Applied DNA Sciences Inc (NASDAQ:APDN) Q4 2014 Earnings Conference Call December 16, 2014 9:00 AM ET
Debbie Bailey - Investor Relations
James Hayward - Chairman of the Board, President, Chief Executive Officer
Karol Kain Gray - Chief Financial Officer
Good morning. And 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 Hayward; CEO and President, followed by Karol Kain Gray, Chief Financial Officer for the company. We will conclude with answers to questions from our shareholders.
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 fiscal 2014. 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.
Well, thank you, Debbie. Good morning to our audience and thank you for your loyalty and interest in for joining us today. To our newest investors, welcome to your first investor call. As we closed out 2014 and look ahead to 2015, we want to take this opportunity to update you regarding the steady progress made collectively by the employees of Applied DNA Sciences over the course of this past year. Later, our Chief Financial Officer, Karol Kain Gray will detail our financial results.
Our uplisting to the NASDAQ Capital Markets under the symbols APDN and APDNW took effect on November 17 and represents tremendous step forward for the company. This uplisting not only enhances the awareness of the important work we are doing in the eyes and minds of the investing public, but also more favorably positions us as we seek to introduce and sell our products through larger more prominent household name companies. Following much discussion and very serious deliberation, our Board of Directors elected to execute 1: 60 reverse stock split, which we were able to do as a result of a large majority of our shareholders, almost 90% voting at the Annual Shareholders Meeting in August to give the Board the authority to enact this reverse split at their discretion. We've recognized that a decision to reverse split might not initially be embraced by all of our shareholders, and as such decision was not taken lightly and without deep consideration. Although shareholders are not affected as far as their percentage of ownership, at times stock price can suffer. In our case, we feel that our stock price has suffered a temporary set back. I'd like to note that I too and a significant shareholder and investor in Applied DNA. I am not happy about this decline in our valuation. However, stepping back, it is helpful to recognize that for any trade to occur there are always two sides to the transaction. We believe we are observing an exodus of the short term investors that for many years actively traded our stocks. Yet in the process kept our shares in a very tight padding stock range regardless of our ongoing progress. Now however we are excited as we are meeting with new shareholders, who are actively inquiring about our company and our long-term vision as we continue to strengthen our relationship with our shareholders. This split was simultaneously coupled with an underwritten public offering whereby we raised approximately $9.1 million before deducting the underwriting discount and other offering expenses. The reverse split and funding together enabled us to clean up our balance sheet, attain much more favorable finance terms as compared to our last round of funding by an outside investor and made it possible for our company to uplist on to the NASDAQ capital market.
Now we firmly believe this uplisting is a crucial milestone for our company. And it weight heavily in our decisions. When we meet with clients and potential clients, we are much better positioned as a national market company versus a pink sheet penny stock. Already our customers are responding positively to this development and our sales staff are reporting that this indeed has been perceived in the like we indented. Furthermore, we anticipate this will begin to translate into shorter, getting to know us timelines before these relationships culminate into sales.
The influx of cash was also vital. We've accomplished proof of principle and many verticals, but we need to get more staff in the field and reinforce their support. With this cash and thanks to the many relationships we've been nurturing for years before these changes, Applied DNA is now closer to actually beginning converting many of our business relationships from pilot testing to the initial phases of rolling out into a variety of market place verticals. Any one of these verticals is now better positioned for the revenue growth we want to see.
Now we remain at the leading edge of security technology, and we continue to attract attention from new customers who come to us, but they are often fully waded and precisely aware of their needs offering a shorter time to market. This is exemplified by our recent announcement we that signed Fourth Federal Agency with an initial commencement project. This development took less than two months with the federal agency and us, and is already in early commercialization. Since our announcement of this relationship on the 3rd of December, additional government groups have already approached us. Popular awareness of our availability shortens our sale cycle, we were quite proud to be called innovation of the year for 2014 by Popular Science Magazine on the 12th of November.
Developed with our partner MSS Professional, the SmokeCloak DNA product shown in this images filmed by Gizmodo at our headquarters creates a thermal of charged stream of fog that will fill a huge room in five seconds. Every particle of the fog contains a SigNature DNA marker that is unique to that device or to that location. The DNA in the fog will mark skin for a period as long as three weeks and nearly permanently marks a perpetrator's clothing.
Now we have steadily accumulated proof of principle evidence that our technology is both effective and useful as anti counterfeiting and product authentication tool. The versatility of our products is increasingly becoming clear as we've met with great success and adopting them to a wide set of applications across a comprehensive range of verticals, ranging from the defense industry to the apparel industry to law enforcement and beyond. We have a pipeline of over 100 items that support our revenue forecast. Now while this might sound like too many items for a small company to juggle. I can assure you that we have a highly focused effort on a limited number of well funded pilots that are depicted in this particular slide. Many of them are nearing their end and could lead to commercialization, quantified in millions of dollars of revenue per customer. In fact, given the late date in this quarter, Q1 remember, we expect revenues for Q1 which will close later this month on the 31 December, 2014, that is in two weeks, to be over $1 million for the first time.
