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Edited Transcript of ITC.TO earnings conference call or presentation 14-Aug-19 9:00pm GMT

Q2 2019 Intrinsyc Technologies Corp Earnings Call

Vancouver Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Intrinsyc Technologies Corp earnings conference call or presentation Wednesday, August 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George W. Reznik

Intrinsyc Technologies Corporation - CFO & Corporate Secretary

* Tracy A. Rees

Intrinsyc Technologies Corporation - President, CEO & Director

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Conference Call Participants

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* Gianluca Tucci

Echelon Wealth Partners Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Intrinsyc Technologies Second Quarter 2019 Earnings Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to George Reznik, Chief Financial Officer. Please go ahead, sir.

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [2]

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Thank you, Shanice, and thank you all for joining us to discuss Intrinsyc Technologies Corporation's financial results for the 3 and 6 months ended June 30, 2019. Intrinsyc issued these results in a press release today, which is posted on the company's website.

Joining me today on the call is Mr. Tracy Rees, President and Chief Executive Officer of Intrinsyc.

During the call, we will make forward-looking statements about Intrinsyc's business. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. Intrinsyc refers conference call participants, either today or in future, to read the industry standard disclaimer, which has been furnished as part of today's press release in the forward-looking statements section.

Statements made on this call reflect management's analysis as of today, August 14, 2019. Management does not assume any responsibility or obligation to update forward-looking statements made during this conference call unless required to by law.

Please note that the financial information issued on today's call is stated in United States dollars and in accordance with IFRS, unless otherwise stated. The company is also presenting selected non-IFRS financial measures, including EBITDA, gross margin and working capital. Intrinsyc believes these non-IFRS measures provide meaningful information to investors. However, they do not have a standardized meaning and are not likely comparable to similar measures presented by other issuers.

I now turn the call over to Tracy.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [3]

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Thank you, George.

Intrinsyc reported revenue of USD 5.5 million with EBITDA of USD 169,429. Revenue was down 11% from the previous quarter and 15% over the same period in the prior year. Although revenue was lower in the quarter, the company had several achievements in areas of design wins, new product introductions and expense reduction that are leading indicators of improved revenue and bottom line performance.

We achieved our most productive quarter ever with 9 new design wins. These wins include 5 companies that are currently developing intelligent IoT products that will be powered by the company's Edge AI computing modules and 4 new clients that have begun commercial shipments of their products.

Intelligent IoT products under development include a variety of next-generation intelligent IoT products, including robotics, drones, medical devices, videoconferencing, intelligent cameras and more. We expect to achieve multiyear recurring revenue from our growing list of production clients as they purchase Intrinsyc's Edge AI computing modules to power their intelligent IoT products.

The prolific introduction of new products in the quarter was another bright spot. We had our most productive quarter of new product introductions with the launch of 4 new Edge AI computing platforms, including Snapdragon 855 Mobile Hardware Development Kit, Open-Q 212A System on Module and Home Hub Development Kit, Open-Q 820 Pro µSOM and Development Kit and the Snapdragon 8155 Automotive Development Platform.

In April, we introduced the Snapdragon 855 HDK. The 855 HDK is the design to support the ecosystem of technology companies and application providers looking to utilize the advanced features of the Snapdragon 855. This is Qualcomm's latest generation technology and pushes the boundaries of computing and power performance with innovations in immersive multimedia, artificial intelligence and security.

We announced the Open-Q 212A System on Module and Development Kit in May. The Open-Q 212A SOM is a compact, precertified, production-ready embedded computing module that is ideal for cost-sensitive home hub, home automation and smart audio devices featuring voice control, AI and wireless connectivity. It's powered by the Qualcomm Home Hub 300 Platform based on the Qualcomm APQ8009 System-on-Chip.

Intrinsyc launched the Open-Q 820Pro µSOM on Module, an enhanced power performance version of our popular 820 µSOM with increased processing power, more memory and long life availability in the same ultracompact, 25 by 50 millimeters form factor. The production-ready, precertified 820Pro µSOM is a pin compatible, drop-in replacement for the existing 820 µSOM, requiring only software changes to provide higher performance with more efficiency and long-term availability.

