Implant Sciences' CEO Discusses F1Q14 Results - Earnings Call Transcript

| About: Implant Sciences (IMSCQ)

Implant Sciences Corporation (IMSC) F1Q14 Earnings Call November 14, 2013 4:15 PM ET

Executives

Roger Deschenes – CFO

Glenn Bolduc – President and CEO

Bill McGann – COO

Analysts

Joseph Munda – Sidoti & Co.

Operator

Good day ladies and gentlemen and welcome the First Quarter 2014 Implant Sciences Corporation Earnings Conference call. My name is Erica and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Roger Deschenes, Chief Financial Officer. Please proceed

Roger Deschenes

Thank you, Erica. I would like to welcome everyone to Implant Sciences’ first quarter fiscal 2014 earnings conference call. We also like to welcome those of you joining us on the webcast. On the call this afternoon are Glenn Bolduc, President and Chief Executive Officer and Bill McGann, Chief Operating Officer.

We will begin by providing a brief financial report on the company’s fiscal 2013 first quarter results. Glenn will provide a corporate overview and discuss recent developments. Following our prepared remarks, we will 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 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 November 14, 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 as amended 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 our past and present results.

A replay of the conference call will be available for a limited time by dialing 888-286-8010 within the United States or 617-801-6888 outside the United States and entering the pass code 58696151. Any forward-looking statements we make today are based on assumptions which we believe to be reasonable as of today November 14, 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 November 14, 2013, we filed a quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2013 with the Securities and Exchange Commission and issued an earnings press release summarizing the company’s financial performance for the first quarter ended September 30, 2013.

Revenues for the quarter ended September 30, 2013 were $1,165,000 as compared with $1,415,000 for the comparable prior year period, a decrease of $250,000 or 17.7%. The decrease in revenue is primarily due to decreased shipment of QS-H150 handheld unit sold into Northern Africa and China in the three months ended September 30, 2013 resulting in an 81% decrease in the number of QS-H150 handheld units sold.

In addition, decreased sales of parts and supplies during the three months ended September 30, 2013 as compared to the comparable prior year period. And this was partially offset by an 8.2% increase in the average unit sale prices on sales of our QS-H150 handheld units and increased sales of QS-B220 Benchtop units.

Gross margins for the three months ended September 30, 2013 was $213,000 or 18.3% of revenues as compared with a gross loss of $39,000 or a negative 2.8% of revenues for the comparable prior year period. The increased gross margin is primarily the result of the $372,000 decrease from stock-based compensation recorded on stock option grants to officers and directors in September 2012, which is partially offset by increased manufacturing overheads pending due to an increase in manufacturing personnel cost and increased occupancy cost as compared to the prior year period.

Research and development expense for the quarter ended September 30, 2013 was $1,231,000 as compared with $1,337,000 for the prior year period, a decrease of $106,000 or just under 8%.

The decrease in research and development expense is primarily due to a $339,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants, partially offset by a $217,000 increase in payroll and related benefit costs and increased occupancy cost.

Selling general and administrative expenses for the quarter ended September 30 2013, were $3,408,000 as compared with $10,131,000 for the comparable prior year period, a decrease of $6,723,000 or 66.4%.

The decrease in selling general and administrative expense is due primarily to a $7,189,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants, a $123,000 decrease in legal fees, and a $41,000 decrease in bank charges.

Offsetting these decreases are – offset partially by a $299,000 increase in payroll-related benefit cost and travel expense resulting from the addition of sales personnel, a $211,000 increase in occupancy cost due to the relocation to our corporate offices and a $114,000 increase in selling expenses due to the opening of our Shanghai representative office, and increased participation at industry trade shows and an increase in demonstration units provided to our sales force.

For the quarter ended September 30, 2013, other expense was $1,595,000 which compares with other expense of $1,241,000 for the comparable prior year period an increase of $354,000 and this increase is due to increased interest expense on higher borrowings under our credit facility with EMRJ.

Our net loss for the quarter ended September 30, 2013 was $6, 21,000 as compared with a net loss of $12,748,000 for the comparable prior year period, a decrease of $6,727,000 or just under 53%.

The decrease in the net loss is primarily due to the decrease in stock-based compensation recorded in the current quarter on the September 2012 officer and director stock option grants, and 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 $1,612,000 for the quarter ended September, 30, 2013, compared to $9,427,000 in the comparable prior year period.

On an adjusted EBITDA basis, earnings before interest taxes depreciation, stock-based compensation and the value of warrants and common stock issuances, the loss for the quarter was $2,707,000 compared with the loss of $2,032,000.

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

Glenn Bolduc

Thank you, Roger. I would also like to thank all the participants on today’s call for joining us. For those of you who have been following us the last few years, I am hoping, you’ll recognize a difference in positioning from where we’ve been in the past to where we are today.

