Applied DNA Sciences' (APDN) CEO James Hayward on Q3 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Applied DNA (APDN)

Applied DNA Sciences Inc (NASDAQ:APDN)

Q3 2014 Earnings Conference Call

August 12, 2014 09:00 am ET


Debbie Bailey - Investor Relations

James A. Hayward - Chairman of the Board, President, Chief Executive Officer

Karol Kain Gray - Chief Financial Officer

Mitchell Miller - Director, Communications


Debbie Bailey

Good morning. Welcome to our Applied DNA Sciences' Quarterly Conference Call. My name is Debbie Bailey, and I’m the Director of Investor Relations. I would like to thank everyone for joining us today.

On today’s call, we will be hearing first from Dr. James A. Hayward; President and CEO, followed by Karol Kain Gray, Chief Financial Officer for the company. We will conclude with answers and questions from our shareholders.

Please note that some of the information you will hear during the 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 and Form 10-K/A for fiscal 2013. 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

Thank you, Debbie. Good morning to our audience. Thank you all for your loyalty and interest and for joining us today.

I'm going to begin this quarter by highlighting the company's recent news. Later, our Chief Financial Officer, Karol Kain Gray, will detail our financial results.

I am gratified by our performance this quarter. We continue to establish the company as a technology leader in the anti-counterfeiting segment and the security space. We have generated over $2 million of revenue for the nine months ended June 30, 2014, which is an increase of 59% or $768,000 from the same period last year. These are not only the highest revenues we have been able to report for the first nine months of the year, but for any full fiscal year.

Compared to the second quarter of this year, our third quarter grew by 32%, a very satisfying trajectory quarter-over-quarter

Although our third quarter results are gratifying and provocative, our management team strives steadily for faster growth rates while our quality and operations groups worked tirelessly to ensure that we are ready to respond.

In last quarter's communication to you, we urge you to look at the company now as a growth story. The story begins roughly in 2009, when we first began commercializing and is continuing with exciting co-developments in many verticals and good recurring revenue growth in others.

I think the past quarter, that story has come into even sharper focus. We have multiple new contracts that begin with an at-risk sponsored development phase. Success in that development phase paves the way to higher revenues in the subsequent commercial phase.

We see this for example in the success of our program to protect power stations in Europe and the expansion of the home asset marking in Stockholm.

In many other businesses, we are in an advanced development phase linking with partners and forming powerful co-development agreements. This has happened with the global textiles firm Wakefield, and with the packaging and coatings powerhouse Pillar, but it also has happened with Fortune 100 companies that we cannot name, due to secrecy agreements and with companies in the automotive industry.

Some of our partners are multinationals with large selling infrastructures that take time to onboard. We remain confident that these relationships will bear fruit as they have with Nissha and Smoke Cloak.

Now, shortly after the end of the third quarter, Applied DNA Sciences was awarded a contract with the Missile Defense Agency via a small business innovation research program Phase II, which provides the company funding to develop larger scale and more efficient methods of SigNature DNA application and authentication.

This includes the development of an optical reader that could be employed in the field for rapid detection of the SigNature DNA ink marked on the component. The independent, the intended outcome is a capacity to service 100 additional customers.

What is common among these different initiatives? All of them propel our business along the technology roadmap we have traveled since 2009, but for some, far more quickly and through funded programs. In short, we are in many ways just emerging from the development stage, the fruits of which are becoming more evident every week. Yet in other verticals, we are an increasingly solid revenue generator. We think it's a potent combination.

I'm delighted to welcome new management and science talent during the last quarter. The company has added to Vice President of Life Sciences, Dr. Mike Hogan, a distinguished thinker and inventor. Mike has a doctorate from Yale in the physical chemistry of DNA. He launched an academic career at Baylor in Princeton and has 25 years of experience in translational science with emphasis on the application of physical biochemistry and engineering to the development of diagnostic testing, particularly the lab-on-a-chip approach.

We are really thrilled to have Mike on board. One of Mike's first initiatives will be to assess and develop our presence in the all-important Pharmaceuticals anti-counterfeiting space. Collaborating with Dr. Ben Liang, our CSO, Dr. Hogan will also be guiding our next-gen sequencing techniques for in-field DNA reader.

Now, there are some who have questioned our expansion in staff and space and whether these expenditures predated are increase in revenues by too much time. Let me assure all of our stakeholders that we take every dollar of expense quite seriously.

