Irvine Sensors Corporation F3Q08 (Qtr End 06/29/08) Earnings Call Transcript

Irvine Sensors Corporation (IRSN)

F3Q08 Earnings Call

August 18, 2008 4:15 pm ET

Executives

John C. Carson - Chairman, President, Chief Executive Officer, Chief Operating Officer

John J. Stuart, Jr. - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Analysts

[William Smith - Choice Telecom]

Michael Potter - Monarch Capital Group

John [Vools]

Timothy [Secruski]

John [O’Graudnick]

Presentation

Operator

Welcome to the Irvine Sensors third quarter conference call and webcast. (Operator Instructions) At this time I’d like to turn the call over to John Stuart so that we may begin.

John J. Stuart, Jr.

I’m John Stuart, CFO of Irvine Sensors Corporation, and this is our webcast conference call in which we will discuss our results in the third quarter and first three quarters of fiscal 2008. We’ll follow our normal practice of having John Carson our CEO present an overview on the status of the company and I will follow with commentary on the financials. After our prepared remarks, we will open the call to a question and answer session.

As usual we’ll start by reminding you of the Safe Harbor language that you saw when registering at our website to listen to this call which states that during the course of this conference call we may make forward-looking statements regarding future events or the future performance of the company including Optics. Any such forward-looking statements will be based upon the information we currently have available. This information will likely change over time. By discussing our current perception of our market, the future performance of our company, and our products with you today we are not undertaking an obligation to provide updates in the future. Actual results may differ substantially from what we discuss today and no one should assume that a later date our comments from today would still be valid. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, in particular our 10K for the 52-week period ended September 30, 2007 that we filed in January and our 10Q for the 13-week period ended June 29, 2008 that we filed last week. These and other disclosure documents contain and identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements that we might make in this webcast.

Let’s now hear from John Carson.

John C. Carson

The revenue surge that we experienced at the end of the second quarter was not sustained in the third owing to the working capital shortage that has plagued us since the beginning of the year. The revenue shortfall was mitigated somewhat by margin improvements in Costa Mesa due to cost reductions and in Texas due to improved pricing. John will elaborate on this during his comments.

Our backlog continued to increase in both locations. We are seeing significant new development funding for our information security technology which supports our Eagles 1, 10 & 100 products and we saw actual Eagle product bookings during the period. Eagle 10 board sales with quantities for $90,000 each so there’s even relatively few deliveries can contribute usefully to our financial results.

We experienced a hiatus in orders for thermal imaging products during the quarter but we expect that to end shortly. On a related front, in June along with our partner ARA we achieved a field demonstration for one of our major prime contract customers. ARA makes a miniature unmanned airplane that can carry our thermal invisible vision systems. As a consequence of this very successful demonstration of the new important capability, we may see a revenue stream from this product soon. This product represents a real improvement in the safety of our soldiers in combat situations.

Cliff Pike retired from our Board of Directors whereas Audits Committee Chairman he has provided us with years of stalwart expert service. He was replaced by Jack Johnson who because of his years of leadership positions at Odetics brings a unique combination of financial and operational skills to our Board.

At the time of the stockholders’ meeting family medical emergencies befell our Chairman, Mel Brashears, leading to his unexpected and untimely retirement. I have replaced Mel as Chairman.

Our backlog is at a near record high and is expected to grow substantially during this quarter. We continue to cut costs on the way to sustaining profitable operations and positive cash generation throughout the coming fiscal year. We will achieve these goals at our present revenue levels laying the groundwork for dramatic further improvement when we adequately finance our working capital which will have a very positive upward effect on our revenues.

With that I’ll turn it back over to John.

John J. Stuart, Jr.

