Bluechiip gets traction after years of spinning on ice

Andrew McLellan is the CEO of Bluechiip. The company was started in 2003, with the idea of coming up with a way of identifying very cold samples, mainly bioscience samples of tissue and so on that are frozen and eggs that are frozen in liquid nitrogen, so they invented these chips that do that, that both identify the sample and say what the temperature is. But they’ve been spinning their wheels for years, finally in 2015, came up with a different strategy, that is to say to work with partners who create the vials and so on that the samples go in and they’ve finally started making some sales and they’ve done one sale to a company in North America called Labcon for a $1 million which is over 12 months and they’re talking to a few more. 

It looks like they’re finally starting to get some traction. The chips sell for $1. He’s not telling me what they make them for. They get them made in Europe, they obviously make a decent margin on them. They sell the licence to use them and they’re starting to finally get some traction. The problem with the company is that they’re burning cash at a rate of more than $900,000 per quarter, $300,000 or so a month, and they’ve got $1.2 million in the bank, so they’re going to run out of money fairly soon. They’re going to have to either make some sales quickly or more likely come to the market for some more cash through a capital raising. They last raised money last year at 2.8 cents per share. 

The shares are now 4.5-5 cents, so at least they’ve got a slightly better price now to raise some money, but that’s what they’re going to do. If you buy some things in this thing now you’re going to be shelling out some more money or get diluted a bit because they’re going to have to raise some more money because I don’t think they’re going to make that many sales that quickly. But look, it’s an interesting company, interesting technology. There are some risks associated with the potential competition, which he says there aren’t any but technology moves fairly quickly these days so it’s a bit hard to be certain about that. 

Here's Andrew McLellan, the CEO of Bluechiip.

Andrew, before we get into what exactly you do or the company does and a bit of the history and the prospects and so on, I just wanted to cover off on your cash position.  In the latest quarter you burned $936,000 I think and you’re down to $1.2 million in the bank.  I reckon that means you’re going to run out of money by the end of October.  What are you going to do?

You’re absolutely right, I mean we’ve got $1.2 million in the bank in the last 4C.  We’re getting revenue coming in and we’ve also got some R&D tax refunds that we expect to come in.  But we are in a position where we continue to make some progress on our delivery and delivery to orders and expect some new orders to come in, for which we’re going to need some working capital.

Are you going to have to raise some more money in the next few months from the market?

I think we are most likely going to raise some money but we haven’t come public with that at all, so we do need some working capital to continue progressing. 

When’s the last time you raised capital in the market and what price…?

We raised capital in the middle of last year, in the June/July we raised $3.4 million which helped us progress to the orders that we’ve got in place very well. 

Right, and your share price was a bit lower then I guess wasn’t it?

It sure was, we raised at 2.8 cents was the last raising.  I think today we’re sitting around the 5 cent mark just in the last month’s sort of tracking. 

So a bit less dilution this time or next time?

Yeah, correct. 

You are getting some orders now and you did make some sales in the last quarter, tell us how that’s going?  Are you expecting to ramp up those sales in the next few months? 

Yeah, we changed our strategy about three years ago and that’s really starting to gain some traction now.  We executed a licence agreement with one of our major partners in North America, Labcon North America.  They placed an order on us for – it equates to over a million dollars’ worth of orders that flows for just over 12 months.  We’ve been delivering to those orders since December last year and we sell chips.  I can get into the detail of our MEMS chips, but we sell chips and we delivered our first delivery to that order back in December last year at 24,000 chips or thereabouts.  Then in the last quarter, running into the end of June, we delivered just over 140,000.  We are increasing and seeing those chip deliveries increasing and in the not too distant future we’d expect to see that increase even more for substantial orders to come in on top of that as well.

Good, okay, we’ll get into that in a minute.  I just want to go back into history a bit.  The company was founded in 2003 which was a long time ago, Andrew.  What’s been happening since then?  You’re still burning cash 15 years later.

Yeah, correct.  The company was founded in 2003, we listed in 2011.  I’ve been involved with the company since the start of 2015 and the core technology is fantastic, it’s unique and it’s a world first in its sector and in our target markets.  But our original strategy of go to market was not successful and that strategy was to actually make our own products and sell them into the market and compete with some very large incumbent players.  We shifted that strategy and we’ve been operating for the last three years with a very different strategy in that we’re looking to partner with what we call original equipment manufacturers or the prime incumbent players in the market place. 

We’re now doing that partnering strategy and that’s starting to come to fruition.  We have been around for some time but we’re now starting to really gain some traction.  We are still burning cash, as you mentioned, Alan, but we see that in the not too distant future we’re going to move out of that position.

