USBC Inc (USBC) 2014 Q1 法說會逐字稿

Good afternoon. Welcome to Visualant's first fiscal quarter 2014 conference call. My name is Ben and I will be your conference operator this afternoon. Joining us on today's call is Visualant's founder, President, and CEO, Ron Erickson, and Mark Scott, the Company's CFO.

Before we conclude today's call, I will provide Visualant's Safe Harbor statement with important caution regarding the forward-looking statements made during this call. I would like to remind everyone that this call will be available for replay starting later this evening. A webcast replay will also be available via the link provided in today's press release as well as available on Visualant's website, www.Visualant.net.

Now I would like to turn the call over to Visualant's founder, President, and CEO, Ron Erickson. Sir, please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's call. During the first quarter, we made steady progress in our transition from a development stage to a commercial applications company. This was reflected by the important several milestones we achieved during the quarter, including forming a strategic partnership with Intellectual Ventures as well as shipping our ChromaID scanners and SDKs to some of the brightest inventors and engineers around the world.

But before I comment further, I would like to turn the call over to our CFO, Mark Scott, who will take us through the financial details for the quarter.

Thanks, Ron. Good afternoon, everyone. Our financial results for the period ending December 31, 2013, which is our fiscal first quarter of 2014, reflect the fact that our company continues to advance to our development stage. In this context, let's turn to the results for the quarter.

Revenue was $1.9 million versus $2.1 million in the same year-ago quarter. The decrease was due to $250,000 in deferred revenue recognized in the first quarter of fiscal 2013 from the joint development agreement with Sumitomo Precision Products that did not repeat in the first quarter of fiscal 2014.

Excluding the deferred revenue recognition in the year-ago quarter, revenue increased 4% due entirely to revenue generated by our TransTech subsidiary. The TransTech increase primarily resulted from the release of new product including radiofrequency, asset tracking, and kiosk printer products.

The gross margin was 16.3% versus 26% in the same year-ago quarter. Decrease relates to the reduction in Sumitomo license revenue, whilst offset by increase in TransTech gross margin from 15.7% to 16.3%. Research and development expenses increased to $147,000 to $313,000 from $166,000 in the same year-ago quarter. The increase was due to expenditures related to the commercialization of our ChromaID technology as well as the agreement with Intellectual Ventures.

Selling, general, and administrative expenses decreased $207,000 to $843,000 from $1.1 million in fiscal quarter one 2013. The decrease was due to a reduction in business development expenses of $109,000 and salaries of $100,000.

Net loss totaled $846,000 to $0.01 per basic and diluted share in the fiscal first quarter of 2014. This compares to a net loss of $701,000, or $0.01 per basic and diluted share, in the same year-ago quarter. TransTech also recognized a marginal net profit of $2,000 compared to a net loss of $109,000 in the three months ended December 31, 2012.

The TransTech team led by its new President, Jeff Kruse, has done a tremendous job moving the Company from a quarterly loss to profitability. We expect that trend to continue. Additionally, Jeff and his team continued to open customer doors for Visualant's technology, leveraging TransTech's broad distribution network in the government, private sector security, and authentication spaces.

This completes my financial summary. For a more complete and detailed analysis of these results, please review our Form 10-K for the three months ended December 31, 2013, which we expect to file on February 13, 2014. Now I would like to turn the call back over to Ron. Ron?

Thanks, Mark. As many of you know, last November we formed an important strategic partnership with Intellectual Ventures to advance the commercialization of our ChromaID technology through product applications and IP development. Not only is the partnership a tremendous validation of our technology, but it reveals IV's belief that ChromaID has the potential to replace traditional spectral analysis and other costly methods of identification, authentication, and diagnosis.

IV has committed a significant amount of resources, both monetary and human capital in the strategic partnership as well as has a material vested interest in helping us commercialize our revolutionary ChromaID technology. We were encouraged by the progress the partnership has achieved in such a short period. Together with IV and our other partners, Sumitomo Precision Products, we have been realizing tremendous success in getting ChromaID technology into the labs of the world's most innovative companies and establishing a strong pipeline of potential commercial application.

In December, we completed our joint development activity with Sumitomo Precision Products. They continue to be a licensing partner and will work with us on commercialization of our technology in their markets.

