Applied DNA Sciences Inc. (NASDAQ:APDN)
F1Q13 Earnings Call
February 15, 2013 9:00 am ET
Debbie Bailey – Director-Investor Relations
James A. Hayward – Chairman, President and Chief Executive Officer
Good day and welcome to our Applied DNA Sciences’ Investor Conference Call. My name is Debbie Bailey. I am the Director of Investor Relations, and I would like to thank everyone for joining us today.
Speaking today will be Applied DNA Sciences’ President and CEO, Dr. James Hayward. Please note that some of the information you will hear during our discussion today may consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share, and future products. Actual results or trends could differ materially.
For more information, please refer to the risk factors discussed in our Form 10-K for 2012. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information. At this time, I would like to turn the call over to Dr. Hayward.
James A. Hayward
Good morning and thank you for joining us. The past few months have been dense with developments. Despite our best efforts, revenues of $317,670 for the first quarter of fiscal year 2013 disappointed us. We attribute the gap versus our expectations to the expiration of our prior contracts with DLA via subcontract with LMI, and to slight delays in our transition to new contracts with products in our target markets.
Most of the increase seen, approximately $6.4 million in the net loss for the first quarter versus the same quarter last year is a result of the change in fair market value of the warrants that were issued as part of the recent financing. Without this line item, the overall net loss remains virtually the same as in the first quarter of last year.
I hope that by the end of this call, you will share our enthusiasm for our future and for the developments taking place in our current quarter.
Now, on November 29 we announced a round of financing with a New York City based accredited institutional investor, Crede. The terms of this $7.5 million financing were the best in our history. The improvement in our balance sheet eliminated the “going concern” comment from our auditors for the first time in our history, and has empowered our ability to respond to the opportunities that your management team sees in the foreground.
Subsequent to this financing, we have expanded our manufacturing and authentication assets, and increased staffing in Sales and in Technology. Moreover, we were able to exercise our right to buy back warrants for 27 million shares to avoid dilution we considered unnecessary.
We believe the company is now properly funded to address all of our impending needs at this time, in order to maximize our effectiveness, and to continue the growth and expansion of our business.
In our December conference call, I apprised you of the mandated use by the Defense Logistics Agency, who procures supplies for all our military, of our SigNature DNA by suppliers of high-reliability electronics in a federal supply class known as 5962. This is a tremendous validation of SigNature DNA, and our chance to contribute to the security of our military supply chain, and ultimately, to the safety of our nation’s defenders.
DNA marking to prevent the entry of counterfeits into any supply chain is truly a disruptive technology. Disruptive in that, it completely undermines the efforts of the counterfeit economy. Thanks to the remarkably low levels of DNA required to prove authenticity, the adoption of DNA marking is seamless in every manufacturing scenario we have encountered, and the technology is totally agnostic to the functioning of a marked product.
Nevertheless, DNA marking is a revolutionizing approach to a long-standing problem. It should be no surprise then, that adoption and commercial uptake by a broad industry such as electronics requires very visible validation and a gradual acceptance. We have developed strong allies who have embraced DNA marking, and are helping us lead the charge for an industry-wide adoption.
The big news since our last conference call in December was the Defense Logistics Agency’s announcement on January 28 that they would reimburse trusted suppliers for SigNature DNA marking of high-reliability electronic parts. As they stated in their announcement, and I quote, “that effective immediately, only trusted sources who comply with Deoxyribonucleic Acid marking requirements are eligible to receive FSC 5962 awards from DLA. There are no exceptions.”
We view this as a very exciting development, and we believe it is what the industry was waiting for. With its recent announcement, DLA has lowered any barrier to compliance with the DLA mandate by implementing subsidized costs and safe procurement through trusted sources.
It is a formula that could be powerfully applied to other high-risk categories of parts provided to DLA, and to other government agencies. For electronics businesses, the cost to benefit ratio is significantly enhanced. Return on DNA investment will one day be measured in market share recovered by original manufacturers, and more importantly in equipment and lives saved from the hazards of counterfeit electronics.
Now I wanted to give you an idea about the way DLA contracts come about. We’ve had more than a few inquiries about this, and I do get the feeling that the process may be more complex than one might commonly think.
A Request for a Quotation, or an RFQ for an FSC 5962 part, which is the category we currently mark with SigNature DNA, is posted on a DLA bulletin board system, which goes by the name DIBBS.
The supplier must be aware of the posting, then submit a bid, and then wait to receive a notice of award, if it comes. As of today, this last part of the process has been slowed as DLA procurement adjust to the DNA marking requirements. When a company is granted the award, it fills the order and makes sure that the parts are SigNature DNA marked. If the company is marking for the first time, it must ask Applied DNA to create a unique mark, and to supply the DNA required to mark the quantity of components in that order.
