BrainChip Holdings (ASX:BRN) December 2017, Quarterly Update Presentation

Company Presentations

BrainChip Holdings Limited (ASX:BRN) CEO, Louis DiNardo, provides a Dec Qtr 2017 update covering sales and licensing, new hires and AKIDA development.

So, I'm here in San Francisco at our headquarters office with Ryan Benton, our chief financial officer. As you know, it's late January, early February, which is what we indicated we would do in the next conference call. We did the December call really as a one off, and I think you should expect that we'll do each of these calls coincident with each of the quarterly updates. I've been doing this since 2001 on a quarterly basis. I think it's a great way to interact with shareholders, bring people up to date. News flow can be a little bit lumpy. We can't plan news flow to be smooth. It happens when it happens. But I think that having a regularly scheduled call, in this case, I think it's great that we take questions in advance and I try to incorporate those into the prepared comments.

I'm going to move forward. I hope that technically things are working well. Slide two is nothing more than the standard disclaimer. You can take it, read it at your convenience. I'm sure you've both seen it before. We certainly present it at each of the quarterly updates and I'm sure you've seen it with other companies, as well. So, moving forward, I only have two slides that I prepared, but I have a whole bunch more in the way of commentary that goes with each of these slides. So, what we're going to talk about, again, some will feel duplicative to what we talked about in December, because this is a December quarter update. I do take the luxury here of doing kind of post quarter end stuff. We've got a month since the end of the quarter, and I think it's always good to cover those things that happened since the end of the quarter and certainly many of the questions that I've received are with respect to things that have happened since the end of the quarter.

So, we'll talk a little bit about the European automobile manufacturer to which we shipped our first accelerator card and a little bit about Greg Ryan, who's the sales director in Australia and what traction and things we've got going on in Australia. We'll talk a little bit more about the use of funds from the AUD$21.5 million that was raised. We'll talk about the continued sales growth that we expect with original equipment manufacturers, system integrators, and other partners. We'll talk about AKIDA, which is really the end game for the company with respect to having a universal, called neuromorphic system on a chip. Posts to quarter end. And I think one of the most important things for us to talk about today is the development and licensing agreement, which we signed with Gaming Partners International, and post quarter end, which just came out this morning, our afternoon, your morning depending on where you are, was the appointment of Luis Coello as our European sales director.

So, with that in mind, let me just go through these things kind of one at a time. When we talk about the shipment of that first accelerator card to a major European automobile manufacturer, that has progressed very, very nicely. We're not in a position to name names, but it is a European, major, it's kind of like Detroit. In Europe, you've got three majors, they all happen to be German. That's moving nicely and has actually come to a point where we're engaging in a dialogue about a joint development agreement. The accelerator card demonstrates what we can do in a supervised learning mode. When you think about ADAS, or advanced driver assisted systems, that goes from level one all the way to level five, which is a fully autonomous vehicle that really begs for the kind of capability and capacity that AKIDA can deliver, and I think as we discussed in the last call, our goal with the AKIDA development, and I will talk about the development itself in a moment, when we talk about the AKIDA development, the best case for any development of a processor as complex as this is that you have close collaboration with what we'll call a lighthouse customer, someone that gives you guidance as to what the hooks are, what the ins and outs need to be such that when the product comes out, you've got a baked in customer who's giving you guidance along the way.

So, we're very pleased with the development around that European automobile manufacturer and their goal to get a development agreement in place with us. Not our idea, it was their idea. Further to that, not out of Europe, but out of Detroit, we're expecting an order for an accelerator card out of one of the top three in Detroit, similar trajectory. They want to play with the card, they want to understand how the spiking neural network works with respect to supervised learning as well as get educated and help educate us on what could be done with AKIDA in that development process when the product comes out that there's actually another potential end customer in play.

So, overall, as we embarked on the AKIDA development, we laid out a course of ADAS, autonomous vehicles, find close collaboration with majors in the industry. I think we've really done a great job there. In some respects, they found us and in some respects, we went hunting for them. So, I think overall, that's gone very well. We'll report on that again next quarter, and we'll talk about AKIDA, I'll get a little bit more into where we are in that development.

The appointment of Greg Ryan, as we talked about in December, was kind of a major step forward for us in Australia. There's a whole lot of money being spent in Australia for surveillance and infrastructure. We need feet on the ground in Australia. Greg's done a great job in his first couple of months engaging with law enforcement and civil authorities, things are moving well. We do have to put some engineering resources there to back him up. In Australia, the focus is short and medium term, get the revenue.