Last month we achieved another major milestone in our company's history as we completed delivery of the first production run of our ChromaID software development kit, putting the new technology into the hands of top inventors and engineers across multiple industries.

The ChromaID system consists of software and a scanner that uses our spectral pattern matching technology to direct structured light onto a surface material or through a liquid or gas, creating and capturing a unique marker, or ChromaID, that is invisible to the human eye. This is the first time it is possible to effectively conduct identification, authentication, and diagnostics in the field that could previously only be performed by large and expensive lab-based equipment like spectrophotometers.

The first production run of the ChromaID SDKs underwent extensive and rigorous testing prior to shipment. After testing was complete, we commenced shipping the kits to IV as well as IV's invention network last fall. In January we shipped the remaining SDKs from the first production run to several companies around the world, including an international plastics packaging company, a company that provides authentication for critical semiconductors, a pharmaceutical supply chain company, and a medical waste disposal company.

We are receiving amazing reports and positive feedback about the many new ChromaID applications being developed. The international packaging producer is looking to use ChromaID signatures to match their customers' exact color requirement to a color library for the packaging and containers being produced. Their first attempt with the traditional, less sophisticated spectrophotometers resulted in incorrectly colored containers, whereas initial tests with ChromaID have proven successful. The anticipated cost savings from this one manufacturer, more than $1 million annually in reduced weight.

The authentication company working on semiconductor counterfeiting protection is exploring the use of ChromaID in combination with chemical coating for a two-step authentication application. This application would be faster and more cost effective than using traditional verification methods. A recent senate armed services hearing concluded that there are more than 1 million counterfeit parts in critical Defense Department equipment and systems.

The pharmaceutical supply chain company is working to apply ChromaID to its high-speed pill sorting process in order to detect pills that should not be in the batch being processed and ensure a high level of quality control through the sorting and counting process. The potential health damage and liability from ingesting the wrong medicine is estimated to be $300 million annually in North America alone. Globally, counterfeit pharmaceuticals are more than a $75 billion industry causing 1 million deaths annually.

Finally, the medical waste company is testing the use of ChromaID to confirm the authenticity of unused controlled substances that are required by law to be disposed of with verification. As much as 8% of controlled substance medications are diverted or stolen in hospitals. This application could significantly reduce that amount.

These and other markets provide significant opportunities for the deployment of potentially millions of our ChromaID scanners across hundreds of applications. As these companies confirm ChromaID's unique ability to identify, authenticate, and diagnose more efficiently and affordably, we expect this to translate into licensing and sales revenues over the coming months and years.

The next production run of ChromaID SDKs is currently underway and we expect to deliver more than 75 SDKs by calendar year-end. Given that demand for our SDKs currently exceeds supply, we are focusing on delivering kits to global companies that have the capacity to develop large-scale ChromaID applications, which ultimately have the potential to be significant licensors of our technology.

Turning now to our intellectual property, during the quarter we were issued our sixth patent for ChromaID. This patent further validates our vision to introduce more efficient authentication, identification, and diagnostic methods into the marketplace.

We continue to pursue strong protection for our IP. We have additional patents pending and expect more patents to be granted as we extend our IP foundation and move into the marketplace with diverse application of our ChromaID technology.

A key component of our partnership with IV is that they have committed to file a minimum of 10 patents covering new ChromaID applications. This significantly accelerates and expands our IP development efforts. It is important to note all patents and patent applications resulting from the partnership will be exclusively licensed to Visualant in perpetuity.

Coupling our strong operational progress with our expanding intellectual property portfolio and our strategic business development partnership with IV, we are well-positioned to capitalize on the substantial opportunities that lie ahead.

Lastly, some shareholders have expressed frustration to me over the stock price. As we all know, we have little control over the day-to-day fluctuations of our stock price. However, as the largest individual shareholder and CEO of the Company, I can tell you that our team is working extremely hard to execute on our strategic plan to commercialize our technology. We are encouraged by our progress and I am confident that over time our collective efforts will have a significant positive effect on the value of our company.

Now with that, we are open for questions. Operator, please provide the appropriate instruction.