With this call, management believes we can offer forward-looking guidance based on accomplishments that provides visibility for us. During the first quarter of fiscal 2014, the company achieved several important milestones and made significant progress against the strategic objectives, a trend we are pleased to report that has continued into the current quarter.

In our September 30, 2013 conference call, we listed six catalysts needed for continued growth. In the last 45 days, two of those catalysts have been realized and both were achieved well in advance of the dates we expected them. Instead of just listing these accomplishments, we are going to spend the next few minutes for viewing them with you in the context of where we are and where we are going.

There are many complicated things about our technology and business, but in terms of considering the opportunities, Implant Sciences represents everything comes down to just three very simple questions.

One, how large is the opportunity we are going after. Do we have the change to get there and do we have financing options sufficient for us to achieve our objectives. We see several near term and long-term revenue opportunities. The first of these is the existing trace detection market which we estimate to be approximately $300 million annually. However, we see this as just the baseline for a much larger opportunity.

We believe the market for trace detection has been severely limited by outdated technology. We further believe that our intellectual property offers opportunities to greatly expand the use of trace detection and security applications providing the opportunity to greatly increase that $300 million size we talked about a few minutes ago.

Excluding the advances we’ve made in our technology, the technology you’ll find in competing systems hasn’t progressed in ten years. For example, we currently have a proposal for using some of our patented technologies to reduce the cost and increase the effectiveness of aviation checkpoint security.

We anticipate that succeeding in such a product would significantly increase the size of the ETD market. Aviation checkpoint would be just the beginning as the same approach has many advantages in many other security environments as well. Our technology roadmap included capabilities of the security industry as one of the years and they’ve told us so.

Capabilities such as stand-off detection and field deployable mass spectrometry capabilities that offer the potential for significantly change and grow the trace detection market. As we have previously stated, our goal is to capture at least a third of the explosive trace detection market over the next five years.

The attainability of this call is demonstrated by our recent sale to 19 airports in the Latin American country. This was a good opportunity for us since each of the 19 airports needed at least one system and some needed more. This business was previously held by our competition and all the major trace detection players bid on tender, we won.

You’ll see additional wins in the weeks and months to come. We won not just because we have the best product which we do, but also because we were in a position to win, a position that includes product technology, approvals, and sales channel, a position that was built with contributions from every employee at Implant Sciences.

That speaks directly to the ability of our team to reach those opportunities. This is a team that designed and built one government tester called and I quote “the best nitrate detector in the market today”.

A team whose technology and products have achieved one regulatory success after one another including approval by the transportation security administration for air cargo screening in January 2013. Our technology passed TSA laboratory testing for passenger checkpoint and check baggage in July of 2013.

We passed STAC testing in France and I am not going to try in to find STAC like I did last time to you. Achieving the equivalent of TSA QPL status in that country just this past September.

Our B220 cargo product received qualified status on the qualified product section of the ACSCL in October 2013 and just last week we received designation as a qualified anti-terrorism technology from the Department of Homeland Security. We are the only ones pleased with the quality of our team.

In the letter granting the B220 acceptance on to the qualified product section of the ACSTL, the Chairperson of the technical review panel at TSA wrote and I quote “I would like to personally thank you and your entire team for their hard work and effort in submitting a response to this announcement”.

However it is not just our technology group moving the company forward, sales force has been making progress in many areas. For example, our investment in expanding our sales network in the Middle East is paying off. Our first announcement for the quarter was an 11 unit sale in Saudi Arabia and we expect more orders from that region in the future.

In July, we announced a $3.5 billion order that is scheduled to be fulfilled over the next several months. The majority of this order did not shift in the first quarter limiting the revenue included in the numbers Roger provided. We expect to ship this order over the remaining quarters in this fiscal year.

Another big win was the Latin American airport tender we mentioned earlier in today’s call. A sale that also provides insight into why it takes time for the approvals we have received to turn into revenues. This tender had originally been planned for calendar year 2012.

It was not issued until calendar year 2013 after we won the tender there was an appeal by a competitor. So we had to go through yet another round of meetings and communications before the order was confirmed. The end result was a win for the company, but the process was very frustrating.

We are quite sure and it’s equally frustrating to you, the shareholder, especially when all – with all the naysayer is out there, clearly when selling to governments, there is no specific length of time that can considered a “standard” sales cycle.

Sometimes, it’s couple of months, sometimes more than a year. Stated differently, this market is not driven by personal wants or needs but it’s rather a market that is reliant on or driven by events and legislative mandates.

With extended timelines between the determination of need and the eventual procurement. We recently made our first sale to the China Nuclear Power industry as we have reported previously; the company has been successful in selling to nuclear power plants in Japan. China currently has 17 such nuclear plants with 32 more under construction.

China’s National Development and Reform Commission has indicated its intention to increase the percentage of China’s electricity produced by nuclear power from the current 2% to 6% by 2020 offering continuing opportunity for our products. Our regulatory success is also turning to sales success in the air cargo screening market where we are experiencing growing momentum.

