Applied DNA Sciences' CEO Discusses F3Q13 Results - Earnings Call Transcript

| About: Applied DNA (APDN)

Applied DNA Sciences, Inc. (NASDAQ:APDN)

F3Q13 Earnings Conference Call

August 15, 2013 9:00 AM ET


Debbie Bailey – Director, Investor Relations

James A. Hayward – President and Chief Executive Officer

Debbie Bailey

Good day and welcome to our Applied DNA Sciences’ Investor Conference Call. My name is Debbie Bailey, I’m 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 Applied DNA Sciences’ 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, Debbie. Thank you all for joining us today. We welcome back our long-term shareholders and for those of you who are new to Applied DNA Sciences also warm welcome. We thank you for your continued interest in and support of the company.

On Tuesday this week, we announced the highest quarterly revenues in our history, namely $644,842, a 22% increase in revenue generated over the same quarter last year. We have reason to be pleased with the direction on which we’re heading, particularly as we see the prior couple of quarters as gestational in which we built a very solid framework for revenues to come.

As is evident in our 10-Q filing for the third quarter, our SG&A expenses grew this quarter, but much of this expense can be ascribed to our gestation as we completed product improvements, moved into a new facility capable of handling our increases in DNA production, formulation, and of course, authentication, which is our central dogma.

I will give you a virtual tool of our new facility in a few moments. The result is we are in an unprecedented competitive position, which bodes well for future quarters. We invested in mid third quarter in an asset purchase agreement of the forensic tagging security system of RedWeb Technologies Limited in England. And we hired their Managing Director to help lead our sales in Europe. After working to improve this system, we are beginning to attract commitments for its use in copper marking for railways in Europe.

Our acquisition also from RedWeb of the Sentry spray system was converted after some work into an automated DNA marking spray that labels criminals virtually in the act, literally red-handed. This system has attracted the attention of many potential clients globally. As an off the shore product, our DNA security sprays are the perfect candidate for distributor in channel sales. But seem we intend to exploit as it is the most effective and timely means to get feet on the street.

We now have distributors in Sweden, Italy, Australia, New Zealand, North America, Greece and the Middle East with plans for further expansion. In addition to the distributor’s network, we are working with nine partner companies who are either specialist manufacturers who have unique context and experience in specific industries. We are exploring the development of customize, but quick-to-market solutions with each of these partners.

Applied DNA is engaged with the London Metropolitan Police Service, deploying our DNA net product against home burglaries in two of the city’s high-crime areas, Southwark and Lambeth. Results have been very favorable including in districts adjacent to the target neighborhoods, showing that the crime has not been merely displaced, but actually deterred. We believe this trial will attract the attention of other major cities aborad and in the U.S.

Our working cash and transit continues to assist the UK police in solving robberies. Since we started authentications, we have helped convict a tally of 64 criminals who have now been jailed for a total prison term of 290 years in the UK alone, with many more cases still being processed by the courts.

In Sweden, our SigNature DNA is also valued by the police, who have obtained multiple convictions against organized crime. In sum, our European initiatives are on solid ground with a great trajectory and a superb sales and management team.

In Japan, we have implemented a DNA program that protects macro and provides the consumer with a tool to check that the fish is fresh and authenticate. Working with our Japanese partner Nissha Printing Company, we completed a year long pilot with the OITA Fishermen Co-operative that started in April 2012. Almost 800,000 fish packing labels were produced that incorporated the SigNature DNA customer queue ink used to print details of the [batch log] and expiration of each fish that was individually packaged by OITA and printed using Nissha’s continuous ink-jet printer with the DNA ink made for Oita. In addition, the consumer can check the freshness and the authenticity of the fish by visiting the Oita website and typing in the designated code on the package.

Following the success of this pilot, we will continue to expand our efforts in food labeling with Oita and with other Japanese cooperatives to protect other seafood products, fruit, and wood products. The Nissha Printing Company continues to be a strong partner for us in Japan an in the Asian market in general. They are an 84-year old company, headquartered in Kyoto with over 3,000 employees around the world.

