USBC Inc (USBC) 2014 Q2 法說會逐字稿

Good afternoon and welcome to Visualant's fiscal second-quarter 2014 conference call. My name is Craig, 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 cautions regarding the forward-looking statements made during this call. I would like to remind everyone that the call will be available for replay starting later this evening. The webcast replay will also be available via the link provided in today's press release as well as available on Visualant's website at www.visualant.net.

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

Thank you. Good afternoon, everyone, and thank you for joining us on this call. During the second quarter we made steady progress on our transition from a development-stage to a commercial applications company. This was demonstrated by the shipment of 20 software development kits to Intellectual Ventures' world-renowned global inventor group, who are developing applications based upon our ChromaID technology.

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

Thanks, Ron, and good afternoon, everyone. Our financial results for the period ending March 31, 2014, which was our fiscal second quarter of 2014, reflect the fact that our Company continues to advance through our development stage in this context.

Now let's turn to the results for the quarter. Revenue was $2 million versus $2.2 million in the same year-ago quarter. The decrease was primarily due to $250,000 in deferred revenue recognized in fiscal quarter two 2013 from our license agreement with Sumitomo Precision Products that did not repeat in the second fiscal quarter of 2014. The decline was partially offset by a $54,000 increase in revenue from our TransTech subsidiary. This increase was related to the release of new products, including radio frequency asset tracking and kiosk printer products.

Gross profit was 16.8% compared to 25.9% in the same year-ago quarter. The decrease relates to the reduction of Sumitomo license revenue, offset by an increase in TransTech gross margins from 16.5% to 16.8% related to the new products.

R&D expenses decreased by $120,500 to $91,900 from $212,400 in the same year-ago quarter. The decrease was driven by reduced expenditures for suppliers related to the commercialization of our ChromaID technology.

SG&A expenses decreased 50% to $753,500. The significant decrease was due to a reduction in business development expenses of $103,000; stock-based compensation of $354,000; and legal expenses of $145,000.

Net loss totaled $1.7 million, or $0.01 per basic and diluted share. This was an improvement from a net loss of $2.3 million or $0.02 per basic and diluted share in the same year-ago quarter.

This completes my financial summary. For a more complete and detailed analysis of these results, please review our Form 10-Q. I'd like to turn the call back over to Ron. Ron?

Thanks, Mark. During the second quarter we witnessed firsthand the breadth and depth of Intellectual Ventures' global inventors' network. We have been realizing tremendous success in getting our ChromaID technology into the labs of the world's most innovative companies and establishing a strong pipeline of potential commercial applications.

In the second quarter we shipped 20 of our software development kits to IV. IV deployed these SDKs to 20 hand-picked inventor groups in its global Intellectual Ventures inventor network, which is made up of more than 4,000 inventors across 10 countries.

The ChromaID SDKs consist of software and a scan head 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.

We continue to receive exciting reports from IV about the many new ChromaID applications being developed by these inventor groups. However, we will not be disclosing the new applications in advancement until patent filings are complete.

The markets the investor groups are developing applications in provide significant opportunities for the deployment of potentially millions of our ChromaID sensors across hundreds of applications. As these companies and inventors confirm ChromaID's unique ability to identify, authenticate, and diagnose more efficiently and affordably, we expect this to translate into licensing and sales revenues beginning later this year.

The next production run of ChromaID SDKs is currently underway, and we expect to deliver more than 75 SDKs by calendar year end. It's important to note that we're 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 licensees of our technology.

Turning now to our intellectual property, we continue to pursue strong protection for our intellectual property. We have additional patents pending and expect more patents to be granted as we extend our IP foundation and move into the commercial marketplace with diverse applications of our ChromaID technology. Further, we expect several new patent filings from IV's efforts, which will help accelerate and expand our IP development efforts. A key component to our partnership with IV is that all patents and patent applications resulting from the partnership will be exclusively licensed to Visualant in perpetuity.

In step with this, IV has been introducing our technology to major potential partners and licensees through its fast business development network. This next week, for example, we will be going to Beijing, where we will be participating in and presenting at the Food and Health Innovation Summit, sponsored by a Intellectual Ventures in partnership with select Chinese industry leaders.

We have a lot of work ahead but remain encouraged by our steady progress. We have great confidence that our disruptive technology will soon be deployed in real-world applications.

Now with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Mike Markowski, OnlineFinancialSector.com.

My question is to the CFO, Mr. Scott. And I would like to understand more about the derivative liability of the warrants. That seems like a huge portion of your total liabilities of the Company. Does that go away eventually as the warrants -- obviously, they would go away if the warrants expired. But could you explain that a little?

Certainly. There is a very detailed write-up on the derivative liability in the 10-Q that filed yesterday after market. But there were two transactions in 2013, one of which was the funding that we closed on June 14, 2013, and also the Intellectual Ventures warrant that closed in November 2013. Both of these transactions have some down-ramp protections that create derivative liability. These are five-year warrants, and once the warrants are exercised or converted, then that liability will be reversed.

So if they expire, I would imagine they would be reversed, too.

Correct. As our share price moves up or down -- obviously, if it moves down, we have a gain; and if it moves up, then we have a derivative loss.

