Managing Director, Andrew McLellan on 1H FY18 results and outlook

In this Open Briefing®, Andrew discusses:

  • Bluechiip progression from being in development into a manufacturing company
  • Accelerating production volumes and revenue generation
  • Receipt of a $776k R & D tax refund in January, with more to come and current $2m cash balance
  • Labcon $1m order status and marketing a range of vials incorporating Bluechiip technology

Managing Director, Andrew McLellan on 1H FY18 results and outlook

Record of interview
Andrew, before we look at the numbers in the half year result to 31 December 2017, can you first tell us where Bluechiip now sits in terms of its progression from being a company focussed on R&D and building customer relationships into scaling manufacturing and converting the pipeline of opportunities.

MD Andrew McLellan:
We are moving into a very exciting time. Over the last two and half years we have been pursuing an OEM partnering strategy to commercialise our unique technology. The December 2017 quarter saw us move into commercial production and scaling of our capacity. With the initial orders and developer kit sales that we have in hand, we are transitioning into the production phase. You will see us fully commercialise our technology over the next 12 to 18 months.
This is highlighted by the most recent announcements involving Labcon – both the $1m order in December 2017 and Labcon’s subsequent manufacturing and marketing of Bluechiip Enabled products starting earlier this month. These are the first products entering the market from an OEM partner and we are scaling production to meet demand which will drive revenues. When we look at the current numbers they’re still quite small but our sales and production volumes are set to rise every month for the rest of this year based on orders already in hand.
Our monthly revenues and volumes are expected to increase dramatically over the next twelve months and we expect they will continue growing from there.
Revenue for the six months ended 31 December 2017 was up 124% and expenses were +21%, which drove a 277% increase in Gross Profit, admittedly on a small base, to $163k. As you scale production should we expect Gross profit to continue rising?

MD Andrew McLellan:
Yes, we expect earnings to keep rising as our revenue rises.
As noted, we expect volumes to grow every month this year, just based on the orders we have in hand. New orders will add to that and over time as our volumes of chips and readers increase we will also gain scale economies on the production of our chips.
What I would highlight both in our half year numbers and for the next six months, is that the sales mix has a large impact on margin and profit. Put another way, at the early stage of our partnerships the revenue is predominantly license income and R&D services with licence fees having a very high gross margin. R&D revenues carry a lower margin as there are some direct costs and physical product. As we ship higher volumes of products over the coming six to twelve months we will start to see a more consistent growing level of revenue and margins.
In the medium term our fundamental consumables model will emerge where the revenues we generate today are expected to turn into recurring orders in the future.
The balance sheet as at 31 December 2017 includes a current asset of $1,225k for “R&D tax off-set receivable” and you note that the company received $776k from an R&D tax refund in January, which allowed you to fully repay the $600k R&D tax loan. When do expect to receive the balance of the $1,225k and what is the company’s net cash position as of today?

MD Andrew McLellan:
We currently have cash of just over $2m and no debt. As noted the R&D tax loan was fully repaid in January from the R&D tax refund we received of $776k.
The outstanding balance of $450k from the total $1,225k shown in the balance sheet as at 31 December, reflects the expected R&D tax incentive refund for the 1st half of FY’18 which with additional refund based on R&D expenditure in the 2nd half is expected to be received after the end of the financial year.
The way the R&D tax offset provision works is that as we spend on R&D the expense is recorded on balance sheet as a tax credit and then we file documents with the ATO we get a refund for certain R&D expenditure.
In January R&D Tax incentive program featured a case study on Bluechiip available at
What is the current level of cash burn, both including and excluding R&D?

MD Andrew McLellan:
We have increased our cash expenses, including R&D as we scale our production and sale of chips and readers, and also as we expand our list of developer kit clients who pay us license and R&D fees.
We are now spending around $300k per month, with around two thirds of that being on R&D. This total spend each month varies as the level of R&D and some other lumpy items such as marketing and attending trade shows, as we did earlier in February in the USA.
Last week you announced that Labcon had begun manufacturing their ColdPoint® Bluechiip Enabled cryogenic vial range, can you explain the significance of this.

