Implant Sciences’ (IMSC) CEO Glenn Bolduc discusses Q4 2014 results on a conference call held on September 19, 2014…
Glenn Bolduc – Chairman, President, Chief Executive Officer
Roger Deschenes – Chief Financial Officer
Darryl Jones – VP, Sales and Marketing
Bill McGann – Chief Operating Officer
Mark Jordan – Noble Financial
Kenneth Rybicki – Private Investor
Joe Munda – Sidoti & Company
Patrick Mayor – Private Investor
Eric Panzik – Private Investor
Mark Wilcheck – Private Investor
Sean Sullivan – Private Investor
Implant Sciences Corporation (OTCQB:IMSC) Q4 2014 Results Earnings Conference Call September 29, 2014 4:15 PM ET
Good day, ladies and gentlemen, and welcome to the Q4 2014 Implant Sciences Corporation earnings conference call. My name is Whitney, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Glenn Bolduc, President and Chief Executive Officer. Please, proceed.
Glenn Bolduc – Chairman, President, Chief Executive Officer
Thank you very much, Whitney. And I would like to thank everyone to Implant Sciences’ fourth quarter fiscal 2014 earnings conference call. We are going to do this a little differently today. I am going to offer some brief remarks at the beginning, ask Roger to review the financials with you and then I will offer more description on the activities in the business. We also welcome those of you who are joining us via a webcast today.
On the call with me this afternoon are Dr. Bill McGann, our Chief Operating Officer; Roger Deschenes, who I just mentioned a moment ago, our Chief Financial Officer, and Dr. Darryl Jones, our Vice President of Sales and Marketing. In many regards, fiscal 2014 was a very good year for the company. If a few things had happened faster that we will discuss with you, we believe that we would be talking about our best year ever.
We did achieve two major approvals. Addition to the qualified product section of the air cargo screening technology list and certification by STAC in France. I embarrassed myself once telling you what STAC was, just know it’s the likely equivalent to TSA in France. We continue to make progress on other certifications and in August, we passed our biggest milestone to-date when the QS-B220, our benchtop was added to the TSA’s qualified product list, also known as the QPL.
Our relationship with the Transportation Security Laboratory remains very strong, and in April of this year we announced that we have signed a new cooperative research and development agreement with the TSL to use the benchtop as a “gold standard” trace detector in the development of the next generation of trace detection requirements. With this agreement, Implant Sciences has moved from a company chasing performance standards to one that is truly helping to define them.
Despite the delays in certifications, we were able to achieve significant growth in new international sales bookings. The missing component from our original plan was sales to the U.S. government. We have reported that to you previously. Our remaining steps for this are executing an indefinite delivery, indefinite quantity or IDIQ contract with the TSA and then securing orders against that IDIQ. The history of this process again demonstrates the difficulties in predicting exact timelines. However, we believe that the IDIQ is on track and we remain confident regards to an anticipated procurement award in the near future.
We believe that fiscal 2014 has positioned Implant Sciences for immediate and long-term success and we remain excited about the opportunities that are in front of us. Roger will provide a brief financial report on the company’s results for the quarter and fiscal year ended June 30, 2014. We will then provide deeper insight into the non-financial aspects of the company, its operations, and our plans going forward. Following our prepared marks, we will open the call up for questions from today’s participants.
Roger, why don’t you take over?
Roger Deschenes – Chief Financial Officer
Okay. Thank you, Glenn. A little bit of housekeeping. During this afternoon’s presentation, we will make forward-looking statements concerning upcoming events and our expectations regarding the company’s financial performance. Each time we do we’ll try to identify these statements with words such as expect, believe, anticipate and other words that indicate potential events. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those stated in the forward-looking statements.
Please consider the risk factors contained in the press release issued today September 29, 2014 and stated during this conference call as well as the risk factors and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, which is on file with the Securities and Exchange Commission.
During our presentation, we may discuss or disclose non-GAAP measures. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with U.S. GAAP. The presentation of non-GAAP information is intended instead to provide additional information to investors to facilitate the comparison of past and present results.
A replay of the conference call will be available for a limited time by dialing 888-286-8010 within United States or 617-801-6888 outside the United States and entering the passcode 70417507.
Any forward-looking statements we make today are based on assumptions which we believe to be reasonable as of today, September 29, 2014. We undertake no obligation to update these statements as a result of future events. Finally, this conference call is the property of Implant Sciences Corporation and any recording, reproduction or rebroadcast of this conference call without the expressed written consent of Implant Sciences Corporation is prohibited.
On September 29, 2014, we issued an earnings press release summarizing our financial performance for the quarter and year ended June 30, 2014. Our annual report on Form 10-K for the fiscal year ended June 30, 2014 was filed this afternoon with the Securities and Exchange Commission.