The working capital constraints that John just spoke about and that we talked about in our last several webcasts and disclosure documents produced some direct effects to our top line for our most recent quarter, the 13 weeks ended June 29, 2008. Total revenues for that quarter were about $8.6 million down from the approximately $11.1 million of the immediately preceding quarter and the $9.6 million of the third quarter of last year. This decline was felt in both contract revenue and product sales and at both our California and Texas operations. The relationship of these effects to working capital is straight forward. The pace at which we receive support from our suppliers and service providers needed to generate revenues is gated by the pace at which we can pay for those goods and services. This creates a chicken-and-egg challenge when you must balance the overall cash flow requirements of the enterprise without a meaningful surplus of working capital.

Our working capital remained negative for the second quarter in a row at June 29, 2008 largely as a result of the reclassification of the $2 million debt owed by Opted to its former owner which is technically due next February. Even if that payment isn’t substantially delayed by the subordination agreement between the debt holder and our senior lenders, our effective working capital remains limited. As we have comment on numerous occasions, the persistence of this condition will continue to limit our ability to grow our revenues to the levels necessary to fully absorb the fixed costs of a publicly-reporting government contractor. To ensure our viability we have to correct this imbalance. We have disclosed the engagement of a new investment banker to address this requirement and we are vigorously exploring alternatives. Obviously we can’t go into any details of this process until we have a definitive solution but we will not hesitate a moment to advise stockholders when that happens.

Now let’s return to the numbers, in particular the bottom line. Our net loss for this year’s third fiscal quarter was about $2.6 million an approximate $2.1 million reduction from the $4.7 million net loss in the third quarter of fiscal 2007. For the 39 weeks ended June 29, 2008 our net loss was about $9.8 million an approximately $6.3 million reduction from the $16.1 million net loss throughout the first three quarters last year. These comparisons raise the obvious question. How did we achieve this scalable improvement on lower revenues? The 39 week comparisons are distorted by the fact that last year we had a non-recurring $4.4 million debt extinguishment charge derived from the December 2006 refinancing of our debt incurred for the Optex acquisition and no such comparable expense was incurred in the 39-week period this year. Taking this factor out of the comparison points out that the fiscal 2008 39-week improvements are the result of improvements in the third quarter which ended just six weeks ago.

Now turning our attention to that third quarter, the first of most of these improvements did immediately occur. Despite the low revenues the absolute dollars of gross profit increased nearly $1.7 million in the fiscal 2008 third quarter versus the comparable period last year of which about $1.6 million was due to the increased gross margin on product sales. Roughly half of that product gross margin improvement was due to the net effect of non-recurring adjustment and application of reserves for anticipated losses on Optex products largely due to the successful renegotiation of various Optex contracts that we’ve alluded to previously. But those renegotiations did not just produce one time affects they also re-priced future Optex deliveries which can be a recurring source of possible future gross margin improvements. So we are making encouraging progress towards the kind of gross margins needed for sustainable operational profit.

We were also encouraged by the actions of our customers during this period. In our second quarter 10Q we reported that we had total funded backlog of approximately $43.1 million at March 30, 2008. In our third quarter 10Q filed last week we reported that we had total funded backlog of approximately $52.8 million at June 29, 2008 nearly $10 million higher than just 90 days earlier despite having realized total revenues of approximately $8.6 million in the interim. This means we had over $18 million of new bookings during the third quarter, more than twice the amount needed to replace fulfilled backlog. These new orders despite our highly visible working capital limitations suggest to us that there may be even greater potential demand that we can tap if we can improve our liquidity.

Finally, I’d like to call your attention to the various references in the 10Q related to our ongoing NASDAQ interactions regarding the bid price of our common stock. As we announced in the live webcast immediately following our stockholders’ meeting on July 30, all matters placed before stockholders were approved at that meeting including the authority to implement a reverse stock split if required to maintain our NASDAQ listing. We reported in the 10Q that we had conveyed that outcome to a NASDAQ listing qualifications hearing panel the next day and that informally we got a favorable response to the stockholder action. Historically such panels give a formal response in about 30 days after the hearing so we should be getting such a formal response shortly. We will try to eliminate the uncertainty around this circumstance as soon as possible.

That’s it for our prepared remarks so let’s break now for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from William Smith - Choice Telecom.

William Smith - Choice Telecom

I’d like to know a little bit more about the Tim Looney things that are going on that the 10Q talked about.