When it comes to ADAS or autonomous vehicles, there's really not a lot of collaboration for us. There is some good collaboration or good partners that we could collaborate in the cybersecurity arena and probably in the fintech or financial technology arena as well.

I'm going to jump down to the last bullet and then come back. Just this morning, we announced the appointment of Luis Coello as European sales director. He comes to us with a very, very deep experience in civil surveillance. His last assignment, last tenure was at Teleste, which is one of the major system integrators in Europe. He will start on the job tomorrow. I mentioned this in our last call in December. Europe takes a little bit of time to disconnect from your current employer and moved on. So, we've had this moving along for the better part of the last four or five weeks. He has now left his prior employer and starts with us tomorrow.

He's located in Barcelona, which frankly is a very nice location for us. We have a strong presence in France, as you know. Department of Homeland Security, the Paris police force, the Bordeaux airport, but really spreading our wings and getting into the civil surveillance, law enforcement agencies throughout Europe, including the UK, Spain, Italy, throughout the pan European, the potential account base for us is really what Luis's goal is. So, I think at this point, we have Tom Stengall here in North America well steeped in the surveillance industry, Greg Ryan in Australia, and Luis Coello in Europe. So, we have filled out the senior management team in the sales force to take the products that we introduce, the BrainChip studio product, which was introduced in July of 2017, and the BrainChip accelerator that was released in September and take those to market, drive revenues, drive sales growth while we develop the AKIDA product.

Going back to bullet number three, frankly this is the same bullet that we had when we talked in September, but I wanted to put a little bit more colour around it. We raised AUD$21.5 million, and I do think based on some of the questions that I've received, I think it's important for us to kind of normalise to the fact that we use, as a functional currency, we use US dollars. So, the $21.5 million net of fees was about US$15.5 million, as we completed that fundraising. We ended that quarter, the December quarter with about US$16 million on the balance sheet. We burned something on the order of about US $1.9 million. That's a relatively steady state number. We're thinking it's probably US$700,000 a month. The foresee that was just released showed us at about US$2.2 to US$2.3 million. Frankly, there's a little bit of a lump in there because we paid the second instalment of the Jast license. So, I think you could think of this in terms of about US$700,000 to US$750,000 a month burned. And if you do that math, based on what we have in cash, you've got something on the order of 21 to 22 months of coverage. So, the company is well capitalised. I know there's been a lot of speculation about what the incremental cost of developing the AKIDA product is. The burn rate includes all of our engineering resources, whether they're working on AKIDA, whether they're working on GPI developments, gaming products developments, or other products. That is included. The incremental expense for AKIDA is something on the order of about US$3 million that would be very late in 2018. But frankly, that'll be covered by receipts, cash receipts.

So, I think the company is very, very well capitalised for the next two years. That will give us adequate time for these three senior sales executives to build a very nice pipeline. I’m going to talk about that in a moment, what the pipeline looks like. I committed to that on the last call, I'll give you some insight. But I think we're in really good shape and I'll talk about the AKIDA development and where we are with respect to timelines in a moment.

One of the bullets says every company expects continued sales growth with their original equipment manufacturers, integrators, and other partners. That should also include end users. Certainly our goal is original equipment manufacturers and integrators, and when we talk about gaming products and we talk about some of the other opportunities that we're closely engaged with the leverage that we get out of those relationships where an OAM has an existing account base or existing client base of hundreds or thousands of customers, allows us to control our operating expenses, use their sales force, use their service organisations. It's really the highest leverage sales model that we can fashion for a company that really is delivering intellectual property in the way of either an FPGA on a card, and I'll talk about why we do an FPGA on a card because there was a question that came in on that front, or the eventually of AKIDA being a standalone integrated circuit.

In this respect, when we talk about original equipment manufacturers, we have a very strong engagement, which we're moving forward with, with a company that does a SaaS, or software as a service, model. It's a Cloud-based model. They process literally millions of hours of video. They have specific search engines that are available to end users. In our case, they've recognised that our one shot learning, our ability to very quickly analyse hours and hours and tens of hours, or tens of thousands of hours of video in their prime business, which is media and entertainment where people want to search for their logos and find out what the return on their investment for advertising dollars is certainly a great strength. But they're also moving into the surveillance business very quickly. There are tens of millions of hours of video that are stored and law enforcement agencies, homeland security agencies want to or need to, depending on the circumstance, search that video. So, it's a great outlet for us to go to hundreds if not thousands of customers through one original equipment manufacturer as our partner. That wouldn't be exclusive. That would be one of many that we could do that with. System integrators, similarly, and I think the addition of, for example, Luis Coello who came out of Teleste, is one of the largest system integrators in the surveillance business in Europe. We also have relationships with others. We talked about a province in France outside of the Paris police force or the Department of Homeland Security. I think we talked about that last quarter. I'll touch on that very quickly in a moment.

