Implant Sciences' (IMSC) CEO Bill McGann on Q2 2016 Results - Earnings Call Transcript

| About: Implant Sciences (IMSCQ)

Implant Sciences Corp. (IMSC) Q2 Earnings Conference Call February 11, 2016 4:15 PM ET

Executives

William J. McGann - Chief Executive Officer

Roger P. Deschenes - Vice President of Finance and Chief Financial Officer

Darryl K. Jones - Executive Vice President of Sales and Marketing

Robert P. Liscouski - President

Todd A. Silvestri - Chief Operating Officer

Analysts

Mark Jordan - Noble Financial Group

Ronald Sanchez - Spencer Edwards, Inc.

Timothy Moore - TRM Properties LLC.

Operator

Good day, ladies and gentlemen, and welcome to Quarter 2 2016 Implant Sciences Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Mr. Bill McGann, Chief Executive Officer. Sir, you may begin.

William J. McGann

Thank you very much and thank you all for joining our call. I'm going to come back to you in a moment and give a few preview highlights of what we are going to be discussing today, but before we begin that I would like to ask Roger Deschenes, our Chief Financial Officer, to read our Safe Harbor statement please. Roger.

Roger P. Deschenes

Thank you, Bill. And thank you everybody for joining our call today. I'll begin first with our Safe Harbor disclosure.

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.

We would ask you to please consider the risk factors contained in the press release issued Today February 11, 2016 and stated during this conference call as well as the risk factors and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, which is on file with the Securities and Exchange Commission.

During our presentation this afternoon, we may discuss or disclose non-GAAP measures. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with U.S. GAAP. The presentation of non-GAAP information is intended instead to provide additional information to investors to facilitate the comparison of past and present results.

A replay of the conference call will be available for a limited time by dialing 855-859-2056 within the United States or 404-537-3406 outside the United States and entering the conference ID or pass code, which is 48962897.

Any forward-looking statements we make today are based on assumptions which we believe to be reasonable as of today, February 11, 2016. 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 February 11, 2016, today, we issued an earnings press release summarizing the Company’s financial performance for the three and six months ended December 31, 2015. Our quarterly report on Form 10-Q for the just concluded quarter will be filed on February 16 that's next Tuesday with the Securities and Exchange Commission.

And at this point, I'll turn the call back over to Bill for some initial remarks.

William J. McGann

Thanks Roger. So, Good afternoon everyone. Welcome to Implant Sciences Q2 2016 earnings call. We are going to present back to Roger in a couple of minutes to go into some of the details on our financial performance as we typically do. But similar to the last call I would like to tee up a few points for us to come back to and make sure we hit them appropriately in the discussion and even perhaps to stimulate some questions. So our growth continues without borrowing and that's going to be a very important theme that Roger will hit on many fronts as he is presenting the financial results.

Our supply chain challenges and our production ramp, which we now define pretty simply as our execution while still challenging continues to make great strides in improvements. We turned a huge corner in last quarter, we've really began to ship TSA late in our quarter and we will a lot more about that very exciting. And then we have a new metric that's on the horizon that I kind of personally like, with the last two quarters we are reproducing a revenue stream that surpasses most of any of the prior years. So we are going two for two on that now and you will hear the details of that in a moment.

Finally, we will discuss an update where we are on our strategic activities both in the area of our capital structure as we expect we are going to explore in December, as well as our growth segments and how we view our markets in terms of emerging demand, which we do not typically do or have done in the past. But I have Dr. Darryl Jones, with me today and we are going to provide little more color than we normally do, because we think it's a pretty exciting future.

So with that those are the points that we will be coming and touching on and emphasizing some of the financial connections to that from Roger's report. So back to you Roger.

Roger P. Deschenes

Thank you Bill. So let's begin with the review of the financial results. Revenues for the three months ended December 31, 2015 were $10,292,000 compared with $2,141,000 an increase of $8,151,000, or 381%. For the six months, our revenue increased $20,675,000 or just on the 516% to $24,685,000 which compares with $4,010,000 in the prior year period.

Sales of our QS-B220 desktop systems increased just on the 550% and 946% to $7,557,000 and $20,084,000 and in the three and six month ended December 31,2015 repetitively and this is due primarily to an significant increase in unit volume sold which increased 818% and just under 1,373% respectively in these periods.

We saw increased shipments to the European airports as a result ECAC mandate, the initial shipments that Bill spoke of to the TSA under our delivery order which occurred in December. And increased shipments into Asia, Africa and South America. Offsetting the unit volume increase was a decrease in the average sale price that we realized for our desktop units, which decreased approximately 29% in both the three and six month period.

Sales of our QS-H150 handheld units increased to 114% and under 35% to $1,725,000 and $2,412,000 in the three and six months period ended December 31, 2015 respectively, and this is due primarily to increased unit volumes that increased 121% in the three month period and just under 39% in the six month period compared to the prior comparable period. The increased unit volume is due again do increase shipments into Asia and Africa, our average unit sale price for the QS-H150, decreased approximately 3% in both the three and six month periods.

