Implant Sciences' CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Sep.30.13 | About: Implant Sciences (IMSC)

Implant Sciences Corporation (OTCQB:IMSC) F4Q 2013 Earnings Conference Call September 30, 2013 4:15 PM ET

Executives

Roger P. Deschenes – Chief Financial Officer

Glenn D. Bolduc – President and Chief Executive Officer

Darryl Jones – Vice President-Global Sales and Marketing

Bill McGann – Chief Operating Officer

Analysts

Mark Jordan – Noble Financial

Joseph P. Munda – Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2013 Implant Sciences Corporation Earnings Conference call. My name is Crystal and I'll 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 conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host today, Mr. Roger Deschenes, CFO. Please proceed, sir.

Roger P. Deschenes

Thank you, Crystal. I’d like to welcome everyone to Implant Sciences’ fourth quarter fiscal 2013 earnings conference call. We also welcome those of you joining us on the webcast. On the call this afternoon are Glenn Bolduc, President and Chief Executive Officer; Bill McGann, Chief Operating Officer and Darryl Jones, Vice President, Sales and Marketing.

We will begin by providing a brief financial report on the Company’s fiscal 2013 fourth quarter and full year results. Glenn will then provide a corporate overview and discuss recent developments. Following our prepared remarks, we’ll open the call up for questions from today’s participants.

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 will try to identify these statements with words such as expect, believe, anticipate or other words that indicate potential events.

These forward-looking statements are subject to risk 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 on September 30, 2013 and stated during this conference call as well as the risk factors and uncertainties described in our latest Annual Report on Form 10-K for the fiscal year ended June 30, 2013 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 rather the presentation of earnings excluding certain items provides 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 the U.S. or 617-801-6888 outside the U.S. and entering the pass code 26384817. Any forward-looking statements we make today are based on assumptions we believe to be reasonable as of today September 30, 2013.

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 30, 2013 we filed our annual report on Form 10-K, for the fiscal year ended June 30, 2013 with the Securities and Exchange Commission and issued an earnings press release summarizing the company’s financial performance for the fourth quarter and the full year ended June 30, 2013. Revenues for the quarter ended June 30, 2013 increased 335%, to $2.4 million compared with $552,000 for the prior year period and this increase is due primarily to increased unit sales of our QS-H150, increased domestic and international sales of our QS-B220 desktop and increased sales of parts and supplies.

For the year ended June 30, 2013 revenues were $12,017,000 million as compared with $3,406,000 million for the prior year period, an increase of 253% and this is due primarily to a 225% increase in the number of QS-H150 handheld units sold, this is due primarily to the shipment of the India Ministry of Defense order.

Increased sales to agencies of the U.S. Government, increased sales into Africa, the Middle East, and Japan.

Increased domestic and international sales of our QS-B220 desktop units and increased sales of parts and supplies during the year ended June 30, 2013, as compared to the comparable prior year period, and all this is partially offset by a 4.9% decrease in the average unit sell price on our QS-H150 handheld units.

Gross margin for the quarter ended June 30, 2013 increased to $697,000, over 29% of revenues as compared with gross margin of $53,000 or 9.6% for the prior year period, and it is due to increased unit sales of our QS-H150 and the QS-B220 and increased manufacturing overhead absorption. For the year ended June 30, 2013 gross margin was $3,429,000 or 28.5% of revenues, as compared with gross margin of $999,000 or 29.3% of revenues for the prior year period.

Factors impacting the full year margins include increased stock-based compensation, increased warranty costs, increased manufacturing overhead spending, and a decrease in the average unit sell price noted earlier. Stock-based compensation increased $108,000 and $780,000 respectively in the current quarter and the full year period compared to the prior periods.

Research and development expense for the quarter ended June 30, 2013 was $1,233,000 compared with $815,000 for the prior year period, an increase of just over 51%. For the year ended June 30, 2013 research and development expense was $4,754,000 as compared with $3,180,000 to the prior year period, an increase of just under 50% and this is due primarily to increased payroll and related benefit costs, increased stock-based compensation and both of which are partially offset by a decrease in contract in engineering. Stock-based compensation increased $166,000 and $923,000 respectively in the current quarter and full year period compared to the comparable prior year periods.

Selling, general and administrative expenses for the quarter in the June 30, 2013 were $3,515,000 compared with $2,522,000 for the prior year period, an increase of just over 39%. For the year ended June 30, 2013 selling, general and administrative expenses were $20,630,000 as compared with $8,575,000 for the prior year period, an increase of 141%. And this is due primarily to increased stock-based compensation, increases in payroll related benefit cost, travel, legal and bank fees, all of which are partially offset by lower consulting fees due to the issuance of common stock to certain advisors in the prior year period.

Stock-based compensation expense increased $1,324,000 and $12,177,000 respectively in the current quarter in the full year period compared to the prior year periods.

For the quarter ended June 30, 2013 other expense net was $1,493,000 as compared with other expense net of $1,100,000 for the comparable prior year period, an increase of $393,000. For the year ended June 30, 2013 other expense was $5,399,000 compared with other expenses of $3,880,000 for the prior year period, an increase of $1,519,000. And this is due primarily to increased interest expense and higher borrowings under our credit facility. A loss for the quarter in the June 30, 2013 was $5,544,000 compared with a loss of $4,384,000 for the comparable prior year period.

For the full year ended June 30, 2013, our net loss was $27,354,000, this compared with the net loss of $14,636,000 for the prior year period, and this is primarily due to higher levels of stock-based compensation, increased operating expenses and increased interest expense.

The aggregate stock-based compensation recorded on employee stock options and non-employee warrants amounted to just under $1.8 million and $14,604,000 for the quarter and year ended June 30, 2013, which compares to $200,000 and $724,000 in the comparable prior year periods. We expect stock-based compensation will return to normalize levels in the second quarter of the current fiscal year.

On an adjusted EBITDA basis, earnings before interest, taxes, depreciation, stock-based compensation and the value of warrants in common stock issuance is a loss for the quarter was $1,928,000, compared with a loss of $2,550,000 and for the year, our loss was $6,948,000 which compares with a loss of $8,057,000 for the prior year period.

That concludes the financial report. I’ll now turn the call over to Glenn.

Glenn D. Bolduc

Thank you, Roger and we would also like to thank all of the participants on the call for joining us today. Before we begin this part of the meeting, we’d like to report that we were advised verbally late last week and through this past weekend, that we have achieved STAC certification in France, which impacts the European Union, the Middle East and Africa.

We have also received the draft copy of the certification and are currently awaiting final documentation. We trust you can understand and appreciate our delay today, as we were happily surprised with the exceptionally quick process for our product in France and the European community. I wanted to be sure we prepared well for our discussion with you here today.

In this meeting, we’re going to talk about two companies; there are actually one and the same, Implant Sciences. The Implant Sciences of year ago and the Implant Sciences of today; on the surface these may appear to be very similar, both have talented employees working long hours on innovative technologies and both have operating losses.

However, they are also very different in important and strategic ways that we will discuss with you in the next few minutes. One might ask, what makes these two companies so different, the short answer is Implant Sciences has had the best year in company history. We shipped the largest volume of Trace Detection systems that we have ever shipped.

We exceeded $12 million in revenues, our biggest year ever. We exceeded prior year revenues by 3.5 times last year. Most importantly 2013 is the year in which Implant Sciences changed the Explosives Trace Detection market and established our technology as the new standard in the ETD industry. This was manifested in several approvals we received for our products and technology.