But those original equipment manufacturers, integrators, let's call them other partners, are our go to market business model. And we certainly will continue to engage directly with end customers. They educate us. They show us how things work in their specific vertical market segment, and what the end game for us is really to work through our original equipment manufacturers, integrators, and partners. I don't want to miss any of the questions that I got, so I'm going to pause here just for a second and make sure that I cover things.

We talked about SAS. It's a great business model. What we haven't touched on in the original equipment manufacturing arena are storage partners. All of the video gets stored somewhere. You've got everybody from Dell who acquired AMC, Western Digital, a company called Quantum. Those are organisations that are completely connected to all of these end users. They store the video and as it relates to BrainChip Studio and the accelerator, those are great partnerships for us and working closely with one if not two at this point, large storage manufacturers or original equipment manufacturers in the storage segment so that we can install BrainChip Studio into their platform and potentially use the accelerator so that they can get more bandwidth.

At the same time, and I think I mentioned this at our last call, there is the kind of middleware suppliers of video management system players. The most prominent in the world is a company called Milestone. There's GenTech. There's probably six or seven. But when the camera comes back to the server room, the first thing it hits is a video management system. That's also an opportunity for us to leverage really thousands of customers that those VMS suppliers support. So, that's an ongoing project and something that particularly here in the US, that Tom Stengall is very well focused on.

Just to bring you folks up to date, Saffron is moving along nicely. Maybe it's a little slow, maybe I would like to see it move more quickly, but they're buying more licenses. They're starting to love the performance of the product and we expect that during the first and second quarter, we'll see more traction from them. The large European or French province that we talked about, and frankly I'm not sure why we haven't named the name, it's a place called Eveline, but the project there is moving along nicely.

These projects, and I'll touch on Eveline as well as for example Lockporte, the school district. As much as we would like to see these things happen in weeks or months, they have to mount cameras, they have to pull wire, then they have to put the infrastructure in place. So, the Eveline province is moving along nicely. The Paris police force, as the budget has been refreshed, as you go into the end of the year, people start to run out of money when you're talking about local law enforcement or government agencies. As we came out of the year, they popped their head up and I think we're going to have a very nice first quarter with the Paris police force, and I think Eveline will come on probably later in the first quarter.

And Lockporte, the school district that we've talked about, deployment is moving nicely. They've got union labour pulling wire, hanging cameras, and that's just a matter of time. It's not a matter of if, it's just a matter of when, that we can recognise that revenue. So, I guess all in all, the sales growth that we expect from original equipment manufacturers, integrators, and other partners is moving along nicely.

I didn't touch on Rockwell Collins. Rockwell Collins is, marketing a product in which they'd incorporated us. We don't have a lot of visibility, but we know it's a high priority project for them and we would expect some time here in the first quarter to get more visibility. So again, SaaS, big play for us. Good engagement. I hope some time maybe here in the first quarter, we'll have an announcement to, maybe a joint announcement with a major supplier. Storage, similarly, I would hope here sometime in the first quarter we could do the same and give you folks more visibility on who it is we're working with and what the progress has been.

Rockwell Collins we talked about, and Homeland Security. So, we move forward, let's talk about AKIDA for a moment. AKIDA is forward quite nicely. This has been in research during the second half of 2017. I think Peter has taken the learnings from the Snap 64 product in conjunction with the license that we have from the Jast technology. He's moved forward through what we call the mat lab or simulated environment and has a kernel that is frankly working quite well, and it is something that as we move forward, for example with the European automobile manufacturer, we get into that kind of joint development mode, we'll release that kernel and allow them to start to pump algorithms through it. Similarly, we've got relationships that we're developing, Peter's actually travelling throughout Europe now in the financial technology arena, working with folks that can provide us the algorithms for financial transactions and cyber security.

So, the expectation has not changed. We came out of the back end of 2017, came out of research, have a kernel in place which will move into development. We're looking forward to an FPGA mid year, and then going with the collaborative partners that we'll have in the autonomous vehicle, or let's say ADAS, and more generally spaced financial technology and cyber security. We'll go into the hardened IC design sometime in the early second half of 2018. Hoping that we could get Silicon out maybe later part of the fourth quarter of '18, potentially it could be the first part or the first quarter of 2019.