Sales of parts and supplies increased just on the 484% in the three month period and 637% in the six month period compared to the prior year period, this is primarily due to increased sales of consumables and other supplies that we shipped with the QS-B220 desktop units. And either the sales are supplies in these consumables should increase going forward as the B220 installed base increases.

Factors impacting our average unit sales prices include competitive market condition, volume pricing and our delivery order with the TSA. And as we mentioned in the prior quarter, our decision to offer early payment discounts to certain distributors to haste in collection of our cost receivable which discounts aggregated to $97,000 in the three month period and $307,000 in the six month period.

Our gross margin for the three months ended December 31, 2015 was $3,853,000 or 37.4% of revenues, which compared with $364,000 or 17.0% of revenues in the prior period. For the six month ended December 31, 2015 our gross margin was $10,110,000 or 41% of revenues which compares with $982,000 or $24.5% of revenues for our comparable prior year period.

The increase in gross margin as a percent of revenues in both the three and six month periods is due primarily to the increased manufacturing overhead absorption, this is due to increased volume that was flowing form to our factory here. And lower material cost again for the QS-B220 desktop and this is due to volume purchasing price reductions. And again, as mentioned previously this is partially offset by decrease in average unit sales prices on sales of both our B220 and H150 units.

Research and Development expense for three months ended December 31, 2015 was $901,000 which compares with $1,288,000 for the comparable prior year period. A decrease of $387,000 or 30%. For the six month period research and development expense was $1,984,000 which compares with $2,572,000 for the comparable prior year period. A decrease of $588,000 or just under 23%.

The decrease in both the current three to six months period is due primarily to efficiencies gained from the closure of our San Diego, California advanced technology office, which resulted in decreased payroll and occupancy costs. We also saw decreases in certification and testing fees, which we incurred in the prior year period and a decrease in our engineering consulting fees.

And these decreases are partially offset by increased travel expense incurred in the current period in support of the ECAC deliveries. We expect that our research and development expense will increase in the next six to 12 months due to ongoing product development and this is specific our portable exposures and our products are in the process of being developed.

Selling, general and administrative expenses for the three months ended December 31, 2015 were $3,718,000 it compares with the expense last year $3,195,000 an increase of $523,000 or 16.4%. For the six months period SG&A expenses were $7,256,000 which compares with $5,870,000 for the comparable prior year period, an increase of $1,386,000 or approximately 23.6%.

The increase in selling, general and administrative in the three months ended December 31, 2015 is due primarily due to increased consulting expenses and this is the issuance of shares of our common stock to two advisors. Our service is rendered the advisory consulting and services agreements. Increased payroll related benefits primarily due to the provision for incentive compensation, increased variable selling expenses due to the increase in revenue.

We also saw a charge of $76,000 recorded in the current period and this is a charge that is reported to the awarding by the court of plaintiff council fees and expenses resulting from the Miller litigation. Partially offset these increases are $725,000 of separation benefits that were recorded in the prior year period and these are benefits provided to our former CEO due to his resignation and a decrease in stock based compensation and employee stock options.

For the six months period, the increase in SG&A expense is due primarily to increased payroll and benefit costs, due to again the provision for incentive compensation, increased variable severing expenses resulting from our increased revenues, increased consulting expenses. Again, this is due to the issuance of shares to two of our advisors.

Increased travel expenses incurred to support the deployment of our QS-B220 systems being installed in Europe. And the charge I mentioned previously we recorded resulting from the Miller litigation. These are partially offset again by the separation benefits provided in the prior year period to our former CEO and decreases in stock based compensation on our employee stock options and decreased stock based compensation on non-affiliate warrants.

And we mentioned the litigation as we disclosed in our November earnings call. The Miller litigation, the complaint that was filed in the Suffolk Security Court here in the Massachusetts was dismissed with prejudice and the hearing was held in October during which the court heard all the arguments on the merits of our and the plaintiff’s Counselors request for a legal fees and expenses. On the December 17, 2015 the court ruled that the plaintiff Counsel was entitled to a fee of $70000 other cost with costs of approximately $6000.

For the three months ended December 31, 2015, other expenses which is interest was $2,547,000 as compared with other expense of $2,125,000 for the comparable prior year period, an increase of $422,000. And for the six months ended December 31, 2015 other expense was $5,94,000 million which compares with other expense of $4,159,000 an increase of $935,000. And the increase in both periods is due to increase interest expense on higher levels of borrowing under our credit facilities with the DMRJ and to a lesser extent the increase in the interest rate on the BAM notes which increases took effect on April 1, 2015.

As you may be aware, our notes with Montsant, DMRJ and BAM mature on March 31, 2016. We have commenced negotiations to extend the notes, I believe given past experience we will be successful in extending he maturity date of the notes. Given the improvement in our business, we have submitted our request for changes in the terms of conditions and that would reduce our borrowing cost. At this point, there is really not much more we can say, again other than the fact that we are in negotiations with the lenders.