That was quite a long time to be flogging a dead horse, wasn’t it?

Well, it’s interesting.  I’ve never thought of it as a dead horse but…

I’m perhaps being a bit harsh, not a dead horse, but certainly an incorrect strategy I guess is what you said.

Yeah, and look, the technology is very unique and it’s not trivial.  It’s quite simple in how it operates and performs but it’s not trivial and it’s protected by 25 patents.  In the life sciences marketplace to which we play, there’s often a very longtail on the markets as well.  It has taken some time to get to this point and but we are starting to see that traction come through. 

You better tell us what the technology is and perhaps, along the way, tell us who invented it and how?

Yeah, look, the core technology was invented by a gentleman, Professor Ron Zmood who was a researcher in Melbourne and he came up with the technology because he was interested in tracking frozen products in cold chain logistics.  That’s where it came from and fundamentally the technology is very unique, as I mentioned.  It’s what’s called a micro electro-mechanical system or a MEMS device and it’s a very small, about 1 mm tube piece of silicone.  Within that piece of silicone there’s 52 resonating beams just like a piano.  Those beams respond to different frequencies as different keys on a piano and at the point of manufacture we play different keys.  That provides a unique identification for every single chip that we manufacture.

And when those chips are read and they’re in different temperature conditions they provide a different temperature as well.  As that frequency shifts, it provides a temperature reading, so we provide an ID and a temperature and because it’s a MEMS or a micro electro-mechanical system, it actually operates in very, very harsh conditions.  We can sterilise the chip through heat or radiation and it survives in liquid nitrogen conditions which is -196 degrees, which is a very, very harsh environment.

What was done before to identify and measure the temperature?

What’s really astounding is that at the moment and what is being done is still 50% of biological samples that are put into storage or these are IVF products for the egg and sperm in the IVF market that might be blood or serum or genetic materials that are put on ice to actually store.  Often times and over the 50% of the market is still handwriting onto labels or they’re printing human readable labels or they’re using barcodes and that’s the state of the art.  The problem with handwriting is that handwriting can be illegible, or barcodes or human readable labels in that very cold temperature, they can’t be read because they’ve got frost on them. 

When somebody’s pulling a sample out of storage, they’re trying to actually read what it says, they need to wipe off the frost which is a productivity issue and one is it takes time and the other is that the sample might become destroyed or damaged in that process.  Hand writing is still very much state of the art so we’re competing in those technologies.

Right, so how does one read your chips?  Do you also sell the reader?

Yeah, the chips are read by a reader.  We’ve got a number of different versions of the reader, we’ve got a benchtop reader, we’ve got a hand-held reader and we’ve just started manufacturing what we call multi-vial leaders.  What’s often used in these environments is people will put 100 samples into a box, the box sits in a car and then that goes into a freezer.  We’ve got readers that can read a box of 100 samples at once and which increases productivity dramatically. 

How much do you sell a chip for?  When you say you’ve got the deal to sell chips to Labcon, it’s $1 million, how many chips does that involve?

The best way to think about it is a chip is around $1 Australian.  We sell the chips for around $1 Australian depending on volume.  If it’s lower volumes it’s a little bit higher and if somebody wants to buy $100 million we’ll certainly sharpen the price from $1.  The best way for people to think about it is around about $1 per chip.

I thought you said you’d pivoted the company from presuming a strategy of making the chips and selling them to partnering with other big players.  It sounds a bit like you’re making and selling these chips to Labcon, that’s not correct obviously?

Yeah, Labcon is the consumables manufacturer, so they make the tubes.  What our previous strategy was, was making our own tubes and putting our chips into our own tubes and trying to sell our own cryogenic vials.  Our new strategy is partnering with companies to which we sell readers and chips into their consumables and that being the vials and tubes or blood bags is another example of how we approach that market.

How do you make the chips?  Are you making them here in Melbourne or are you getting them made somewhere else?

We get them made in Europe, they’re made in a silicone chip fabrication process.  It’s like a memory device, we make them in Europe, there is no capability in Australia at this point in time to manufacture silicone chips, so we get them made overseas under a production contract. 

Right, and what do they cost you?  If you sell them for $1 dollar what’s your margin?

Yeah, look, we make a good margin, we keep our margin quite confidential, as we’re discussing with different OEM partners it’s really quite important.  We do have different price points on our manufacturing, so as we scale we see an increasing margin as well and as the volume of chips increases, that increases also.

Obviously, the margin contains your licence or your IP, doesn’t it? I suppose one thing you could have done is license your IP rather than sell chips.