All of our customers must comply with our own standards for DNA security and undergo inspection, training and certification to be able to work with our SigNature DNA, and they must steadily operate under our quality standard.
Finally, the company applies for a DLA subsidy. I think you can see that the process is not as simple as perhaps just sending a purchase order. These necessary security hurdles have also slowed our initial revenues from this business. But most of these are first time through kinks; the process will become a lot faster as the machinery gets geared up, and we gain experience.
We also announced today, the activation of a new contract with DLA, very first time Applied DNA has been a director contractor with the U.S. government. This is for the authentication of these DNA marked components throughout the supply chain.
We have already signed six contracts with trusted distributors and suppliers of 5962 electronic components, and we have four contracts pending, bringing our total to 10 electronics companies with DNA marking ability. Eight more companies are currently in negotiations with us.
In order to facilitate uptake by the smaller manufacturers, and to speed the time-to-market while some of our customers prepare to mark with DNA in their own facilities, we have established a third-party marking capacity with two very dedicated partners; SMT, in Connecticut, recognized many of the methods used by counterfeiters, and was among the first to bring this outrage to the attention of the U.S. Government. SMT has already established three DNA marking lines at their facilities, and they have already marked thousands of 5962 components to fulfill the initial DLA orders.
Premier Semiconductor Services in Arizona, test the electronics to ensure their veracity and they’ll now supply DNA marking as a value-added service as well. Since the DLA announcement of its reimbursement policy, we have been receiving inquiries and orders at our highest level.
Now, as one might expect with an initiative of this size and impact, there has been controversy in the industry concerning aspects of the mandate. We think we have met these objections squarely and effectively. At a meeting in January of an influential industry standards group, the JEDEC JC-13 Committee, we presented extensive and precisely documented results of third-party testing of SigNature DNA showing that the product was remarkably robust, and fully up to military specifications.
We received strong feedback from many at the conference, who told us their questions were answered concerning any risk of functional interference with parts. Favorable articles about us have appeared this week in the military trade magazine, HIS Janes, in Aviation Week and Space Technology, and the popular supply chain site EBN.
An added benefit of our military work has been the extensive test results, which support the use of our DNA mark when deployed in extreme services. We’ve discovered our DNA marks will survive under extraordinary circumstance, plunging from extremes of temperature from minus 65 degrees to 265 degrees, surviving for over 1000 hours at 175 degrees centigrade. For comparison, consider cooking your Thanksgiving turkey at 350 degrees Fahrenheit for 40 days, and our DNA does just hot. Our marks have been examined for compatibility with humans, which will eventually help us with pharmaceutical applications.
We’ve even simulated the behavior of our marks in deep space. In every case, SigNature DNA proved a stellar performer. We’ve recently hired an additional sales rep, Bob MacDowell, with over 15 years in the electronics distribution industry. He has international experience procuring and selling electronic components to the largest OEMs and distributors. He brings with him relationships that will help APDN align with key partners to help implement SigNature DNA marking industry wide and we’re really pleased that he has joined our team.
While this segment of our business continues to garner publicity, please be assured that our core businesses continue to provide steadily growing revenues, and we continue to expand into new market verticals in some of the higher risk areas where authentication of products provides a needed method of verification, and can help track products.
In the United Kingdom, as announced last year, we have partnered with the London Metropolitan Police to protect homes in some of the highest crime areas of London. To-date, the 2,000 homes whose valuables have been marked with our DNANet asset protection system have experienced NO home burglaries, whereas in neighboring areas not involved in this project, burglaries have been reported.
A public relations campaign associated with this project has helped to deter crime in neighborhoods protected by DNANet products. We hope to expand this project to other police forces in the UK and elsewhere. As our European business continues to grow, we are pleased to announce the hiring of an additional employee with extensive management experience and technical knowledge of our markets.
He will work to increase our revenues throughout Europe focusing on the metal-marking markets, and working to mirror our success in the U.S. with marking microchips and other electronic components.
Now, the theft of copper globally has become a scourge to virtually every municipality. Thefts of copper rise and fall in direct relation to the Commex Copper Price Monthly Average. Of the more than 3,000 copper utilities in U.S., more than 95% experienced significant copper theft in the last 12 months, sometimes with a replacement cost of greater than $2 million per incident.
The estimated U.S. deaths from attempted theft of energized copper wire are more than 35 per year. As we announced last year, we have begun marking metals with electric utilities and with large national railways in Europe. We expect this to be a growing market globally.
We’ve also made great strides with Textiles. Recently we have begun, with our partner The Textile Center of Excellence in Yorkshire to mark wool yarn at the industrial level. This is quite an accomplishment and something we have worked towards for a number of years.
