Blue Calypso, Inc. (OTCQB:BCYP) Q1 2016 Earnings Conference Call May 16, 2016 4:30 PM ET
Andrew Levi - Chairman, Chief Executive Officer and Chief Technology Officer
Chris Fameree - Chief Financial Officer
Andrew D'Silva - Merriman Capital
Good afternoon. Welcome to the Blue Calypso’s First Quarter 2016 Earnings Conference call. My name is Ben and I'll be your operator for today.
Joining us for today's presentation is Founder and CEO, Andrew Levi; and CFO, Chris Fameree. Following the remarks, we will open up your call for questions. And before we conclude today's call, I'll provide the necessary disclaimers and cautions regarding the forward-looking statements made by management during this call. I'd like to remind everyone that this call will be recorded and made available for replay via link in the Investor Sections of the company's website.
Now I'd like to turn the call over to Blue Calypso's Chief Executive Officer, Andrew Levi. Please proceed.
Thanks operator. Thank you all for joining us today on our first quarter 2016 earnings conference call.
Our focus in the first quarter 2016 is in primarily around three areas. First, deploying our KIOSentrix platform with Fortune 500 retailers; second, continuing to innovate an advance state of our mobile consumer engagement solutions and intellectual property necessary to protect our competitive advantages; and third, fortifying our balance sheet and capital structure.
We made significant progress on all three of these areas in the first quarter that will enable us to achieve the level of growth we are targeting in the coming years. Frizzing all of these exciting opportunities, I want to discuss the elephant in the room that I am sure most investors are concerned about with regards to our IP litigation with Groupon and FourSquare.
As you may be aware, on Friday May 6th for the advice and recommendation of our legal team at Fish & Richardson, we elected to settle our distribute with Groupon in Eastern District Defective Court. This was the primary reason for postponing of scheduled earnings call as we wanted to allow us much time to finalize the settlement and be in a position to discuss freely with our shareholders. Currently our legal term is working vigorously to complete and agreed upon settlement for Groupon who are not quite there yet. This is what I can speak to you today.
On May 5th, the Company entered into a memorandum of settlement with Groupon pursuant to which it has in principal settled all outstanding litigation with Groupon. The terms of this settlement are confidential.
On May 6th, 2016, the Court held a hearing regarding the Federal Circuits decision issued on March 1st, 2016 and the pending motion for summary judgment related to subject matter eligibility. The Court heard arguments from the Company and Four Square Labs and took the matter under advisement. During the hearing, Judge Gilstrap had a trial date at September 12, 2016. The court also required the parties to submit briefing on certain collateral estoppel issues and a joint docket control order within 15 days. We look forward to working together to determine the best course of action with Four Square Labs.
While I cannot get into the details on the terms of the Groupon settlement, I can say – what I can say is that we work very closely with our legal counsel to arrive at his decision. Most of verity of items we factored in the current proper patent environment and sate of the trial when considering the long term causes and benefits to the Company when determining whether to settle or continue the litigation process.
Ultimately, we concluded it was in the Company’s best long term interest to settle this current matter with Groupon. In addition, we feel strongly that the current state of patent litigation and patent awards is not encouraging for software at this time as nation-wide District Courts are in validating software patent at approximately 70% rate under 35 U.S.C. 101 commonly referred to as Alice, according to a presentation of IBM’s patent counsel provided at the Innography Insight 2016 Conference this past April.
Although the Eastern District has been far more favorable for patent owners will only approximately 30% in validation rates, this does not preclude defendants from taking us through PTAB under 35 U.S.C. 101 were claimed once instituted by PTAB are being in validated at over 70% through CBM review which everybody knows we’ve gone through once.
One question that’s come up is since we’ve been through this once, is it possible that we could end up in a CBM review again? And answer to that is yes, as there is no lending on the number of CBM reviews, a defendant can take a company through.
This stake of 70% CBM review according to 2015 study conducted by Fitzpatrick, Cella, Harper & Scinto LLP a leading national intellectual property firm.