So far this quarter, we have shipped more systems for air cargo than we did in the quarter ended September 30, 2013. We have more air cargo units in backlog today than we have shipments so far this quarter and we have more air cargo sales in the pipeline that we believe will close before the end of the quarter than we have in backlog.

This is a trend we are very pleased about and it is greatly aided by – are being added to the qualified list just a few weeks ago.

Many of our air cargo orders were from sales leads generated at the Air Cargo 2013 Show where we exhibited earlier this year. Our marketing group is working to build the pipeline with additional events. The company has exhibited at several trade shows so far in 2013.

Last month, we were at Inter Airport Europe in Germany with one of our distributors. Just last week, we had our own booth at Air Cargo Americas in Miami which some of you have commented. This week we are at Transport Security Expo in London and we are teaming with more of our distributors at three additional shows in France and the Middle East later this month.

No discussions of the Implant Sciences team would be complete without talking about manufacturing and operations. In July, we moved into our new facility that offers greatly increased manufacturing capacity. We are currently working to increase our capacity to over 100 systems for a month.

And we were successful in securing a grant from the Commonwealth of Massachusetts to assist in the training that will be part of this growth. Summary, we believe our team’s ability to achieve our objectives. They’ve done a great job of proving it so far. Knowing government approvals are critical to growing sales, we made obtaining them by priority. We did this several years ago.

Your team has come through with a stunning five regulatory successes so far in calendar year 2013. You will know there are few folks out there who said that we wouldn’t achieve approval or qualifications, or sales. We believe our success clearly reputes claims nonetheless our regulatory successes must be translated into continued revenue growth that means sales.

Knowing that we needed to expand our sales channels to take advantage of approvals, we set out the five new distributors covering key areas. Again, we succeeded in the team came through. We have strong representation in many areas of the world and have reached the point where credible players are seeking us out to expand their product lines.

Knowing that we needed more leads to drive sales, we have some programs to raise our visibility and increased market awareness. The marketing team came through. We have an active trade show schedule that is generating leads. We have direct marketing campaigns that are supporting sales efforts.

We have updated our collateral to reflect our position as the new standard in explosive trace detection. You will see more new initiatives in the coming months. Having set the goal of achieving $100 million in revenue within the next few years we have tasked our team with building on the success we’ve had so far.

We are confident in their capabilities and prospects to succeed. Our FY 2013 revenue results were almost four times FY 2012. With the approvals and qualifications in hand and the transportation security administration passenger checkpoint qualification expected soon, management believes the company can experience significant sales growth in FY 2014.

Such growth however will be dependent on the timing of achieving the TSA checkpoint qualification. Recent trend suggest companies are shying away from providing estimates or guidance. We certainly have. However, we believe today that our shareholders may be better served if management provides us some insight on the company’s future.

So we would like to give you a status update of the passenger checkpoint qualification approval process and the potential impact on results. In December of last year and before we had any other approvals, we met with TSA to discuss our checkpoint solutions. We advised TSA that we could have a suitable product in a shorter than normal timeframe and requested TSA to accelerate the approval process.

In February of 2013, we submitted a Qualification Data Package or a QDP for our B-220 product in the checkpoint application. That QDP was accepted by TSA. TSA then weighed Readiness Testing and Evaluation RDG&E and moved us to Independent Testing and Evaluation IT&E in April.

This signified to us that TSA accepted our acceleration request. In June 2013, we were advised we passed Independent Test and Evaluation. We announced these results in early July and we are very encouraged with the progress we achieved. At that point, we had an approved product. However, before TSA purchases equipment, the equipment needs to be qualified.

As we discussed during our previous call, qualification requires two other major processes, TSIF or Transportation Security Integration Facility Testing and Operational Test and Evaluation or OT&E. With the accelerated progress we enjoyed up to this point we had hoped to be done with this process by now.

Unfortunately, due to delays beyond anyone’s control including the U.S. government shutdown in October, our product has just recently entered the final phase – TSIF or TSIF testing. Allowing appropriate time for the completion of this stage, followed by operational test and evaluation, final review and approval, we believe we could be on the qualified product list or QPL in early April 2014.

This is significant as there were indications that government procurement is expected to begin in April 2014. There were no ETD procurements during the government’s FY 2013 which ended on September 30, 2013. And the funds allocated were pushed forward to the government’s 2014 year.

There is an allocation for explosive trace detection that is substantial and we believe our technology meets the requirements set for the by TSA. Achieving checkpoint qualification would be evident proof of this. We also believe our technology offers significant advantages over the competition that we have discussed with you many times in the past, Achieving STAC qualification and TSA qualification for air cargo screening and checkpoint will position us to achieve near and long-term revenue opportunities.

As you are aware, our fiscal year ends on June 30. Assuming our eventual success in winning passenger checkpoint qualification without further delays, we believe we will be in a position to receive U.S. government orders measured in millions of dollars that would enable the company to realize significant revenue growth over our FY 2013 comparisons.