I should point out that these results are of course unaudited at this time. In May, the office of the Secretary of Defense on behalf of the Defense Logistics Agency awarded the company a two year nearly $3 million Research Innovation Fund or RIF contract. It is not a grant; it is a contract to demonstrate capability of expanding DNA marking to six major federal supplier groups. This award follow the nearly $1 million small business innovation research contract with the Missile Defense Agency to demonstrate our capability to service up to 100 suppliers of electronic parts to the agency.
Importantly, both of these contracts are aimed at commercialization. They are revenue amplifying contracts. As we move through the course of these two years, we will be working directly with commercial partners; together these contracts provide a predictable revenue base of approximately $500,000 per quarter which for us is a solid launching pointing to weight our continuous revenue growth.
Our progress in industry has been equally strong. Attracting funded pilots in agro chemical and industrial plastics. The scale of these projects can measured in billion of kilograms per year, if we are successful. Needless to say, we are doing everything possible to ensure our success in these categories. And our recent funding actually makes that more probable. Now during the last quarter, we've taken steps, bold steps to reduce our operating cost by up to 10% in the current fiscal year. And we are determined to shorten our path to profit.
Our sales, products and production teams remain highly focused, making the best of limited resources. The sectors highlighted on the slide are targeted for significant development, and we are pleased at our steady rate of progress. And I'll comment on a few. Now let's just move ahead, let's look at textile here and move ahead to the next slide. Thank you, Brian.
Textiles are a massive market for us in US and in Europe with rampant counterfeiting. As we just recently reported to several entities and companies, there are large American retailers who are as much as 80% of their textile product is counterfeit. As proved by our patented SA [ph] FiberTyping. In fact, in a recent trip overseas, I met with the CEOs of some textile manufactures who when confronted with our data, actually admitted to using fibers that do not comply with their label claim. You can be assured our technologies will bring these manufactures into compliance.
In late October, as shown on the slide, we signed an agreement with the large textile manufacture for whom we are marking a DNA mark in cotton in California today as we speak. This program will allow us to monitor quality and supply chain integrity through every step of textile manufacture right to the delivery of our -- to our partner's customer, a large US retailer.
Let's go back to Slide 5. Thank you, Brian. Back in October, we announced two well known auto manufactures had chosen to use Applied DNA Sciences' anti-theft marking technology to protect their vehicles, imported into at least one EU country. For each vehicle, a unique, botanical DNA-based mark is designed and applied to the vehicle in multiple locations. The SigNature DNA mark provides absolute identity for the vehicle, while also recording the name of the owner of that vehicle in a secured, cloud based database. The marks are covert, difficult to remove, if found vehicle in their component parts are traceable back to its owner and location from anywhere in the globe.
Today, we highlight remarks by a high level Stockholm police official and an insurance spokesman, urging car owners to use the APDN anti-theft product smartDNA, one of our brands to protect their cars and car parts from criminals. These two experts in car theft prevention were sighted in Sweden's largest newspaper. Now initial orders could exceed $1 million per year, with the opportunity for growth in this and other markets.
Now effective December 15 actually just yesterday, the Defense Logistics Agency will now no longer issue solicitations requiring their suppliers to DNA mark FSC 5962 micro circuits. Instead, DLA will mark these high risk components in-house at their own labs in Columbus, Ohio, actually an exciting development. The organic growth with DLA is a testament to the agency's support of the program that is our program with them. The location is becoming the electronics DNA hub for the agency. The changes for DLA, all components will physically filter through the lab, allowing for a 100% inspection and random testing of subsets based on visual inspection. This is a dramatic difference affording DLA a unique opportunity. Once passed, these parts will be DNA marked with the SigNature DNA mark. The impact to APDN will be less revenue initially, however, the program will transition over the course of a year, some current contracts have been extended and new ones awarded. While solicitation will change as of yesterday, contracts already awarded must be honored. These contracts go out a year longer so the period of transition will be at least that long. The revenue impact to APDN is not really fully known at this time, but the facts remain, DLA has invested and establishing this capability in-house, coupled with the two year $3 million Rapid Innovation Fund contract awarded to us at the end of August. This could lead to more opportunity based on successes of both the DLA in now separate and APDN's RIF demonstration across many other commodities were being given the opportunity to participate in marking six new federal supply groups themselves containing 66 new federal supply classes for which DLA issues more than 100 million solicitation a year.