For the first time in the history of American Aviation Security, there were three TSA approved ETD or Explosives Trace Detection vendors. A year ago, U.S. air cargo facilities can only choose between updated versions of what were essentially the same systems that had been around for more than 20 years.

Now they have access to new technology that is easier to use, less expensive to own and operate, and has passed the newest standards for the trace detection industry. Today, Implant Sciences is actually opening the doors, leading to the opportunities the Company has been pursuing for so long and which we have been telling you have been available to us.

Let’s be clear, we’re going after our share of the over $2 billion explosives, weapons and contrabands, known as EWC detective markets. We expect to achieve this through capturing market share during the recapitalization of currently deployed systems and by creating additional demand for our products in the ever-changing security world.

It is currently estimated that approximately $300 million of this market is in trace detection equipment sales largely split between two companies. Our FY2013 sales that Roger just reviewed with you make up about 4% of this market, leaving considerable room for growth for us. Implant Sciences’ goal is to capture at least a third of that market over the next few years. Let me repeat that, our goal is to capture at least a third of that market over the next few years and we feel we are well positioned to do so with the products and the approvals we currently have in place.

Currently a large portion of trace detection equipment sales to government agencies, these sales require approvals and certifications which is why we have made those activities such a high priority for the company. A year ago we had no approvals for our B220 or for any product. As of today Implant Sciences has two major approvals in hand with another one passenger check point and baggage screening in the United States well along the process. In January of 2013 we were approved to air cargo screening by the TSA, with this approval, Implant Sciences became only the third manufacturer to currently have TSA approval for trace detection and we are the only U.S. owned approved provider.

In July we announced that we have passed the detection performance testing for TSA passenger check point and baggage approval.

As we mentioned a few minutes ago, we recently learned that we have passed certification testing at Service Technique de l'Aviation Civile or STAC in France. My apologies to anyone French for the butchering of that mouthful. I have some French in me, obviously not the language. This is among the most highly respected certifications worldwide in any industry and achieving it will immediately allow us to sell our product for passenger, cargo and baggage screening in Europe and several other countries around the world.

Our distributors have told us that this is one of the catalysts they have been looking for. We will be present at several European trade events this fall to show our technology and certification to the security community and users of this equipment. We must also comment on the Transportation Security Administration passenger and baggage holds process. Many of you have had questions concerning what our July announcement meant and where we stood relative to being able to sell product for passenger checkpoint and checked baggage screening in the United States.

To be included on the Qualified Products List or QPL at TSA requires a three step process. The simple equation is IT&E plus TSA plus OT&E equals qualification. Trust me. We’ll explain what that means in a minute here. The first step called IT&E or Independent Test and Evaluation is laboratory based detection performance testing considered by many to be the most difficult process as evidenced by so very few products obtaining a passing grade.

We completed IT&E in July and while we aren’t allowed to discuss specific details of the results, based on the feedback we received we didn’t just pass the test. We nailed it, and we should all be very, very proud of the efforts of our employees who generated these results.

Following IT&E, products were tested at the TSA Systems Integration Facility also known as TSIF, located at Reagan International Airport, TSA operates the systems in a simulated aviation security environment before actually deploying them in airports for final testing.

The last phase is operational, test and evaluation or OT&E where the equipment is used in an actual airport security setting to perform, live screening of passengers and baggage. Upon satisfactory completion of all three stages, the equipment is qualified for use in passenger check point and check baggage screening. Currently our B220 is additive making steady progress through the qualification process.

Let’s switch gears for a second and talk a little bit about air cargo. And with regard to our air cargo product, the V220 ended qualification testing in June. As you may recall from previous investor call we had, we estimated that we would achieve qualification three to six months after testing started.

We were just at the early end of that window, and we expect new soon. Meanwhile, the products approved status, allows it to be used for air cargo screening, by any certified screening facility in the United States and abroad. A year ago, we couldn’t sell to U.S. air cargo companies.

Today we are in decision makers offices. We have had successful trials at a number of facilities, and of the three major freight properties in the world, we have sold to one, have been added to the preferred vendor list of another and are actively engaged with the third.

We believe that details on the number and location of systems that will need to be replaced are classified information and therefore, we can’t discuss it. Surprised to say that these systems are included in our estimate of several thousand of trace detection systems that will need to be replaced market wide over the next few years.

We have succeeded in taking business away from the established players in the industry, several orders have been announced and more are in the pipeline. This is a true testament to our technology and product. The deadline for replacing obsolete systems is still months away. The cargo screening facilities are acting now because, they see the advantages offered by the B220 that we have enumerated before with all of you.

We expect this trend to accelerate, as the deadline approaches. Faced with this, our competitors have been making very aggressive offers to keep their clients in the fold. However, the accounting still works in our favor and the meeting with the customer earlier this year we were able to demonstrate that their savings and switching to Implant Sciences and Systems would allow them to completely recover their investment in less than 4 years.

By that estimate the competition can give a way their equipment and nor still cost much less over the life of the system. The unique advantages of our systems makes them attractive and security applications that have not typically used to trace detection in the past. This allow us to create demand in new market segments such as banks, hotels, sporting venues and malls the name of few. Our successes in some of these areas have been documented in the press releases, we have issued over the last year.

As we bring additional capabilities to market, we expect to be able to continue to open fresh opportunities and take a growing share of the overall security market. Our successes with both regulators and customers demonstrate that Implant Sciences is the new standard in trace detection. We are the only TSA approved security manufacturer specializing in trace and we are focused on advancing the technology.

Our vision is compelling and gaining recognition within the industry. We continue to work on new products incorporating the technologies we acquired in 2008 with the Ion Metrics acquisition and others that we have developed along the way. Recently, when we presented our prototype ion mobility spectrometer/mass spectrometer trace detection system at the DH, Department of Homeland Security Industry Day, our team received a rare round of applause.

Government technology leaders have long been waiting for a solution such as this in some cases for decades. They are excited to see Implant Sciences demonstrate leading innovation in the industry and setting the new standard for the next generation of trace detection.

The Company has also succeeded in capturing the attention of the professional investment community. Last year no one covered us, today we are followed by two firms and we believe more are on the way. Of course what everyone wants to hear about our sales, earlier this year we shared our estimate to sell 50 of our B220 systems customers by the end of the fiscal year. Some folks expressed disappointment with what appeared to be such a modest goal but we knew that it would take time to build momentum in the industry.

We are pleased to report that as of today we have sold a total of over 100 B220 systems. You want to talk about difference from last year, our backlog today is greater than our entire FY 2012 revenue. We consider that first 100 only the beginning, many of you have heard us speak about catalyst for our business, these are key achievements that will enable us to grow faster.

Our critical catalyst are as follows; one, approval of TSA’s labs for IT&E for checkpoint and baggage screening, check and done. International approvals, such as STAC certification testing for France. I won’t try the name again, but check that one is done as well. These will be followed by qualification of our cargo technology, final TSA qualification for passenger and baggage in the United States, and obviously orders which all of you are looking for following each of the aforementioned approvals and qualifications.

These catalysts will allow us to increase our rate of penetration across the security industry. Without having any of them, we were able to grow revenues nearly $9 million in FY 2013. As they start to take effect, we expect our sales volume to grow even more quickly. Can we give you an exact timetable for this? Now, we can’t, we have proven that to you. Doing so has proven to be very difficult as too many of the variables are entirely out of our control.

All businesses that work with government agencies face these same challenges and we are no different. The ultimate change from last year’s Implant Sciences to this year is this. A year ago, we had a lot of goals with no proof we could reach any of them. Today, we have the proof as evidenced in the approvals we have received and the sales that we have made.