To be clearer, we believe that depending on the timing of qualification of the checkpoint product, we could grow revenues from $12 million in fiscal 2013 to between $17 million and $24 million in the fiscal 2014.

We also believe, based on past government procurement practices that if we are successful in securing orders from US government agencies, those will be multi-year orders that could be growth catalyst for fiscal 2015 and the years beyond.

We continue to be blessed with strong financial support and advice of our senior secured lender DMRJ Group LLC in New York, also known as Platinum Partners. Without them, none of what we have accomplished would have been possible and we wouldn’t be in a position to talk about what’s to come.

As reported earlier today, we’ve entered into an agreement with DMRJ to extend our credit facilities through September 30, 2014. We view their action as a commitment to the success of the company and believe we have had and continue to have a very strong financial partner.

We thank them again for their support and vision. We also thank our committee involved investors who are as passionate about the company as we are. On average, we receive five phone calls a day from shareholders. We appreciate each and every one of those calls and try to be as good a listener as we can be.

Please keep them coming and we will do our best to be as responsive as we have always been. Each and every employee’s goal every day is to reward you for your investment and support. All the employees here know my bosses and that is you the investor. So to circle back to the questions we asked a few minutes ago, we see tremendous opportunities.

We are confident that we have the team and the technology and we also believe we have the financial support to achieve our objectives. We appreciate and thank – we appreciate your participation and thank you for being part of today’s conference as well as your continued interest in the company and we’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question which comes from the line of Joe Munda with Sidoti. Please proceed.

Joseph Munda – Sidoti & Co.

Good afternoon guys. Thanks for taking the question.

Glenn Bolduc

Hi, Joe, how are you doing?

Joseph Munda – Sidoti & Co.

Good. Glenn, first off, I want to talk about the $3.5 million order that didn’t ship in the quarter and will ship in the remaining quarters, can you give us some insight into how that will work? Is it going to be evenly divided over the next three quarters or is it going to be more in one quarter or less than another?

Glenn Bolduc

Joe, it’s difficult to say right now. I got to be careful here. This is part of a very large security order that includes our equipment among other equipment and the delivery of the order is based on the customers’ deployment practices and like a lot of things, it’s just moving a little bit more slowly than expected.

We had thought most of this order would have shipped during our first and second quarter and right now what we are seeing is, some of this will be stretched out a little bit. We have received a sizable deposit for this order.

So we know it’s real and we are very, very confident of it. The predictability of when it will actually ship though is something that is beyond our control right now.

Joseph Munda – Sidoti & Co.

Okay. Glenn, also, I mean, you did touch on a lot of data points here a lot of approvals which is great. Am I hearing you right, you said a $100 million in revenues over the next few years?

Glenn Bolduc

No, what we believe our objective is to be a $100 million company within the next few years.

Joseph Munda – Sidoti & Co.

Okay, so not necessarily sales, you are saying on a capitalization?

Glenn Bolduc

Right.

Joseph Munda – Sidoti & Co.

Okay.

Glenn Bolduc

We expect the company to be capable of doing. The market today, Joe, just the basic market that sits out there is $300 million a year. And we believe…

Joseph Munda – Sidoti & Co.

So you are saying, you are going to be a third of that?

Glenn Bolduc

Right, we believe we can capture a third of that.

Joseph Munda – Sidoti & Co.

Okay. And then as far as the guidance you gave, there was a lot of insinuation on your point saying that, basically, the final approval of – with the government for the TSA qualified product, basically you are saying the government is holding off purchasing and so you guys got approval. It almost seems like that’s what you were insinuating?

Glenn Bolduc

No, no. I am sorry, if that's the way it came across. Okay, I think it appears to be coincidental, at this point.

Joseph Munda – Sidoti & Co.

Okay.

Glenn Bolduc

But the indications to us are their buying is going to take place in the March, April or their ordering I should say is going to take place in the March April timeframe and just where we see stand with them right now on these final two phases of testing which we thought would be done by now, but unfortunately they are not. It looks like it will be into the beginning of 2014 before that will complete.

Joseph Munda – Sidoti & Co.

Okay, okay, that's helpful. And then as far as…

Glenn Bolduc

At least I knew this today that was very helpful to us. There was a sub-step in one of the two processes that we got very favorable news on earlier this afternoon.

Joseph Munda – Sidoti & Co.

Okay, as far as the breakout of revenues, can you give us some sense of what was domestic versus international?

Glenn Bolduc

Yes, I am trying to think it, Joe. I’d say, I think it was close to 50-50.

Joseph Munda – Sidoti & Co.

50-50.

Glenn Bolduc

Yes, which is – about half of our revenue in the September quarter was domestic which is a favorable trend for us, just showing penetration in the U.S. In Q2, we are seeing a similar trend every day when we are looking at orders, it’s a about equal between what we are seeing domestic versus international.