John J. Stuart, Jr.

Okay. Do you have something specific?

William Smith - Choice Telecom

Not only the price per share concern but also the stockholder equity concern that was alluded to or not alluded to but that was talked about in the 10Q with regards to the issues with Tim Looney and the $2 million.

John J. Stuart, Jr.

In the constellation of issues revolving around the Optex acquisition, what we paid for it initially, the possible impairment of goodwill associated with that, and the dispute we’re having with Tim Looney regarding his allegations that we did not register his shares promptly, and our allegations that may have misrepresented financial information. We’re not really allowed to comment on the litigation while it’s in progress. The part related to the impairment though is a very open issue and it relates to the fact that we paid a certain price back then based on our expectations of future performance and it was a higher price than the book value of the enterprise so the difference between the price we paid and the book value of the enterprise shows up on the balance sheet as goodwill. We have to periodically re-evaluate that and we have to do it with great formality once a year. We are in the middle of that process now. It’s to be effective as of the first day of the fourth fiscal quarter so the exercise is ongoing. And the outcome of that would have a very significant effect if we had to take an impairment charge. Regardless of what it may have been worth then, we think it’s worth more now because we’ve made a lot of improvements to it. The backlog’s way up; we’ve professionalized the infrastructure and management setup; we’ve got them ISO qualified on their first pass; so we’re hopeful that there won’t be an impairment charge when this analysis gets completed. But until it is, it’s an open issue and if we have to take a charge obviously it will impact financials and hit the equity directly.

William Smith - Choice Telecom

I don’t know if you can answer this or not, but do I understand that part of this litigation with regards to the $2 million, is it possible that we’d still have to pay that even though I’m sure that’s part of the litigation?

John J. Stuart, Jr.

Well as you say the outcome of that is probably tangled up in the outcome of that overall dispute. So I don’t think anybody knows the answer to that question right now.

William Smith - Choice Telecom

The next thing I’d like to ask is on the $52.8 million, a substantial portion of that being seen in the next 12 months. Is that with the way the working capital is today?

John J. Stuart, Jr.

Substantial is one of those words of art that has a certain amount of fluidity to it. Even with the working capital limitations of today we can meet that goal. If we can break that hobbling effect of those working capital limitations, we’ll be at the upper end of that kind of spectrum. I can’t quantify that for you today but I can say that they have slowly been inching their way forward in the last quarter despite those limitations. So they would probably continue to do that without help, but we would like to speed up that pace.

William Smith - Choice Telecom

The product sales themselves that are coming out of California, Costa Mesa I guess, they increases slightly quarter-over-quarter?

John J. Stuart, Jr.

No, I think they decreased slightly.

William Smith - Choice Telecom

Okay, that’s right. They decreased slightly quarter-over-quarter. The reason for that is?

John J. Stuart, Jr.

John made allusion to that. There orders for the general imaging products come in bursts and we didn’t get one of those bursts in that third quarter.

John C. Carson

We finished the deliveries against a $2.5 million order in April and so for most of the quarter we were waiting for the next order and there was just a time delay in that.

William Smith - Choice Telecom

On the last stockholders’ meeting call there was a comment made about inventory and I thought you were saying 500,000 and we were talking about the thermal cameras I believe. I really didn’t understand what it meant. I don’t know if you even remember that but when it comes to the inventory that we have on hand of those cameras, how do we stand today?

John J. Stuart, Jr.

I’m sorry; I don’t remember that particular comment. I remember John making some comment I think about the fact that we could ramp up fairly substantially over our current rate but that’s all I recall.

William Smith - Choice Telecom

Where are the Eagles being manufactured at?

John J. Stuart, Jr.

The Eagle products are board level products. We buy all the parts and do the final testing here.

John C. Carson

The final [inaudible] testing but there are specialty shops that put the parts onto the circuit boards so we outsource that piece.

John J. Stuart, Jr.

But it’s all done locally here.

William Smith - Choice Telecom

So as far as production capabilities, what are we running at in Costa Mesa?