Yeah, it’s a good point but it’s not trivial to the manufacture of chips.  There’s a small handful of facilities around the world that are capable of making our chips, so it is very unique and it’s not something that the partners we’re talking to necessarily have the capability of doing themselves.  Our model is selling a licence to our partners and selling chips to which as their volumes increase we sell more chips and manufacture more chips.

You are selling licences as well as selling chips?

Yeah, our business model is we sell a licence for our partners to incorporate our chips into their products and our readers and to utilise our readers.  We also saw some engineering R&D services, but our eventual real aim and our real business model is the sale of large volumes of chips.

Just to be clear then, is Labcon buying a licence as well as buying chips from you?

Yes, so Labcon signed their licence agreement back in April 2017 and they paid a licence fee at that point in time and they’ve paid a quarterly licence fee to us since then and they’ve now moved since December last year into purchasing chips off us and incorporating them into their own vials.  They’ve tooled up a range of vials to adapt our Bluechiip technology and they’re also tooling boxes and other things at the moment.  They have paid licence fees, we’ve also got a number of other companies that have paid licence fees to us including Genea Biomedx who was an IVF company based in Sydney and also Planet Innovation who’s a local Australian R&D provider.

How big a deal is Labcon?  What sort of market share do they have in their world of frozen vials and so on.

They’re a large consumables manufacturer for the life science industry.  Last year they manufactured $1.4 billion of consumables that were across a broad range of products.  They have a substantial market share in the life sciences space and they’ve tooled up a specific range to include the Bluechiip technology so they’re pushing that into the market.  They’re based in North America but they do have global reach and what we are seeing is that as they’re pushing product down into the marketplace, a number of other OEM partners or large incumbents in the marketplace are starting to approach us and they’ve sold now 29 developer kits into quite a number of organisations across the globe.

What was that, you sold 29 developer kits?  What is a developer kit?

Yeah, so our business cycle is to go out and talk to and target these OEM customers and large incumbent players in the marketplace.  We move through a phased approach where we get into a discussion, sign a non-disclosure agreement.  Then we sell what we call a developer kit and the developer kit is around $10,000 and what it includes is a reader and a range of chips and we put a little bit of engineering time into it as well to configure the product, so our partners can test the Bluechiip technology.  But it’s real important for us that the developer kit is a significant stage in our process of converting to OEM partners.  We then, from the developer kits, we then execute a licence agreement. 

Labcon bought a developer kit a couple of years ago, they moved through executing of a licence agreement and started paying us some licence fees and now they’ve moved into purchasing chips and putting product into the marketplace.  The developer kits are really important along that process for us and with 29 developer kits sold, that’s a significant lead indicator of where the partnerships are progressing. 

How many firms have bought developer kits from you and then dropped off, not gone through to the next stage?

That’s a great question, Alan.  We’ve not seen any walk away and say no.  What we do see is that quite a number test and they go through a due diligence cycle of testing all of our product and fit and as I said, none have walked away but it does take them some time to go through the process of configuring and making a decision on implementing.  We see that increasing but we haven’t seen any walk away necessarily.

You think that those 29 developer kits will turn into 29 customers?

I think into the future, yes, absolutely.  It’s just a matter of time.  Bluechiip is in a very strong position in that there’s a unique un-met market need in that identifying samples that are in very cold conditions and recording the temperature of those samples, nobody else in the world can do.  As we progress over the next 3-5 years, I think we’re going to see a substantial number of those partnerships really coming online.  But we’re already up and running with Labcon as the first of those going to market.  Genea Biomedx is another company that are progressing and also Planet Innovation is a currently engaged OEM partner.

Can you tell us what the extent of your deal with Labcon is?  I mean, have they made any kind of commitments as to how much of their product range will contain your chips?

They’ve made a commitment in December, they made a commitment for the first year’s supply, and we’re progressing to that.  But we see that there’s a very large market opportunity.  $1 million is a drop in the ocean to what the opportunity is.  There’s 300 million samples get put into store a year in liquid nitrogen or -80 degree freezers.  So at approximately 1 million chips in the first year, there’s enough generally for 300 million.  We would see that our penetration into that market will increase substantially, so the opportunity is huge and Labcon has certainly shared that vision.

Right, so you’re saying that the total market is 300 million, is that per year or what?

Yeah, that’s per year.  The overall market size, there’s over 2 billion samples that are actually in store, but every year there’s 300 new samples going into store.  That number is actually – if you try and equate it to on a population basis, the population of the globe being over 6 billion people, you get to that number pretty quickly.  That’s the number each year that goes into storage, 300 million, and it’s a large growing marketplace.  Especially as genetic testing and cell-therapy type applications come through and onto the marketplace, there’s a lot more biological samples going into the store and going through the process of being stored and then used into the future.