(Operator Instructions) [Dale Fuller], private investor.

Yes, I initially found out about this stock through -- I can't remember the guy's name, but he's on TV all the time. It was a promo, this email thing they send out like a promo.

And I was a little -- not that knowledgeable about even the market at that time, but I came in at $0.52 a share and I have bought it as it has fallen down. I just hope that at some point to see it back at that level. Could you see that happening?

Dale, as I indicated in my earlier remarks, obviously I am a large shareholder -- I think the largest individual shareholder -- and obviously that's my desire that over time as we do what we are doing, move our technology into the marketplace that we should see a corresponding value reflected in our stock price.

We are not guarantors. It's hard to know how the market moves some days, but clearly that's our ultimate desire -- to have the stock accurately reflect the work that we are doing with our technology and the licenses we obtain over time with the technology. So thanks for being supportive and I appreciate it very much. I am not a guarantor of that stock price, but, like you, I certainly want it over time to reflect the real value here and we certainly hope it will.

Thank you.

(Operator Instructions) [Stan Seward], private investor.

You guys, Visualant as well as IV, have distributed these SDK kits to various companies. Do you guys actively and proactively monitor what's going on with those companies that have the SDKs? Is there -- do you have a feel for -- and when do they come to a point where they say this can really help our company; we are going to buy a license from you guys?

It seems like already a couple months maybe the SDKs have been out there. How long are you -- before these companies you think commit to you guys with this technology?

Thanks, Stan. Good question. So there are a couple of parts to the answer. First, with regards to Intellectual Ventures.

As part of that process they -- we provided them SDKs and they shipped those SDKs to a select group of inventors, 20 inventors and inventor groups around the world. As part of that, those inventor groups have then --- and individual inventors were charged with playing with our technology, working on applications, imagining what might be possible with the technology.

They are tasked then with coming back to Intellectual Ventures 60 days after they receive the SDK, so we are getting close to that point. We got the first SDKs to them in early December, so we are going to be having that feedback momentarily. So that's, as I think you know with the various things we've said in our press releases and 8-K filing, they will be coming up with applications and filing patents as a consequence to that, of the work that is being done. So we are in that process.

The other SDKs are in the hands of companies and those have just been out not very long. Our head of business development, Todd Sames -- our VP of Bus Dev, Todd Sames, is in touch with those people sometimes on a daily basis. We've done a training with them, training in the use of the SDK. We answered questions.

I think, Stan, it's hard to know when they come back with the potential license or a suggestion for an application that can lead to a license. This is one of those things where we have to let that sort of take its own course. In other words, we can't -- that's a function we can't force. We can't force an outcome.

They're going to come back to us in due course. We stay in close communication with them, but I certainly would not speculate on when we are going to see a license come out of that process. We certainly hope sooner rather than later, but there again we can't force that.

Okay, thank you.

(Operator Instructions) [Howard Miller], private investor.

Hi, Ron. The mobile market would seem to be a lucrative place to go; can you say a few words about that?

Absolutely. As we all know, those smartphones that probably all of us on this call have embody a number of different kinds of sensing technology -- GPS, various location technologies.

Our vision of ChromaID technology is another sensor technology clearly in its application. It can sense all kinds of things. It can authenticate, it can identify, it can diagnose and we believe that over time our ChromaID sensing technology can appropriately find a place inside a hand-held instrument, inside a smartphone, in a mobile instrument.

That's something we are working on. We're talking to a number of people in that marketplace, in the mobile OEM marketplace, and we think it can really be a very, very large market for us. The development cycle for mobile phones, for next-generation mobile phones is something that takes a while, so people start developing things today that wouldn't come into the marketplace for perhaps three years.

But we need to begin that process and we have begun that process of beginning to talk to people who are component manufacturers and handset manufacturers, believing that our sensor technology could find a place in smartphones and really provide us an opportunity to have millions and millions of units out in the marketplace over time.

It sounds really lucrative in the long run. Another issue is -- and I'm sure other investors are probably interested to know, where did the $5 million go? You've been in business with it now for quite a while, but if you stand back and just kind of summarize, what's all the stuff you've got done for the $5 million that was raised a year ago?