John C. Carson

On the Eagle products it’s just onesies, twosies per month right now but that will hopefully change. They’re expensive products though so as I said in my remarks in small quantities they’re about $90,000 a copy and tens of thousands even in very large quantities. So you don’t have to sell huge quantities to generate a fair amount of revenue.

William Smith - Choice Telecom

I guess what I’m trying to get to is, as far as output coming out of Costa Mesa, how much more could we increase that in those facilities?

John C. Carson

Oh. A very large amount. Thermal cameras we’re capable of doing right, our last deliveries were between 50 and 100 a month. We were offsetting between those numbers and the jobs we’ve been bidding run around 100 units a month and these units depending on the orders range from $5,000 to $10,000 apiece. So that’s where we are right now. If it got to be more than 200 or 300 a month, we would probably start building them in Texas. Those are the thermal imaging cameras. In terms of the stacked memory, those kinds of parts which we’re now running at about $2 million a year we could multiply that by 10 or 20 or 30 before we exceed the capacity or require new equipment. So we’ve got a very large upsize capacity in that area. I think that pretty much covers Costa Mesa.

William Smith - Choice Telecom

The partner ARA in the drones, can you tell us any more about that?

John J. Stuart, Jr.

ARA the company or the -

William Smith - Choice Telecom

No, the partnership.

John J. Stuart, Jr.

It’s very useful I think to both of us. Because of Optex and because of members of our senior management team, we have very strong connections to the armored vehicle community. In this country it’s dominated by General Dynamics Land Systems VAE and Textron. So when this little bird with our vision systems on it gets sold into those communities we are the private contractor. With ARA’s expertise and good connections with the Green Army, with the soldiers, so when they’re bought for soldiers’ direct use, they carry them and launch them themselves, then ARA is prime. Any other markets we identify we’ll sort out as we go along. We think this is going to turn out to be a very good relationship for both parties.

Operator

Our next question comes from Michael Potter - Monarch Capital Group.

Michael Potter - Monarch Capital Group

You may have gone over this but it took me a while to dial in. Where are we on the current capital raise and what are our alternatives and is the company looking to perhaps joint venture or even sell the company in order to maximize shareholder value?

John J. Stuart, Jr.

Yes, you missed some of our prepared remarks on that. The most we’ve said publicly is that we’ve engaged a new investment banker and we just said we’re pursuing a bunch of alternatives diligently. We’re really not allowed to be more specific than that at this point in time. On the second part of your question, that one came up at the stockholders’ meeting and obviously the Board will look at anything that makes sense from a stockholder valuation standpoint but again that’s not something we can comment on if we were in high gear on topics like that. At the moment that’s as far as we can go.

Michael Potter - Monarch Capital Group

Who is the new banker that you guys engaged?

John J. Stuart, Jr.

We have not disclosed that publicly at this point.

Michael Potter - Monarch Capital Group

As part of their engagement have they been assigned to look for strategic partners and/or companies to acquire us?

John J. Stuart, Jr.

That’s not their primary focus. As we’ve commented on in prior webcasts, we already have some strategic conversations underway with a variety of entities on our own so we may get them to help us in that regard but it’s not their primary focus.

John C. Carson

The tendency has been for potential acquirers ranging from private equity firms to major Department of Defense prime contractors is to directly contact us.

Michael Potter - Monarch Capital Group

So we have been contacted directly?

John C. Carson

I can’t comment on any of that but what I said is true.

John J. Stuart, Jr.

Historically we’ve had comments like that for decades. In fact if you were around, we were actually involved in a very high profile strategic arrangement with IBM back in the 90s. It’s something that we are always open to and people are not reluctant to approach us if they have something interesting to say.

John C. Carson

The contacts generally work directly rather than through an intermediate which if we were actually actively putting the company up for sale we would perhaps secure an investment banker just for that purpose.