So our efforts at globalizing Applied DNA now include the Middle East with strong opportunities for us in textiles, brand protection, and in security. We will have more to tell about our efforts in the Middle East by next quarter.

The foundation for our record performance in the third quarter rests strongly in our steady forward progress in military electronics. Today, August 15, marks the one-year anniversary of the first step of the requirement by the Defense Logistics Agency of the Department of Defense, in their requirement that SigNature DNA be used to secure the authenticity of the Federal Supply Class for electronics known as 5962. Integrated circuits comprise this class and their counterfeiting puts out countries weapon systems and our war fighters at terrible risk.

In this singular year, we have contracted with 18 companies and we are in negotiation with an additional 35 companies. Our progress as directed by DLA began with the independent distributors who formed the dominant portion of our current customers. As acceptance by our early adopters increases, our sales cycle shortened as evidenced by the accelerating rate of our customer acquisition.

But perhaps most telling of our future is the fact that we have already signed our first of the much larger customer in the classes of authorized distributors and original component manufacturer. The size and technology demands of customers in these latter categories are significantly greater allowing us to get more DNA marked components into circulation, increasing our revenue per contract.

The accumulating mass makes this program more effective with each passing day as more of the recipients of these DNA secured chips can participate in the assurance of each chips origins. Our experiments have shown that each marked chip can be DNA authenticated more than 10 times at any point along the supply chain, the testimony to the robustness of our signs. But most important is the gradual impact of growing demand for the authentication as the DNA mass in the marketplace increases. This will form an increasing annuity with a greater role on our revenue and our margins. We announced just last week that the number of SigNature DNA-mark components was passing the milestone of 500,000 units. We really look forward to informing you as this number multiplies.

An ecosystem is in place now, where business partners are equipped to mark and are incented to do so. Those partners can help us take the next step to work with downstream companies who can authenticate these parts. Those potential authenticators are halfway there already, although they may not know it. In keeping with our efforts to economize the cost of sales and control our SG&A, we will be launching our authentication programs that can be sold by channel partners who are already well established in the electronics and military marketplace.

The slide now appearing on your screen depicts the marking of a microchip with our SigNature DNA. This molecular branding as it were of an authentic chip, allows us or our customers to ascertain the originality or the source of the chip with as little as just a few molecules of a DNA marker that we engineer uniquely for each individual customer.

The quantity of our DNA marker required to trace each component is so small that our methods are totally agonistic to production methods and to the form fit in function of these chips. We have developed a portfolio of patented technologies tailored to reach step in the diversified electronic supply chain.

Now in this slide, I have depicted a simplified form of our technology roadmap. As we progress upward on these arrows, our customer base becomes larger and our contracts more meaningful. The scale of operations becomes larger, the massive DNA mark chips increases by logs, and the impact of the accumulating contracts will enhance our revenue growth rates. The signs of our breakthrough are already here with growing inquiries from prime contractors and from additional federal agencies.

The prime contractors will be centralized for us as they have the power to flow down the technology and require their suppliers to DNA mark. Moreover, the prime contractors are key to our establishment as an industry best practice, a step that will compel our use in commerce outside of defense, a step that opens up a global marketplace and will uncap incremental revenue.

Now many of you have written requesting a virtual tour of our new facilities, so allow me to welcome you to our new home. Let me remind you that we are at our core, a biotechnology company. By comparison to most biotech firms, our rate of investment has been moderate and very carefully controlled. Our transition from a scientifically focused biotech company to an entirely immersed in sales is about mid complete. With sales comes manufacturing and we are committed to flawless scalable execution, hence our need for a secure state-of-the-art operations facility.

Now, the next few slides will give you a quick view of that new facility. Here, we show our reception area, branded as our corridors and rooms generally speaking with images and logos that enforce our image in the marketplace. To the left, you see a secure corridor that leaves down the path to our forensic laboratories. And those are the doors of both sides of this corridor. You will notice, the construction is to a pharmaceutic caliber.

On the right is a view through a secure glass panel into one of our forensic laboratories. And as you can see function is segmented in this laboratory by the construction of individual rooms and access to each room carefully controlled.