I will began now by reviewing the fiscal results. Revenues for the quarter ended June 30, 2014 were $1,529,000 as compared with $2,402,000 for the comparable prior year period, a decrease of $873,000 or approximately 36%. For the year ended June 30, 2014, revenues were $8,552,000 which compares with $12,017,000 for the prior-year period, a decrease of $3,465,000 or approximately 29%.
The revenue decrease in the quarter ended June 30, 2014 is due primarily to decreased shipments of our QS-B220 desktop into Asia, Europe, the Middle East and United States air cargo screening facilities, decreased unit shipments of our QS-H150 handheld units in Latin America and to a lesser extent, decreased sales of parts and supplies.
For the year ended June 30, 2014 the revenue decrease is primarily due to the shipment of QS-H150 handheld units under our contract with the India Ministry of Defense in the prior-year period and this is partially offset by increased sales of our QS-B220 desktop units to U.S. air cargo screening facilities, increased shipments into Latin America, Europe and agencies of the U.S. government.
The average unit sell price on sales of our QS-H150 handheld units for the quarter and year decreased approximately 8% and 4%, respectively. The average unit sell price for our QS-B220 remained relatively unchanged.
Gross margin for the quarter ended June 30, 2014 was a loss of $135,000 or 8.8% of revenues which compares with $697,000 or 29% of revenues for the prior-year period. For the year ended June 30, 2014 gross margin was $2,054,000 or 24.2% of revenues which compares with $3,429,000 or 28.5% of revenues. The decrease in gross margin dollars for the quarter and year ended June 30, 2014 is due primarily to decreased sales of our QS-H150 handheld units. The decrease in gross margin percentage for both the quarter and year ended June 30, 2014 is primarily due to an increase in our manufacturing overhead and this is mainly personnel and occupancy costs, an increase in provisions for obsolete inventory as compared to the prior year period and this is partially offset by the decrease in stock-based compensation recorded on stock option grants to officers and directors in September 2012.
Research and development expense for the quarter ended June 30, 2014 was $1,186,000 which compares with $1,233,000 for the prior-year period, a decrease of $47,000 or approximately 4%. Our research and development expense for the year ended June 30, 2014 was $4,787,000 which compares with $4,754,000 for the comparable prior year period, an increase of $33,000 or just under 1%.
The decrease in research and development expense for the quarter is due to the stock-based compensation recorded on the September 2012 officer and director option grants in the prior-year period. For the full year the increase in research and development expense is primarily due to increased payroll related benefit cost and occupancy cost. Again, this is offset partially by the decrease in stock-based compensation. Stock-based compensation for our research and development expense decreased $139,000 and $626,000 respectively for the quarter and year when compared to the prior year periods.
Selling, general and administrative expenses for the quarter ended June 30, 2014 were $2,449,000 as compared with $3,515,000 for the prior year period, a decrease of $1,066,000 or about 30%. For year ended June 30, 2014, selling, general and administrative expenses were $11,388,000 as compared with $20,630,000 for the comparable prior year period, a decrease of $9,242,000 or just under 45%.
The decrease in selling, general and administrative expenses for the quarter and the year are due primarily to decreased stock-based compensation recorded on the September 2012 officer and director option grants. This decrease is partially offset by increases in several administrative expenses which are detailed in the earnings release.
For the quarter ended June 30, 2014, other expense was $1,899,000 which compares with other expense of $1,493,000 for the prior-year period, an increase of $406,000. For the year, other expense was $6,889,000 which compares to $5,399,000 for the prior-year period, an increase of $1,490,000. The increase in both the quarter and year is due primarily to increased interest expense on higher borrowings under our credit facility with DMRJ and to a lesser extent borrowings under a new senior secured promissory note.
Our net loss for the quarter ended June 30, 2014 was $5,669,000 which compares with a net loss of $5,544,000 for the comparable prior year period, an increase in the net loss of $125,000. The increase in net loss is primarily due to lower sales and gross margin, increased operating expenses and increased interest expense. This is partially offset by the decreased stock-based compensation we have discussed previously.
Our net loss for the year ended June 30, 2014 was $21,010,000 as compared with a net loss of $27,354,000 for the comparable prior year period, a decrease of $6,344,000. The decrease in the net loss is primarily due to the decrease in stock-based compensation, again recorded on the September 2012 officer and director option grants in the year ended June 30, 2014. This is partially offset by increased operating expenses and increased interest expense.
Aggregate stock-based compensation recorded on employee stock options and non-employee warrants amounted to $579,000 for the quarter ended June 30, 2014 which compares to $1,797,000 in the comparable prior year period and amounted to $3,707,000 for the year ended June 30 2014 which compares to $14,604,000 in the prior-year period.
That concludes the financial report and I will now turn the call back over to Glenn.