Michael Potter - Monarch Capital Group

As I listen, the equity value for the investors has been wiped out for the most part. So I would hope that the Board does its fiduciary obligation and look at all tracks. We’ve been trying to raise capital for not months but for quarters unsuccessfully. So you guys are great engineers and obviously you’ve developed things that the defense industry certainly wants but we have not been successful as an operating company. So if the alternative to unlock the shareholder is to sell the company, I hope you guys would seriously look to do that and not wait for someone to knock on our door. Our door might be nailed shut by then.

John J. Stuart, Jr.

Correct. Again, we can’t go beyond what we said before. The Board is certainly considering all possible reasonable courses of action.

Michael Potter - Monarch Capital Group

Hopefully that will be successful.

Operator

Our next question comes from John [Vools].

John [Vools]

Mr. Carson, now that you’re Chairman, have you considered maybe hiring a headhunter to maybe get a new CEO to run the day-to-day operations in order to restore the confidence in the company?

John C. Carson

We have several candidates for that. We’re not planning to add that cost in the near future until we’ve assured ourselves of profitable cash-generating operations.

John [Vools]

That’s before you hire the CEO or should you get a CEO to make the operations profitable?

John C. Carson

I believe we know what we have to do to make the operations possible and we have for probably the first time in our history a very clear and clean opportunity to do that.

John [Vools]

I hope it’s clear because you stated earlier in the year that we were going to do $50+ million in revenue; you reiterated that in another conference call; then you went down into the low $40s; now it doesn’t look like we’re going to do that, so to me it shows that there’s something out of touch here added on to the fact that in the last conference call you stated that after a year and a half you realized that operations in Optex weren’t going as planned. A year and a half before you realized that operation ongoing is planned. Don’t you think that’s sort of stretched out?

John C. Carson

It wasn’t so much that the operations weren’t going as planned as that the margins weren’t as prevented. That took a while to penetrate. It was very artfully done. To go back to your earlier statement about the revenue, as the previous questioner pointed out we were in this financing mode since Q1 and it took a little bit longer. Had we had any idea that we were going to be working capital strapped for that whole period that we were, I certainly wouldn’t have been so bullish about $50 million worth of revenue because that was the problem. And unfortunately it took substantially longer than we had thought it would to correct that condition.

John [Vools]

Yes, I agree but it seems that everything takes a little longer and there are too many, as I said before on another webcast, there are just too many missteps and it’s maybe because you can’t devote all the time to being a CEO that’s needed and your expertise is in product rather than running the day-to-day operations. Am I right or wrong on that?

John C. Carson

I don’t run the day-to-day operation. That’s one of the areas the company has improved so dramatically over the last couple of years. The technology side of the company which I formally ran is now run by Volkan Ozguz. He’s extremely strong and requires almost no attention. The product side both here and at Optex is run by Pete Kenefick who only took it over about this time last year which is when we really got our arms around the difficulties that we faced in Texas. And through his efforts and the new team at Optex as well as the old team at Optex because all that we really did was change out the Looney family as the management of Optex. The present group is extremely good. So my day-to-day duties are mostly keeping an eye on John Stuart.

John [Vools]

You’ve got a lot to watch over there. The thing I’m saying is a lot of times he paints a rosy picture but I don’t see it as that. He just painted a rosy picture of the inventory increasing but that’s more of something we can’t produce. That’s more problems for us believe it or not with all this inventory. We can’t produce what we have. We can’t generate it.

John C. Carson

I didn’t hear him say anything rosy about increasing inventory. I thought he was trying to respond -

John [Vools]

I mean backlog, not inventory. I’m sorry. The backlog. Painted a rosy picture and it is a rosy picture if we can get it out the door but if we can’t get it out the door, then guess what? Like you said, now the customers are starting to call us and I have a feeling they’re calling to say “When am I going to get my product?”