Taking all of these developments into consideration, it became clear that our own facility was not sufficient to support projected levels of business. As we mentioned earlier, we see the opportunity to sell thousands of systems over the next few years. This summer, we moved into a new 58,000 square foot facility that we estimate is capable of supporting a manufacturing rate of 200 systems per month or more when fully build out and staffed. Last year we could have handled only a fraction of that volume of sales.

We’ve talked a lot about change but no conversation about the state of Implant Sciences would be complete without talking about what hasn’t changed. This starts with the most talented team in the trace detection industry, a group of smart, focused, hardworking individuals, they get things done no matter what the odds. We’re truly a tenacious group, it continues with a loyal and dedicated group of investors who are the true owners of the Company, and the people for whom we come to work for everyday. It includes a mission of protecting people world wide that we all hold close to our hearts.

Finally, we continue to enjoy the strong support and advice of our senior secured lender DMRJ Group in New York, whose ability to see opportunity where others did not has made all this possible. As we have in the past we would again like to thank all of our investors at DMRJ for having the belief and confidence in our ability to deliver the products and results we have.

General George Patton once said and I quote, ‘I don't measure a man's success by how high he climbs, but how high he bounces when he hits bottom.’ Over the last five years, we believe we would measure up fairly well on that scale. A few years ago we had but one product, no money, low sales, no certifications and minimal market awareness, but with careful planning, hard work, and an investment in building the best team in the industry, we bounced back very well.

We have two products, and we’re on the way. We have achieved two major government certifications with additional ones in the pipeline. We are taking business from the established players in the industry, and our sales are growing. The security worlds including our competitors know who we are and hear us knocking on the door, and we are coming in.

Thank you very much for participating in today’s call and for your continued support of the company and this group of people. We will now take your questions and as always, we invite all of you to visit with us here at our new facility, we are quite proud of it. And any of you who would like to visit can set up such a time out in the future, but I think it’s Crystal, if you could please line us up for calls now. I’d appreciate it.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mark Jordan with Noble Financial. Please proceed.

Mark Jordan – Noble Financial

Good afternoon, gentlemen. Glenn, I’d like you to summarize what you see is the recapitalization opportunity that is on the table at TSA over the next one, two and three years?

Glenn D. Bolduc

Sure, Mark, thank you. We got to be a little careful with how we do this. There are government agencies out there, TSA, state department, commerce department, defense department, et cetera, et cetera, all of whom have need for such equipment. The most obvious users are TSA which we actually refer to in our discussion. TSA deploys many thousands of units and many of those units or a good number of those units we believe are at end of life, and there is still a need for those units to be replaced. We believe they are measured in the thousands. We believe the approval process that we are currently undertaking puts us in a very good position to take our fair share of that market fees.

This Explosives Trace Detection equipment is also used around the world in embassies and consulates and there are about 300 of those facilities worldwide deploying single or multiple units. It’s measured above a thousand and we believe we are positioned well for that market. The Department of Defense uses this equipment, local governments use this equipment. But I am not sure I want to get much more specific than that. Darryl or Bill do you have anything to offer around that?

Darryl Jones

Just to add to your statement that this is what we classify as sensitive security information. So in spite on regulations that we cannot give any specific numbers, but I think broad terms Glenn, you hit it right on the…

Glenn D. Bolduc

Bill, you have.

Mark Jordan – Noble Financial

Now I could ask one more follow-up relative to that do you believe that the TSA has established a timeframe at which they would probably issue a potential contract is that a first half of calendar of 2014 event end of 2014, end of this year. Is there any census to what timing there might be activity on TSA’s part?

Glenn D. Bolduc

We believe there will be activity from the government on several fronts and the timeframe that you’re speaking about is a reasonable one. However, we all know we don’t control the government with regard to those timelines. What we are doing is working to have our equipment available as soon as possible. So we’re sure to be included in any such decisions that they make.

Mark Jordan – Noble Financial

Okay. Final question for me, you’ve talked a little bit about the potential capacity of your new facility. Could you tell us what’s your current productive capacity of the 220 is and what do you think will be reasonable goals for the Company in terms of monthly productive capacity, say by middle of the fiscal year or in the fourth quarter of this current year?

Glenn D. Bolduc

That’s a tough one Mark, but we’ll take a say of that. On our quarterly wallet, let’s get on to monthly basis. We’ve obviously increased our facility capacity and I think in my remarks before we talked about eventually being able to handle 200 systems a month, which would suggest 50 a week. What I would say is we don’t have any impediments right now that prevent us from achieving that at sometime during 2014. The facility is working very well for us.

Our ability to attract and retain people is working well. The design of the system is lending itself two in-house production and right now our manufacturing group has been able to handle everything Darryl has thrown at it. It’s kind of interesting around here because between Brenda and Darryl you get game on quite a bit here, and Darryl wants have [indiscernible] can’t achieve, but I’m sure we’ll need it.

Darryl Jones

Can I add to that? Mark, this is Darryl. I’ve never seen in my years of selling trace anything beyond 200 a month, I mean that’s a definitely a reasonable high-end number.

Bill McGann

Yes, Mark, this is Bill. Just to give you a little more clarity. Brenda and I are actively working from our current capacity on a 30, 60 and 90-day ramping plan to get to volumes of that magnitude. So if you come here, you’ll actually – we go over week, month over month, see the stations and the line flow grow to that kind of capacity, all the way from sourcing and supply chain through production.

Mark Jordan – Noble Financial

You could go hypothetically to 100 plus production rate within that 60 to 90-day timeframe?

Bill McGann

That is the plan, sir.

Glenn D. Bolduc

Yes, sir. That we could do. For those of you that have known us for the five years that this group isn’t managing the company. Manufacturing has never been an impediment in the shipping process. They’ve always been able to come up to speak quickly and I’ll go back to the Beijing Olympic order, which was early on in my time with the company, and that order came in six weeks before 08/08/2008 and the units had to be there, I think two or three weeks in advance for training and it was, I think 315 units. They got there. They were used. They are still deployed. They are in the hands of the China air marshals and the China subways and railway stations right now.

So we’ve been a very resilient group as far as that is concerned. We were a little nervous in the old facility. For those of you that visited us there, especially when you saw some of the high production times, it was difficult in the old facility. It’s going to be far easier in this one, and as Bill mentioned, there was a plan day-in, day-out here that get us to the levels we need to get to.

Thank you for the question, Mark. We appreciate it. Crystal, can you move us to our next question please.

Operator

Our next question comes from the line of Joseph Munda with Sidoti & Company. Please proceed.

Joseph P. Munda – Sidoti & Company, LLC

Good afternoon, guys. Thanks for taking the question.

Glenn D. Bolduc

Hi, Joe, how are you?

Joseph P. Munda – Sidoti & Company, LLC

Good, good. First off, Glenn, following up on some news pieces that came out recently, I saw you got a training ground from the State of Massachusetts. Can you give us some sense of how much that training ground was for and how that will be used?

Glenn D. Bolduc

Joe, we are prohibited from discussing the amounts under confidentially agreements Roger is advising me. But fundamentally it’s a training ground that will be used in our operations budget, bringing folks up to speed in our facility. As you know, we fully intend to do all of our manufacturing in-house. These funds will be used in the training of those folks as well as operational training folks as well.

Joseph P. Munda – Sidoti & Company, LLC

Okay.

Glenn D. Bolduc

For worldwide delivery and installation of equipment.

Joseph P. Munda – Sidoti & Company, LLC

How will that be booked on the P&L? Will that be booked as revenue or will that be booked as other income, how it’s possible?