Okay, so I got you. So it is really -- not really a real liability.

No, it's not a real liability. It is one that is created by GAAP and will ultimately clear itself out as these are exercised or limited over the next 4.5 years.

Okay, let me ask another question about the licensing deals that you believe that you're going to do in the future: are these going to be on a per-unit basis? Or is it going to be -- are we talking one-time fees? Or what is -- can you comment on this?

Mark, let me take that. I think, Mr. Markowski, it's going to depend on field of use. There are going to be circumstances where a person, for example, might want to have a license on an exclusive field of use. That would require, obviously, a significant upfront payment. In addition to an upfront license payment, we are planning on structuring these transactions so that there's an ongoing royalty. And the royalty would be per-unit-based, typically.

Then, in addition, giving our proprietary algorithms and access to the database, which is a part of our ChromaID overall solution, there could be a subscription or per-click fee associated with that, as well. So you could logically have three buckets of revenue coming from a license agreement.

Can you elaborate what those three buckets would be?

Well, you could have an up-front fee.

An upfront fee, right?

You can have an upfront fee. You could have a per-unit royalty. And then you can have -- we would have a piece of the subscription or per-click revenues for access to the database.

Now, that is an interesting thing -- access to the database. Can you elaborate -- I understand the per-unit and the upfront fees, but this is an interesting aspect that I have seen rarely.

We think there is a significant Big Data play. And in some of our filings, we talk about this, in some of our public announcements -- a Big Data play.

So let's just take, for example -- I'm going to make this up -- but let's say that you are using our ChromaID technology to access a database that relates to whether a product is cocaine or not, all right? Illicit stuff.

And let's say -- let's think back to the old Xerox model. Let's say that the device was available to law enforcement, and they had the opportunity under the base license and the per-unit license to do 10 scans a month to see whether an illicit substance was cocaine. And that came with the basic subscription; it came with the basic cost of the unit.

If they wanted to go beyond that, they would then pay -- as we did in the old Xerox model, you would pay a per-click or a per-scan for everything over a certain amount, because you are accessing that database that tells you whether that substance is cocaine or not. So that is just a rough example of something that could conceivably occur.

If you remember, back in the day when we got our first copy machines, you got to make, let's say, 1,000 copies a month; and then after the 1,000 copies, you paid, let's say, $0.03 a copy or some amount. You could do a similar model here. So you give a person a base amount, and then over that they could pay on a per-click basis for accessing that database.

As the database builds over time, we think the database has great power; because people are accessing that, the database has more and more information. So we think that accessing the database on a subscription or per-click basis can over time be a very significant revenue source for us. That is often missed by, I think, the casual observer of our technology.

Well, I think so. Because as an analyst, it is very rare to find something like this, where you have that third aspect. And what you are really talking about is you -- let me think about this for a minute. You are talking about -- you are creating data. You've got a database. So first of all, how would you know whether somebody is clicking into that database? Because aren't they buying your devices? How would you know?

But you are going to connect into the database. That is relatively easy, to know when somebody is accessing a database.

The database could be maintained, depending on the circumstance, by a trusted third party; or by the customer itself; or, potentially, by us in partnership with the database company. You're going to know when they access it.

So you are saying you have a way --.

The database is going to be -- potentially, in a large database, it could be -- it would be in the cloud. And you are going to be able to know when people access it.

Okay, so can you give me more of, like, of an example, a better example of a large -- a database that would grow. Okay.

Well, I think -- for example, let's talk about pharmaceutical counterfeiting, for one. How many pharmaceuticals are there that you want to check to be counterfeited? Pick a number, it's a big number.

And there are new pharmaceuticals all the time. You are going to be adding to that database, and you want to know. So that's going to be important. There could be some life-and-death issues involved in that. It's important to access the database; it's important to have the database updated. And there is, I think, an example of where that could make a difference.

Well, my question is: if you -- let's say you have that database, and you have all those counterfeit pharmaceuticals. And just say there's 1 million pharmaceuticals out there. Is there somebody that would want access -- I could understand why Merck would want access to the ones that are -- they're counterfeiting its drugs. But is there a reason for somebody else to need -- to want to know what's going on with Merck's drugs?

Well, I think, for example -- yes. I think the 30,000 to 40,000-plus pharmacies in America might want to know. Because a counterfeit pharmaceutical can make its way into the channel of distribution at various points. So you might want to check at the local pharmacy level, for example.

I got you. So you are saying -- so all the pharmacies -- Walgreens, CVS, all those guys would want to know that.

Let me give you another example that could have a consumer face to it. And that could be something relating, for example, to food safety -- that you want to know that that milk, or that formula, that infant formula that you are giving to your child is not adulterated. It doesn't have some thickener, or some extender in it, or whatever. We have all read in the press that that has happened. So you want to be able to check. And there is a database that you would access.

And so let's say a person -- they had the unit, and it was attached -- it was tethered or attached via Bluetooth to their smartphone. They would be accessing the database to see whether their infant formula was good infant formula. It hadn't been adulterated; it hadn't been cut with something else or extended.