John C. Carson

You bet they do and they’re not so much now as they were a year ago or even six months ago. We’ve had a long hard drill working through that with them. They have been extremely helpful in terms of making timely payments, helping us work with our suppliers because they carry a lot of weight. They’ve been working with us and again I have to give a lot of credit to Pete and to [Danny Schuning] who has taken over the Optex operations and the controller back there [Karen Hawkins]. Very, very strong group that is dealing with the very problems you’re talking about but what was really good about the backlog increasing in the last three months or four months was that the revenue levels at Optex are going up and their backlog is going up faster than their burning it off and the faster they burn it off, the faster it goes up, which is why John I think was being bullish looking forward that as we get our working capital stress overcome, which I believe we will very shortly, we should see a positive surge both in revenue and backlog pretty much across the company but particularly at Optex.

John Vools]

But if the revenue in Optex is going up, I thought it was a mixture of to the last report $4+ million at Optex and $4+ million at Costa Mesa. Am I right or wrong?

John C. Carson

Yes, we had a big month in March but taken as an average over the year, March excepted, Optex’s revenues have been going up and they’re -

John [Vools]

But it didn’t go up until the last quarter.

John C. Carson

Yes, you’re right.

John [Vools]

The thing I don’t understand is if we’re cutting costs, and every quarter you say we’re cutting costs and whatever and this means it’s a saving on cash, then where is this cash going? Why isn’t this cash going to generate more revenue? Why do we have $8 plus million this quarter and last quarter we had $11+ million but if we’re saving cash, where is the cash savings going to? How come we’re not generating more revenue if we’re saving cash for inventories and products, whatever? Where’s it going?

John C. Carson

The backlog is ramping faster than we can keep up with.

John [Vools]

But what about the sales?

John C. Carson

I know. The backlog is rising faster than we can keep up with so we got behind on our suppliers. Now we were way behind on our suppliers at the beginning of the year so it’s been a catch up ever since then and we didn’t have the cash and even with the cost cutting that we’re doing it’s helping us catch up but not very fast. We need a surge to quote an expression. The short answer to the question is the cash that we’re saving on expenses is not enough. We need more.

John [Vools]

Yes, but if you’re saving cash quarter by quarter and you are saving cash, then why isn’t it reflected in higher revenue? Like why didn’t we do $12 million this quarter as opposed to $11 million last quarter if we’re saving more cash every quarter?

John C. Carson

We didn’t say we were saving cash. We said we had cut expenses. I think John mentioned that the stockholders’ meeting that we’ve cut about $1 million of labor and labor related expenses over the last six months or so. But that’s not enough. We’ve stretched out our creditors to the point where they’re squeaking and the small incremental gains you make by that just don’t break through that kind of a problem. We need an infusion of some size and we’ve said that for several quarters now.

John [Vools]

All right gentlemen. I hope everything works out but like I said you can see that there’s a lack of confidence in the investors and like I said before mentioning a $50 million backlog a couple years ago or we came up with a new product we’d drive the stock up but now people want to see results and I’ll tell you the truth, I hope it’s not too late. And like I said, if it means having someone, a new CEO, coming in and changing everything, if that’s going to do it, I hope you’ll keep your eyes open for that. But I wish you the best.

Operator

Our next question comes from Timothy [Secruski].

Timothy [Secruski]

I’d like to start with a couple of questions on the Eagle products. John, as you probably know watching the news, the Soviet incursion into Georgia was preceded by cyber attacks on the country’s infrastructure. That was on Fox News and it only goes to prove that all countries and all commercial entities of any size need protection on the cyber front. So I’m wondering what you’re doing to get that product out there. I know you mentioned that there have been 12 units of Eagle 1s sold and I wonder if you can confirm, were those sold to larger companies who might have an interest in beta testing it and seeing its capability and then perhaps jumping in on a larger fashion?

John C. Carson

No, not yet. Those were sold to agencies in the Department of Defense, primarily missile defense agencies. They’re the first people that have realized the importance of this dating back two or three years when we first started getting development dollars for this thing. The reason why is they were early where talking about putting a missile base in Poland and other places in NATO in which in case we can’t firewall those areas so there’s an obvious path for cyber attacks that will exist. So they got on it early and that’s why the products got developed before there was a real sensitivity to the need on the commercial side which is really starting to happen now. We will start marketing that community very shortly. I have to confess we’ve been focusing our marketing efforts on DOD to try to secure that front first and then go into the commercial side.