Glenn D. Bolduc

Joe, the number is really not overly significant. I’ll tell you that…

Joseph P. Munda – Sidoti & Company, LLC

Couple [ph] of hundred thousand dollars.

Glenn D. Bolduc

Yes, yes. It’s not a big number, Joe.

Joseph P. Munda – Sidoti & Company, LLC

Okay. And then, Glenn, as far as the other orders, R&M Trucking and DMS [ph] any inkling on the size as well as what units were purchased? That would be helpful.

Glenn D. Bolduc

I’m going to let Darryl answer that question.

Darryl Jones

Yes, we normally just don’t give away the number of units. I will give you that because I know everybody is kind of interested in our growing pipeline and where we think we are going. As Glenn mentioned, we sold over 100 units this year alone. I can safely tell you that we have, Joe, about 200 units that we’re actively going – we’re actively in pursuit of in the cargo market. 100 of those or so are driven by the recap, because of the seven-year lifecycle typically from the product. So that’s one market.

And the other market we could say that is driven by expansion of warehouse facilities, new buildings that are being built, conversion from different technologies and since there over 100 types of different products on the ACSTL. Many people are gravitating toward ETD just because of the type of performance that we can give and they grab the ETD versus x-ray and then there is the real advantage for full total cost of ownership that Glenn alluded to. So again, people are asking me for specifics. I’m saying that we have 200 active in the pipeline.

Joseph P. Munda – Sidoti & Company, LLC

And is that just the B220 or is that a combination of both?

Glenn D. Bolduc

B220 in just U.S. air cargo markets.

Joseph P. Munda – Sidoti & Company, LLC

Okay, because I noticed you gave the B220 number of over 100 units, but no number on the 150 is that a number that we have back into for the year?

Glenn D. Bolduc

For the year, we did – it was a huge number.

Roger P. Deschenes

Yeah, Joe, we try not to give out the unit information because it gives competitions from ideal pricing.

Glenn D. Bolduc

Yeah I know it’s just difficult for us for forecasting purposes.

Joseph P. Munda – Sidoti & Company, LLC

Okay, couple of more. Glenn, I also saw you guys, converted the line parts, it’s about $24 million of it, into convertible notes, any idea on the terms of the notes and the conversion price?

Glenn D. Bolduc

Yes, Joe, there were two different pieces, each at $12 million, so there is a $12 million piece convertible at $1.18 a share and then the second piece is $12 million convertible at $1.09 a share. And the first piece was done around September 30 2012 , the second piece was done around March 31 or April 1.

Joseph P. Munda – Sidoti & Company, LLC

Okay.

Glenn D. Bolduc

No, that was more of an update.

Joseph P. Munda – Sidoti & Company, LLC

Yeah.

Glenn D. Bolduc

That was done February 28 Roger just corrected me, I’m sorry.

Joseph P. Munda – Sidoti & Company, LLC

And when did it raise still somewhere around 15% is that correct?

Glenn D. Bolduc

Yes correct.

Joseph P. Munda – Sidoti & Company, LLC

Okay. Any updates from DMRJ they will continue with no issues as far as funding is concerned, I know it goes open until March of next year, correct?

Glenn D. Bolduc

I’ve begun discussions with them about the March date, the relationship with DMRJ and Platinum, I’ll good, but it’s better than good. So they are very, very supportive. I know they are excited about the different approvals that we’ve been going through. I’ll be interested to speak with them about this latest stack approval because it’s a big one. This is a big one. This gets us into Europe, Middle East, Africa. Lot of countries look for TSA and stack approval or TSA or stack approval and stack approval is extremely well regarded worldwide.

Joseph P. Munda – Sidoti & Company, LLC

Glenn, I’m sorry. Can you quantify that opportunity? I know you guys said 300 million approximately for ETD between the three companies. What does stack approval open up, how much of a pipeline opportunity is there?

Glenn D. Bolduc

Darryl will address that Joe.

Darryl Jones

So there is couple of things to point out; as you might know, Europe has been on this, not just ban, radioactive sources in the country. So we’re the first ever approved non-radioactive source, by the way that started a long time ago for this ban and so now we’re approved and there are about 136 airports in France, marked quite of that by couple of units per airport, you have a large number that we can go after for the first time.

Joseph P. Munda – Sidoti & Company, LLC

Excellent. What are they have been using at X-ray instead of…

Darryl Jones

Good question, they have been using ETD, but they rather not procure, they have been using ETD and x-ray and also couple of others. But they were rather not the cure anymore radio active source ETD?

Joseph P. Munda – Sidoti & Company, LLC

Okay.

Darryl Jones

Joe, I think you are familiar with some of the actions Europe took with regard to other radioactive source material a year or two ago, and this was major reason for us seeking approval at STAC, we had significant conversation with them and an agency that we are using over there, and we know our technology is very well received.

Glenn D. Bolduc

I’m going to add to that, I just to be clear, there are only three airports in France that use ETD at this point, and because we have radioactive source that opens up to all of those other one, I just mentioned.

Joseph P. Munda – Sidoti & Company, LLC

Okay.

Glenn D. Bolduc

Okay, and the big reason that they have not opened up in the airports because they don’t want radioactive sources in the airport.

Joseph P. Munda – Sidoti & Company, LLC

Okay, that’s very helpful. Thank you. Roger in your prepared comments you’ve talked about SG&A becoming normalize in the second quarter, is that a level about back at around 2 million a quarter, I know a lot of that is stock compensation expense. I’m guessing because of the recent addition of Hector Giraldo, that’s why it’s going to taken for the second quarter, am I correct?

Glenn D. Bolduc

Joe, we still have the tail on the STAC option grants from last year.

Joseph P. Munda – Sidoti & Company, LLC

Okay.

Glenn D. Bolduc

The last September. So those will be fully vested for the most part. So we’ll get down to the levels of – in a range of $1.6 million to a $1.8 million for the year. So the first quarter, we’ll see approximately that amount for the quarter, but going out the rest of the year, you should be seeing approximately $500,000 per quarter or thereabouts.

Unidentified Analyst

Okay. And that’s starts third quarter or second quarter?

Glenn D. Bolduc

This will start in the second quarter. Well, tomorrow.

Unidentified Analyst

Okay. And then, I guess, my final question, Glenn, with the pending, I don’t know what you want to call it, government shutdown, how does this affect the approval process and the order flow or potential order flow for Implant Sciences and, I don’t know, any comments or colors would be much appreciated?

Glenn D. Bolduc

We’ve been following what’s going on in Washington quite closely over the last few days and everything that we’ve read suggests that there will be many agencies that are affected by this, but it does not appear that security and TSA operations are among the groups that will be affected. Some of the testing labs will be, but in our world, we do not see a material impact to TSA operations or, more importantly, TSA and other government procurement for security products.

Unidentified Analyst

Okay. And Glenn, one quick thing, could you give us some color on the recent hire, I know I just mentioned it of Hector Giraldo and his impact and why he was added to the team?

Glenn D. Bolduc

I’m going to ask Darryl. He reports to Darryl. I’ve interviewed Hector extensively. My comment on him; seasoned sales professional, particularly with South America, South and Central America, which was – is critical to us today. Darryl, why don’t you add more about the…

Darryl Jones

Yeah, and just as you were saying Glenn, part of that reason, so again, he is a seasoned professional who has established relationships in security sale trade for 17 years. He knows all the players. He knows all the distributors.