Our net loss for three months ended December 31, 2015 was $3,313,000 which compares to a net loss of $6,244,000 for the comparable prior year period, a decrease of $2,391,000 or just under 47%. For the six months ended December 31, 2015, our net loss was $4,224,000 which compares with a net loss of $11,619,000 for the comparable prior year period, a decrease of $7, 395,000 or approximately 63.6%. And the decrease in a net loss for both periods is probably due to increased revenues and gross margin both of which approximately offset by an increases in operating expenses and the increase in interest expense.

Adjusted EBITDA for the three and six months ended December 31, 2015 were a loss of $122,000, and income of $2,17,000 which compares to a loss of $3,447,000 and $5,843,000 respectively in the comparable prior year periods. And these represent an increases or swings in our profitability of $3,569,000 and $7,860,000 in the three and six months periods respectively.

And also as of note and as Bill mentioned during the three or six months, we successfully self-funded the significant working capital required to deliver the record revenues being reported today. And with that Bill. I will turn the call back over to you.

William J. McGann

Thanks very much, Roger. Okay so to recap that in the construct of some of the highlights, we will try to like thread a couple of needles here to talk about the current results and really threading the needle to give you glimpse about the future, because we think it's pretty bright. I mean we did give guidance for the year back when we began our fiscal year and we said at that time we are not going to provide quarterly guidance, but I guess I would say we feel very confident about our full-year view at this point in time.

So with that we are really starting to be able to drive our definition of execution now that our TSA deliveries began in December and really those results that we achieved in the second quarter were only partly fulfilled by TSA deliveries. So the majority of TSA deliveries are still ahead of us this quarter and into the fourth quarter and we remain very confident of getting most if not all of those units delivered in our fiscal year so that's one reason why I think we could be fairly confident of having a very, very strong FY 2016.

In addition to that we also announced in December that we have won the Canadian TSA or CATSA Order and we will be delivering that order this quarter. So there is another nice tender which our teams successfully completed and won and as we indicated in the last earnings call the follow-on or second wave of European ECAC tenders are now out and we are starting to compete for those awards as we speak.

So some of those were framework agreements and we won in the first round and so we are in with the feel pretty good shape to continue our penetration around the world for installing explosive trade protection, in case anybody who hasn’t paying attention, the world has not gotten safer lately.

So switching for a second to connect some of our great sales performance to our financials for a moment, an interesting measure, I guess it's not a metric unless we look at every quarter. but we might is that we have driven a positive $8 million swing in our EBIT in the last 12 month from minus $6 million to plus $2 million. And sometimes get lost in the quarterly focus that everybody kind a really is manically focused on.

But I couldn’t be more pleased, I'm proud of the entire team for all of the concerned affords that go on in this company and making of this result. I mean it's an $8 million swing in EBIT in the positive direction is a big even for this company in the 12 month period. So I really want to congratulate my entire team, not just the executives but all the people throughout the company that make this happen.

Okay so switching to something a little new and different for our earnings call. Let's talk a little bit about the strategy initiatives in the business. I guess I’ll start with our announcement going back in December regarding exploring strategic alternatives for our capital structure. At that time, we announced that we will be working with Chardan and Noble Financial Capital Markets Group and we have been.

Together with the support of our Board Directors we begun to explore our options and they are been reviewed along four pretty straightforward lines of thinking. One is the base case, what can we do and what does it takes to stay the course and sustain our growth as we are. That’s we have to in view of everything else we look at, always have our base position. So that’s a quite bit of time and effort analysis have been sunk in and continue to think about that.

Another option is to explore the replacement of our debt some or all for equity and while this is not an new concept for our company, our profile now is changing dramatically and then we have actually created some equity that I think we can leverage at this point. And that kind of makes that option more real than it ever had been in the past, so that we continue to explore.

And the third one, while not obviously we've also been looking at how to accelerate our growth through some form of a capital raise in an acquisition of technology. I can assure you that while some like some Smirk or discount this as an approach there are some real opportunities to expand our channel and take on new complementary technologies to accelerate our growth. And in fact, without giving any detail we had somebody in this week talking to us about those very opportunities.

And we say what we want, we are trying to be very broad in far reaching in how do we explore creating a very stable growth platform's company. And of course the first option is to gain significant scale through an acquisition where we become part of growing entity to drive accelerated growth, and achieve the business in market synergies available to that combination.

So we are a couple of months into this, since we announced it, the holidays not a lot happen, but there is not a lot specific to report, but we remain very confident and that I want you all to know that we are very focused on getting our company into a very strong and sustainable position.

So with that I’ll switch now to the other part of the strategic activities of companies, which we typically don’t talk a lot about at all, and then it’s our strategic growth plans. We currently see the total available market today at around $850 million annually. That’s a number that we don’t typically report.

Now this consists of products, service, consumables, R&D funding really a rollup of the entire available market as we see it. The analysis we do comes from a couple sources of market research and those of same reports with our analysis on top suggest that this market is going to grow to about $1.5 billion over the next five years that’s a CAGR of about 12%, pretty good.

And if we break it down a little more specifically, we see based on aligning our strategy and our products, a focus on the Middle-East in terms of geography along with China aviation, even though the Chinese market is somewhat of our concern, the airport and the infrastructure expansion projects are still very, very vibrant.