And even as the Eastern District has recently shown a propensity to validate software patents in increasing rate, we also considered a scenario where if we were successful in the Eastern District, there is just a high likelihood of an appeal to the Federal Circuit where 101 in validation rates are currently very high as well.
We agreed upon settlement closer the chapter with Groupon that it does not close the book for Blue Calypso’s future patent asset monetization with other parties and in fact preserves the IP portfolio until the landscape pendulum swings back to normal.
We feel strongly that a number of significant events will unfold in the Paladin Supreme Courts in the coming years that will provide a return on Fish & Richardson contingent relationship with Blue Calypso. We believe that our decision will reverse shareholders overtime and protect the patents we work tirelessly to crate. This decision allows us to focus 100% of organic capital on the core business mobile customer engagement solutions while the United States considered how it will allow software vendors and patent owners to protect their innovations in the future.
We began the first quarter of 2016 been recognized among the top ten merchandizing solution providers in 2016 by retail CIO outlook for our expertise in providing a unique and flexible platform to connect consumers to brands.
The positioning is based evaluation of Blue Calypso’s specialties and providing unique merchandizing operations and delivering an innovative location centric mobile software engagement platform across the broad retail sector. The annual lists of companies are selected by panel of experts and numbers of retail CIO Outlook Editorial Board to recognize and promote technology, vision, leadership and innovation.
We are excited to be recognized where retail CIO and its contributing team of industry leaders as noted innovator in 2016.
Moving on to our KIOSentrix platform, in the first quarter of 2016, we deployed KIOSentrix across 4,000 retail locations and 20,000 product SKUs with our partner IntegraColor. Our partnership, positioned in this instance for the plant tag industry, was extended to all of the low stores in the U.S. as well as Monrovia, one of the country’s premier wholesale plant growers where we are expanding our rollout to additional plant retailers.
The horticulture industry is generally not a tech innovator but through extensive proof of concept research, we’re able to sell loads the short-code messaging with superiority QR codes when wires and plats want real time care information beyond what is available on traditional plant tag.
It is providing to give both loads and Monrovia location based in size into where their people are when they are most interested in this information and last provides Monrovia’s retailer network the ability to add additional products into review intractable mobile coupons.
Concluding the first quarter of 2016, we partnered with the Salem Red Sox, a minor league baseball team in Salem, Virginia to engage fans via mobile at LewisGale Field using Blue Calypso’s innovative KIOSentrix platform.
As part of their dedication to providing the best in-stadium fan experience possible, the Salem Red Sox are using SMS to provide game updates in the event of inclement weather as well as deals and promotions to fans that have opted-in. Further down the line, the team plans to eventually experiment with beacons to create more opportunities for sponsorship.
KIOSentrix comprehensive analytics will allow the Salem Red Sox to better understand what fans are looking for and what levels of engagement they are comfortable with. By implementing this mobile fan engagement strategy now, the team will ultimately be able to deliver more relevant and memorable game experiences for their fans throughout the 2016 season. By the way, the Salem Red Sox are in first place in the Carolina League Southern.
Subsequent to closing of the first quarter 2016, we announced our first U.S. patent issued for our new mobile sponsor gamification family with more patents pending and to be filed in 2016. In an environment where software patents in the post Leahy-Smith America Invents Act era are very difficult to retain from the USPTO, we secured this new patent as something we believe in body to the uniqueness of our gamification intellectual property.
In fact according to Law 360 the USPTO has denying over 90% of new patent applications that have been following recent months. We are committed to innovating technologies that enchasing ROI for brick-and-mortar retail partners and consumer brands manufacturers when customers are onside and engaged with their brands. Receiving this new patent in future IP protection, it’s a part of the strategy as we see strong momentum with consumer engagement and brand affinity over mobile platforms.
In fact U.S. review in the U.S. social gaming market is projected to grow at compound annual growth rates of 19.6% from 2016 to 2019 according to research in markets.
From a capital structure perspective, in the first quarter, we repaid and retired all outstanding convertible debt held by Magna Equities thus avoiding potential dilution to our existing shareholders. We made strong progress on all three areas in the first quarter and as a result of position in 2016 for significant growth in our business.