He came in, immediately looked at our distributor base, curtailed the ones that would be the – the ones that we should – that should remain, the ones that are active, the ones that we might be able to find some better partners with. In the first day, he was already making customer calls and following up with leads. I mean, this guy is a great addition to getting us really to penetrate Latin America market.

One thing I will spiel, but without getting into its tooth, more specific, because we already made a significant inroad into one of the countries in Latin America with a press release that will be forthcoming without going to specifics, but we’re going to be entering into 20 airports. We just won the tender for about 20 airports.

Glenn D. Bolduc

Joe, if I could summarize it, Hector afforded us someone who hits the ground running. He is, as Darryl said, is the seasoned veteran of the industry. I didn’t realize it was 17 years. I knew it was 10 plus. He has worked for some of the competition and he knows the territory very, very well and that’s what we were looking for.

Unidentified Analyst

Okay. Great. Thank you. Thank you for taking all my questions.

Glenn D. Bolduc

Thanks for the questions, Joe.

Operator

Our next question comes from the line of William Sokolowski [ph], investor.

Unidentified Analyst

Hello, yes. Hello?

Glenn D. Bolduc

Hi, how are you?

Unidentified Analyst

I’m good. It was I think the previous speakers because they asked questions that were pretty much the ones that I was looking forward to. But I’d also just like to ask the question. What kind of prognosis do you have for the future? I joined – I bought your stock when it was 14, and I’ve stayed with it because I thought that there was something there that was worth watching, but it has been a long time and I was just wondering, if you have anything to say about the future of the stock price.

Glenn D. Bolduc

When you say, you bought in at 14, can I assume that means $0.14?

Unidentified Analyst

No, $14.

Glenn D. Bolduc

$14, okay. So you are a shareholder that goes back probably 10 years or 12 years.

Unidentified Analyst

That’s correct.

Glenn D. Bolduc

Okay. Well, a little bit of history. We took the company over in 2008 and 2009 and the stock was trading below $0.10. So we feel fairly good about where we are today. Obviously everybody would like a higher stock price, but I think we closed – I’m going to guess, we closed at $1.15 or $1.18 today and hoping the market likes the news we’ve just put out. But as Roger indicated in his opening comments, anything that we say is something that we believe.

We are not here to maintain the status claw [ph]. We’re here to improve. Five years ago when we were sitting at the $0.08, $0.09, $0.10, whatever it was we were at, our objective was to move the company forward. We feel we’ve done that. Our work isn’t done. We believe today we are stronger than we were before because of the approvals that we have and without those approvals it would have been very difficult to grow this company because it would be difficult to operate in the U.S. market.

The company that you bought into was much, much different than the company we are today. That company was selling primarily internationally and I would say this company has done a great job with the penetration it’s had internationally, but stock growth going forward will be highly dependent upon sales into the TSA market. We believe with the approvals that we have today we are positioned well to do that and the approvals we’ll receive. And certainly the stack approval we are about to receive also positions us very well.

I’m not sure I answered your question entirely, but the group of people that’s joined this company has done so with the belief we can advance the company from where it is now.

Unidentified Analyst

Okay. Okay, thanks very much. Appreciate that.

Glenn D. Bolduc

Okay.

Operator

Our next question comes from the line of David Wolman [ph], investor. Please proceed, sir.

Unidentified Analyst

Hello. Can you hear me?

Glenn D. Bolduc

Yes, we can.

Unidentified Analyst

Okay. If you could address your comments from the Noble Conference earlier in the year; Glenn, you had remarked that there were eight companies or agencies that have a requirement for about 7000 units, which need replacement. I was wondering, at this time how many of those units have been replaced.

Bill McGann

Hey, this is Bill speaking. I was actually at that conference as well with Glenn, and I think what we were attempting to do is just as what we’re doing here today saying that a handful of customers gives us some opportunity for many thousands of units. Glenn and Darryl have enumerated a couple of them with TSA and agencies like the Department of State and there is a few others and literally it is a small handful of agencies and customers like that that total a very large number of thousands of units and that’s what we said. And to answer your question directly, to our knowledge, that’s still a good number.

Glenn D. Bolduc

And predicate to selling into those agencies, we need the approvals that we’ve been discussing here today, the TSA, security checkpoint and baggage approval as well as the European approval from STAC because that list of customers that we talked about was not specific to just the United States. That was a worldwide list. And we’ve alluded to at least half, if not more of that group of customers et cetera, et cetera that we talked about at the Noble Conference.

Unidentified Analyst

I see. So well, that leads me into my next question, which sort of the bottleneck I guess I would call it. A lot of us were expecting larger sales by this point in the year. Would you say that the bottleneck is the approvals like the lack of qualification for example for cargo?

Glenn D. Bolduc

Approvals are a critical part of that and with regard to our cargo product today we are approved, today any freight forwarded cargo company out there can buy our product, use it and they would be adhering to the law imposed by the United States government. Our equipment isn’t qualified, as of today we’re in the qualification process , we alluded to that in our remarks a little while ago we’re at the front-end of the end time that we thought, we estimated three to six months our equipment has been in test a little over three months now and we do expect news soon.

We have until January of 2016 to achieve that qualification stature. We expect we’ll receive it long before that. Has it impacted us a little bit? Competition does whatever it can to impact you in anyway it can, we do the same thing to our competitors. As we approach some of these deadlines, we’re seeing increased activity among that Group, we’re also seeing increased sales Darryl just alluded to the sale that we recently made and there are others that we feel very confident about today.

Unidentified Analyst

Okay, all right that answered my question. One more, from the TSA perspective if I were a freight forwarder, and let’s say next February rolls around and I’m not in compliance, that’s I am using some expired machines how does the TSA know that I am not in compliance and what is the penalty for me?

Bill McGann

Well the process is somewhat varies, but basically TSA does I guess you could call it inspection reviews or audits of all of the certified screeners, facilities and equipment, and it’s on a regular programmatic basis.

So they would be discovered during that TSA operational rhythm and they would have to – I don’t know what exactly the TSA would do in terms of punitive or corrective action, but most certainly it’d be reasonable to assume they wouldn’t force a corrective action plan where they’d have to get their systems in compliance, that’s how governments work, right.

Glenn D. Bolduc

And considerably there could be fines imposed or they would be prohibited from shipping cargo on passenger carrying aircraft.

Darryl Jones

I think it’s fair to assume that their business would be impacted if they did not produce corrective actions. Speaking to some of those freight forwarders exactly what happened.

Unidentified Analyst

Okay. And if could just ask one more question, when you are participating in these sports conferences, the stadium conferences, where I assume you are meeting with owners and stadium operators, what is that that you are presenting to them, are you just trying to make connections, are you trying to sell them 220s or do you have a new system that’s on the drawing board for checking tickets, I am just wondering what you are doing there?

Bill McGann

Actually what we see is the best application for them today is probably our H150, because it samples on a non-contact basis. It also samples continuously and it allows for the fastest throughput. We all know what happened in Boston on April 15, which has certainly raised an awareness at all levels in the sports world, and I am assuming you are alluding to the press releases we put out about the Global Sports Summit, where we attended the General Manager and President level conference in Chicago in early May, and we were asked to attend that on a rush basis. And then in August, we attended the Owners conference in Colorado, and there is a high-level of alert among the sports franchises because they recognize the vulnerability that their venues pose today, and we continue to work very closely with them and hopefully we’ll have more to report in the coming months to you about that.

Unidentified Analyst

Okay. Thank you, very much for answering my questions and congratulations on the milestones achieved.

Glenn D. Bolduc

Thank you.

Operator

Our next question comes from the line of Sean Sullivan, private investor.