Very applicable as we're finding in robotics and gaming, we've talked about autonomous vehicles. We've got drones, cyber, fintech. It is a general purpose neural networking processor. We've been very pleased with the response that we've gotten as we’ve talked to potential customers. So, it's moving quite well. One bullet that I saved for last that I want to spend some time on was the announcement that we put out just yesterday on Gaming Partners International. This is, for us, a very big win. We have a vision system, a video analytic capability, which is exceptional, particularly in low light, low resolution conditions, and you can imagine that that is the case in casinos.

What we've found, and I think we've got more education about this than we ever expected, this was a process with GPI or Gaming Partners which started in July of last year. I visited their manufacturing facility in Beaune, France where they manufacture chips. These are not computer chips, these are actually currency in the casino. Gaming Partners has literally the lion's share of all chips manufactured for all casinos in the world. They do business with virtually every major casino in the world. They're called currency, the casino currency. Particularly, those of you that are Australian, you're probably not going to go into a casino that is not dominated by GPI chips. Similarly in Asia, take Macau for example, and in the US as well. So, they have a lion's share of the casino currency market.

What we've garnered from our discussions with them, and we talk about game outcome, which you're all familiar with, which is who won, who lost, did the bet get paid off properly or not, and we've talked about game statistics, which is how long did a player sit at the table at a bet spot and how many hands were played, how many hands were won, and how many hands were lost. Those are very, very valuable assets. What the casinos are most concerned about, particularly in Australia and Asia, and this came as a surprise to me to learn six months ago and took a trip to Bordeaux, a trip to Beaune, a trip to Kansas City, Missouri. I think actually on not our last call, but the call before, I mentioned that I happened to be making the call from the Mid West and I was at the manufacturing facility of GPI in Kansas City.

The casinos, particularly in Asia and Australia, where the dominant share of revenue comes out of game tables, as compared to the US where the dominant share of revenue comes out of slot machines, is counterfeit chips. It's the most predominant way people are cheating in casinos. They counterfeit chips. They walk in with a pocket full of $500 counterfeits, they play, they colour up or down so that they know they've turned over their chips, and even if they've lost a bit, they have coined money. So, our engagement with GPI and other partners is a full on system. It's kind of game outcome, game statistics. More importantly, it's casino currency security and table security. The project is moving along very, very quickly. There's a great sense of urgency.

I was at the GPI facility in Las Vegas just yesterday. We're moving at full speed to get this, the capability added to their competency. They provide cards, they provide tables, they provide chips, they're engaged with virtually every major casino in the world. So, for us, we have now I think successfully engaged with kind of the 800 pound gorilla in the space. There are a lot of system providers into casinos, but when you pretty much own the casino currency business, providing currency security is an add on which is extremely valuable, it's a little bit less about the value of the counterfeit that was lost. I got an example, I guess it was several months ago, about a casino, I believe it was in Melbourne, where it was something on the order of $75,000 of loss to counterfeit.

The problem is not the $75,000 loss. Casinos are turning over millions, and tens of millions, and hundreds of millions in revenue. It's the public relations issue and once the counterfeiters recognise that there's a weakness in the security system, they all show up at that casino. So, what a casino is left as their alternative is they have to throw away all of their existing chips and they have to buy a whole new chip set, and that's a very expensive task.

So, if you read the press release about Gaming Partners International, what they've done is they've embedded and RFID tag, radio frequency ID, in each and every chip, particularly in the Asia and Australia market. So, when you sit at a game table and you're moving chips across the table, there are actually antennae under the felt and they are counting those chips. They're recognising, "This is a $25 chip. This is a $50 chip. This is a $100 chip." So, when you try to cash out your chips or you try to colour your chips up or down, there's a check spot and the dealer puts them there and there's an RFID system that recognises how many chips and what are the values of those chips. The ability to add video analytics and have a visual inspection to correlate, those are the kinds of things, and there's a wide variety of other things that we're doing with GPI, but those are the kinds of things we're doing.

It's extremely exciting. I think most of you have probably read the press release. It's a $500,000 license fee. There's about $100,000 in engineering, nonrecurring engineering, and then there's a long term revenue sharing plan. We haven't discussed publicly what those revenue sharing numbers are or what the length of it is, but it's meaningful for us. We did size the market in the press release with 3500 casinos globally and about 60,000 gaming tables, kind of on a dollars per day basis. It's about $200 million market for the analytic tools. So, I think it's, for us it's an opportunity to service 3500 casinos through one original equipment manufacturer and not have to build a sales force. And we wouldn't do that if it were not for the fact that GPI has such a big brand, such big reach, and such an existing and installed customer base.