On the vertical side of the view where we see the opportunity for greatest growth and emerging demand there is what we call our fueled operation segment, this is where we see a strong correlation and opportunity for growth based on our innovation our product roadmaps particular in the areas of drug detection.

So these opportunities will represent the out year growth in that three to five year horizon on the five year plan. So, in nutshell we see our growth continuing and our current markets globally through share gain with our existing products and variance of them. This growth will further enhanced by new technology innovations and products in the segment of our emerging demand. So we think there is, this is a really a focused vision and we are completely fixed on it. It's what we get up when our feet hit the ground everyday and we work on, we are also excited about the opportunity to deliver on it.

That’s about it, before I open up for questions I would like to thank my team for allowing me to provide the leadership of support for all their efforts, I mean that is important to me and I never overlook that. I also want to thank our lender platinum partners for their own wavering way bring support over the years and finally I want to thank all of you, our shareholders for the great support you provide the company with.

And with that I will open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Mark Jordan with Noble Essential. Your line is now open.

Mark Jordan

Yes thank you. Bill a question relative to TSA I think you mentioned that you expect to get preponderance of the order shipped in the current fiscal year, which was obviously just would imply you will be doing it over seven months. Will that shipment rate the linear through the quarters or will it vary?

William J. McGann

So approximately Mark. We work very closely with our partners in TSA, Todd Swearingen our program manager for TSA interacts with them on a daily basis as needed and we have a lot of latitude with them in fulfilling our delivery orders. So we are trying to manage the fulfillment of all of our major contracts and I think we are doing a very good job with it, we are very confident of that. And so I'm not going back off from what we said we are going to do. We think we can deliver all of it in the fiscal year. Might 100 unit slip, I don’t know, no one is that perfect, but we feel very, very confident we can deliver most of it if not all.

Mark Jordan

Okay. My second question, you mentioned that initial tenders for second wave of [V-check] (Ph) were out. When is the deadline for installation for that second wave for the smaller airports like you had the September of 2015 for larger ones. When is that second wave supposed to be installed?

William J. McGann

Well, it's a great question. And I could tell you we don’t have perfect clarity on that. The smaller airports are all the airports with less than 500,000 thousand passengers a year which is an indication that there are numerous and vary probably in their schedules. In fact, not all the tenders come out on some sort of a synchronized schedule its 28 countries. So the initial wave of follow-on tenders is out that we are competing and have visibility to that we expect to continue and I'm going to allow Darryl to elaborate a little bit.

Darryl K. Jones

I can just say that mandate allegedly is around March to 2017. But a lot of people don’t just mentioned they are actively doing the acquisitions now.

Mark Jordan

Okay, thank you.

William J. McGann

So if they stick to their guns it will be on or before then.

Mark Jordan

Okay. Thank you.

William J. McGann

Okay. Thank you Mark.

Operator

Thank you. And our next question comes from the line of [Jim Shimes] (Ph) a private investor. Your line is now open.

Unidentified Analyst

Thank you. The numbers clearly are looking a lot better. I guess the one number that kind a surprise me on the down side for Q2 was the gross profit margin percentage, 37.4% it's understandable that it's less than Q1 of 44%, because of the absorption issue, but I would have expected it to be relatively close to Q4 of 2015. Could somebody comment on that please?

Roger P. Deschenes

Yes this is Roger. Part of a decrease is a result as well as the TSA pricing, I mean their pricing is lower than anybody else's and it is a little bit more in terms of consumables that we shipped with the product. So the TSA margin will be lower than our normal distributor sale.

Unidentified Analyst

So what should we expect going forward over the next two to four quarters then in terms of gross profit margin?

Roger P. Deschenes

Yes at the last earnings call we said we gave ourselves gross margin range of between 42% and 44% so now that does factor in some of the TSA. So right now, I think year-to-date we are 41% and going out TSA will be part of the mix, there will be other sales that we expect to achieve a higher margin and Todd’s group has some cost out initiatives that we are looking to pull cost out of the system. So we still feel as Bill mentioned, in terms of the information we provided previously, we still feel the range for the year of margins between 40% to 44% is still on target.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Ron Sanchez with Spencer Edwards. Your line is now open.

Ronald Sanchez

Gentlemen congratulations on your super growth that you are showing. I just had just a simple question, what is the total number of shares now fully diluted in how large the gap that you are requesting or expecting to roll over?

William J. McGann

Well we currently have just under the 78,806,000 shares outstanding and in terms of the debt the principle of a debt is just doing it back of an envelope here. It's about $65 million, so if you got different tranches, some of the debt is just a secure promissory note that is not convertible the one piece of debt that's the note with Montsant Partners the principle and interest that total about $5.1 million our convertible at $0.08 so that would convert into about 63 million shares.

Ronald Sanchez

Okay, all right. Thank you very much.

William J. McGann

Okay you are welcome.

Operator

[Operator Instructions] And our next question comes from the line of [Howard Vein] (Ph), a private investor. Your line is now open.

Unidentified Analyst

Hi, everybody. I had a question regarding - actually I have two questions. Question regarding the TSA contract it seems to me this contract came out above the year and a half ago or something like that?