MD Andrew McLellan:
This is a game changer for Bluechiip as it is the first OEM partner to commit and subsequently produce product with Bluechiip’s technology. It provides significant validation for our business model especially given the fact we have now supplied an increasing volume of chips over the last three months and see that increasing into the future.
The initial $1m order received in Dec 2017 is an initial standing order which we expect to increase significantly over the coming years.
On top of the supply to Labcon supply we also expect an increasing number of partners to adopt our technology and include it in their products.
The fact Bluechiips are now included in manufactured partner’s products should be seen as a game changer for our business.
What happens at the end of the current $1m order from Labcon? When do they need to reorder by?

MD Andrew McLellan:
Labcon, as announced in December 2017, placed a $1m order for chips and readers. This is intended as an initial order. We have already delivered tens of thousands of chips under this order and Labcon has begun manufacture and is establishing marketing of a range of vials incorporating our technology. As this calendar year progresses our deliveries to Labcon will grow each month and we expect to end the year delivering at a rate well in advance of $1m per annum It is worth noting that on top of the chips and readers covered by the $1m order, we have already sold additional products to Labcon.
Towards the end of this calendar year we expect Labcon to reorder. Labcon has made a very significant investment in tooling to manufacture vials incorporating Bluechiip’s technology and is now investing in marketing and distribution of this range of vials with a view well beyond just the initial $1m order of chips and readers. Labcon’s products give us direct, high quality exposure to the $200+ million per annum biological sample storage market.
Scaling production can be challenging. Are you comfortable with Bluechiip’s ability to do this and what additional costs and resources will you need?

MD Andrew McLellan:
You’re absolutely right that scaling can be challenging. There is always risk involved. That said we are scaling our production, we’ve delivered more in February than we did in December and we continue to scale our capacity. By year end our monthly volumes will be running at 3-4 times their current levels, well ahead of an annualised $1m order rate.
We have added two technicians since December and are looking to expand our resource base a little further to meet the production requirements for our chips. On the reader side we’ve turned on the manufacturing capability at Planet Innovation to meet that demand.
We are putting some automation in place which will help reduce costs over time. As we increase volumes further we will gain significant economies of scale.
Your long term focus is building a large base of recurring OEM revenue streams, with Labcon being first example of that. What other sources are you currently generating revenue from?

MD Andrew McLellan:
Over the last three quarters we have consistently increased our cash receipts. This has come from the sales of chips, readers, software, R&D development services, developer kits, and licensing fees to partners and including Labcon, Genea Biomedics and Planet Innovation.
In the short to medium term we aim to see the conversion of those developer kits into full OEM partnerships and then into product driven revenues as partners put product into their end markets.
We also sell product directly into the market, with increasing demand including in China where we have recently supplied five systems. and also seeing demand for product in North America and in Europe as we build distribution infrastructure in those market.
Long term though the focus is on delivering recurring volumes of chips that are embeded into consumables, such as the vials now being marketed by Labcon.
Looking at the pipeline, how many developer kits do you now have in the market?

MD Andrew McLellan:
Our pipeline is now sitting at 16 developer kits.
Of those 16 developer kits three have converted into OEM partnerships with Labcon North America, Genea, and Planet Innovation. We are in active negotiations with the remaining 13 customers with some being relatively advanced.
Labcon is the first of our OEM partners to have a product in the market. and I would point people to some good images of Labcon’s range which are included in our ASX release from 19 February 2018. Labcon is producing 5 different vial sizes incorporating our chips and these were on display at the Society of Laboratory Automation Systems (SLAS) trade show three weeks ago in San Diego. They are progressing to launch these products into the global market place in the near future.
How important is the Society of Laboratory Automation Systems (SLAS) trade show that you attended earlier this month and at which Labcon displayed vials incorporating BCT’s technology?

MD Andrew McLellan:
These trade shows are very important and SLAS is one of the major ones.
The nature of the B2B type market place is that you don’t have a high street shop to display your products. So, trade shows are where we put up our shopfront and meet customers.
The SLAS show in San Diego had 6,600 attendees from across the world and over 200 companies displaying product. All of the major pharmaceutical companies have attendees that are looking at the latest technology and products.
For us it was extremely exciting because we put up our shopfront as Bluechiip in our own right and at the same time in another part of the show Labcon was also displaying Bluechiip Enabled product.
This does two things for us. Firstly, it helps end customers gain confidence in our product and technology, because we have a very well-regarded organisation as an OEM partner displaying market ready product. Secondly, it shows other organisations that we are talking to, some of which have bought developer kits, that other organisations are already picking up our technology. This encourages them to move more quickly.
Thank you.

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