The company also began shipping the Snapdragon Automotive Development Platform based on the Qualcomm Snapdragon SA8155P processor from Qualcomm Technologies Inc. The platform provides OEMs and ecosystem partners with access to QTI's high-performance automotive infotainment and advanced driver assist platform for developing, testing, optimizing and showcasing next-generation in-vehicle infotainment solutions. The ADP provides an optimized application development environment for rapid deployment of high-performance and power-efficient connected automotive infotainment offerings.

These products are catalyst for both product development services as well as future recurring revenue from computing modules. In fact, we are experiencing strong demand for these products in this quarter. These products also sell at a higher margin, and we expect an improvement in our overall hardware margin during the third quarter.

Select highlights from the second quarter 2019 are as follows: From April 30 through May 1, the company's CEO and CFO presented and participated in one-on-one meetings at the Planet MicroCap Showcase in Las Vegas, Nevada. We announced the receipt of orders that are in aggregate valued at $921,000; orders for the company's computing modules were valued at $411,200 and included an initial stocking order for new client. The company also received orders from existing and new clients for product development services valued at $509,811. Products and services order are expected to be delivered over the next 4 months.

On July 3, the company announced the receipt of orders in the last week of June valued at USD 818,000. Orders for the company's embedded computing modules were valued at $384,240 and included an initial stocking unit for a new production client building medical devices. The company also received orders from existing and a new client for product development services valued at, in aggregate, at USD 433,936.

We announced the resignation of the company's Vice President of Global Sales, Mark Waldenberg. I worked closely with Mark to effect a smooth transition, and I will continue to manage the sales organization until a replacement is hired.

We introduced the following new Edge AI computing platforms: Snapdragon 855 Mobile Hardware Development Kit; the Open-Q 212A System on Module and Home Hub Development Kit; the Open-Q 820Pro µSOM and Development Kit; and the Snapdragon 8155 Automotive Development Platform. We increased our design wins of companies developing their products or shipping commercial devices using our computing modules from 62 to 71. Clients shipping products powered by Intrinsyc's Edge AI computing modules increased from 24 to 28, with 43 additional companies currently developing products around our computing modules.

George will now provide a detailed review of our financial results.

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [4]

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Thank you, Tracy.

Intrinsyc experienced decreased hardware product and services revenue in the second quarter and year-to-date for fiscal 2019, with reduced operating expenses for continued quarterly positive EBITDA compared to the prior comparative periods. Intrinsyc's revenue was $5.5 million for the quarter ended June 30, 2019, representing a decrease of 15% over the prior year second quarter of $6.4 million and 11% decrease over the prior quarter ended March 31, 2019 at $6.1 million.

Total revenue for the company's embedded computing hardware products line of business was $3.5 million during the 3 months ended June 30, 2019, which is a decrease of 17% from the prior year second quarter of $4.3 million and decreased by 13% from the 3 months ended March 31, 2019 of $4.1 million.

Services and Software revenue was $1.9 million during the 3 months ended June 30, 2019, which decreased from $2.2 million for the prior year second quarter and from $2.1 million during the 3 months ended March 31, 2019.

Total revenue for the 6 months ended March 31, 2019, was $11.6 million, representing a decrease of 7% over the $12.5 million in the prior year. The decline in revenue for 2019 is due to 9% decreased revenue from Intrinsyc's embedded computing hardware products in conjunction with a decrease of 4% in the company's engineering services and software revenue compared to the prior year.

Gross margin for the 3 months ended June 30, 2019, increased to 34% from 32% in the first -- in the second quarter of 2019 and was consistent with the same period in the prior year. The increase over the prior period is attributable to the change in revenue mix, with increased revenue contribution from Intrinsyc's software products and development kit hardware products at higher gross margin during the most recent quarter.

Gross margin for the company's Services and Software business increased to 57% during the most recent quarter from 56% in the prior quarter due to increased software sales in addition to the favorable impact of the weakened Canadian dollar. Gross margin for the hardware products business increased to 22% in the second quarter of fiscal 2019 compared to 21% in the first quarter of 2019. Gross margin percentage for the 6 months ended June 30, 2019, was consistent at 33% with the prior year period.

Core operating expenses consisting of sales and marketing, research and development and administration expenses declined to $1.7 million in the second quarter of 2019 compared to $1.8 million in the first quarter of fiscal 2019 and were consistent with the prior year second quarter. The decrease over the first quarter of 2019 is due to decreased investment in head count, offset by increased costs pertaining to the company's global expansion and strategic opportunities.