William J. McGann

Yes.

Unidentified Analyst

Was delayed for nine months, because of the protest or whatever?

William J. McGann

A little more than that but you are on the money.

Unidentified Analyst

The original contract was based on something like a $1billion dollars that the TSA had provided, wanted to provide and Implant was given an indefinite contract for I believe 16.7% of that that's a $167 million and I assume that the initial trail was for a quarter of that. And the numbers I'm hearing don’t seem to match that. So I'm wondering why is there a difference between the original contract and what your giving out today.

William J. McGann

There is no difference in the original contract, the contract was for 1,170 units to be delivered and that's what we will deliver and as I said will be delivering that within our fiscal year. You are correct in that originally we were hoping to have deliver that probably split across a couple of fiscal years, but then we got bogged down with a protest being lodged by others bidder and that took quite a while the usual process to vet that complaint and we survived that.

And then the TSA, the world kind of changed again when they had their GAO report and the security issues with their red teams, not making excuses, this is all stuff that they did that further delayed the initial deployment. So we sat more than a year waiting to deliver the first units, which we began in December, there is that absolutely no deviation from the award that we won and go ahead Roger.

Roger P. Deschenes

Yes, I just want to add, what you are referring to the IDIQ.

Unidentified Analyst

Yes, the IDIQ. So it seems like the pricing on that per unit seems to different than your original contract?

Roger P. Deschenes

That’s an IDIQ, it’s a purchase order then half of the IDIQ they issues delivery orders. So why expenditures can purchase up to $162 million of ETD from us, presently they have issued delivery order for 1170 systems.

Unidentified Analyst

I understand, did they renegotiate the pricing per unit?

Roger P. Deschenes

There is nothing renegotiated.

Unidentified Analyst

Okay, so it's the original contract?

Roger P. Deschenes

Yes. Think of it as a contract vehicle which they can continue to purchase from.

Unidentified Analyst

Related to that I understand that they came out with the next request for units I guess would be. I saw that somewhere, so I assume that’s also coming out for the next acquisition. Anyway the second part of my question is the stock price, I mean you got all this great stuff going on and all that’s happened is stock prices just gone straight down. Can you give me some insight into what is happening?

William J. McGann

You and a lot of people ask that question, we ask ourselves that. We don’t get a lot visibility, I mean I have asked Roger and I know he has worked hard and diligently to try to pull whatever data we can to see what's happening but we don’t get a lot of visibility of our shareholders and what they buy and what they sell. I mean, we can pull Noble reports, it gives you a thumbnail of a very small percentage of the people that - the non-objectionable ones. So the people that don’t subscribe to that we have no idea what they are doing. So I don’t know how to answer that in a very specific way. Roger do you?

Roger P. Deschenes

I in fact that the stock has been re-traded and we are as confused as you are, because you know we think the stock should be higher.

William J. McGann

It benefits no one for the price to be low.

Unidentified Analyst

Yes that’s certainly true.

William J. McGann

Benefits no on for the price to be low.

Unidentified Analyst

Yes, so I was going to say as far as the future goes, it’s my understanding that the next quarter you are not going to be borrowing anymore money, you are going to do it on your own.

William J. McGann

We borrowed money last quarter and we borrowed barely any of the quarter before like couple of $100,000. We really haven’t followed money this yet, so that’s a good thing.

Unidentified Analyst

You haven't borrowed money for your operations?

William J. McGann

Correct.

Roger P. Deschenes

That’s correct.

Unidentified Analyst

But I though you showed some interest expense this year, I mean this last quarter.

Roger P. Deschenes

Well I mean that’s a debt that we came into the year with. So still accruing interest on that.

William J. McGann

It's accruing.

Roger P. Deschenes

But we haven't borrowed any additional money this year. It will be definitely $200,000 right.

Unidentified Analyst

I see, okay so from now on you are going to try and do it on your own?

William J. McGann

We have been.

Unidentified Analyst

Okay great.

William J. McGann

We intend to do it.

Unidentified Analyst

Okay. thanks very much.

Roger P. Deschenes

Thank you.

William J. McGann

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of [indiscernible] a private investor. Your line is now open.

Unidentified Analyst

Hi guys congratulations. I just have a few questions. Do you guys have any immediate plans to market your company to money managers or any kind of micro cap type players that may look at a company like yours to invest in?

William J. McGann

Well, we do from an Investor Relations perspective a lot of presentations to brokerage houses that do retail stock investing, Bob Liscouski if you are on the call do you want to address that? Bob kind a leads our charge on that initiative, do you want to say few words about that Bob?

Robert P. Liscouski

Yes, I mean we are out in the market place all the time talking to folks just really giving the street a good understanding of what we are doing in the marketplace to growth that we've had. So as Bill mentioned in the beginning of the call. One of the opportunities or one of the efforts we are undergoing here is looking through the strategic initiative and trying to tell people that you know over the past year we've improved our operations and we've got quarter-over-quarter growth, we are doing all the right things of grabbing market share. We really are the leader in ETD space today.