Joseph Munda – Sidoti & Co.

And then, I guess, if you could give us some color on the break up between 220 and the 150?

Roger Deschenes

I’d say, it’s about 50-50 as well, Joe, because the domestic sales are basically air cargo.

Glenn Bolduc

That's correct, that's B-220

Roger Deschenes

You are going to see a greater concentration of B-220s, Joe. But we are seeing activity for the H-150. Don’t count that H-150 out yet. There are some interesting opportunities out there for H-150.

Joseph Munda – Sidoti & Co.

So, based on your – I mean, if this approval comes through with the government, the back half of the year would be pretty much a monster back half, right, if this all comes to fruition?

Glenn Bolduc

Correct. The back half will be very, very large, yes.

Joseph Munda – Sidoti & Co.

Okay, so, all right. So we are assuming the next few – well, this quarter is over, but the next quarter maybe a lumpy quarter and if this approval comes through all the growth pretty much will be in the back half of the year and continue to on to 2015.

Glenn Bolduc

If there is one thing we’ve noticed about Implant Sciences, the quarters have always been lumpy. And it’s much easier to look at the performance of the company on an annual basis. Two years ago, we did $3.5 million and for the June year, for the June 2013 year, we were just over $12 million.

But, there were a couple of quarters, where – just didn’t feel real good about what was going on with the company but when we totaled up everything up it was $12 million. Certainly, $1.2 million result in the September quarter.

I would have loved to be in a $5 million $6 million result in each of the next three quarters to be $4 million, $5 million, so that we get to that 70 in the $24 million number on an even basis.

That’s just not this business. This business is one where you will realize significant orders, you’ll have stuff that will come into the quarter, you’ll have stuff that will fall out of the quarter.

Our hope is that, once these approvals are achieved and once we see orders which are the result of mandates and various governments’ recapitalizations that will see something that’s a little bit more steady on a month-to-month quarter-to-quarter basis, but for right now, this is the animal that we are dealing with.

I don’t think measurement of the company on a numbers basis for one quarter is a fair measurement, I am sure there will be some people out there that will do it. I think you got to look at this and say, where did they end up.

Joseph Munda – Sidoti & Co.

No, Glenn, listen, I believe with you in that sense, but from a – perspective, it’s just the nature of our business. So, I am just trying to get…

Glenn Bolduc

No, I was answering the question trying to address, because I know that’s the problem that you face and I know I’ve sat with you in your office, tried to give you some idea of what our business is and I guess, I’m just trying to do that again here right now.

Joseph Munda – Sidoti & Co.

No, I understand and that’s what I am trying to get at. So, I am just saying, what I am saying is that based on what I am seeing in front of me and the approvals and profitability and the guidance, the possible guidance that you are issuing here, I am just assuming that at the back half of the year, it’s going to be a lot stronger than the front half of the year. That’s pretty where I’m getting at.

Glenn Bolduc

Yes, very much. So, that is our expectation. And the nice part about that Joe is, what we believe is that, it will position us for 2015 as well, because when those orders occur they are typically multi-year orders that come with some very, very large numbers.

Joseph Munda – Sidoti & Co.

Yes, and any sense of what the government opportunity is, I’m guessing your guidance assumes the capture of some of those orders, but I am guessing it’s not the entire – here, I am just trying to get a sense of what the opportunity would be once that approval is attained?

Glenn Bolduc

Joe, it’s measured in thousands of units.

Joseph Munda – Sidoti & Co.

Okay.

Glenn Bolduc

Okay, there are some things that we can’t talk about, some things we can’t but it is measured in thousands of units.

Joseph Munda – Sidoti & Co.

Okay. Thank you.

Glenn Bolduc

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of (Inaudible) Private Investor. Please proceed.

Unidentified Analyst

Glenn, this asking about – little more about the backlog. Nor order-by-order, but, I think you said that you, what is your current backlog in dollars roughly and when you spread that by expected ship date by quarter what does it look like?

Glenn Bolduc

Our current backlog is in excess of $5 million, okay, the difficulty, Jim, is trying to identify when all of that will ship, simply because of – requested ship dates that we’ll receive from the customers. What I am comfortable with is it will ship in this fiscal year.

Unidentified Analyst

When you say in excess of five, are you saying it’s in the area of $5 million to $8 million or something like that?

Glenn Bolduc

Yes.

Unidentified Analyst

Okay. Is any of your hesitation on the shipments relating to your ability to manufacture and test the product or is it totally customer-dependent?

Glenn Bolduc

It’s mostly customer-dependent, there were always stresses that you realize in the manufacturing and test process. But we have people here who have worked with – for larger numbers, far more difficult situations. So, I am sure, we’ll overcome all of those hurdles.

And, yes, Bill just said, we are ramping our business in the – I think my comments I indicated what we are doing is we are building an organization that can ship in excess of 100 units a month.

Unidentified Analyst

And what is a ballpark revenue number for a B-220 and what is it for an H-150?