Before we take a look at other exciting developments in the second quarter 2016, I’ll have our CFO, Chris Fameree to review the first quarter 2016 financial results. Chris?
Thank you, Andrew. I will now run through the first quarter 2016 financial results. First and foremost, the first quarter was highlighted with improved top lining growth.
Revenue for the three months ended March 31st, 2016 was approximately $263,000 as compared to $116,000 for the same period in 2015, or 128% increase year-over-year. The increase is primarily attributable to project based revenue and a subject to timing of development projects.
Total operating expenses including cost of revenue for the first quarter of 2016 increased to $1.1 million versus $724,000 in the first quarter of 2015. In addition to the increase in cost of revenue, the increase in operating expenses is due to a 179% increase in sales and marketing expenses as the company has invested in sale personal and other marketing efforts and a 49% increase in general and administrative expense primarily associated with stock based compensation.
Net loss in the first quarter of 2016 totaled $884,000 dollars or $0.16 per basic and diluted share compared to a net loss of $609,000 or $0.12 per basic and diluted share in the same period a year ago.
The increase in net loss resulted primarily from an increase in operating costs of $411,000 and interest cost of $114,000, net with a gain on change in derivative liabilities of $101,000 and an increase in revenue of $148,000.
As Andrew previously mentioned, during the first quarter, the company also extinguished our outstanding convertible notes payable and associated accrued interest. Cash on hand at March 31st, 2016 totaled $212,000 compared to $730,000 at December 31st, 2015.
However, subsequent to the first quarter of 2016, the company raised an additional $1 million in a private placement with a strategic investor which we plan to use for additional marketing and working capital purposes. Andrew Levi, our CEO will further discuss this important investment later on in our call.
On that positive note, I will turn it now back over to Andrew. Andrew?
Thanks Chris. Subsequent to the first quarter of 2016, we announced that Hal Brierley, a 30-year veteran and loyalty advisor to Fortune 500 consumer brands was appointed as a senior advisor to Blue Calypso in conjunction with his $1 million strategic investment. As an existing investor, Hal has been following our evolution for some time and made a strategic bet on the management team and the company after we pivoted the business model entirely to our mobile shopper engagement platform.
We believe that Hal’s human capital and extensive relationship with Fortune 500 retailers will not only accelerate the rollout of our solution, but also prepare our organization for the next phase of its growth cycle.
Our focus on mobile shopper engagement for product manufacturers and multi-location brick-and-mortar retailers comes at a time when retailers are reporting their worst financial performance in decades due to the Amazon effect. In fact, some retail analysts on Wall Street are only recommending retailers that are unamazonable like jewelry and fitness brands. The disruption with today’s consumer purchasing habits is a result of new technologies, but also the lack of big box retailers creating an experience for their shoppers when they are in-store engaged with their brands. We and our new partners believe our KIOSentrix platform provides a rich and scalable platform that embraces product manufacturers, retailers and consumers alike while supporting all methods of activation such as beacons, short codes, NFC, Wi-Fi, and mobile apps as well as distributed content.
We believe that our success in 2016 will be demonstrated with new partnerships and marquee customers and we expect to expand our roster to include additional Fortune 500 brick-and-mortar retailers in the near term.
We believe the balance of 2016 and beyond will be transformational for Blue Calypso on an operational and financial level. Already in the second quarter of 2016, we have strengthened our balance sheet, expanded our solutions offerings and aligned our company with the innovator in loyalty programs.
Moreover, our current pipeline has never been more robust as we are preparing to deploy several proof-of-concept demonstrations with major Fortune 500 brands in the United States. The combination of these recent achievements set the stage for significant growth later in 2016 and beyond.
As always all of us at Blue Calypso will pack each of you as a shareholder for your trust and continued support. You own the company, we work for you and we believe our hard work and commitment to produce the returns for us all.
This concludes my remarks. Now with that we’re ready to open the call for your questions. Operator?
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Andrew D'Silva of Merriman Capital. Please go ahead.