Even this past quarter if you look at the chart is if you take the chart that maybe positive EBIT and those are all good things to be telling people. It goes back to the question of why the stock is doing poorly. We are performing, we are executing and now that we've got a couple of positive orders under our belt, I think we can have meaningful more meaningful conversations with people who would be looking to invest in the company, because as everybody knows , one quarter doesn’t necessarily pull the trend. So we need to continue to perform over quarter-over-quarter and that’s what we've been doing.

Unidentified Analyst

Okay. I mean I just was more curious in anything if there were any formal conversations with portfolio managers et cetera to kind of - I don’t how to say this other than the fact that predominantly the shares that are traded in your company probably on a daily basis from the most part is retail generated. And so you are getting those swings back and forth, I think if you get institutional involvement, I certainly you would probably scare a lot of use. And most of the information that kind a generated from Implant Science, which I personally think is a fantastic company and I congratulate you guys. But unfortunately one of the negatives is most for the information that is transferred from being that it is mostly retail traded stock is on these crazy websites, which is a lot of the time isn't based on even anything that resembles the truth. So that’s why I'm question if there were any kind of active plans and I understand while you say you put consecutive quarters and the growth is great, how you guys kind a go about doing that because I wasn’t exactly sure?

Roger P. Deschenes

No Chris and it’s a great point too, I think part of the issue is on the pink sheet, so the institutional investors have some limitations in terms of what they can buy.

Unidentified Analyst

Yes.

Roger P. Deschenes

And consequently to your point we get a lot of people out there, they chat on this board and it become a pay attention to them, it would Chris. So it's for the average investor if they pay attention to it, they get scared they look at that stuff, but the smarter investors that really look at the fundamentals understand what's going on.

Operator

Thank you. And our next question comes from the line of [Douglas Saar] (Ph) a private investor. Your line is now open.

Unidentified Analyst

Yes, gentlemen thanks from taking my call. If you could, could you tell me the production numbers that you are doing monthly on the bench top units and of those numbers is that all in-house or are you subcontracting some of that?

William J. McGann

Yes. I'm going to let Todd Silvestri our Chief Operating Officer speak to that but I'll start off by saying yes, we produce everything in-house on our B220 and the number is going to be consistent with the numbers that we alluded to in last earnings call in terms of capacity. I'm not sure if Todd is going to tell you an exact numbers, because we don’t kind of don’t let that to be known.

Todd A. Silvestri

No and we don’t want it to be known, but secondly, I would love to have a situation where it was nicely fluid that I can say this number with some small error band around that number. Unfortunately we are producing boxes if you will. So we got to collect a bunch, but I would go back to what Bill said you know we are able to, we have more than our capacity to meet the demand that Darryl is bring down which I appreciate very much. And well we don’t have an issue there.

William J. McGann

I'll give you one point of color, I mean going back a year ago when we were talking with investors about what we thought maybe our production capacity numbers would look like in terms of demand, we thought we would be very happy and proud to produce maybe a couple of hundred systems a month. And I told you last earnings call we doubled that.

Todd A. Silvestri

We are more than that.

Unidentified Analyst

You can live up to those the estimate from the last earnings call. Thank you very much.

Operator

Thank you. And our next question comes from the line of [Peter Banes] (Ph) a private investor. Your line is now open.

Unidentified Analyst

Thank you, good afternoon everyone, congratulation on the growth. And I want to echo the frustration of being a shareholders for few years and seeing the company with $24 million in sales in six months at the market cap of $34 million, but I know you are working hard to get on the major exchange and hopefully that market cap should be 10 times that. but I know you are working real hard at that. But my question is so this order will be shipped in by June to the TSA, so we know ECAC is very important and CATSA is very important, but really the elephant in the room is TSA. So I want to piggy back on the other gentlemen's question. So you had roughly $167 million IDIQ, you have a roughly $1170 I don’t know $40 million, $50 million order with TSA.

So there is a $100 million left on the IDIQ and you have got three programs that I see going in with TSA is that they obviously have more airports to refresh to the tune of I have read anywhere to up to 2,400 additional units. So my first question is has the tender for the next round of desktops even been looked at or is it out is it in the planning stages my first question. Second is TSA looking at the handheld when you are coming out the handheld and is that something that's going to be incorporated into their security systems and the third is the inline. Can you give us an update as I know they gave you $2 million to develop there but is it where is it in the process and is it a possibility in one year, three year, five years again with the handheld one year, three year, five years. And with the refresh one year, three year, five years, because I mean you have to do something after June to maintain your growth and where do we see that growth coming from.

William J. McGann

So maybe multiple voices will take that on, but I'll start for sure. So the TSA buying cycle is not now, but we know what it is and we have this ability to their five year deployment plans and they are actually just this week on the hill reviewing and marking up the budgets okay and there are line items and therefore various types of purchases. And I can tell you, even if you get side of them they are wrong. Okay, but it’s their process and they buy kind of the next buying cycle opportunity will be in our next fiscal year so that's beyond June to your point.