Timothy [Secruski]

Can you share with us some ideas and thoughts you may have already, and I assume you do have them already, on how you’re going to market this?

John C. Carson

There are two entry points for us. One is at the board level, in the telecom business they’re called blades, and they’re add-ins. Routers and associated units have open slots for this kind of functionality so the customers for that are people like Cisco and Juniper and the other Internet center and core Internet and enterprise level suppliers. The other is to make a box that fits between the routers and the enterprise tube to provide the protection. We will probably be entering at the blade level and sell to people that make boxes.

Timothy [Secruski]

This technology in my opinion is ripe at this time for marketing. There’s a need out there without a doubt and the question is how exactly you’re going to bring it to market and how effectively you can do that to beat the other bigger players that might develop this technology.

John C. Carson

I think it’s going to be a critical element of this strategy which is our IP. I don’t believe there’s any way to do this problem without violating our IP. That doesn’t help a lot when you’re selling to the military but it sure is a wonderful thing when you’re doing it on the commercial side. Now that the commercial need has been recognized finally I think we’ll be able to use that for leverage both getting in the market ourselves and getting return for our shareholders from other people’s entry into the market.

Timothy [Secruski]

Can we expect to see more in the way of news releases on this line of products?

John C. Carson

Yes. They’re going to be somewhat vague because the users in the government are very sensitive. As we go into the public arena they should be a lot more easily generated. So in the near term we’ll have press release. Whenever we get a contract of material value, bigger than $1 million or $2 million, we’ll put a press release out on it; it’s just not going to be terribly informative about what it is exactly that we’re selling or doing.

Timothy [Secruski]

My next question has to do with the UAV that you’re working with ARA on. I believe they call it the Nighthawk?

John C. Carson

Yes.

Timothy [Secruski]

There are many micro UAVs and many UAVs out there. What makes your product unique?

John C. Carson

I’m hesitating because I actually started to show this at the shareholders’ meeting. We have a video, the demonstration I referred to, and it was pulled at the last minute because it was considered to be competition sensitive by our customers and I could see that it is the uniqueness of what we’re offering that we’re trying to avoid going public with until we’ve actually got a large contract for it. So I haven’t figure out a way to answer your question without giving away the store. But I will say this. The Nighthawk was developed by ARA with the property that it could be folded up without disassembly and put into something that looks like a mailing tube for carrying around. That’s why they did it. We were able to determine that that gave it a unique potential capability that would be a very savings feature for the soldier and we had to demonstrate that that was the case. We did. That’s about as far as I can go to answer your question but it is a really amazing thing and it’s truly one of a kind.

Timothy [Secruski]

I would say certainly from my experience anything that’s containerized for military use and possibly being used by an 18-, 19-, 20-year-old as the operator on those armored personnel carriers or tanks or whatever, you want something that you don’t have to assemble and all of a sudden you’re losing parts or you’re breaking them or there’s not enough room to put it together. So if it is in fact containerized and sealed up and can be used, that would be a good thing. We’ve seen some other products.

I’m thinking about your PMTV which you know I’ve seen and I’ve held and I’ve used and it’s a great product. And the government paid to develop it but yet when it came time then some of the bigger players got in on the contracts. At least at this point I know you’re vying for other contracts but hopefully this is not going to be the same situation where you’re developing this under a government contract only to have somebody else sweep in if you will, no pun intended, and take away the business.

John C. Carson

We have a major competitor in that area Insight Technologies in New Hampshire and they beat us on the first one. The next one’s coming shortly. We’ll see how we do. We haven’t been taken out of that arena at all. We were just unready for that first big competition to make sure that we had everything exactly in place to win that. We were not beaten on price and we were not beaten on basic performance but there were some things that show up when the first time you put a bunch of them out in the field that, like having bugs in a piece of software. You find out about them only after you’ve fielded it and we did on that one and we fixed those things. We don’t think we’re going to be easy to beat from here on in because we had them on price and performance.