In fact, we managed by the antithesis of the field of dreams. We plan out every step in our growth. Given our historic investment in solutions, services and products, it would be far worse to be unprepared with orders for commercial services and supplies arise.

We have recently developed the methods to manufacture DNA in-house at a scale previously thought too difficult or expensive, led by Ben Liang and our crack engineer Dr. Alex Tran, we have been steadily increasing our capacity for a massive DNA libraries and for large reserves of single marks that are required for sustained projects.

The net savings is already more than $200,000 per year, but more importantly, the internal control will allow us to provide higher levels of service and ensure that we respond to orders with short run turnaround times, both qualities that when customers in a very competitive market.

Now, right now, we are bidding on contracts that require a massive authentication capacity. There are no guarantees that will win these contracts, but we would be guaranteed to lose if the framework for the capacity is not in place for our bids.

Similarly, compliance with ISO standards for business operations and for forensic science necessitate an absolutely top-flight quality team and the eventual ability to pass audits by governments by police organizations, by logistics inspectors by the FDA and ministers of health and welfare. We are progressing with our ISO certification nicely and I do expect to make announcements in this regard in the near-future.

In order to minimize expense, the company outsources all non-essential staff and has been cultivating sales channels whenever possible. This practice allows us to screen potential employees should business demands increase.

Our electronics business also scored a success outside the military this quarter, when the House of Representatives commended the Jet Propulsion Laboratory, a component of NASA, for its initiative to explore SigNature DNA authentication. The house also requested a briefing on the DLA SigNature DNA program, along with other anti-counterfeiting planning by the DoD.

This wide visibility and credibility for our electronics business has generated inquiries from across the spectrum of government agencies and commercial manufacturers. The House requests for a briefing is a very, very positive sign, recognizing the program as impactful across the whole of DoD and an opportunity for us to give our platform even more visibility.

Now our expansion in the EMEA continues. Our third quarter EMEA revenues grew approximately 41% over the second quarter of this year. Importantly, the expansion is nicely diversified between applications on the one hand, and on the other a steady expansion of established businesses such as copper theft prevention, cash-in-transit protection and home asset marking.

We have previously gained most of our EMEA revenue from the security sectors such as cash-in-transit, but have more recently matched these revenues with new clients who are increasingly seeing the benefits of using our products for anti-counterfeit and brand protection measures, particularly in the textiles area.

We have continued to build our reach to consumers with the growth of distributors, now more than dozen throughout the EMEA region, who we used to sell product to the security sector. Excluding cash-in-transit, where we sell directly, and we can now boast sales reached to 14 countries. Sales by our distributors traditionally takes time to ramp up, to gain momentum, but we are seeing very positive early signs.

To support our growth, we have recently recruited Dr. Joe Greenwood, who is our Technical Director for the EMEA and who is already making great progress in improving to be an excellent addition. Also underway are two major trials of our home asset marketing program in cooperation with law enforcement.

In these trials, valuable items in people's homes are marked with DNANet by police, providing law enforcement with solid evidence when criminals are captured. Through use of signage and other publicity, criminals are deterred from home invasions and burglaries.

The trial of home asset marking in the Tyresö neighborhood of Stockholm, the program is called Marked DNA, has attracted national television coverage in that country. That kind of media coverage adds to the deterred value of the product. We want the would-be criminals to know we have deployed defenses against them and we are not unhappy about its publicity value to us of course.

Police across Europe have noticed the benefits of using forensic products to deter crime and we are actively working with law enforcement in six major European countries currently. There has also been a considerable uptick in interest by American law enforcement.

In textiles, we are very excited about the energetic industry response to our new textiles programs that we launched back in December. We continue to meet with large yarn spinners, mills, weavers, to talk about SigNature T and fiberTyping. The program is generating great interest as the first fiber-forward approach to protecting the textile supply chain.

By marking at the raw fiber stage, every node in the supply chain gains the ability to authenticate its supply. This gives the program a truly global reach and covers both, synthetics and organic fibers. The textile program has had extensive media coverage.

Let's talk a bit about our co-development agreements in textiles, because they show so clearly the way our company is laying the foundation for vibrant growth in this vertical and because some of you seem to have questions about the role of our partnerships.

In June, the company signed an agreement with Wakefield Inspection Services, which operate in over 60 countries. Wakefield service, every point in the massive global textile supply chain and is expected to pave the way for Applied DNA Sciences to become an integral part of the entire textile industry. The agreement has the potential to open numerous opportunities for us as SigNature T is developed for authentication at all points in the supply chain from raw materials to finished products, to the retail market.