And we have a number of actions lined up in place to make sure we secure our seat at the table on future TSA purchase that’s why we work so hard to become the company that we are becoming. So you are right, it's got to be something that's sustained year-over-year and government contracts are lumpy, they are lumpy in number, they are lumpy in timing and that's the world we live in, but we feel pretty comfortable with where we are on that.

In terms of ECAC, there is a larger world of that going on, that's that second wave and that will continue and no really asks the question well where does ECAC go from there? And I think I tried to catalyze that thought on the last earnings call. I said well now just so you got a basically a security fence if you will, from an explosive detection perspective around Western and Central Europe, what about all of the countries in the Middle East and Easter Europe that's fly into those destinations.

If they don’t have equivalent measures of security, there is going to be a cost levy somehow in that system or either all of those bags and all of those people are going to have to get deplaned on an transfer sight to go through some equivalent measure of security or they are going up. And that's going to be a cost that’s going to get levied on somebody or they are going to push that further upstream to those countries and say why don’t you deploy equivalent measures and everybody is happy. So that's part of the strategy for growth around the world.

China is whole thing on to itself, more airports being built in China, I think all the countries combined and despite what the woes of the Squawk Box, CNBC market reports about the Chinese economy and the Chinese market. First of all there is no correlation between the economy and the market in China, but the one thing that we know is that the airport construction infrastructure construction market is very vibrant and that's where we play. So I think we look favorably upon that part of the world.

In terms of the handheld that's your second question, and I might take a breath and let others speak to that but I'll tee it up. We are going to complete our next handheld refresh in this fiscal year and launch it for a robust year next year and we have plans to do so. The TSA doesn’t buy handhelds, they never have. Beyond sort of the curiosity buy where they evaluate them in their labs, there is however for the first time a requirements document for handhelds for the TSA to look at.

Now that has no connection to whether they will build a test protocol to evaluate them and approve them on a qualified products list however, but there is a requirements document being socialized that we've seen for handhelds finally. And they may do that we don’t have that in our plan, okay we would love it to be in our plan, but that is not part of our growth plan so that would be additional opportunity.

Our handheld largely will play to the 2000 unit installed base that we have that we can back and quickly try to recapitalize and grow that because of the new capabilities into other areas like drug detection. Okay Darryl, do you want to add something to the handheld?

Darryl K. Jones

No I think you hit all the key points. We see that the drug market is largely untapped from our perspective. So probably on the order of $100 million marketplace that we can actually effectively go after. And I want to put another explanation point on the fact that ECAC is just as big as a TSA. So we won in Europe and so feel that we are going to continue to win in that sector as well.

William J. McGann

Yes and on your third question, and I’ll ask another voice to be heard from on that and Roger is going to talk about the new line, and all the great physic that’s going to go into that device. Actually is our inline program and that has been slow and starting, again I'm not going to make any excuses, it is what it is, we have to deal with the constraints of these contracting agencies at getting our statements of work approved et cetera and all the auditing around it. So we are ready to launch that. I'm going to let Todd Silvestri speak to that.

Todd A. Silvestri

I’ll take over right from there, so we are ready to launch that project. We are still waiting for some of those things that Bill had mentioned between, completion of the statement of work and the internal auditing approvals that they have got to go through for that to happen. And then there is just no way to accelerate that kind of stuff. But I would say though that the project in and of itself integrating our technology with other security technology the checkpoint is something is very exciting. It's a prevalent in the five year plans of TSA, it's gotten a lot of positive press if you will from the European Union. So we defiantly see it being part of our future, part of the future of the industry. And I wish I could accelerate some of the things that I don’t control unfortunately, but that’s we are ready to go.

Unidentified Analyst

Is that something you are doing on your own or is that something you are working with integrators on?

Todd A. Silvestri

So okay thank you for that tee up, but at this point in time we have left a lot of room to work with other integrators, okay we have not made any selection of different kind of company or different company to work with. And we have opportunities to do so both with complementary and technologies and other folks that are very prevalent in the checkpoint security space. So I guess to answer your question to say, we very fortunate that a number of different companies want to work with us in that space and we perhaps can be a little bit picky and choosy as to which one they choose at the right time.

William J. McGann

So I have a slightly passionate and somewhat different view from a lot people out there that talk about integration. Integration is real, integration is happening or will happen I should say, and there are definitive plans being put on the table to do so in TSA and other agencies. So we are right on the tip of the sphere there. and I think funding this in line initiative is just one example of many to come, many proposals like this which we are submitting for funding on right now in fact.

So I always wins however when people say you got to go with big large integrator guys, I mean completely the wrong approach in my opinion, my opinion okay. Because the core technology in the innovation is driven by the guys that produce the stuff that sits on the edge, okay that’s us, that’s are competitors, that’s us of the x-ray world and their competitors. These are the best people to drive innovation for their technologies to meet new threats as they come on board to do concurrent design or spiral development however you want to think about accelerating technology into the marketplace by any process. In my experience that’s always been the best.

So integration comes down to basically defining a set of rules whereby information from those very powerful edge devices send decision information to basically a work flow module where a decision maker takes events that are happening that they do not control and turn those events into a series of actions that define security. That’s integration.