Thank you, Roger in our last earnings call
Glenn Bolduc – Chairman, President, Chief Executive Officer
Thank you, Roger. In our last earnings call, we talked about the company being at an inflection point, defined as a time in the life of the business when all of its fundamentals are about to change. The impact of this change will be so profound that in the future, it may well sound like we are talking about a completely different company. Over the next few minutes, we will discuss these changes and what we are doing to complete our mission.
The catalyst for this change is upon us and as we position the company to achieve one of our longest and dearest held goals, securing stable and profitable revenue stream for the company, a big part of this is sales to the United States government, which we touched on in our opening remarks. Our B220 was placed on the QPL just last month, 31 days ago and we have submitted our bid in the tender for the next buying cycle for the government.
We know that historically the government’s buying cycle at the end of its fiscal year, which is upon us, presents challenges for the government contracting processes. However, we have every reason to believe that the IDIQ will be forthcoming and we remain positive about that outcome.
When we were planning for fiscal 2014, our budget for non-U.S. government sales was $9 million. As Roger just reported, our actual results were $8.6 million nearly all of which were non-U.S. government, which is an achievement of about 95% of that part of the budget. Given that the budget was created with the assumption that we would achieve QPL status during the first half of the year, which would have also increased our rest of world opportunity, 95% is a reasonably acceptable performance in that one sector or taking that one sector alone. Not having a product on the QPL precluded us from bidding on other business.
When looking at yearly revenues for Implant Sciences, I am sure many of you noted the significant bump in revenues in fiscal year 2013. It’s no secret that our 2013 revenues were influenced by the large Indian MoD order that we recorded, which was almost $6 million and was about half of our revenue that year. Large orders such as the India order tend to skew year-to-year comparisons for growing companies like ours. If you were to exclude the revenues associated with India MoD and compare a normalized 2013 with 2014, you see a 35% growth in sales year-over-year in like kind of business. We can’t do that in this kind of an analysis, but if you did that would be viewed as a respectable achievement.
With the approvals and certifications in hand our fiscal 2015 budget plans to bring the company to profitability by the end of the fiscal year. Included will be a strong contribution from sales to the U.S. government as well as expanded international sales. We have reviewed this budget in detail with our sales team earlier this month. They not only renewed their commitment to the goal but expressed strong confidence in their ability to achieve. This confidence is driven by several factors.
Let’s start with certifications. Certifications are critical to unlocking major sections of the market and we just received the single most important certification of all. In much of the world, the TSA’s QPL or qualified products list is the primary certification required in request for proposals and tenders. For those who have been doubting that this would translate to sales, we already have proof. An order we have been working on for some time, the sale of benchtops to the Incheon International Airport in Korea went through almost immediately after we were added to the list. Fundamentally, they made it a condition that we be on the QPL before they buy from us, even though they didn’t need TSA qualification. Based on discussions during our weekly sales pipeline meetings, we believe this is the first of many.
Certifications also represent a significant gate to winning business in Europe. For some time, the European Civil Aviation Conference or the ECAC has been working on a unified performance standard for explosives trace detection equipment. For the last two years, completion of this work had been considered imminent and buyers have been hesitant to purchase equipment until they knew which products would meet the standard. ECAC established back in the 1990s, by the way, completed its draft of the standard and associated test known as the Common Evaluation Process or acronym CEP, just last year. Implant Sciences was one of the few suppliers asked to participate in the trial of the CEP last winter. With the information obtained from that trial, ECAC finalized the performance standard and testing procedure earlier this year and the first round of formal tests is underway.
We have been advised unofficially that the benchtop QS-B220 will be included in the initial list of products that have passed the CEP when it is published later this fall. We anticipate that the publication of the ECAC test results for explosives trace detectors will trigger a wave of buying across all 44 ECAC member states. We have already had meetings with the purchasing authorities in several of these countries and expect to be in an excellent position to capture a good share of this business.
None of this is worth anything without access to the decision-makers and this is where our investment in growing our sales channel is paying off. The security and defense market tends to be one with long sales cycles that rely heavily on trusted relationships. Relationships like these take time to build. Where possible, we have added distributors that already possess these relationships. In other areas, we have developed the relationships ourselves. The net effect is that we have much better visibility into explosive trace detection procurements around the world. We see more deals so we have the opportunity to win more.
Within Canada, the Canadian Air Transport Security Authority, CATSA, regulated by Transport Canada, began lab test and evaluation of the benchtop just not long ago. CATSA does not possess a technology certification process, but they do have an approval process. They have expedited the evaluation of our system. It is nearly complete, and we are expecting an encouraging final report to be ready to allow us to compete for future procurements within CATSA’s fiscal year, which ends March 30.