Hi, good afternoon. I just had a couple of quick questions. First off, as far as the pipeline goes, I am glad to see you making progress with starting pilots. It’s hard that acceleration that we are seeing right now compared to previous quarters related to the initial critical reference customers you’ve already launched with. And then what are some of the larger opportunities in your pipeline that you might start pilot with be worth meaning from a top line perspective if you were landing them and they become customers?
Sure. Two great questions. Thanks Andy. Reference accounts, as we’re building a business are critical. I think there is anybody that has gone to the process of creating and launching a technology already type of the business, you know the first 10 to 20 accounts that are willing to go say great things about the effect you have on their business are really the difference between being reaching high acceleration or being flat. So there is no doubt that some of the reference accounts that we are bringing in now help pay the road for the future opportunities that we’re adding to the pipeline.
And to your question about what’s some of these opportunities look like. Because of the nature of a horizontal approach to retail, the size of the business that our technology appeals to if you consider consumer packaged goods and retailers can be all over the map, they can be very, very small, all the way up to you know as you’ve seen us today talk about loads [ph] and big box retain. But we also mentioned that we’re about seeing [ph] several trails of proof of concepts with several Fortune 500 product manufacturers and retailers and some of those opportunities are seven figure deals for year.
So we were really I believe at this juncture, very well positioned better than we ever have been to really grow and land some of these market accounts that generate not just top line growth revenue but the profit margins that we need at some point here in the not to just in future to be self-sustainable and cash flow positive.
Just to recap, you said $1 million plus in potential revenue from some of the bigger customers or potential customers in pipeline?
That’s correct, yeah. I want to be real clear that is not a typical size deal but we have some of that size in the pipeline right now. We’ve also got some that are $1,000. So we want to make sure that nobody things that every one of our deals is going to be a $1 million, I wish that it was, but in fact that we are now appealing to and attracting the interest of Fortune 500 accounts that really see our technology is critical and can and will write a $1 million check dissolve a very critical problem for themselves is very exciting to us.
Yeah, thanks for that color that was great. And then as it relates to the competitive landscape, since the last time when we talk, has it changed at all or it’s still just a handful of outside companies starting that emerging market and then retailers from – of which are looking to you know have internally driven solutions?
Yeah, it’s still really, really thin on the competitive landscape which is, it’s great. You know there is kind of two size to that coin where fairly early in I say first any in solving this problem that exists in this retail phase. And therefore the landscape is fairly wide open. There are small handful of hopes that we’re seeing out in the market and something similar. And I would say I have defined some organization it’s approaching from our platform perspective appealing to product manufacturers, retailers and consumers like we are. As you know is as success happens, there will be more competition, we anticipate that lenders face. That right now the opportunities we just want as fast as we can and grab land is pretty wide open as we see it.
Yeah that first answer is pivotal I think right now. Just last question for you guys, just actually for Chris in particular and I am sorry if I missed it in your prepared remarks. But since the strategic investment withheld took place after the quarter, can you give us a sense of how much working capital, what kind of working capital runway you have right now let’s just stay in a steady state scenario?
Yeah, I mean with what we have in the pipeline and it’s disclosed in our Q that we can certainly make it through the end of the year. We hope that becomes a sustainable, you know we have sustainable revenue at that point that will carry us through. Obviously we’ve got to deliver on our pipeline and some of our plans but right now we are forecasting currently through the end of 2016.
Got it. Great, thank you very much for answering my questions and good luck going forward throughout the year.
The next question comes from [indiscernible]. Please go ahead.
Hey, guys, thanks for taking the questions here. First off, from the headcount standpoint, specifically sales related, how do you guys feel, do you feel like you are – this is a good level to be at, are some hiring to do, can you comment on that?
Yeah. Sure. So we have a two prong strategy going and chasing net new business. We are – we had a brand direct approach which requires us to go find every retailer, every product manufacture individually. But I would say that the strategy that is providing I think the most traction and it’s the most appealing is our partnering, is our partner channel. We’ve added and continue to cultivate the handful of very influential partners in every call [ph] we talked about rapidly the organization that has taken us to loads, Monrovia and another handful of accounts. But I think we are up to six partners now that have taken us into a period of organizations of all sizes.