It's really interesting, sort of looking back we've had really one of our best years ever. We've really accomplished a tremendous amount in the past year.

We closed on a little over $5 million financing last June and that allowed us to do several things. It allowed us to complete our purchase of TransTech and we were able to buy out a very difficult shareholder and then clean up our balance sheet. So we did a lot of things sort of fundamentally that made the balance sheet look better.

And then, working hand-in-hand with Sumitomo, we were able to bring together and work on a software development kit that is now for the very first time moving out into the marketplace. In addition, we've expanded our IP, achieving now six patents, filed for a number of additional patents, attended trade shows, entered the XPRIZE competition that people have heard about where we are working on a Tricorder Star Trek medical diagnostic device, and have done a number of things that we think are really significant in terms of the growth and development of the Company and the foundation for going forward.

We have also, in addition to closing on the final purchase of TransTech, really turned it around. It's now operating in the black. Developed that very significant contractual relationship with Intellectual Ventures, which is going to lead to, we believe, large ongoing licensing revenues along with an expansion of our intellectual property.

And all of this really done on a really pretty tight budget. Because when we closed on the financing and took care of those large expenditures -- TransTech, buying out a couple of the shareholders that had been disruptive -- we ended up netting an amount that didn't give us as much runway as we had hoped.

Then I'm going to add to that something that I think is important to note. As we developed these SDKs, we had third-party providers that caused some unnecessary -- an unnecessary slowdown in the ultimate delivery of the product and we had some malfunctioning circuit boards. So one of those things where I think in life and in business certainly every once in a while Murphy's Law hits you, so it took longer and cost more.

But I think, nevertheless, when you look back, Howard, I think we have accomplished a tremendous amount and we are certainly well-positioned now with a clean balance sheet, with an SDK in the marketplace, with tremendous strategic relationship with Intellectual Ventures and Sumitomo Precision Products, and a wholly-owned subsidiary, TransTech, the has completely turned around from $100,000 a quarter loss to now profitability thanks to the strong efforts of Jeff Kruse and his right hand, Steve Waddell, who is the controller at TransTech. So I think that's how I would answer your question, Howard.

I appreciate the answer. You guys run a lean operation there and I'm sure it's a tough job, so thanks for all the great effort for you and this team.

Thank you.

(Operator Instructions) Stan Steward, private investor.

Ron, I think you touched on it there. As we -- this is -- I don't know exactly how to word this, but as we anticipate the first licensing fee, how do we from this moment till that moment fund ourselves? A while back you had mentioned about the funding that we did receive, the $5 million, but with (inaudible) stock options and those overhanging warrants you sort of thought maybe were inhibiting our stock price a little bit? But what -- can you address that a little bit?

Right now we are out in the marketplace discussing with various investors and investment bankers various financing options going forward. And that would include obviously a discussion, Stan, of the current existing warrants and other aspects of financing so that we can be on a firm footing going forward.

So I would say right now the short answer is we are out there looking at options, talking to a lot of smart people, current investors and potentially new investors about options for us. And as part of that conversation looking at the current warrant structure and the best way to address that, if at all.

Okay.

Thank you, ladies and gentlemen. That concludes our question-and-answer session. I would now like to turn the call back over to Ron Erickson for closing remarks.

On behalf of Ron, thanks for joining us on our call today. We would like to thank you for your continued support and patience. We look forward to speaking with everybody soon.

Thank you, sir. Before we conclude I would like to provide Visualant's Safe Harbor statement with important cautions regarding forward-looking statements made during this call.

During this conference call, the Company made forward-looking statements regarding expectations for future financial performance, which involve uncertainty and risk. It is possible the Company's future financial performance may differ from expectations due to a variety of factors including, but not limited to, our need for additional financing; the sale of significant numbers of our shares; potential adjustment in the exercise price of our warrants; and a volatile market price for our common stock.

It is not possible to foresee or identify all such factors. Any forward-looking statement in this report are based on current condition, expected future developments, and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that such statements are not guarantee of future performance and actual results or developments may differ materially from those projected.

The Company makes no commitment to update any forward-looking statements included herein or disclose any facts, events, or circumstances that may affect the accuracy of any forward-looking statement. Thank you for joining us today for today's call. You may now disconnect.