In late May, we signed the partnership with Pillar, which has also confused some of our stakeholders. Pillar is a business unit of the giant corporation ITW and Pillar is going to target key customers for joint development of DNA marking programs, with a focus on their value-added solutions. Pillar uses state-of-the-art plasma technologies that are high-energy format in which DNA is stable and they can make DNA binds tightly to a variety of substrates in textiles, packaging and in other media. We expect our relationship will be of great mutual benefit.

Now, finally, I would like to talk with you about our capital restructuring, important to every single stakeholder. I would like to describe today some coming steps in capital restructuring that we think can be great leaps in the strength and visibility of the company in the all-important capital markets. These steps are contained in the proxy statement, which appears on our website and at the site in our 8-K filed on July 21st.

Now, we are asking for your support on the reverse stock split and a reduction in the number of authorized shares outstanding both, subjects will be discussed at the upcoming annual meeting on August 28.

A reverse stock split is designed firstly rather to increase price per share in order to meet the share price listing requirements of either NASDAQ or the New York Stock Exchange. It is also designed to bring the share price to a level that would make it easier for institutional and retail investors to invest in our company and it is designed to enhance trading liquidity with improved market listing and shareholder components.

The primary reason our Board of Directors recommended the reverse stock split is to increase the per share price of our common stock to meet the listing requirements of both markets, NASDAQ and the New York Stock Exchange. The board believes that attaining and maintaining the list of our common stock on the NASDAQ, with the New York Stock Exchange is in the best interest of our company and our stockholders. Yes, a reverse split reduces your number of shares, but it increases the price per share proportionately.

It does not alter your fractional ownership of Applied DNA. Our Board of Directors believes that an increased stock price might encourage investor interest and improve the marketability of our common stock to a broader range of investors, including institutional investors.

We believe that the reverse stock split will make our common stock a more attractive and cost-effective investment for many investors, which should enhance the liquidity available to the holders of our common stock. Accordingly, we believe that the approval of the reverse stock split is in our company's and our stakeholders' best interest.

We are currently authorized to issue 1,000,350,000 shares of common stock. Because the board is mindful about the potential dilutive effect on existing shareholders, and because the approved and recommended range of exchange ratios would result in more shares becoming available than the board believes are necessary for reasonable foreseeable future funds, the Board of Directors has also approved and recommended an amendment to our Certificate of Incorporation to decrease subject to stakeholder approval and implementation of the reverse stock split, the authorized number of shares of our common stock from 1,000,000 350,000 to 500 million shares.

You should understand that management and the board have no plans to issue the 500 million shares. We are merely reducing the number of shares we are authorized to issue. Our Board of Directors believes this number of authorized shares of common stock will provide the company sufficient shares of authorized capital available to be issued for any proper corporate purpose without further stockholder action.

Now, it's my pleasure to introduce Carol Karol Kain Gray, our Chief Financial Officer. Karol?

Karol Kain Gray

Good morning, everyone. I would like to take a few minutes to review the June 30, 2014 10-Q, which was filed yesterday August 11, 2014.

For your information, I have two slides that have been included in the presentation. The first slide presents the balance sheet and the second slide presents comparative financial information on the performance of the company for the three and nine months period ended June 30th.

Before I speak to the third quarter number, I would like to update you on our recent private placement. On June 3rd, we closed a private placement of our common stock and warrants with a group of investors, including members of the senior management team and the Board of Directors for gross proceeds of $2.1 million pounds. The purchase price of the common stock represented a 5% discount to the volume weighted average closing price of our common stock from May 13th to the 16th. The warrants are exercisable at a 20% premium to the purchase price for a period of one year and do not have cash flow exercise provisions.

The common stock purchased as well as the common stock to be issued upon exercise of the warrants will be subject to the six-month holding period, under the provisions of Rule 144.

As you can see on my slide, at June 30, 2014, the company had cash and cash equivalents of approximately $2 million. The company's current capital resource include cash, cash equivalents and other working capital resources. Historically, the company had financed its operations principally from the sale of equity securities.

We have engaged with investment bank regarding possible financing. While we have no formal commitments for any future funding, we believe that will be able to raise additional funds as needed.

As Dr. Hayward already stated, we closed the third quarter of our fiscal year reporting revenues of $841,000, which is a 30% or a $196,000 increase from the same quarter of the prior fiscal year. These are the highest revenues we have been able to report for any quarter in the operating history of the company. This increase was a result of higher sales from DNA chips, our cash in transit customer and an agreement for the development of plastic products. These illustrate Jim's comments regarding the revenue growth and opportunity that exists in EMEA.