Sales and marketing expenses for the most recent quarter were relatively consistent at $610,000 for the prior period and decreased from the prior year quarter of $656,000 due to reduced trade show commission expense due to lower revenue and travel costs.

R&D expense decreased to $331,000 in the most recent quarter from $427,000 in the first quarter of fiscal 2019 and $376,000 in the prior year second quarter due to reduced development activities. R&D expense is a result of investment of the company's engineering capacity in its development activities as it continues to broaden its product portfolio. The company also performs R&D activities on customer paid engagements in addition to the R&D expense reported.

Administration expenses decreased to $754,000 in the second quarter of fiscal 2019 from $786,000 in the prior quarter but increased from $661,000 in the prior year second quarter. The increase over the 3 months ended June 30, 2018, is due to increased employees of the company's product operations team over the past year in addition to expenses associated with its global expansion and strategic opportunities.

Total core operating expenses during the 6 months ended June 30, 2019, increased to $3.5 million from $3.3 million in the prior year period with changes in each area as follows: Sales and marketing expense decreased to $1.2 million in 2019 compared to the prior year of $1.3 million due to decreased marketing activities, lower commissions and travel expense; R&D expenses decreased to $758,000 in 2019 from $773,000 in the prior year due to decreased investment in the company's product development initiatives; and administration expenses increased to $1.5 million in 2019 compared to the prior year of $1.3 million due to increased production staff, increased expenses pertaining to the company's expanded geographic operations and additional costs pertaining to the company's strategic activities.

EBITDA was $169,000 or 3% of revenue for the second quarter of fiscal 2019 compared to $156,000 or 3% of revenue for the first quarter of fiscal 2019 and $450,000 or 7% of revenue in the same period in the prior year. EBITDA performance in the second quarter of fiscal 2019 was impacted by a combination of decreased services and hardware product revenue, offset by lower operating costs. EBITDA for the 6 months ended June 30, 2019, was $325,000 or 3% of revenue, which decreased from $758,000 or 6% of revenue in the same period in the prior year, which is also attributable to lower revenue, offset by reduced operating expenses during fiscal 2019.

The company transitioned to the new lease accounting policy under IFRS 16 in fiscal 2019, which resulted in the establishment of a right-to-use asset with a corresponding lease liability on its June 30, 2019, balance sheet pertaining to its lease commitments attributable to its facilities located in Vancouver, BC, Canada and Taipei, Taiwan. The company has implemented IFRS 16 lease accounting on a retroactive basis and presented a pro forma balance sheet as of June 1, 2019, accordingly.

As a result, the company has amortized the fixed portion of its right-to-use lease during the 3 and 6 months ended June 30, 2019, which contributed to the increase in total amortization expense in this period with the variable portion of its lease commitments continuing to be accounted for as an operating expenses allocated to each respective functional area based on relative head count. The company's adoption of IFRS 16 lease accounting policy has impacted its prior reported periods, which have been restated for consistency in presentation.

Due to the weakening of the Canadian dollar, the company incurred a foreign exchange loss of $110,000 during the 3 months ended June 30, 2019, compared to a foreign exchange loss of $68,000 during the first quarter of fiscal 2019 and a loss of -- a foreign exchange gain of $162,000 for the prior year second quarter due to the revaluation of the company's Canadian-dollar denominated treasury investments and lease liability under IFRS 16.

The company generated net income of 600 -- of $66,000 with earnings per share of 0 during the 3 months ended June 30, 2019, compared to a net loss of $172,000 with a loss per share of $0.01 for the first quarter of fiscal 2019 and to net income of $109,000 with earnings per share of 0 in the same period in the prior year with 20 million shares outstanding as of June 30, 2019.

The company reported a net loss of $106,000 with a loss per share of 0 for the 6 months ended June 30, 2019, which decreased from net income of $269,000, earnings per share of $0.01 for the prior year period. The company has purchased a total of 1.6 million shares since October 2017 under its normal course issuer bid or NCIB for an amount of CAD 2.3 million at an average price of CAD 1.44 per share, with 51,000 shares repurchased by the company during the 3 months ended June 30, 2019 at an average cost of CAD 1.32 per share.