Here is our general development laboratory, where we are working on new methods and pictured in particular. Here are some of the printing methods that customers have requested. We use to deliver DNA since these are the printing methods they already have in place at their facilities. Pictured here on the left is a DNA extraction laboratory and on the right a high profile of some of the equipment used to actually amplify the DNA once we have that extracted.

On the left is just a component of our chemistry laboratories. Keep in mind, our technology uses not only the basic principles and current advances of molecular biology. But we’re also very much a chemical platform with rapid reading components that are associated with our DNA and with new science and technology that ensures our DNA binds tightly to the target we have in mind. On your right is a DNA sequence here, one of the tools we use in confirming the identity of a particular customers signature DNA mark.

And then finally here we are in our conference room preparing for our Investor Call in today. So as we have previously communicated, we brought on Judy Murrah as Chief Information Officer a step toward advancing information-based solutions around our core DNA-based product.

Our business is ultimately an information delivery platform, which uses biotechnology to give customers actionable information about counterfeits and about crime events. We say that our business operates at the intersection of biotechnology and information technology unique in this way.

Customers benefit with a clear value proposition. The base of SigNature DNA marks in circulation is growing, the data is rich. Externally for customers that can mean added insights in supply chain and product life cycle security, counterfeiting and crime prevention and more. It can mean new revenue streams for us in markets such as pharmaceutics and consumer goods.

Internally, we are completing complementing this direction by optimizing and automating our business processes to drive efficiency, effectiveness, and security on behalf of our customers. While I hope you can see that we are now pass gestation and birthing new business in RedWeb.

And now, I’m happy to answer some of the questions you have graciously provided.

Question-and-Answer Session

Debbie Bailey

Question one; how many preferred B shares were delivered to Crede after the recent S-3 registration and at what price range?

James A. Hayward

On July 31, 5,500 preferred shares were issued to Crede for $1000 a share. The company received gross proceeds of $5.5 million and exchanged for that. On August 14, yesterday, we exercised our option and converted the B preferred stock held by Crede into $42,307,692 shares of the company’s common stock at a conversion price of $0.13 per share.

In addition, we have also exercised our option to repurchase the Series C Warrants issued to Crede for $10,000. The Series C Warrants held by Crede were to initially purchase 26,737,967 shares of the company’s common stock at an exercised price of $24.31. And we have received a number of questions and comments about the most recent financing, and I’d like to take this opportunity to address some.

We take our responsibilities to the physically conservative and to grow the company responsibly quite seriously. And we’re at a unique moment in time that we can’t allow to pass. As I hope you have seen over the years, this management team at Applied DNA has been very conservative and cautious.

We’re at a very exciting crossroad and in order to fully capitalize on the pending opportunities, we have to have the proper infrastructure in place. And, of course, this requires investment in personnel, in equipment, in facilities. We will continue to do our best to manage our costs and expenses while making sure that the company is fully prepared to meet the demands of our customers.

And remember in addition to being employees of Applied DNA Sciences, we are all proud shareholders too.

Debbie Bailey

How is it determined that an item is or isn’t counterfeit? I understand that you have some kind of handheld device that is used. Could you give us an overview on just how this unit does its job and each unit is unique for each manufacturer and supplier?

James A. Hayward

Thank you, Debbie. Each SigNature DNA Marker is first designed and manufactured to be a highly customized and encrypted botanical DNA marker. The SigNature DNA Marker is then encapsulated and stabilized, so that is resistant to heat, to organic solvents, chemicals, and most importantly to ultraviolet or UV radiation. Once it has been encapsulated, our SigNature DNA embedment systems can be used to embed the SigNature DNA Marker directly onto products or other items or into specialty inks, threads, and other media, which in turn can be incorporated into packaging our products. Once it’s embedded, our SigNature polymerase chain reaction kits can provide rapid forensic authentication of specific SigNature DNA Markers.

In creating unique SigNature DNA Markers, we use DNA segments from one or more botanical sources. We arrange them into unique encrypted sequences and then implement one or more layers of anti-counterfeiting techniques, because the portion of DNA in the SigNature DNA Marker used to identify the product is so minute. It cannot be detected unless it is replicated billions of times over or amplified as itself.