As you can see from the side, we have generated over $2 million revenue for the nine months ended June 30, 2014, an increase of 59% or $769,000, from the same time period last year. These are the highest revenues reported ever for the first nine months and for an entire fiscal year.

The increase in revenues for this nine-month period was primarily from an increase in sales to suppliers of the United States Defense Logistics Agency DLA of approximately $350,000 from renewals of existing contracts as well as the signing of new contracts. The renewal rate for our DLA customers demonstrates the opportunity for recurring revenue.

As you can see, we are growing revenues across all market verticals and continuing to reduce our reliance on any one customer. The company's revenues earned from the sale of products and services for the three-month period ended June 30, 2014, included in aggregate of 10% from one customer of the company's total revenue. During the nine-month period ended June 30, 2014 no customer representative 10% or greater of the company's total revenues.

In summary, this fiscal year-to-date Applied DNA Sciences has recorded over $2 million of revenue. The increase in revenues earned and our deferred revenue increase is an indicator that our sales are continuing to grow and demonstrates the company's ability to close contracts in a shorter period of time.

I also know that many of you have inquired about our operating expenses. I would like to assure you that we continue to look at ways to control our costs and implement efficiencies wherever we can. In the past quarter we have been able to lower some expenses and we will continue to look for ways to responsibly manage our costs.

Selling, general and administrative expenses for the three months period ended June 30, 2014 decreased by approximately $292,000 or 9% from the three-month period ended June 30, 2013. The decrease is largely attributable to reduction in stock-based compensation expense related to option modifications as well as the decrease in consulting fees, bad debt and travel expenses.

These decreases were partially offset by higher salary expense due to an increase in full-time headcount from 44 as of June 30, 2013 to 52 as of June 30th this year. The increase in the number of employees compared to the same period in the prior year was necessary to build the operation to meet the anticipated future demand of sales.

Rent and related utilities also increased b $80,000 as a result of our move to the larger office space during the end of June 30, 2013. Our rent and utilities have stabilized since our move to this location.

Our legal fees increased by approximately $130,000, due to an ongoing lawsuit with SmartWater. I would like to provide you with a brief update on the case.

On June 11, 2014, SmartWater filed a motion in the United States District Court, the Eastern District of New York on quite significant infringement claim against the company. Our response to the court on this issue was due on August 29th. Our legal fees related to this lawsuit should also decrease.

Compared to the same quarter last year, we experienced an increase in our research and development expenses due to our upgraded laboratory space and our new corporate headquarters as well as an increase in development to support the expansion of the company's business. In particular, we have multiple [workstations] progress toward a launch of new products for field detection and reading of optical marks which used the SigNature DNA ingredient.

In summary, our net loss for the three-month period ended June 30, 2014, decreased by 10% or $1.9 million from a net loss of $2.1 million for the three-month period ended June 30, 2013.

Year-to-date, the company incurred a net loss of $10.9 million compared to a $13.9 million for the prior fiscal year period, a decrease of 22% or $3 million. The net loss includes non-cash transactions of approximately $4 million. This includes a loss on the chart change in its fair value of warrant liability of $1.6 million and stock-based compensation of $2 million. These non-cash items had no impact on our liquidity.

Thank you for your time. Now, I would like to return the call back to Dr. Hayward before we address your questions.

James A. Hayward

Thank you, Karol. We received in the meanwhile some additional questions. I think, Mitchell has been gathering them and I am anxious to hear.

Question-and-Answer Session

Mitchell Miller

Yes. I have. Jim, now I would be happy to let our listeners on internet. Jim, just before we begin, I did want to mention to our listeners that, the questions that arrived by e-mail before the webinar today, we have tried to incorporate into both of your presentations here, so some of the questions hopefully have already been answered. These are the ones that we think are outstanding.

Let's begin with, Paul. This one came by email and he asks I have long been waiting for an ADNAS pharmaceuticals anti-counterfeiting business. How long do you think this will take to begin generating revenue for the company?

James A. Hayward

Okay. Paul, you should know from my own personal history I come from pharma and its one of the areas where Applied DNA really has the opportunity to save lives and make a genuine difference in the human outcome.

We have had to wait until our platform was validated until we crossed much of the (Inaudible) when it comes through a new destructive technology and we feel we have done that, so to that end we have now honored Dr. Michael Hogan, who has a wealth of experience in biotech and pharmaceuticals as several of our employees.