So, I think I've covered the accelerator card and the European automobile manufacturer. Kind of towing the water here with an opportunity and I think we'll an order maybe as early as this week for another automobile manufacturer out of Detroit for the accelerator card. We have built up the sales force. I think we talked a bit about the capital raise, what the runway is for that capital. We are well capitalised. Original equipment manufacturers, the AKIDA development, and certainly we just touched on what's going on with GPI.

So, in summary, and again, I reduced this to really just three slides, but I have a whole lot more to say. For 2018, the company is well capitalised. You can do the math with a $700 or $750,000 US burn rate. We're well capitalised both to build a meaningful base of revenue in the existing products as well as develop AKIDA. We're well staffed with Luis joining us in Europe, Greg Ryan joining us in Australia, Tom Stengall here in North America. We probably in the next couple of weeks will also announce in North America our first manufacturer's representative. You know, Tom located in Boston, and we have an applications engineer that backs him up, but that's still not enough feet on the street and the typical business model in North America is manufacturer's reps. They represent multiple lines, but they only get paid when they book an order and we call it the "Eat what you kill" kind of strategy. So, we'll start with the south-western United States, because we have our Newport Beach, southern California facility and we can provide a little technical support. But we'll have a rep that covers everything from Texas through southern California, and up through Nevada.

Certainly, you know, we have commercially available products for the surveillance business. We've got a well established customer base, not big enough, and we need to broaden our European presence outside of France. We've got some really nice opportunities that we're chasing here in the US. I did commit and before I forget, I did commit to give you a sense of kind of what our sales pipeline looks like. And I'm only measuring things really since we introduced BrainChip Studio, I think was July 17th of '17 and BrainChip accelerator, which I think was September 10th of '17. That product launch has generated something over 250 leads. We did talk about Milipol, I think when we were on the call last time. But with 250 leads, we've really got our mind around and arms around about 100 opportunities.

We've qualified something over 60, close to 65 of those opportunities with a lifetime value of about $280 million. So, there are 63 qualified opportunities from birth to grave, have an opportunity in the category or the class of about $280 million. Of those 63, we've got 13 design ones, which have a lifetime value of over $25 million. With one, two quarters under our belt with those products just having been commercially released, I think this is wonderful traction. We've got dozens of software drops of BrainChip Studio. BrainChip Studio begets the opportunities for BrainChip Accelerator.

So, I think I've covered most everything. I do have your list of questions. I want to make sure that I didn't miss anything that wasn't kind of duplicative. We talked about the sales management in Europe with Luis starting tomorrow. There was a question about the turnover there, and some of you, for some reason, happen to know Hung, Hung Do-Duy who left the company a couple of months ago or a month ago or so. And that was his personal choice. He was really not a sales executive and he wasn't a design centre manager. He had run that company kind of as an administrator, as the president of the company.

I should probably mention in addition to Luis Coello joining us in Europe to run sales that we will have a design centre manager at our Toulouse facility. So, I think we're in good stead there. There was a question about us taking advantage of the Australian government's recent announcement to make $3.8 billion available. We certainly will engage there. There is a question about us relisting on NASDAQ, and that was a popular topic a year ago or so, and frankly I think I've learned a lot, I think we've learned a lot as a company, and the Australian market has been very kind to us, the Australian shareholders have been very loyal to us. At this point, I think we're in one of those points of a hockey stick in our growth and I don't see any reason, at least in the near term, that we would relist on another market. As we get down the road and things get bigger and better, and better and better, who knows where we go, but I think the experience I've had with the shareholders and investors in Australia has been wonderful.

We talked about Gaming Partners. Let me make sure, there are a couple things here, I want to make sure I didn't miss. I think generally speaking, we talked about the licensing fees. There is a question about whether the licensing fees accomplish milestone four, which is part of the RTO, and I'm not going to gloss over that. It's a $500,000 license, but I'm not going usurp our board of directors' authority in ratifying that. That'll be a decision that they'll have to make very shortly. We just signed the agreement, frankly, on Friday. So, we have not had a chance to talk as a board. I think we covered sales growth. So, I think I covered much of what was questioned. I'll pause this, if I missed anything, and if I have, please send an email to the address that you forwarded the questions to and I'll be certain that somebody gets back to you.

So again, we talked in December. I'm sorry that it feels a little bit repetitive, but I felt before I went into the holiday, we owed it to shareholders to have a conversation. But you should expect that we'll have this conference call right on the heels of every quarterly update. So, thank you again for joining us and we'll talk to you again in a quarter.