The company had cash and investments of $3.8 million as of June 30, 2019, which declined from $6 million at December 31, 2018, due to the positive EBITDA and related operational cash flow during the most -- during the year-to-date performance, offset by capital expenditures required to support its operational growth, funds used by the company to repurchase such shares under its NCIB program and the impact of working capital movements.

The company's days sales outstanding or DSO for its accounts receivable of 30 days as of June 30, 2019, which decreased from 44 days as at the prior quarter period end. The company had $6.9 million as of June 30, 2019, which increased from $4.6 million as at December 31, 2018, and is comprised of purchases to fulfill outstanding and anticipated client product orders. The company had decreased net working capital of $10 million as of June 30, 2019, from $10.3 million as at December 31, 2018, due to the positive EBITDA in fiscal 2019 year-to-date, offset by the company's NCIB program and the capital expenditures.

And now I'll return the call back to Tracy.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [5]

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Thank you, George.

Intrinsyc continues to take Internet of Things products to the next level, building artificial intelligence or advanced analytics directly into the devices and systems where insights are needed in real time. We are currently developing new products and expect to launch additional automotive development platforms and Edge AI System on Module and development kits based on Premium-TIER Snapdragon technology over the next few months. These products will join our broad portfolio of Edge AI computing modules with high-performance multicore processors and integrated artificial intelligence to power intelligent IoT solutions such as autonomous vehicles, intelligent cameras, smart home hubs, smart cities, robotics and industry 4.0 applications and many more.

This week, we signed a supply agreement and received an initial order in the amount of $1.2 million for the company's Open-Q 835 Edge AI computing modules. We expect to deliver these modules in the fourth quarter 2019 for the initial launch of our client's product. We have also been providing product development services to assist our client in the development of their product.

Although we can't predict how successful our client's business will be, we believe they have a proven management team and strong sales channel for their products. We hope to have a long-term collaboration with our client for shared success.

The order from our new client is an example of how our design win, based on a product developed in 2018, can come to fruition. In addition to the record number of new design wins achieved last quarter, we have a strong pipeline of new design win opportunities for this quarter and believe we can continue to expand our client base in a meaningful way. Although the company is consistently achieving positive EBITDA, we are taking steps to improve our financial performance and made additional reduction in our operating expenses in the second quarter. Since March 2019, we have made operating expense reductions primarily in personnel with an annualized cost savings of over USD 1 million with a full impact of these savings beginning in the third quarter.

With these cost savings and new orders received in the latter half of the second quarter and beginning in the third quarter, we expect to have a particularly strong fourth quarter financial results. I'm confident that we can execute on our growth strategy and deliver long-term value for shareholders.

I'd like to thank our shareholders for their patience and support. Operator, we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gianluca Tucci with Echelon Wealth Partners.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [2]

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I guess I'll start firstly asking on how bookings on your backlog ended the quarter.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [3]

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Yes. So we had a good improvement to date in our hardware backlog, and our bookings and expected shipments through the end of the year look very promising.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [4]

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Okay. Good. And so you added some commentary around a particularly strong Q4. In terms of seasonality, how should we be thinking about the second half compared to the first half of '19 in terms of percentages of overall annual revenue?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [5]

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I'm not sure if I'm following your question exactly, but are you asking how are we going to compare this year versus last year?

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [6]

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Correct. Yes. Correct.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [7]

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Yes. Well, I think there's some similarities. I think we had a pretty good quarter last year in the fourth quarter. I think that was record earnings in the quarter. And I'm kind of dancing around a little bit because we don't give guidance per se. But we -- if you add up all the bookings that we've received, and have already talked about shipping in the fourth quarter, I'd go back and say the same thing again. We're going to have a particularly strong fourth quarter.

