaken by different organisations, along with its own extensive experience in the mining sector, to assist TMC to produce a first-of-its kind exploitation contract application to the ISA. This is expected to be completed in the current calendar year.

2023 outlook

The key event in the year is the expectation that the ISA will implement regulations covering mining in the deep sea at its meeting in July. This would then allow TMC’s application for a commercial nodule collection licence in NORI-D to proceed. Inevitably there is uncertainty over this event, although we note the following recent developments:

A UN intergovernmental conference on marine diversity approved a new maritime biodiversity treaty covering areas beyond national jurisdiction. The treaty calls for the protection of 30% of the region. We note that the ISA remains mandated to regulate the deep sea, including the Clarion Clipperton Zone (CCZ), where TMC’s NORI-D is situated and where 43% of the region is already protected.

National governments are becoming more interested in the CCZ and deep-sea mining as a source of battery materials (see Edison’s note on critical minerals). In particular, France, which had been one of the more vociferous nations calling for a moratorium, appears to have softened its stance, while the French Research Institute for the Exploitation of the Sea extended its CCZ exploration contract, a pre-requirement for future development. It has also been reported that China has recommenced its interest in the region.

From an operational perspective, TMC has no major offshore activity planned for the year, but it continues to develop its onshore capabilities. The main focus for 2023 is on assembling the required information and plans to apply for an exploitation licence. These include an Environmental Impact Statement and an Environmental Mitigation and Monitoring Plan.

Financials

2023 should see reduced losses due to the absence of significant one-offs such as the $69.9m vesting charge, while from an operational perspective there are no major, and expensive, sea trials planned. As outlined above, the majority of the work this year will be developing the required plans and gathering supporting evidence for the exploitation licence application, which, subject to the ISA’s progress on the requisite legislation, will be submitted later in the year. We have assumed costs of $50m before share-based payments. Note that our forecasts have been changed to assume only the $30m fund-raising already announced in 2023, down from previous expectations, hence the lower net cash at the year end. However, we now assume a $150m fund-raise in 2024, primarily for Project Zero, albeit we note that TMC does not currently have shareholder approval for such a sizeable raise, nor is it likely to be management’s preferred route given the dilutive effect for existing shareholders.

Key sensitivities therefore are on the timing of the licensing application in 2023 and the commencement of nodule collection, which will affect 2024 numbers (currently expected to commence in Q424).

Exhibit 1 highlights the changes to our forecasts. We also introduce 2025 numbers (see Exhibit 2), which will include the first full year of production from Project Zero, albeit still in a ramp-up phase and therefore not at the long-term anticipated rates.

Exhibit 1: Forecast changes

2023e

2024e

Old

New

Change

Old

New

Change

Revenues

$m

0.0

0.0

N/A

71.9

71.7

-0.3%

EBITDA

$m

(36.7)

(50.0)

36.2%

(46.1)

(59.4)

28.8%

Normalised operating profit

$m

(40.0)

(50.0)

25.0%

(49.2)

(59.4)

20.7%

Normalised PBT

$m

(40.0)

(50.0)

25.0%

(49.2)

(59.4)

20.7%

Normalised basic EPS

c

(9.1)

(14.9)

63.3%

(11.2)

(12.1)

7.6%

Net debt/(cash)

$m

(95.2)

(26.8)

-71.8%

(26.1)

(44.6)

70.7%

Source: Edison Investment Research

Exhibit 2: Financial summary

$m

2021

2022

2023e

2024e

2025e

Year to 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

INCOME STATEMENT

Revenue

0.0

0.0

0.0

71.7

358.4

Cost of Sales

0.0

0.0

0.0

(78.5)

(341.3)

Gross Profit

0.0

0.0

0.0

(6.9)

17.0

EBITDA

(115.7)

(157.0)

(50.0)

(59.4)

(32.4)

Operating profit (before amort. and excepts.)