Glenn D. Bolduc

Hi, it’s private investor. Mr. Sullivan, I thought you became a probate officer overnight or something.

Unidentified Analyst

Yes, I have been the jailor. Glenn [indiscernible].

Glenn D. Bolduc

I knew someone at [indiscernible] out there.

Unidentified Analyst

Okay. You’ve mentioned in passing two more products, if I heard you right, in development. Did I hear that correctly and if so, could you expand a little bit about those products?

Glenn D. Bolduc

I’m not sure. It’s not a product yet, Mr. Sullivan. I think you’re talking about the IMS-MS. It’s a technology and it’s a white paper that we’ve shared. And I think Bill wants to answer. Go ahead, Bill.

Bill McGann

Yes, hi, Mr. Sullivan. So, yes, we kind of alluded to it, but I mean, well, I think we can talk a little bit.

Glenn D. Bolduc

They get nervous around here when I start talking engineering.

Bill McGann

Yeah. So we don’t want to talk about dates. We can talk about what we’re up to, right. So we do have a functioning, hybrid, high mobility, mass spectrometer here in our lab that we’re very proud of and that is moving into a product development, commercial product development cycle as we speak. That one is probably a little longer out there, but we want to start getting a lot of feedback from government regulators, gatekeepers about critical requirements, because it’s not just about the technology, it’s about what the technology does for the end users. So we are in the stages of showing what that product can do and seeking feedbacks from some other key government stakeholders around the world.

We could talk more about that if you want, but the other one that’s a new product that is in development is the new generation of our handheld, which as you know, has been a very strong workhorse, backbone of the company with lot of the great technology in it, and think of it as porting all of the great B220 technology advancements we’ve made in our desktops and regenerating a new version of a handheld keeping all of those great features that the handheld had and putting some B220 flourish on top of it to make it even stronger, and you’ll see that product coming out sooner in time.

Unidentified Analyst

Okay.

Glenn D. Bolduc

So those are the two new product developments that we have in our pipeline. We’re staying very focused on trying to keep our costs well aligned with our strategy and vision to grow. So we have great ideas in the pipeline. A couple of them we just named to you are in the works and we have lot of ideas in the pipeline that we are waiting to become more profitable so we can invest in them.

Unidentified Analyst

The first product you mentioned, what – how does that differ or what is the function that you have in mind for that?

Bill McGann

So think of it as being a much higher resolution instrument, so you’ll be able to have a much broader range of the testing across all kinds of categories of compounds for drugs and explosives, it will give you great advantage in dealing with the new threats that are on the horizon that people talk about these home made explosive mixtures, it will be a built-in detection against somewhat of a forensic tool. I mean, they will have broad reaching. I mean, mass spectrometry has been the holy grail of explosives trace detection for probably the better part of two decades and there are others working on it, but I mean, we’ve really positioned ourselves well recently with it.

Roger P. Deschenes

Mr. Sullivan, the key differentiators will be throughput as you will have far fewer false positives.

Unidentified Analyst

Okay.

Roger P. Deschenes

Better – and obviously the better resolution that Bill was just alluding to and you’ll have obviously more specific data on the substances that you’ll be detecting.

Unidentified Analyst

Okay, I know…

Bill McGann

And it will be…

Unidentified Analyst

I’m sorry, go ahead.

Bill McGann

I was just going to say it will be in the form factor of the size of a desktop, which is definitely different than what we’ve seen the competitors present. They’ve presented systems that are much larger than that.

Unidentified Analyst

Okay, good. I noticed that your R&D expenditures are up about, what, 50% or so? Is that relating to these two new products as well as other activities you have going?

Bill McGann

It is, we’d added in our R&D department. We’re a company today of about 74 people. Our R&D department consists of about 33 – 35 of those. We’ve added in the sales and marketing areas as well as the R&D market – the R&D area in the last year, and a large part of that expense is related to the stock-based compensation that Roger was alluding to before, but if you strip the stock-based compensation away, you’ll see increases in expense due to the headcount that we’ve added. It’s important that you continue to build your company in your technology and in your marketing areas and those are the areas that we’ve been focusing on.

Unidentified Analyst

Sure. Before I get back to [indiscernible], let me ask one more question. Few prospects have – you mentioned needs for 100s if not 1,000s of units, maybe two or three or four organizations having TSA. What if there is so much bad press about the screening systems that the TSA uses at airports now, what if the TSA said, okay, we’re going to scrap those and we’re going to put out a bit to get 500, a 1,000, 5,000, what would you do in that case? How would you respond if you got a very significant order from the TSA or anybody for that matter?

Bill McGann

First and foremost, we will be front in center in that bidding process. Secondly, we would expect to be successful. Thirdly, upon being successful, we have the resources, the facility and the capability to meet or exceed manufacturing requirements. That’s what we’ve build over the last two or three years. The final piece of it, being the new facility here.

Unidentified Analyst

What if I understand you correctly Glenn, you will have a limit by mid year next year of 200 units.

Glenn D. Bolduc

That’s 200 a month Mr. Sullivan, typically the way these organizations order, it’s not an order where they will require 1,000 units on November 30.

Unidentified Analyst

Got you.

Glenn D. Bolduc

They will place an order that will call for some number of units monthly over a period of time. The other thing that I should comment on is we have not eliminated our contract manufacturing or outsourcing contracts that we’ve used and we do have a strategy that enables us to put some overflow into contract manufacturing market as we go forward.

Unidentified Analyst

And I assume your margins are much better if you are manufacturing in-house?

Glenn D. Bolduc

That’s exactly why we’ve done this. Correct, sir.

Unidentified Analyst

Okay, all right, thank you very much and congratulations, that’s quite a significant increase in revenues year-after-year and quarter-after-quarter. So congratulations on that.

Glenn D. Bolduc

Thank you very much.

Operator

Our next question comes from the line of Jim [indiscernible], he is a private investor also.

Unidentified Analyst

Good afternoon, gentlemen. Getting back to the STAC certification, when you first mentioned it, I have the impression that this was and or the EU certification and then when you started little few minutes several minutes later, talking about well this would open up opportunities for you to sell in the x number of airports in France. Is there a STAC equivalent in Germany, and on the other parts of the EU or does all the EU rely upon the STAC certification for these products.

Glenn D. Bolduc

I am going to ask Bill to address your question.

Bill McGann

Yes, happy to do so. So currently the EU does not have an official European Union approval process.

Glenn D. Bolduc

One singular…

Bill McGann

One singular for all the nations They are actually working on such an approval process, in fact it’s what they refer to as draft mode. So currently today some of the different countries have unique requirements, STAC is a very prominent, extremely well recognized, been in place for a couple of decades and they are a reference certification for much of the world as Glenn, and Darryl have said, Europe, North Africa in particular with a lot of the French speaking former colonies and even throughout Asia, in fact.

So we expect the recent certification news from the French civil aviation authority to help us globally and specifically what Darryl was referring to is, all of the airports in France that have not been buying because they have been holding off looking for non-radioactive source driven products, which we now meet with this approval. So it’s a little bit of a mix bag that STAC is a very prominent global certification much like TSA, it does represent, European approvals but it’s not a replacement for Germany maybe having some of their own requirements on top of it. It might be a pre-requisite for example the U.K. also has a similar requirement and we expect those to get harmonized over the coming next couple of years into an EU candidly, we don’t think it’s going to look a lot of different in STAC, but we’ll see.

Unidentified Analyst

Can you comment on how you are at this point in time, relative to achieving the similar certification with the German authorities with the EU and so, I mean with the U.K and so forth.