Glenn Bolduc

Hold one second. Jim?

Unidentified Analyst

Yes.

Glenn Bolduc

Pricing is not a good thing to discuss, but what I will give you is list prices and then what you’ve got to understand is we do work through distribution. But the list price on a 220 is $46,000 and on a 150, it’s just under $30,000, $20,099.

Unidentified Analyst

And when you say list, that’s what the user would pay, well, before negotiation?

Glenn Bolduc

It’s MSRP, manufacturer suggested retail price.

Unidentified Analyst

Right, okay, got it.

Glenn Bolduc

I don’t want to get into trouble with the legal guys.

Unidentified Analyst

And are there follow-on maintenance orders, so how much maintenance contract per year…

Glenn Bolduc

There were maintenance contracts and there were also consumables.

Unidentified Analyst

Okay.

Roger Deschenes

More so, to B-220.

Glenn Bolduc

Consumables more so with the B-220 with the H-150, very, very limited consumables. That’s correct.

Unidentified Analyst

Okay. Thank you.

Glenn Bolduc

Thank you

Operator

Your next question comes from the line of Nicholas Goodman [ph]. Private investor, please proceed.

Unidentified Analyst

Yes, hi, Glenn.

Glenn Bolduc

Hi, Nick, how are you doing?

Unidentified Analyst

I’m good thanks. I was just curious because you talked about after getting approvals things should accelerate, but the company already has qualified status for air cargo. So those approvals are done, correct?

Glenn Bolduc

The qualified status for air cargo just happened, two weeks ago?

Roger Deschenes

October 18.

Glenn Bolduc

Roger Deschenes, so three weeks ago, four weeks ago.

Unidentified Analyst

Great, and congratulations on achieving that. So, really any impediments to people in the air cargo field being purchasers or gone what we - should we expect to see some larger bulk sales in the air cargo while we wait for this checkpoint approval?

Glenn Bolduc

Yes, you are correct Nick. The impediments of selling in the cargo world are now lifted and the answer to your question is, yes you should see more sales in the cargo area. And we are starting to see.

Unidentified Analyst

Good and when you report them, do you think you will able to give us a little more detail in terms of – some metric to measure either numbers of the units or if you can’t do that, at least the bulk dollar amounts so that we can start to gauge what these contracts are – and of course names of - name players in the industry would also be helpful.

Glenn Bolduc

Okay, so let me go backwards here. You just saw our release that we put out and what you don’t know is the release was delayed because what we were doing was attempting to name the customer. We are in the security business. Some of these guys don’t necessarily want people knowing what equipment they are using.

And we have to respect that. And so do you, okay. Relative to size of orders and dollars, as we grow and as the playing field levels a little bit more for us in terms of approval status et cetera, et cetera, I think we will be able to do a little bit better job with that for you.

But it is something that, this is a lot of the phone calls that I do get. For those of you who have called me, you know that I have said these things to you before. But, in the future we will work on trying to do better with that but we have to feel comfortable that we are not compromising any of our customers out there.

Unidentified Analyst

Okay, that’s all I want to know. Thank you.

Operator

We have no further audio questions. We have a question which has just came in from the line of Dan Christopher, private investor. Please proceed.

Unidentified Analyst

Just a real quick question. Regarding the 8-K that follow the letter that on the qualification of the B-220 and the air cargo QPL there was a letter from the TSA that you had referenced a little bit earlier in the call and within that letter, it basically said that the B-220 was fast tracked to the qualified list because of certain market conditions. I’m just curious if you could add a little color to exactly what they mean by that?

Glenn Bolduc

Bill just said, they like us. I don’t want to be self-serving with that. I believe they like our product. Our product performed well. And they moved on a bill.

Bill McGann

There is also a pending deadline in January.

Glenn Bolduc

Correct.

Bill McGann

I think they are very sensitive to giving us a fair swing of that and not restrict us from fully participating in the recap of cargo such as it is. It’s not as big as checkpoint, but whatever it is, we are now able to play fully.

Glenn Bolduc

It’s a reasonable market and I think what they did recognize is that, not having the qualified status, it was something that could be used against us. And, the testing that they had done was satisfactory and they moved us to the qualified list. We viewed it as a very positive move. Needless to say we had hoped for it and internally we talked about getting it by January 1 and we received it – what was it, October 8?

Bill McGann

October 18.

Glenn Bolduc

October 18. So they moved more quickly with that than we had expected and we were most appreciative of it. That’s for sure.

Unidentified Analyst

Awesome. Thank you for the answer and thanks for the time this afternoon.

Glenn Bolduc

Thank you.

Operator

Your next question comes from the line of Jacob Yakobi [ph] private investor. Please proceed.

Unidentified Analyst

Good afternoon gentlemen.

Glenn Bolduc

Hi, how are you?