Timothy [Secruski]

On that subject, talking with a couple of people who used your product or your competitor’s product but it was a miniature thermal viewer. They commented to me that it was great except there was an issue over the range and the clarity at the longer distances and I guess you might respond that there are different applications; you have bigger viewers that are heavier and maybe on a tripod or whatever if you’re in the defense. But I’m wondering, has there been any thought or any work on fusing a magnifying optic on the front of that that comes with a kit that you just snap it on and maybe gives you instead of two power magnification maybe a five power or six power or ten power?

John C. Carson

The answer is yes and we are selling it that way now. There are two or three ways you can improve the range compared to cooled systems which I believe is what your friends were comparing it with. The soldiers have two kinds of capabilities. They can use cooled thermal imaging which is always much longer range than uncooled but cooled requires a lot more batteries, it’s heavier, it’s a lot harder to maintain. So there’s a trade. The world is headed towards uncooled but when you really have a long range need, you’ve got to have some other way of getting there. So what’s happening is on the uncooled side is you’re going to larger format arrays which allow an optical zoom of the type you’re talking about to happen without too much of a loss of field of view. I know that was kind of a technical answer to your question but your question was kind of techy, too. Bottom line is, yes, we can put optical zoom in and we are where the requirements allow us to. There will be situations where we cannot beat a cooled system however.

Timothy [Secruski]

Yes, I would understand. There are gives and takes when you talk about weight and power consumption. That’s all I have.

Operator

Our next question comes from John [O’Graudnick].

John [O’Graudnick]

Can you maybe talk about, without getting into specifics, maybe the dollar size of some of the procurements you’re bidding on out there and when you hope to see the awards being given out on some of these bids?

John C. Carson

That’s a good question. In the past up until maybe six or eight months ago a large bid for us would be $5 million or $6 million. Right now we’re bidding contracts anywhere from $15 million to the one that’s pending most soon for us is around $65 million over a couple year period. Awards are scheduled sometime this fall for some of these larger ones. They are for people as you know that include the Marine Corps which are notoriously less predictable in their procurement scheduling as say some others. I hope I haven’t offended too many marines with that comment. But at any rate, this fall.

John [O’Graudnick]

Can you comment at all, I know it’s pretty classified, on the 3D technology with the company that’s giving you about $4 million up to date to develop something in the 3D technology? Are you able to comment on how that’s going?

John C. Carson

Actually that one contract has now reached over $8 million. The most recent addition to it which we got a month or two ago was $3.8 million. That is to make computers and cubes and we’ll take a whole circuit board worth of electronics and miniaturize it to one or two half-inch square on the side of the cubes. You’ve probably seen some earlier versions of that at shareholder meetings and the like. This one is for real programs. So in this case we have partners that range from Raytheon to Lockheed that are telling us what they want us to miniaturize and then showing us a production path into their programs. And that’s been the purpose of that program from the beginning is to get military products made much smaller, lighter and more power through 3D electronics.

John [O’Graudnick]

Maybe I’m confused. I thought there was one going on with a commercial company, not a government.

John C. Carson

Different one. Same size but different one. Now I can understand. When you said it was classified, this commercial company is secret but classified you usually use with the military versions. Anyway, this commercial company is not yet allowing us to reveal who they are and any detail of what we’re doing for them but it’s getting very close to production; it’s been a very, very successful program; it’s also taught us technologies that we would not have probably ever learned had we not had this relationship. As they say they’ll announce it when they get ready and you’ll probably see advertisements and then we’ll be able to say yes, it’s us.

John [O’Graudnick]

Can you give us any type of time like in six months or 12 months?

John C. Carson

I’d rather not say just on the basis that people can make connections. You probably couldn’t but somebody who’s listening might be able to.

Operator

There appear to be no more questions at this time.

John J. Stuart, Jr.

This concludes our webcast for the three-quarter mark of fiscal 2008. If you’d like to listen to it again, it will remain archived on our website through the close of business Monday, September 1. Thanks for listening.

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