Glenn D. Bolduc

That we don’t really know of any major approval process there, but it’s usually almost on tender type of basis where if you are submitting for a tender, purchasing agency, would say we want to do a test kind of thing and so, we do that on as they come basis. So, STAC is more like TSA once you get the approval you’re good for all tenders in that country and country that referred to it, and if another country has their own requirement, you’ll have to deal with that on a tender-by-tender basis.

Darryl Jones

Jim, the other think that opens up, this is Darryl, is that on tenders sometimes they ask for TSA approved and/or STAC approved. So, this opens us up worldwide, beyond just being a prince colony if you will.

Unidentified Analyst

All right and then, different topic right now you are on the [indiscernible] board what can you say about your plans or migrating on do an exchange?

Glenn D. Bolduc

The intend on behalf of the Company is definitely there to do so there are some requirements that we need to achieve before we can do that. We’ve add those conversations probably premature right now to discuss them it is our intent to move but as I’ve said we do need to meet the pre-qualifications to do so.

Unidentified Analyst

Can you give a rough timeframe when you think that you might be meeting those qualifications?

Glenn D. Bolduc

I’m hopeful that we do so within the next 18 to 24 months and obviously the better our results are the sooner we might be able to get there. There is a requirement for share – and obviously the objective is to get to a more stable exchange. We define that as NASDAQ. There is a share price requirement and there is a net equity requirement and we have a little bit of work to do to achieve that.

Unidentified Analyst

Okay. Thank you.

Glenn D. Bolduc

Thank you.

Operator

Our next question comes from the line of [Steve White], Investor. Please proceed, sir.

Unidentified Analyst

Hey, Glenn.

Glenn D. Bolduc

Hi. How are you, Mr. White?

Unidentified Analyst

Hey, doing well. Hey, just want to give you all congratulations on your growth and it sounds like there is a wonderful opportunity out there for you. Being a finance guy one of the thoughts in having invested in companies with opportunities for growth, one of the things that seems to be the ultimate killer or somewhat is that implements net income number. And I understand that they just – the company that you guys are in, you know you need to continue to invest in marketing and sales and those high positions on.

What is your company’s, I guess among that management team that’s sitting in the room there. How focused are you guys on that projected point where you breakeven, where there is net income to the bottom line. If you were to take your pipeline out and maybe cut it in half and go from a conservative approach, at what point do you guys foresee yourself and I guess how much of a driver is it that you guys get that bottom line growth?

Glenn D. Bolduc

We got a couple of folks blushing in this room. Of course when you ask the question how often do you talk about it because I don’t think there is a dig or buy that we don’t. The calculation for this is reasonably simple for financial reoriented folks. Our goal is to achieve 50% gross margins with our products and we clearly believe that’s in our size, if you cut back all the non cash expenses that the company goes through, we are running in a $10 million to $12 million a year rate. So what that’s going to suggest is some number north of $20 million that brings you to that cash flow break eve point that EBITDA breakeven point.

Unidentified Analyst

And when you say the $20 million Glenn just to clarify you are talking about the top line revenue number of sales. Okay, thank you.

Glenn D. Bolduc

On an annual basis…

Unidentified Analyst

Sure absolutely.

Glenn D. Bolduc

This break down to $5 million to $6 million quarterly number, and with the pipeline that we see the opportunity available to us, all the things that we’ve discussed on this call, the approval process in place, we believe we are near that opportunity to that.

Unidentified Analyst

Okay, so your team would be okay with projecting potentially and I know it’s a bit potentially that opportunity could be realized with in the upcoming fiscal year. So I guess that puts us sometime June 2014 something like that.

Glenn D. Bolduc

Correct, and we have stated that in the past.

Unidentified Analyst

Okay and that’s appreciative, Like I say with my limited experience in investing in companies like this it just seems like while the revenue starts to pour in, it’s amazing how the SG&A just continues to just continues to climb and I know you guys with some of the depreciation of the equipment that you have the facility you are going to see some of that increases and expenses but that’s kind of what I wanted to get a feel of this, how often are you guys really caring about that breakeven, because that seems to be the thing that always keeps these stock’s price in tact. And so, well good to hear, that’s what I was looking for.

Glenn D. Bolduc

Okay, thank you.

Unidentified Analyst

Thank you.

Operator

Our next question comes from the line of Nicholas [indiscernible], Investor. Please proceed sir.

Unidentified Analyst

Hi, gentlemen. I have a question regarding something you said earlier in the call, regarding January 1st 2014 date and the comment, I think that Joe was making about the importance of that, and how shall it might be ramping up into the date, and I was wondering if you could just clarify what’s the importance of that date and why we are potentially sales increase leading into it?

Glenn D. Bolduc

Sure, I think it might have been Darryl, but since I started off and handed over to you. But yeah, I mean that the January date is when they grandfathered systems under the cargo qualified product list, either has to get re-approved or have to taken of the list. And there is a number of those systems in the field that the current certified screening facilities have to be replaced.

So in Glenn’s opening remarks, he had made the comment that, some of the cargo freight forward are buying in advance of that day. Darryl alluded to the comment that, we are also expanding into other new facilities, not just replacement of the grandfather units, because people are finding our systems to be favorable in their use operationally as well as their cost of ownership. And then I addressed the question, a hypothetical about what would happen if one of the screening facilities were out of compliance.

So, I think, we, probably all three of us sort of talked about it. But, I mean, at this point I would defer to Darryl to talk to you about the opportunity, but the date itself is the date which grandfathered systems under the current ACSTL will expire.

Darryl Jones

Not much more to offer than that, that was a good summary. Again I’d say 50% of the pipeline that we are looking for is because of that grandfather dated January, but the other 50% is just because of the fact that the advantages that our product offers in general and ETD versus other technology.

Unidentified Analyst

Okay, great, thanks. I have a couple more questions if you don’t mind. I am just curious, I mean I know that you are reluctant to give out customer names and quantities of unit sold to them. And I am wondering do you envision a day of when might that be where you can get customers name so that we can start associating certain groups with being [indiscernible] customers?

Glenn D. Bolduc

Nick, Darryl just jumped over me, he wanted to answer this question.

Unidentified Analyst

Okay.

Darryl Jones

One should understand that we would love to give out the names of the customers and some of the statements that they are making. A lot of them are government entities and you have to go through a government approval process for us to even say their name.

So they are the ones that are causing the pause versus us and if even smaller companies, some of the air cargo facilities, sometimes they don’t want to be named even having an ETD product, they don’t want everybody to know what they are using as a security measure.

So it’s just unfortunate, we’re just causing that [indiscernible], we can’t always report what we’d like to report. I mean, I just said, we are in basically we had a new sales that happened couple of weeks ago, but we still haven’t been able to get it approved press release through the government. So please be patient with us on it, we are going to give you as much information as we possibly can.

Unidentified Analyst

Okay, well that’s helpful. Just to hear with the landscape is likely. Given that today is the last day of fiscal Q1 and I think I was little surprised by the $2.4 million revenue number from Q4 and I was wondering perhaps without getting into too much specifics, can you give us a sense of sequential earnings picture and how you see the company going forward this coming quarter and perhaps one after as well?

Glenn D. Bolduc

Nick, as a practice we haven’t done that in the past and what I would point to is the year-over-year results we generated 2012 to 2013 where we went from, I think it was $3.4 million to just over $12 million. And if you go back and you look at our quarters you’re going to see some quarters low, you’re going to see some quarters very high. And I think that’s what you’re going to see in our performance this year as well. I think unfortunately until these large orders kick in where they cover multiple years or multiple quarters that’s what we are going to have to deal with that as a company.