(116.2)

(157.0)

(50.0)

(59.4)

(35.5)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals & share based payments

(33.4)

(17.1)

(10.0)

(10.0)

(20.0)

Reported operating profit

(149.6)

(174.1)

(60.0)

(69.4)

(55.5)

Net Interest

8.3

3.2

0.0

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

Profit Before Tax (norm)

(107.9)

(153.8)

(50.0)

(59.4)

(35.5)

Profit Before Tax (reported)

(141.3)

(170.9)

(60.0)

(69.4)

(55.5)

Reported tax

0.0

0.0

10.0

11.9

7.1

Profit After Tax (norm)

(107.9)

(153.8)

(40.0)

(47.5)

(28.4)

Profit After Tax (reported)

(141.3)

(170.9)

(50.0)

(57.5)

(48.4)

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

(107.9)

(153.8)

(40.0)

(47.5)

(28.4)

Net income (reported)

(141.3)

(170.9)

(50.0)

(57.5)

(48.4)

Average Number of Shares Outstanding (m)

205

240

269

394

394

EPS - normalised (c)

(52.66)

(64.09)

(14.86)

(12.05)

(7.21)

EPS - normalised fully diluted (c)

(46.93)

(58.04)

(13.60)

(11.33)

(6.78)

EPS - basic reported (c)

(68.96)

(71.22)

(18.58)

(14.59)

(12.28)

Dividend (c)

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

44.6

45.2

50.2

105.2

107.1

Intangible Assets

43.2

43.2

43.2

43.2

43.2

Tangible Assets

1.4

2.0

7.0

62.0

63.9

Investments & other

0.0

0.0

0.0

0.0

0.0

Current Assets

88.6

49.7

29.7

76.5

110.8

Stocks

0.0

0.0

0.0

17.9

89.6

Debtors

0.0

0.0

0.0

11.2

18.3

Cash & cash equivalents

84.9

46.8

26.8

44.6

0.0

Other

3.7

2.9

2.9

2.9

2.9

Current Liabilities

(26.6)

(41.7)

(41.7)

(41.7)

(41.7)

Creditors

(26.6)

(41.7)

(41.7)

(41.7)

(41.7)

Tax and social security

0.0

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

(13.8)

(11.7)

(1.7)

(1.0)

(65.5)

Long term borrowings

0.0

0.0

0.0

0.0

(64.5)

Other long term liabilities

(13.8)

(11.7)

(1.7)

(1.0)

(1.0)

Net Assets

92.8

41.5

36.5

139.0

110.6

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

92.8

41.5

36.5

139.0

110.6

CASH FLOW

Operating Cash Flow

(115.7)

(157.0)

(50.0)

(59.4)

(32.4)

Working capital

18.5

17.8

0.0

(17.9)

(71.7)

Exceptional & other

41.3

72.7

0.0

0.0

0.0

Tax

0.0

0.0

0.0

0.0

0.0

Net operating cash flow

(55.9)

(66.5)

(50.0)

(77.3)

(104.1)

Capex

(0.4)

(1.2)

(5.0)

(55.0)

(5.0)

Acquisitions/disposals

(3.4)

0.0

0.0

0.0

0.0

Net interest

0.0

0.0

0.0

0.0

0.0

Equity financing

134.7

29.7

35.0

150.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

Net Cash Flow

75.0

(38.0)

(20.0)

17.7

(109.1)

Opening net debt/(cash)

(10.1)

(84.9)

(46.8)

(26.8)

(44.6)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

(0.2)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

(84.9)

(46.8)

(26.8)

(44.6)

64.5

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by The Metals Company and prepared and issued by Edison, in consideration of a fee payable by The Metals Company. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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General disclaimer and copyright

This report has been commissioned by The Metals Company and prepared and issued by Edison, in consideration of a fee payable by The Metals Company. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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London │ New York │ Frankfurt

20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Healthcare

Respiri — Wheezo commercialization picking up pace

In a recent business update, Respiri recapped its commercialisation efforts for the wheezo device and associated remote patient monitoring (RPM) programme. Towards the end of Q323, the company has onboarded roughly 100 patients across eight clients, including two client wins during the quarter. We understand that Respiri is also in advanced RPM discussions with two private health insurers and four clinical services companies. Patient onboarding commenced earlier this month at Arkansas Heart Hospital and at an undisclosed North Carolina-based healthcare organisation, and the onboarding process is underway at Michigan Children’s Hospital. Respiri’s recent commercialisation strides, along with new client wins, are anticipated to support the company to reach break-even (c 40,000 unit sales), which we estimate by FY25.

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