Recently, I conducted an interview with Glenn Bolduc, CEO of Implant Sciences (IMSC.PK). IMSC manufactures explosive trace detection (ETD) equipment for use by security personnel. In my interview, Mr. Bolduc explained IMSC's competitive advantages, its market opportunities, and liquidity position. What follows is a lightly edited version of the interview I conducted with Mr. Bolduc.
Daniel Lauchheimer (DL) -- A lot of people know about, and have experienced bulk detection -- metal detectors, X-Ray scanners -- but ETD seems a bit more abstract. Could you bring the subject a bit more down to earth. When would a normal person come into contact with an ETD device?
Glenn Bolduc (GB) -- Many people have come in contact with an ETD device but they didn't realize. For example, when a security agent asks you to take your laptop out of the bag, they ask you to do this so your fingers will touch the laptop, which they then can scan for traces of explosives. This process works because explosive material sticks to a person's hands and when a person takes his/her laptop out of the bag, that residue transfers to the laptop. Security agents can then sample this laptop to see if the person has been in contact with explosive material.
To bring an example with a different sort of twist, if the organizers of the Boston Marathon had required everyone to have a ticket, our devices could have scanned the ticket to see if it contained explosive residue coming from a person's hands. Employing this procedure with our technology could have possibly saved many lives. Additionally, when a bulk security machine detects an anomaly, security personnel can employ ETD technology to gain added clarity to the situation.
DL -- You offer two devices -- a portable product, and a desktop product -- what is the difference between the two products?
GB -- The difference lies in that the portable device does not make contact with the item when sampling it -- our devices blow out a little piece of air, and we can draw a sample from that outflow of air. However, the benchtop device does make contact with the item to draw a sample -- someone wipes down the item and then processes that wipe to test it for explosive trace material. Even though the portable product has more advanced technology we sell the benchtop product because the TSA's standard procedure calls for the wipe down method, and they have not developed any standards for the contactless solution.
DL -- As a jumping off point to talk about the benefits of your product: Many of your customers talk about the low cost of ownership as a benefit of your device over your competitors. Could you talk about why it is your product offers a low cost of ownership, and your competitor's doesn't?
GB -- Well, the low cost of ownership takes on many different facets. We have the fastest clear down time in the industry -- our unit decontaminates itself, and self calibrates allowing for very little down time for the machine. The competition, on the other hand, takes personal intervention to keep the device working. In the case of the benchtop product this requires calibration several times a day, which involves materials and chemicals, those cost money. On top of that you have the employee who does the calibration. When it comes to the portable device you also save money by not needing to use the swabs, which can cost a lot.
Besides for this, our product, unlike the competition, does not use radiation when processing the sample for analysis. Devices that emit radiation when processing samples have been outlawed in some countries, and customers do not like getting involved with such risky products.
DL -- So what do customers look for more -- the low cost of ownership, or the lack of radiation?
GB -- It is about 50/50.
DL -- You have sold to many different types of end users -- government security, corporate security, event security -- etc. Your market is broad. I would like to drill down a bit here. Earlier this year you received TSA approval for cargo screening. How much will the TSA spend on cargo screening in the future? And what is the buying process like for them?
GB -- The TSA approval does not impact TSA Spending, with TSA approval we got a foothold into the freight forwarding business. The largest freight forwarders -- DHL (OTCPK:DPSGY), FedEx (NYSE:FDX), UPS (NYSE:UPS), and SBA -- process cargo, which the TSA requires them to scan with an ETD device before loading onto a plane, and now they can use our product to run those tests. Importantly, the TSA revamped its standards for ETD testing last year, and we passed those standards, giving us a very strong ability to compete in this market.
In terms of the TSA itself, we have already tested it extensively for use in the passenger (as opposed to cargo) market, and the TSA currently has tests underway to see if our equipment passes their standards.
Lastly, our two main competitors -- Smiths (OTCPK:SMGZY) and Safran (OTCPK:SAFRY) -- operate in the UK and France, respectively. We, on the other hand, give the TSA (and other American companies) their only chance to buy ETD equipment from a USA based company.
DL -- You also recently opened up an office in China, where you have already sold to aviation, rail, and police customers. How much do you think the Chinese market is worth? What is their process like? Is it different than the USA's process?
GB -- We have sold 800 units in China. Those 800 units generated around $25-30mm in revenues. We have a large opportunity in China considering this size, and especially as they build out their infrastructure. The City of Beijing alone deploys 200 of our units deployed to 170 subway stations. Chinese Air Marshals also use our devices onboard airplane to scan passengers. Moving to other parts of Asia -- in Japan we protect nuclear power plants, and in India we help Indian security personnel detect improvised explosive devices (IEDs) and homemade explosive devices (HMEs).
DL -- Would you say these are your top markets -- in terms of opportunity?
GB -- In both China and the US we have the opportunity to sell thousands of units in each market, and over the next 3-5 years we estimate conservatively the market to stand at around $1bn. We continue to focus on the US, and as you can see we have a very nice business internationally, and continue to capitalize on it.
DL -- Aside from the security market your device can also detect narcotics. A lot of the press for your company centers on the security applications, can you give any color on the narcotics end of things?
GB -- We have a broad set of customers for our narcotics business. Customs and borders guards, prisons control and schools. We don't have TSA approval yet for narcotics detection, but as I mentioned we have a large customer base for this end of the business, and we got a lot of hits for the side of the business during demonstrations.
DL -- You have a relationship with DMRJ, and they continue to provide you with a lot of financing. Recently they converted their $23mm credit line into two sets of preferred shares. What is the conversion ratio for those preferred shares to common shares?
GB -- They convert on a 1 to 1 basis, but they carry a coupon.
DL -- How do you pay that coupon? And how do you pay the interest on your other debt with them -- the $5.6mm promissory note?
GB -- The interest gets rolled back into the principal, but we have other options to pay back to interest including PIK, and cash.
DL -- Lastly, you currently have 50mm shares outstanding; how do you see the common equity base in the future?
GB -- The equity base can grow to 100mm shares going forward.
DL -- Anything else to add?
GB -- I would just like to emphasize that IMSC has new technology -- a non-radioactive product, with a low cost of ownership, and self calibration -- all this results in a safer and more efficient product. We are the only American based company, and finally we passed the most recent (2012) TSA tests for ETD devices.
DL -- Ok, thank you for your time.
GB -- Thank you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.