Unidentified Analyst

I’m good. Thank you very much. A quick question, last year or I am not quite sure if it was this year or last year, you had a new sales manager for Russia and the former Soviet Union, but we haven’t heard anything at all as far as any sales in that area. So anything you could tell us about that, especially with the Olympics next year?

Glenn Bolduc

We are quite active in the Russian market right now, Mr. Yakobi [ph]. I am pretty confident you will see something about that.

Bill McGann

Yes, it was a strategic, we have short-term objectives in this business to drive revenues and we have sort of global strategic objectives and Russia and the CIS totaling 30 states is an area where this company hasn’t made a sale in - since about, I don’t know, the mid-2000s, 2007 or 2008.

So, there is activity there and we really figure that we needed to make a strategic move to basically start planting our flags. We are very active in participating in the Sochi Olympic, upcoming games as well as other pretty substantial programs in Russia in the CIS countries and we have one person there who you made reference to and on the drug side, we actually have some very exciting opportunities not just in explosives.

Turns out that part of the world has some pretty significant challenges not just from their proximity to the golden triangle where heroine comes from in the form of opium but also in some of the manmade synthetic drugs that are now plaguing the world.

And Russia is right on the front-lines of receiving all the action in that area and we are pretty well positioned doing lots of trials at the moment with some of the Russian federation agencies and they are going very well.

Unidentified Analyst

Very, very good. If I could ask just one - I am sorry, go ahead. I’m sorry.

Glenn Bolduc

But what I would add is, there has been considerable dialogue with the agencies in Russia concerning explosive trace as well as the detection of illegal narcotics. And, I just don’t want to give away too much of competitive information.

Unidentified Analyst

Okay. Of course, if I could just ask one last question, in light of the horrible bombing at the Boston marathon last year – this year, excuse me, has there been any interest from police departments or other agencies in Massachusetts and throughout the country in the handheld especially, anything on that front going on?

Glenn Bolduc

Mr. Yakobi, if you look at some of the events that we participated in and they have been three, two were global sports summits. One was held in Chicago the other in Colorado and that was for all of the major league professional sports franchises NBA, NFL Major League Baseball and National Hockey League.

And we were actually summoned to the first one which was – I think held May 8 and 9 and the Boston Marathon of course happened on April 1 5. So we were a late addition to that presentation. We also participated in the collegiate event that was held – it was either Alabama or Mississippi and I did not attend that one Daryl Jones did. And that was to present to college venues and there were four more college venues than there are professional venues that are facing this kind of a problem.

We are in the process of putting a program together for these folks. We are actively speaking with the biggest names in sports. I think all of you would immediately identify, the folks that we are speaking to.

We are not at liberty to discuss those right now. But we do believe that that is one of the markets that greatly adds to that base market that we talked about in the presentation previously. It doesn’t move as quickly as you would like a. I can attest to that. But we do have an active program underway for all of that.

Unidentified Analyst

Very, very good. Thank you very much gentlemen.

Operator

We have no further questions. I will now turn the call over to Glenn Bolduc for any closing remarks.

Glenn Bolduc

Thank you very much for participating. My hope is just that, anybody who has a question has asked it. I was approached by a shareholder just recently who indicated to me that there were some people who felt they were blocked from they asking questions.

That does not happen here folks. I assure you of that. If you have a question, I ask that you – I think it starts – the code is, and ask your question. We are here to answer those questions. We take your calls, as I said, that averages about a five a day.

Many of them are good calls some of them aren’t. But we deal with them as they come in. And if anybody has any questions I do ask that you reach out to us and talk to us directly either here or by private form.

If any of you are in the Northern Massachusetts area, we invite you to stop by. We have had several shareholders who have visited us here in the new facility. I think they’ve been quite impressed with it and it gives us an opportunity to show you the full suite of products that we offer. Is there another question?

Operator

Yes, we have a question, which comes from the line of Vincent Clark [ph] Private investor, please proceed.

Unidentified Analyst

Thank you for taking my call. I know, I’ve spoken to you on a couple occasions in the past actually and I really appreciate the candidness. I do have a couple of questions before we end this conference call and one of them is regarding the revenue opportunity in the air cargo space due to the deadline that’s coming up in January.

How many units are we talking about in terms of the pipeline for, just air cargo due to the deadline come January?

Glenn Bolduc

Mr. Clark, we haven’t spoken in specifics with regard to numbers. But it measures in the hundreds, okay. And, as I said in response to a question earlier, really don’t like giving away some of the competitive advantage of disadvantage that we might be playing at. We are a smaller company.

We are in a market that has much larger companies and I just think, it’s prudent for us to be a little bit more careful and in addition to that, we deal with sensitive and secure information SSI and we have to be very careful about some of the stuff that we talk about.

We don’t intend or mean to be pervasive at all on this. We try to share with you as much as we can. But at the end of the day, our job is to try to generate as higher possible revenue number as we can for you folks. But we don’t want to do anything that jeopardizes any of that either.