Are you saying or do you think that your chips could replace the labels on the samples that are already in storage?

There’s a potential for that, yes, and we do get a number of requests from customers to say, ‘Hey, can you retrofit onto our existing products in store?’  We certainly can do that…

What’s the answer, you can do it, can you?

Yeah, we can do it and what we have done is customised what we call a button.  The market leading vial on the marketplace or tube, we’ve actually customised the button that can go into the bottom of the tube.  While the customer might still utilise a label on the vial, they may also put a button into the vial and retrofit it back into what they’ve got in store. 

Is there any potential for moving into other businesses?  I mean, obviously what you’re targeting now are the really cold things like liquid nitrogen bio storage, what about ordinary cold storage, is there a potential market there?

Yeah, there certainly is.  We’re very focused at the moment on the life science and the frozen, very cold life science market, but there is certainly adjacent markets.  One of the unique propositions of the Bluechiip technology is we survive the very harsh cold conditions.  We survive sterilisation, so if there’s other technologies like radio frequency identification, so RFID type technologies which are like a passcode for a door type tech, they don’t necessarily survive sterilisation or those radiation type items.  The other is that we have a very unique ID that’s actually produced and we control that. 

There’s a very strong anti-counterfeiting marketplace as well, so there are significant opportunities in adjacent markets.  We’ve been doing some work in the background, we call it Horizon 3 type research and development and we’ve applied for a patent on a technology which we codeveloped with Melbourne University, which we’re calling an ‘over temperature chip’ which would provide an indication for when something has gone down into the cold and then come out of that and gone above a certain temperature that might be an indicator that the sample or the product is now damaged.  For that over temperature chip, we certainly see that there’s a very good opportunity in the cold chain logistics market place.  That’s a very, very large market.  While we’re maintaining a very strong focus in the life science and the biological storage marketplace, there’s certainly adjacent opportunities and as we grow in time, we will be accessing those markets.

It occurs to me that the technology that’s developing now for supply chain data and recording these sort of things is blockchain and I just wonder whether blockchain is a potential disruptor for you or are you looking at possibly putting your stuff on blockchain as well?

Yeah, there’s an application for us in blockchain and what Bluechiip provides is that our belief is that every item needs to have a unique identifier, which sounds fairly obvious and it is.  Everything needs to be identified.  We can provide that identification and when that’s being used in a blockchain type setting where you’ve got traceability right across the board, it still needs that identifier, so that’s where we play.

What are you doing about that, anything at all?

At the moment, as I said, we’re focused on the immediate marketplace, but we’re exploring all of the markets including blockchain.

But it is the case, isn’t it, that one of the risks about Bluechiip is that technology is changing so quickly all the time that something might come along that makes your devices, your chips, obsolete.  I mean, obviously I’m not an expert in the area, you know what’s going on.  Is there anything going on that could come along apart from blockchain or maybe as well as blockchain?

Yeah, there’s blockchain certainly, so we can play into that.  The technology is evolving, but we have a very unique position and we’re well protected on our core IP and we also have a patent that’s been granted in North America that relates the ID and the temperature of samples in storage and we see that as being very valuable.  You’re absolutely correct, technology evolves.  But we’re not seeing, especially in the very low temperature environments, any technology that’s really coming through that would disrupt us from what our market opportunity is.  There are adjacent technologies, radio frequency identification that is out there and available.  We haven’t seen any evidence but it operates and works well in the very low temperature environment.  There is the potential for that to encroach, but what those technologies absolutely do not do is provide a temperature with that ID.  In that space we’re very well protected.

Right, because your chip actually identifies what the temperature is, whereas a barcode can’t do that or an RFID can’t do that?

Yeah, absolutely, correct.

Right.  When you go to talk to companies like Labcon and the others you mentioned to do a sales pitch, are you pitching against anyone else at all?

We’re pitching against handwritten labels and barcodes and some RFID companies that pertain to working.  What’s very important for us is that ability to sell a developer kit and allow our partners to actually test and prove out that our technology works.  We’re not necessarily competing with other technologies, so to speak.

Sounds great.  Is there anything else you need to tell me, Andrew?

I think we’ve covered most of it, Alan.  I think Bluechiip’s in a very exciting position now, is basically the core takeaway.  We’re now starting to produce and deliver chips and we’re doing that in volume with some substantial partners.  We expect that to increase and grow in the short to medium term, so it’s a really exciting time for us.

Great to talk to you, Andrew, thank you.

Fantastic, thanks very much, Alan.

That was Andrew McLellan, the CEO of Bluechiip.