And I could go on for hours on this if you would like, because I have actually done this in another part of my life with other technologies and it's going to happen. As I say, resistance is feudal we want to be on the front end of that but we wanted to be respectful because people that talk about “well we'll just give all this great technology to some big third-party company and they'll integrate it.” Good luck.

Unidentified Analyst

No that wasn’t the thought was, the thought was you agreed 100%, you are the innovators, you have the technology, the chosen the technology, the best technology, but they do have the financial backing and resources. So that’s why hopefully you will think of using them is for the financial part.

William J. McGann

well they might like the work flow module candidly, because they are very capable of doing that.

Unidentified Analyst

So it would be a good partnership. But again thank you for taking questions, wonderful six months, we are excited about the future, we all hope the share price catches up with your growth curve, but congratulations and thank you for all your, because we know you guys are doing what you need to do. Thank you.

Roger P. Deschenes

Thank you.

William J. McGann

Thank you.

Operator

And our next question comes from the line of Timothy Moore with TRM Properties. Your line is now open.

Timothy Moore

Good afternoon.

Roger P. Deschenes

Good afternoon hi.

William J. McGann

Hi.

Timothy Moore

Well my question is really quick, everybody is talking about the share price then of course the debt is the bigger issue. But I heard your interview with Dr. McGann in December talking about getting up listed and I know at one time NASDAQ was the board you guys were looking at. Do you guys have any comments on that?

William J. McGann

Okay, I don’t remember that but if you say it. We have looked at that in the past and think actually a little bit about in the last earnings call. Bob Liscouski if you are still with us you might want to say a few words about some of the things we learned at our recent financial conference that we presented at, if you want to give some color there, I would appreciate it.

Robert P. Liscouski

Yes sure. So it goes back to your previous question as well, the utmost thing that we could do to qualify for NASDAQ we still have a bit of a hell of a time before we can do that. Our debt-to-equity ratio I think is still high, I don’t want to sound like I really - I'm not the financial expert here, but in talking to the folks in the space that they have been advising us and we are looking at it, we know that we are on a path to do that. It would clearly be helpful for the stock to get up list, so even on the QX exchange I think we showed a positive movement for the company.

So again we are looking at all those options and we want to be in a better position for our investors and attract. We got great quality of investors who are looking to continue the path of getting great quality of investors, getting more of the institutional types into our stocks, so we can level out trading and be recognized for what we are doing here. Don’t have anything I can concrete articulate to you, the nature of the call doesn’t allow us to do that but I'll just tell you clearly that’s we are continually examining those options.

Timothy Moore

Great thank you. Yes. I have been an investor for a few years and just want to say keep up the good work thanks a lot.

William J. McGann

Thank you.

Operator

Thank you. And our next question comes from the line of [Kenneth Rebecci] (Ph) a private investor. Your line is now open.

Unidentified Analyst

Hello, thank you for taking my call. My phone cut in and out a couple of time, so I missed some of the financial. And I'm not going to make you go over all of that again. I suppose I can read it. As an individual investor a lot of my information comes through Yahoo and the internet and I do a lot of communicating on the message board and the two complaints or criticism that are constantly being lodged at the stock, are first of all the debt which you address, so I won't make you speak to that again. But secondly, if the stock is so cheap as I believe it is and as I have been accumulating it for many years now, why are no insiders purchasing the stock at a lousy $0.42 a share?

Roger P. Deschenes

Well Ken I can tell, this is Roger. From my perspective I do own 200,000 shares of the stock. I invested three years ago and paid a hefty AMT tax on it. So I can't speak for the other folks here, but everybody has their own personal financial situation and we do feel the stock is well. As a buyer its attractive price, but as a holder it's not at a good price.

Operator

Thank you. And our next question comes from the line of [Eric Acland] (Ph) a private investor. Your line is now open.

Unidentified Analyst

Thank you. Thank you Bill, Roger and Bob great quarter, great progress. I know you guys are working very hard in fundamentals and I think as an investor and I've been a long holding investor and whenever I buy, I think the fundamentals are good. The big development in the room is I think the conversion overhang on this five million, because every time I buy a share I've to figure out that half of that share is going to go to the debt holder and I know that you are negotiating with them. But I think anything you can do to freeze that or come to some sort of terms where we know and we can define what the conversion is going to be in the dilution to shareholders that would go a long way towards investors being able to calculate what their potential return is by holding on to the stock. I think that's probably the single most uncertainty at least in my mind in terms of a value described to being a shareholder in the company.

William J. McGann

I think that is one of the clearest statements that I have heard. I agree with you.

Operator

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Bill McGann for closing remarks.

William J. McGann

Okay. Well, thank you again all and listen we remain very committed as a team to drive growth in the company in the markets we serve and we are going to start serving some new markets like we've given you a slight view of. We are going to continue on our efforts strategically to keep this company going in the right direction, keep the turnaround going in the right directions and we are going to continue to try to address our capital structure as we promise we would.

I really do thank everyone for taking the time for their questions, for their listening and we are going to be here. We are going to be here every day trying to make this company everything that we know that it is and I thank you all for participating in the earnings call. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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