And as part of that, let's say they were paying $9.95 a month for that subscription to assess that database. So in addition to the unit and the application they had on their smartphone, they would have a subscription to access that database.

All right, so you are basically saying a mother could basically -- per subscription, is that what you are saying?

Right.

Could basically -- could tell whether it is the real -- okay.

Okay, so the key is -- so the database is -- the larger that grows, the bigger the possibilities.

Right. To put it in a -- yes. I could see over time how in certain applications the database became the tail that wagged the dog.

Yes. Right. Now, when would you anticipate these three different types of revenue streams? Obviously, the upfront fee -- you could have that coming -- some of that start coming in by the end of the year, probably, right? Or when would you -- of these three things, what would you say?

Well, I would say, as we just indicated in our remarks here, our formal remarks, that we expect during the balance of this calendar year to see some of the beginnings of those licensing revenues. And you are correct, that those would be more probably than not the kind of upfront fee that we're talking about.

And then as you develop units, and we will start to see royalties come from the unit volume. And really, almost immediately thereafter, depending on the use case, you could begin to see subscription and per-click revenues from the database. Because once the units start getting deployed, you're accessing -- you're starting to access the database.

Have you released any -- I haven't seen anything, but maybe I haven't found it. Have you released anything in terms of the range that you would get on a per-unit basis? I would imagine it's different for each base, right?

Well, yes -- every use case. Every use case would be different. You are going to have circumstances, and we have talked about this, certainly, where our technology is embedded in a process control device in a certain setting. So it's part of the larger unit, and it's playing a key role, but it's not a sort of stand-alone thing.

And then there is -- I mentioned just a moment ago tethering something to a smartphone, or ultimately embedding our technology in the smartphone itself and having a myriad of applications that would be available using that form factor. So I think in each one of these, it is going to depend on the circumstance; and it will depend on the use case; and it's going to depend on all the circumstances that surround the application.

Logically, there are some applications -- and I think this is really the case in everything in the marketplace -- there are high-value applications and there are low-value applications. A low-value application might be: am I selecting the correct paint to match the paint on my living room wall? That is a low-value application. Our technology can certainly do that.

A high-value application might be: is that really morphine or has it been diluted? Or is there water in aviation jet fuel to cause a plane to crash? So we could imagine different kinds of applications, high value and low value. And I think often in the marketplace, pricing equates to the inherent value in the solution being provided.

Yes, you mentioned that there's 100 different -- at least 100 different companies earlier, right? Or 100 different potential applications with millions of potential --?

No. I mean, it's hard to put a number -- easily, there are in excess of 100 applications of the technology. We can't even imagine all.

Many people who have heard me in the past have heard me say: what is the most exciting application? And I will say, it is the one I can't imagine. Because literally, people will approach us with ideas and concepts that we can't consider or hadn't considered previously, based on our own experience.

But yes, many, many applications that would lead to the deployment of, yes, literally millions of our units -- whether associated with a smartphone in process control and a whole host of other application circumstances.

Let me ask you this. The reason why I asked 100 is: do you have -- obviously, you're going to have to price all of these 100 applications in terms of the royalties --

Correct.

-- what you want to get per everything.

Right.

How are you going to handle that? Do you have a team that is going to do that? Do you have an expert, or how are you going to do that?

Well, a couple of different ways. That's a business development function, and each licensing agreement is its own -- negotiated. You can have templates, of course. You can have fundamental aspects of that contract. And I say that as a lawyer, as well, because as some of you know, I am an attorney.

And so the contracts -- you have got a template that hits a lot of the basics, and everybody agrees that those are important in an agreement. But each contract is going to be, certainly, tailor-made for its own unique circumstance and will be negotiated. The price and terms, that will all be negotiated. So we do that with our business development team.

And then, as I indicated in my prepared remarks, we have, in working with a group like Intellectual Ventures, who are strategic with us and a partner -- they have 800 employees. They have 70,000 patents. They have $6 billion under management. They are the world's largest intellectual property fund.

So as part of what we do with them -- what they are doing, they are opening up their global business development network, talking to global brand-name companies about deploying our technology.

Now, to use the vernacular, this is not their first rodeo. They know how to do license agreements. They do them all day long. So we will be working hand in glove with them as they open doors. And obviously we're doing our own business development effort, as well.

And do you have, like, a -- so, obviously, they are incented because they're incentivized to get the best possible deal.

Oh, yes.

Because they are taking -- for you. Okay, I don't want to dominate the questions here. I will let somebody else ask one.

Okay, thank you. Good questions.

(Operator Instructions) And at this time, this will conclude the question-and-answer session. I would now like to turn the call back over to Ron Erickson for any closing comments.

Thank you very much. I want to thank everyone for joining us on the call today. And I want to thank you for your continued support and patience. We're working hard on your behalf. We look forward to speaking with you again soon. And thanks again, and all the best.

Thank you very much. Ladies and gentlemen, 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 included but not limited to our need for additional financing; the sale of significant numbers of our shares; the 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 statements in this report are based on current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that such statements are not a 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 statement included herein or disclose any facts, events, or circumstances that may affect the accuracy of any forward-looking statements.

Thank you for joining us on today's call. You may now disconnect your lines.