Being able to mark wool yarn at the industrial level opens up the entire wool marketplace and our partner, located in the heart of this industry is well positioned to help us take advantage of this.
The new formulation we have developed, which allows us to mark wool at the industrial level can also be used to marking cotton, and we have therefore also begun marketing our services to UK cotton producers and to cotton producers abroad.
We’ve recently signed an agreement with the Scientific Society of the Egyptian Cotton Champions to start a pilot study to mark five tons of cotton at the ginning stage. This relationship has huge potential, and we are quite excited by the possibilities it represents.
I will keep you updated as the study progresses. Another exciting accomplishment in textiles, is the recent successful completion of a feasibility study for a major producer of high-performance engineering compounds for the plastics industry. We hope to be able to work with this company on a commercial scale as a result of our successful study.
As you might by now have inferred, we continue to advance and make improvements to our products and formulations to meet or to exceed the needs of our customers and potential customers.
We continue to file patent and trademark applications to protect your intellectual property. I am pleased to share with you the recent news that we have received Notification of Allowances for four patent applications filed over the past years.
These patents, which cover the use of optical reporters linked to DNA for instant read and forensic authentication, are actually quite strategically important for the company covering many applications that require both instant read and forensic DNA markers. These patents will further protect our intellectual property and add a barrier to entry to others trying to imitate our product offerings.
And as I was writing about this, thinking about our challenges and those of an advancing global counterfeit economy, I turned to Google. In particular the Google Analytics page we maintain for our own website, the search engine optimization tool, which tracks words like counterfeit and counterfeit goods and anti-counterfeiting.
Now sadly, stories continue to abound of counterfeit products causing grave bodily harm or even death. Counterfeit medical devices, counterfeit and possibly defective auto parts such as brake shoes are abundant. The problem continues to grow, despite the good work of the many anti-counterfeiting organizations, and this again sadly, includes impacts on high-security, high-reliability, high value products, the places where our company has gained initial traction.
On the other side of the coin, a Google search for counterfeit microchips brings up Applied DNA in six of the top twenty listings, including the number two with over 4.8 million hits.
The International Chamber of Commerce in February last year estimates that the counterfeit economy globally could reach $1.7 trillion by 2015, displacing 2.5 million jobs a year. Now as the CEO, this puts us actually in an enviable position, this is one of the largest markets available to any company. And we at Applied DNA mean to have an impact. We are out there every day, talking to companies, presenting at conferences and educating the world about the dangers of counterfeiting and the strength of our products to help in defeating this scourge.
We continue to take pride in doing good while doing well for our shareholders and for the community at large. Thank you for your time, and for your continued support of our company.
Thank you, Dr. Hayward. We now would like to take the few questions that have been submitted by you the shareholders. Question number one is, when will you begin setup or construction of the new labs you mentioned in the last conference call?
James A. Hayward
Thanks, Debbie. We are still in the process of implementing this expansion. We anticipate to expand our current footprint by three or fourfold, and to have it staffed up as quickly as we can.
Over the past year there has been several partnerships or agreements announced by APDN, and thinking in particular of CNSE, Holliston and Inventionland; had there been any developments or progress in any of them, can you share any particular?
James A. Hayward
Well, I can tell you that all the partnerships you mentioned have devolved to be critical partners, and wonderful partners working closely with us. We’ve made great progress, we believe in development in all of these relationships. However, at this point in time, we cannot divulge any additional information.
Again, it is part of the constraints of being a biotech company operating in a security industry.
Thank you. Press release for Swedish contract doesn’t seem to be included, were they withdrawn or will actually appear in Q1 2013?
James A. Hayward
We are still growing very strong in Sweden, and in fact, it is helping to propagate our platform from the UK to Eastern Europe in general. We have expanded our business into a prominent Swedish utility company, which we did announce by protecting their copper.
We are working with the Swedish Rail; we’re working with multiple Swedish Police departments. We’ve added no cash as a Cash and Valuables in Transit customer. So we are making great progress in Sweden, and we have continued really to try to keep our customers informed both in the form of press releases, and in constant contact e-mailings and postings through our website.
Thank you. And one final question, the Board had approved Dr. Hayward a bonus, thought that was supposed to be attached to quarter of $1 million profit?
James A. Hayward
Thanks, Debbie, and thanks for your concern. The bonus that the Board granted me is not related to the bonus to which you refer, which was originally part of my employment contract. Bonus granted to me was strictly for the performance in the prior year.
Well, thank you all very much. Hope you enjoyed our conference call; look forward to talking with you once again at the end of our next quarter. Bye-bye.
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