Then finally, there is TSA. Having completed our submission of the IDIQ contract with the TSA several months ago, we are simply awaiting final approval of that document. We had hoped to have it for you by this time. This contract provides the federal government the ability to quickly buy what they need when they need it and reaching this milestone will remove all barriers to procuring and deploying Implant Sciences equipment for passenger and baggage screening across the United States. To reiterate what we said earlier, we are confident that we have met all of the requirements to obtain an IDIQ, which will be a landmark event for the company and more importantly we believe we will be successful in winning a sizable award from the contract.
Taken altogether, this represents exactly the opportunity we have been marching towards since entering the trace detection market some years ago. Today we would like to talk briefly about our plans to continue the growth of the company in the coming years. We are all well aware of the developments in the Middle East and the evolving threat that ISIS and other terrorist organizations pose to the United States homeland, to American interests abroad, as well as to our allies.
We have learned that these groups remain intent on attacking us and our government is working hard to counter that threat here in the United States as well as abroad. We know that these groups continue to look for vulnerabilities to exploit for attacks, whether it be in the aviation industry or mass transportation systems or other soft targets. Successful defense against these evolving threats requires a comprehensive system of intelligence, law enforcement and security initiatives.
Implant Sciences’ trace detectors are a critical component of that system by offering the best available technology to be applied wherever that threat appears. As we have proven with our deployments in airports, subway systems, office buildings, as well as sports venues. To stay ahead of evolving threats, it will be necessary to screen more people and bags in less time at lower cost and while using fewer personnel than ever before. We will need to protect a wider range of locations against an increasingly diverse array of attack vectors coming from a growing number of terrorists, all while maintaining our normal way of life.
The fact is that everything we as a company have achieved so far has been done without leveraging the full value of our intellectual property. We hold patents in trace detection technologies that run from sample collection through analysis with more on the way. With what is widely regarded as the most impressive and accomplished team of experts in our industry, Implant Sciences will greatly expand its reach in the security market by turning these unique capabilities into new products.
IHS Research estimates that the explosives, weapons and contraband detection equipment market, which includes X-Ray systems, metal detection and explosive trace detection will exceed $2 billion by 2017. On top of that, about $400 million of chemical detection equipment is currently sold worldwide every year. Neither of these figures considers new products to meet the new threats emerging in the market. Consider then potential new opportunities in subways.
In China, they are conducting airports style screening on subway passengers and creating huge lines. Others are worried about the possibility of a chemical attack like the 1995 Tokyo subway event, but this time done with a more effective delivery system. Implant Sciences’ technology holds the potential of providing solutions for both these problems. Our Ion Mobility Spectrometry analysis engine is capable of detecting chemical warfare agents and our patented vortex collector offers opportunities to screening large number of people in short periods of time. Subways are just one market.
We estimate that the path we have taken has already grown the company’s total available market from something measured in tens of millions of dollars to something measured in hundreds of millions of dollars. By exploiting the unused capabilities in our IP portfolio, we believe that we can reach a total available market measured not in tens of millions or hundred of millions, but rather one that is measured in billions of dollars.
When we first entered the security market, we had a great team and great products and not much else. In virtually all other regards, sales channel, financial resources, certifications, et cetera, the competition has been ahead of us. In fact, way ahead of us. Catching up has required a lot of hard work, and yes, a lot of money. We believe we have closed the gap and have the momentum not just to catch them, but to surpass them completely. Reaching this point has required the support and assistance of many. Foremost among these are our dedicated employees. I couldn’t ask for a better team and we are immensely proud of the efforts they have all expended in pursuing our goals.
We have thanked the DMRJ Platinum Group several times over the years and do so again today. Their agreement last spring to extend our loans until March 2015 assures we have the time to realize our goals.
We would like to thank you, our shareholders, who have to be one of the more passionate groups in the market. We know very few of you are willing to part with you share and we appreciate your support. Your advice and encouragement have proven to be true assets to the company as we have made this turn.
We thank the distributors who have helped us open new markets, develop new contacts, and deliver our products to an ever-expanding base of customers.
And finally we thank all the industry experts, government officials and dedicated scientists who have offered us insights and advice in shaping our trace detection products.
When we first started, the obstacles between us and success were many. Some were very high. One by one, we have overcome them all. We have reached the point where we have a clear vision to the sales volume we need and a defined path that will let us achieve it. As we have noted before, this team has not failed in reaching a single one of their goals that we have set over the last few years. We are not going to change now.
Humorist Lewis Grizzard used to like to close his stage appearance with the line and I quote, “Life is like a dogsled team. If you ain’t the lead dog, the scenery never changes.” The same can be said about companies and markets. We have been chasing the market for so long, it can sometimes seem like the story is never changing, but it is. We have built the product, built the team, built the sales channel and are winning the certifications. The way we see it, is that Implant Sciences is poised to become the lead dog in this market. The scenery is about to change a lot.
With that, we will close and we will take your questions. Thank you.
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