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [8]

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I think the color I'd add to that is we did $7.1 million in Q4 last year, and that was behind watermark quarter. It was also in '17. It's just -- it's not only seasonality. It's just the way that some of our customer orders and the timing in them. There was some several large ones in those periods. We actually have that same trend this year where we're going to have a substantial quarter -- back half, particularly in the fourth quarter. So it's not really seasonality, but it really is trending in some ways like that.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [9]

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Okay. And then just I guess a follow-up to that question. In terms of your design wins, how many of your current -- I think you said that there are about 71 design wins. How many of those are expected to go into production in Q3 and Q4 of this year?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [10]

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I don't have that exact number offhand. I'd just note that we increased from 24 to 28 in the last quarter. So we had 4 start production last quarter. And basically as a run rate going through the end of the year, I'd expect we'd be in the vicinity of that number, perhaps 3 to 5 per quarter through the end of the year.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [11]

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Okay. That's great color. And so if I could just talk a bit about or ask about the order that you announced yesterday, that $1.2 million order, I guess, can you dive a bit deeper into the type of customer that this is? And how it all -- if it is recurring, how does it end up being like a recurring order in nature?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [12]

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Yes. So we are, as I mentioned, working on product development, so we're assisting the company with building their product, which is a videoconferencing system. And in addition to doing that product development that the product has been designed around, the use of our System on Module to power the device, so they're -- every time they sell a videoconferencing system, they need to order more hardware from us to power their devices. So that's where we get to the repeat revenue.

So I mentioned this is an initial stocking unit, and it's a new company that's founded by -- their founders have done this business previously. So they know the space very well, and they have very good channels lined up for the sale of their product. And we don't know exactly how well they're going to do, but we do expect them to be successful in the market and to make repeat orders as they generate sales through the year and through multiple years.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [13]

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Okay. Okay. That's fair. So in terms of your expectations for, I guess, particularly Q4, does that mean that your overall gross margin in the quarter, it's safe for us to err on the side of conservatism for the fourth quarter because it's going to be shipment-heavy?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [14]

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I think there'll be more hardware than typical for sure, so that does affect our overall margins. But again, the nice thing is our costs aren't going up incrementally. Our costs are relatively fixed, and as I stated, have even decreased from the prior year and decreased from our prior quarter -- in this quarter.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [15]

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Okay. Good. And I noticed in your disclosures that you bought a new ERP system that caused a bit of a spike in CapEx. Is that project completed?

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [16]

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Yes. It's in midstream. We did buy the software and related components of that, the hardware, et cetera, so those have already been incurred from a CapEx perspective. We anticipate the system to be implemented later this year as we expand into more production more hardware, cost of sales and bill of materials management is very important, so it was important to upgrade a legacy system that frankly we've been operating for almost 20 years. And in addition to CapEx, we did open up our own facility in Taiwan. So we did invest in the setup of that facility too so that was included particularly in Q2.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [17]

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The costs aren't going to recur.

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [18]

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Yes.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [19]

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Right. So is your overall -- like, can you give us an update on your consolidated head count as of the Q2 end?

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [20]

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Yes. It's 80 people in aggregate, and we started the year with 93. So we've had a net decline of 13, and...

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [21]

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And I assume that, that's all because of your cost-saving initiative as of March.

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George W. Reznik, Intrinsyc Technologies Corporation - CFO & Corporate Secretary [22]

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That's correct.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [23]

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Okay. Good. Now so do you think that you're at kind of safe OpEx perspective now? Or is there some more opportunity to trim some of the overhead?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [24]

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I think we're operating pretty lean. And -- well, in my case, I'm doing 2 jobs now. I have -- the prior one there wasn't enough hours in a week. So the organization is pretty lean. And we think we're in the right place given that we expect improvements in revenue and even in margins and certain areas that, that is more than enough to deliver improved bottom line results.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [25]

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Okay. Excellent. And then just one more from me here. Can you give us an update on your strategic review process, gentlemen?

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [26]

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Yes. So we don't have anything to talk about at this time. There are things that we continue to work on and continue to look at opportunities to enhance shareholder value and work with our -- closely with our Board and advisers to find those opportunities that are going to enhance shareholder value. So not going to report at this time, but we'll get back to you when there is.

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Operator [27]

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(Operator Instructions) This concludes the question-and-answer session. I would like to turn the conference back over to Tracy Rees for any closing remarks.

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Tracy A. Rees, Intrinsyc Technologies Corporation - President, CEO & Director [28]

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Thank you. Before we conclude this call, I wanted to thank everyone for joining us today and for your continued support of Intrinsyc. As a reminder, we encourage you to visit Intrinsyc's website at www.intrinsyc.com to stay updated on the company's activities.

Operator, you may now disconnect the call.

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Operator [29]

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Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.