Unidentified Analyst

And just one last question. Congratulations on all your regulatory approvals, by the way. With the STAC approval in France, has that changed the market conditions for you folks out in Europe and is there – I am sure it has but…

Glenn Bolduc

Dramatically.

Unidentified Analyst

And what do we have to look forward to in terms of changes from the STAC approval?

Bill McGann

The acronym actually goes by STAC and I will try it again. It’s Service Technology Aviation Civil. Civil Aviation Service of France.

Glenn Bolduc

And it’s quite similar to the Transportation Security Administration. And these are folks who set the requirements for what equipment must do, how it must work et cetera, et cetera.

One of their strong desires was a non-radioactive source which we were able to provide to them. The STAC approval was something that I did not expect until the end of the year as well. And we received that – I think it was on October 1 actually and we were hinting at it while we were on the September 30 call.

Obviously, France and several other countries in the European Union as well as countries in Northern Africa as well as the Middle East adhere to STAC requirements.

Our guys have been quite busy in handling discussions with regard to the STAC approval. There is something that’s a little bit different about this business as well. The approvals that we’ve received and I’ve said this before are not easy. They are very, very difficult and there are many companies out there who said they are going to get them and then they don’t get them.

We were one of those companies, we told we’re going to get approvals three years ago and we didn’t get it. And we would go and tell customers who are on the verge of getting approval and then of course we don’t get it. What we’ve noticed with a lot of customers is, once you get the approval, then they start the process with you.

So for shareholders or potential investors or people who look at Implant Sciences and they sit and they say, well, I got the approval on October 1, why aren’t they reporting all of these sales. We have customers going through evaluation processes right now and that’s what a lot of our excitement is about.

A year ago, today, this company had no approvals. We had nothing a year ago, today. And today, we are cargo approved and qualified. We are STAC approved and qualified. We are passenger approved, we are not qualified yet and we have safety act designation for both of our products and actually we did have some safety act approval a year ago.

Okay, but, our cargo product was just recently approved, was just recently designated by TSA. So, I’m answering your question in a long roundabout way. But the STAC approval was a key catalyst for us this year. There are several other approvals that are out there that we are seeking.

But the big ones for us were STAC and also TSA obviously and we have those. TSA approval makes us good in Canada, Israel and certain other countries around the world including some countries in South America. The market that abides by TSA regulations is over 50% of the worldwide homeland security market. That’s why TSA was so important for us.

Unidentified Analyst

How does STAC approval compare to – in terms of market opportunity compare to TSA approval?

Glenn Bolduc

Bill, if you want to?

Bill McGann

So, it’s just for the country of France alone of course not as big. But the other part of the story is that, when you look at the European Union, they are also in the middle right now of establishing a certification requirement for explosives detection systems. And, their STAC approval is one of the sort of templates if you will for that.

And we expect that so-called ECAC, the European Civil Aviation Conference, which is the rest of the 17 European Union nations will be adopting a standard for certification that is similar. It won’t be identical, but it will be very similar to STAC.

So, again, having STAC being a template for driving what comes, if this was the original question what kind of impact does it have, when you look at all of Europe just from an EU perspective plus the North African nations that Glenn mentioned, and you add up all that requirement, it can equal and it can compete with the size of a TSA North America’s market. But that’s all growth. That is all new frontier.

Glenn Bolduc

That's not in that market number that we discussed earlier.

Unidentified Analyst

So the, $17 million to $24 million, does it include the opportunity – STAC?

Glenn Bolduc

It does include opportunities with STAC but…

Bill McGann

Not the rest of Europe.

Glenn Bolduc

Not the rest of Europe and I mean, it’s a small piece of it for right now.

Bill McGann


That $17 million to $24 million is what we believe is achievable between now and June 30.

Unidentified Analyst

And one actually last question, and that question is with the PR, I heard your comment earlier and that is, the company has to feel totally comfortable from a competitive standpoint of not really – too much information, but are you expecting in the process if there is no relief at the amount of units, with releasing the revenue be reasonable?

Because I know that the concern is, is giving competition an idea of per unit cost, but if there is no mention of the amount of units, then releasing the revenue be reasonable, because as an investor, I just want to get an idea of what the revenue flow is?

Glenn Bolduc

Mr. Clark, as we said before, we understand the concern and let us work on try and redress that and doing a better job with it for you. Certainly, as we get these approvals and we realize more success, it becomes a little bit easier for us to do that.

Bill McGann

Some of the big orders will be published by the government themselves. You will be able to see them before, at the same time we do.

Glenn Bolduc

You will have it right down to the penny.

Unidentified Analyst

Okay, so one last comment. Congratulations on all the good work. I really appreciate it and really appreciate the candidness. Thank you very much.

Glenn Bolduc

Thank you very much. We appreciate it.

Unidentified Analyst

All right, good-bye.

Operator

Okay, we have no further questions.

Glenn Bolduc

Okay, thank you very much folks,

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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