One of the main tasks for our company will be to help us achieve and develop our business in pharmaceuticals. We have already begun our interactions with the regulatory issues and honestly we are quite thrilled our pending prospects.

Mitchell Miller

Okay. We received a number of questions about the partnerships that we have been announcing. Writer, you'll forgive me if I miss pronounce your name Shailesh asks what has been the revenue impact of the numerous partnerships that APDN has announced so far?

James A. Hayward

The truth is that we are actively supporting our partnerships from the very day we sign them. There is often significant infrastructure training and logistics ramp up between the time we begin to work with a partner in full commercial production.

We work closely with our distributors. There are more than a dozen in Europe, alone, very closely. They need to understand the product line, pricing and messaging. Very often, the customers ask for services and solutions and we can work with them in specifying the product for these solutions, which often turn out to be sponsored or paid for development contracts, so we have great faith in our distribution network and we think that they will turn out to be very meaningful for the company in the not too distant future. We have already seen that happen very, very quickly with our excellent partner in Tokyo, Nissha.

For example, as you know, the current DLA program began as a partnership which has lasted for some period of time before it became what it is today and that is a fully mature revenue producing renewable sticky business.

Mitchell Miller

Thanks. Okay. This came by (Inaudible) who asks about the MDA contract, military defense agency contracts seems important. He asks, "Can you give more detail?"

James A. Hayward

The military must approve everything we say about this contract, so far we have said all that we are permitted to say, but we are working to win approval for more detail and we will share with you any additional information just as soon as we are able. I am sure you realize that as anxious as you are to hear about new developments in these contracts we are anxious to tell.

Mitchell Miller

You have a question on the reverse split for which I do not have a name. Will the reverse split, if it happens, reduce my share of ownership in the company?

James A. Hayward

No. It will not. Your ownership in the company in terms of percent ownership will remain exactly as it was before. The only distinction being that you will own fewer shares that each represent a larger dollar value of the company, so your ownership does not alter. In fact, eventually the value of that ownership, we hope, will grow because of the potential demand from institutional investors. Of course, we cannot guarantee that response, but that's like you what we are hoping for.

Mitchell Miller

Here is a question from Mike on the announcement you mentioned in the presentation about by the House of Representatives asking for a briefing on the DLA DNA marking program. Mike asked, "Does the briefing requested by the House of Representatives delay or negatively impact the DLA program in any way?"

James A. Hayward

To the best of our knowledge, absolutely not. The House briefings or the House request for briefing is a very positive sign. It recognizes the impact of our program across the whole of DoD and it's an opportunity to give the product even more visibility. We will keep you apprised if any changes should occur, but I think it's a very positive development.

Mitchell Miller

Okay. A little bit more on our capital restructuring possibilities. A questions, again, I don't have the name for this. Some of these have come in over the webinar facility. I don't have names for all of them. Jim, when do you anticipate up-listing to a big board exchange.

James A. Hayward

We will be submitting our applications and in fact are in the process to list our common stock on both, NASDAQ or the New York Stock Exchange, at such time as determined prudent by Board of Directors. We should more information about this after our annual shareholder meeting on 28 of August, but needless to say it's one of the most exciting developments in our history today.

Mitchell Miller

Okay. I think, we have a couple more minutes. Maybe Brian can let us know, so I will squeeze in a couple of more questions.

This one with, again, no name on it - my apologies. With 60 large customers, why are there effectively no revenues? As management and the board discussed the pricing of APDN's products that have any changes in policy occurred. This came from (Inaudible).

James A. Hayward

Okay. Well, first of all, we discussed pricing always everyday as critical issue and we are very much in-tuned to the possibility of competition although I have to say we occupy a very unique position in the marketplace.

Now many of the customers of those 60 large customers entered through the DLA program, in which prices are fixed, however we are seeing a much greater diversity in project types and services, some greater in potential than even $10 million per year.

At this scale, you could imagine our risks are higher and the time-to-market is slower, so don't give up faith. The larger the customer, the bigger the opportunity and all good things come to those who wait. Believe me, we don't want to wait any longer than you do.

Mitchell Miller

That's about it. Jim, thank you for your answers.

James A. Hayward

Great. Well, thank you all for participating once again. Grateful for your questions and most importantly grateful for your investment in our firm and for your steady support and enthusiasm, your many messages of encouragement, and good day to all.

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