We’re certainly confident, we’re going to improve on the $12 million that we did in 2013. I doubt seriously we’ll do 3.5 times, which should be what some number at around $45 million, $50 million as much as you guys have liked that. But there will be a number on an annual basis that will do. Some people might sit and say, Bolduc is hiding, and I am not doing any hiding.

What I’m trying to do is paint as much reality to you guys as we can. If there is one thing that we have done is that we’ve delivered what we said we were going to deliver, not necessarily in the timeframe, but we try to explain that working with governments and government agencies it’s difficult to predict that stuff time to time and quarter to quarter.

Unidentified Analyst

Right, okay so you’d be saying that expect lumpy results that is hard to project quarter-to-quarter what revenues might be.

Glenn D. Bolduc

Right, but next year this time we are very hopeful to deliver very, very good news to you guys on the year, and looking at 2014 in comparison to 2013, and 2013 $12 million we felt that was a reasonable achievement given what we had to work with, given where we came from, we entered the year, we had no approvals.

That was pretty significant result, and entering this year we had one approval and early in the year we got the IT&E approval for the passenger and baggage hold product, we’re on the verge of the STAC approval which gives us presence in Europe, particularly in France, in Europe, the Middle East and Africa so we do believe the table is set for us for 2014, Daryl if you want to answer.

Darryl Jones

Okay, I’ve also said – I remember you say Glenn we have backlog that exceeds fiscal year 2012 right now.

Unidentified Analyst

Right, I thought you mentioned before you sold the 100 and you have a backlog of roughly 200 QS-B220.

Darryl Jones

No that’s not backlog that’s pipeline opportunity.

Unidentified Analyst

Pipeline I’m sorry. Got you, okay. So I mean if Q4 2013 was $2.4 million are you anyway comfortable that you can that we should expect you can beat that with Q1 which just going to close today.

Glenn D. Bolduc

Again this is not something that we’ve commented on the past Nick and I do not want to establish a precedent with that. Not at this time and not with where the Company is right now.

Unidentified Analyst

Okay, well I appreciate you’re taking my questions and congratulations on the milestones, the floor to [indiscernible]. Thanks guys.

Glenn D. Bolduc

Thank you.

Operator

Our next question comes from the line of Larry Godfrey [ph]. Please proceed, sir.

Unidentified Analyst

Hi, Glenn and team.

Glenn D. Bolduc

Hi, Mr. Godfrey [ph] how are you?

Unidentified Analyst

Good, good. Listen my question is if I was a competitor watching IMSC over the last couple of years trying to get into this business and grow and develop. To the point where you are today or you have done most of the heavy listing, and you have established a couple of good products. You’ve gotten certifications. You’ve gotten the latest technology and non-radioactive. Currently you’re the only company that is TSA approved. Why wouldn’t I come in and just try to buy you guys out and absorb you, have you had any contact anyone about being purchased?

Glenn D. Bolduc

If we did Mr. Godfrey [ph] at this point we would not be able to discuss it.

Unidentified Analyst

Okay.

Glenn D. Bolduc

For all of these obvious reasons we are building our company for the benefit of our shareholders, where we also have personal goals with regard to safety in the world. Okay. But our objectives are to build the best shareholder value we can for our shareholders. Right now, that’s focusing on the fundamentals, a lot of which have been discussed on this call, to improve sales, breakeven, profitability, continued approvals in the process and what we believe is, we have the foundation built, so that we can achieve those things.

Unidentified Analyst

Fantastic, good luck.

Glenn D. Bolduc

Thank you.

Operator

Our next question comes from the line of Mark Mitchell with ACR International. Please proceed sir.

Unidentified Analyst

Hello gentlemen.

Glenn D. Bolduc

Hi Mark, how are you?

Unidentified Analyst

I am doing outstanding, long time no talk to you. Congrats again for all the accomplishment. I have only one question, I guess, now we are getting a little longer with the tweet here.

Glenn D. Bolduc

That’s okay.

Unidentified Analyst

Where did you see Smith’s in L3 more grow all the competitors’ a year from now in ETD market?

Glenn D. Bolduc

Yeah, where do we see that?

Darryl Jones

I can tell you where we see ourselves.

Glenn D. Bolduc

Yeah, it’s up to put ourselves their shoes and what they see. Can we try answering this as to where we see ourselves being relative to them, would that help you?

Unidentified Analyst

Absolutely.

Bill McGann

With the approvals that we are achieving, we put ourselves in a very good position to secure orders. We are a small company. We are an American company, we manufacture domestically. These are good factors. We have stated in our prepared comments that our objective is to take at least a third of the market. We’ll try to identify to you what we see that market size being. Is it reasonable to expect you achieve that one year, probably not, but over time we do expect to achieve that.

We will take some market share from our competitors. We will create some demand creation as we call it where there are other markets that we’ll pursue. We’ve talked about some of those and what we see for our company is a very stable company; 12, 24, 36 months out, gaining market share in this all important security industry, but more importantly what we see ourselves as is an industry leader in explosive trace. We believe we do represent the new standard in explosive trace detection. The test results that we’ve generated at each of these agencies that we’ve gone to is very, very good. We’re not allowed to talk about numbers, but they’ve been speaking to us and we did do very, very well.

So we see ourselves in a very, very prominent position. I don’t think the other guys are going to go away. I do believe that they will be there, just going to have a new competitor to deal with. These other companies that you allude to and by the way L-3 is not a competitor of ours today, they are not selling any explosive trace detection product. The competitors are Smiths and Morpho, but they also sell x-ray equipment, metal detection as well as advanced imaging equipment.

Unidentified Analyst

Thank you.

Glenn D. Bolduc

Do you want to add anything to that.

Unidentified Analyst

But for what it’s worth, I’ve been an investor before years, this December and the one singular think that’s kept me hanging in there is the patent portfolio. And now I think it’s finally getting to that point or just making a difference?

Glenn D. Bolduc

Mark, I think you and I met at a trade show in a both or in a Investor Conference was it in Las Vegas?

Unidentified Analyst

It was, in memory.

Glenn D. Bolduc

Yeah, I recognized your name, and I think Todd was with me, when we were there.

Unidentified Analyst

And Bob Liscouski [ph].

Glenn D. Bolduc

And Bob Liscouski was there as well. That’s right. How many patents did we have when we were there 12 or 13?

Bill McGann

Probably it was 12.

Glenn D. Bolduc

12, yeah, and today we have 17 here. So, we’ve added IP portfolio that you allude to Mark and how many would we file for?

Bill McGann

I think three there filed.

Glenn D. Bolduc

We have five pending right now Mark. So, we obviously made a major investment in our IP and we’ve done that by making an investment in the people that we brought into the company who give us STAC intelligences.

Unidentified Analyst

You don’t see have any problem acquiring all the talent. Maybe there is a reason associated to those patents.

Glenn D. Bolduc

Could be, we just think we’re a good place to work. We think we have the best products in the world and we believe what we do makes a difference. It’s a philosophy here.

Unidentified Analyst

I’m very confident that you are executing to the best of your ability and I will be waiting patiently. Thank you for your time gentleman.

Glenn D. Bolduc

Thank you for your investment and we appreciated your support.

Operator

There are no more questions gentleman.

Glenn D. Bolduc

Crystal, thank you, very much and to all of the folks who are still on the call, thank you for your support and thank you for your questions and also for all of the interest that you display in our company.

Again if any of you would like to visit with us, please give us a call, we’d love to have you. Thank you again, so long.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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