This amplification can only be achieved by applying strands of DNA or a primer, and polymerase chain reaction or PCR techniques to the SigNature DNA Marker. The sequence of the relevant DNA in the SigNature DNA Marker must be known in order to manufacture the primer for that DNA. As a result, we believe the effort required to find, amplify, select, and clone the relevant DNA in a SigNature DNA Marker would involve such an enormous effort and expense that the markers are virtually impossible to copy without our proprietary systems.

We offer rapid readers capable of instantly testing for the presence or absence of any of our SigNature DNA Markers. In addition, when a forensic level of authentication is necessary, we offer in-house forensic DNA authentication that will confirm those sequences in approximately two hours.

Initially, before our items are sent for authentication to our facilities, there is a rapid reader that is employed to determine if there is DNA on the product. The rapid reader we currently employ is not unique to each individual. Understand that the DNA each customer receives is unique to them, but the rapid reader can identify the initial presence of DNA without that specificity.

For a more detailed analysis of the DNA it is sent to our labs, we’re working on the next-generation reader and I hope to be able to tell you more about that in the coming months.

Debbie Bailey

Would you please tell us about – tell us the details of your partnership with SMT Corporation and exactly who they are?

James A. Hayward

SMT is a superb ally. They are offering our DNA marking to all its customers and also as a third-party service and dedicated facilities for SigNature DNA Marking of electronics. Premier Semiconductors are second third-party marking partner and we’re pleased to be working with both SMT and Premier Semiconductor to DNA marked products.

Founded in 1995, SMT Corporation is a global broad line independent stocking distributor of board level electronic components and related peripherals to the commercial and defense and aerospace industries with more than half a billion components in stock, representing over 1,200 major component manufacturers, it maintains one of the largest ready to ship electronic component inventories in the world.

SMT’s main focus is on the U.S. defense and aerospace industry, which demands the highest in component quality, traceability and inspection documentation for high reliability applications. SMT continuously strives to be the industry leader in protecting customers from the always persistent and growing threat of counterfeit components.

Their world renowned practices and strict testing procedures put them at the forefront of keeping their customers sequestered from the growing dangers of sourcing in the open market. Added 72,000 square foot Sandy Hook, Connecticut facility, SMT has completed a purpose filled high security DNA marking unit geared to high volume production flows. Another laboratory is also completed and ready to be added as necessary.

Security, quarantine and test facilities have been ramped up to support the SigNature DNA marking and authentication platform.

Debbie Bailey

According to your publicity, your product is unique and required by the Department of Defense, yet your performance has reflected by stock price is decimal. Has the Department of Defense renege on their requirement that all suppliers use it and why are sales to non-defense customers not exploding?

James A. Hayward

Nothing has changed with respect to the DLA requirement. All components that fall into the FSC 5962 category are required to be marked with our DNA markers. As company bids get accepted, they are coming to us for their unique DNA marker. And as we have stated previously, we have signed 18 contracts to-date, but there are an additional 34 companies in various stages of negotiation at this time.

And as I spoke earlier, the category and size of these customers are evolving according to our expectations as laid out in our technology roadmap. We have reason to think that these companies and others will begin to use the DNA markers not only for FSC 5962 components, but hopefully all of their products and this will begin to flow down to their supplier and subcontractors. And we are beginning to see signs that this is what will happen.

Debbie Bailey

I would like to know the status of the Markem-Imaje Letter of Intent. Also I would like to know if there are any ongoing discussions with pharmaceutical companies or with the FDA about any future requirements of DNA to mark pharmaceutical packaging?

James A. Hayward

Well we continue to work closely with a great partner in Markem-Imaje, while we cannot comment on any of our ongoing conversations with pharmaceutical customers, we remain committed to and working to help protect pharmaceuticals against counterfeiting. This is a longer-term project that will take time and investment, but it’s something that as a company, we are absolutely committed to pursuing. And that is doing well, while doing good. This is a direct way to save lives and improve health by preventing the infiltration of counterfeits.

Well, with that, we’ll end our third quarter investor call. And we thank you very much for your interest and loyalty to Applied DNA.


The organizer has ended this session. And this call will be disconnected.

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