So yes, if we continue to work closely and work well with our partners, ultimately that precludes our need for adding sales folks that are tasks with taking grants direct. So we are really looking both very closely, I am not sure at this juncture if we’re going to change our effort and mix in going direct, but you know in the event that we just continue to focus our energy that they are, I think we’re at a pretty decent size right now. If we grow some, we may need to post, there are responsible for helping with the on-boarding of new accounts which obviously is a good problem to have. But I think what you are looking for is as we thought to achieve revenue traction, we’re going to have to lay up a bunch additional overhead and expenses. Now my answer to that is no. There is not a direct correlation between adding accounts and adding headcounts. We think we can scale pretty well with the very lean organization.
Okay, now I appreciate that. And just sort of along those same lines, I know it’s really early in the process here, but given the expectation for sort of the naturalization cycle for your sales teams for incidence maybe you don’t expect them to be productive whatever that means your model over the first 12 months then after that you expect them to be a cash G&A breakeven or better right. So I mean do you have any expectation for again just it’s a naturalization cycle for the sales team?
So I would expect a new add to the sales force to be bringing revenue in the door within 90 days. And my expectation of performance of assuming that we make the right hires is that a new add would cash flow positive or beyond within six months. And I think because of the rare model works, we – it’s really an enterprise sales cycle, I mean it takes sales pursue process that in and out itself regardless you experience level in 10 year with the company is longer than most, it’s not transactional, we are not seeing the ad here, we are selling system. So that in and out itself takes longer than something transactional. But that being the case, we make the right decisions in hiring which you know we hope that we will. There is scenarios where we hire the right people that have industry expertise in mobile, have relationships with retailers and product manufacturers and understand this for marketing that could come into the organization and can be an immediate contributor.
Yeah, thank you for that. And then I guess just the last question I have would be is there anything that I am missing here that sort of has been back out or is run its cycle, do you have any cost rolling up, anything that will improve overall I guess dropdown in productivity of the income statement, is there anything in your as a result of maybe I mean I know that the patent litigation wasn’t a cost for you all and but just in general, is there anything here that there is lot of transaction, you guys have a done a lot say you know obviously last 12 months, so is there anything year-over-year that we should see will help provide leverage the next three quarters or into the future?
Chris, you want to take a short at that?
Sure. You kwon I think inherently you know based on milestones of the company obviously we have stock based compensation that you know you can look at as relatively lumpy. And so I would expect you know there are operating expense improves a little bit in the second quarter. But I think you know in general what we’ve had is a significant amount of investment in our platform. And as you know it’s really our backend as a software service type platform. So it’s very scalable platform and I think we’ll see a significant amount of leverage off of our effort going forward as we continue to grow revenue.
And so you know I think we’re – our cost structure is pretty fat, you know we continue to look for ways obviously to make sure we are deploying resources efficiently and effectively, that’s my thought on that.
Sure, I appreciate that. And you guys have been well and active and it seems like you got things going in right direction. So I appreciate it. I look forward to talking you next quarter. Thank you.
Thanks. I appreciate it.
This concludes time allocated for questions on today’s call. I’d now like to turn the call over to Mr. Andrew Levi for his closing remarks.
Thanks everyone for joining us today. We’ve got – we’ve many dedicated hard working people throughout the company, from our financial department to grant it out every day to out BC Labs team to keep our solutions constantly evolving. My sincere thanks from all of management to all of you. We could not do without you. Lastly, if we aren’t able to address all of your questions today, on today’s call, feel free to contact us or our investor relations from MZ Group, who would happy to answer them for you.
We look forward to speaking with you soon. Operator?
Before we conclude today’s call, I’d like to provide Blue Calypso’s safe harbor statement that includes important cautions regarding forward-looking statements made during this call.
Statements made during today’s call that are not statements of historical or current fact constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms believes, belief, expects, intends, anticipates, will, or plans to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s reports filed with the Securities and Exchange Commission.
Finally, I would like to remind everyone that a recording of today’s call will be available for replay immediately after the call and through June 11th, 2016. Please refer to today’s press release for dial-in instructions.
Thank you for joining us for today’s presentation. You may now disconnect.
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