Now the agency is implementing the program more fully in-house for its customer base, the armed services, army, navy, air force, marines and coast guard. The agency is also briefing across the DoD channel. It would also appear that inquiries coming from other non-DoD federal agencies are partially due to the DLA's approach.
In addition, our supply chain program is the natural progression which is solutions set supports. We constantly evolved the benefits of what the technology can accomplish in a wide range of industries for a broadening group of customers.
And that concludes my comments. And now Karol Kain, our CFO will report on the numbers.
Karol Kain Gray
Thank you, Jim. Good morning, everyone. While this has been a very busy year for Applied DNA Sciences. I'd like to spend a few minutes highlighting the finance activities including the capital raise as we have closed during this fiscal year, in addition to just discussing some of the main points in the 10-K which was filed yesterday. I know shareholders have raised many questions related to these activities and Jim and I plan to address these questions during the Investor call. In June and July, we closed on two tranches of private placement of common stock and warrant with the group of investors including members of our senior management and Board of Directors raising slightly more than $2 million. Following that raise on September 11, we issued and sold 10 month promissory note totaling $1.8 million to Jim Hayward, our CEO and one other individual. On November 11, both investors agreed to exchange for cancellation their respective note to participate in the Maxim underwritten public offering. The removal of this liability improves the balance sheet and was in the best interest of the company.
Before I cover the details of recent public offering, it is important to our shareholders to understand why we use Maxim to this raise. Maxim is a full service investment banking, securities and wealth management firm, headquartered in New York, that provides a fully array of financial services to a diverse range of corporate client and institutional investors. They have experienced in funding and emerging growth companies like ours, experience in reverse split and uplisting to NASDAQ and access to capital and institutional investors that we could not find on our own. Maxim successful raised $9.1 million in an underwritten public offering that closed on November 20th. The public offering was comprised of 2.8 million shares of common stock and 2.9 million warrant priced at $3.25 per share of common stock and warrant. The public offering price to each share of common stock was $3.24 for each warrant one to penny. The warrant have a per share exercise price of $3.50 are exercisable immediately and expire five years from the date of issuance. I should note that our CEO and an affiliated of our board members participated in this offering.
Part of the proceeds that the company received was used to repurchase warrants from the previous financing. The warrants that were repurchased had provision that were diluted to the company and also were recorded on our balance sheet as a liability. Currently as of today, there is no debt recorded on our balance sheet. The most recent financing was done in part to facilitate the company's uplisting to NASDAQ which as you know we were able to accomplish last month.
On November 17th, the company began trading on NASDAQ under the ticker symbols of APDN for the common stock and APDNW for the warrant.
In summary, since June 2014, the company has raised over $13 million which include investment from the management and Board of directors. These funds are being used strategically to cover operational, business development and research and development expenses as we continue to move towards a breakeven point.
10-K. I would now review our financial statements for the fiscal year ended September 30, 2014. This year the company generated over $2.7 million in revenue, once again another record year for the company. This was a 34% increase or $685,000 from 2013 revenue. The increase was marked acceleration in growth compared to the 1.9% increase in revenues from fiscal year 2012 to 2013. While fourth quarter revenues were disappointing, we still achieve record results for the full fiscal year. Several of our customers did not close on contracts in the fourth quarter, but should result in high quarter to this year, for this quarter in particular.
The increase in revenues for this fiscal year was primarily the result of term sheet for $350,000 entered into with DLA [ph] of which $219,000 has been recognized during fiscal year 2014. Sales to supply of the Defense Logistics Agency increased by $162,000 and to a small extent an increase FiberTyping sales made up the difference.
As you can see our revenue base continues to diversify. No customer represented greater than 10% of our total revenues for the years ended September 30, 2014 and 2013. The revenues from customers outside of the United States continue to contribute to our total revenues. For fiscal year 2014 and 2013, 33% and 38% of our revenues were from customers located outside of the United States. We believe that the revenue from the sale of our products outside of the United States will continue to grow in the near future. Our diverse and global customer base means less reliance on any one customer, country or industry and suggest less concentrated risk. It also demonstrates the continue growth of our products and technologies into new market, new countries and new customers.
Deferred revenue increased by $242,000 to $508,000 in fiscal year 2014 from $148,503 in fiscal year 2013 which relates to a purchase order from government agency and other agreements we've entered into as part of our pilot phase. The two new contracts that Jim mentioned earlier will provide the company with a known source of revenues over the next two years of approximately $4 million.
Selling, general and administrative expenses increased by $2 million or 80% to $13 million. The increase is primarily due to an increase in payroll to support production and sales. This year rent and utilities increased by $273,000 as a result of larger office space. Legal fees increased by $234,000 due to litigation brought against us by SmartWater which has been dismissed by the court at the request of SmartWater.
In the area of research and development, the company incurred $1.3 million in expenses for fiscal year 2014, compared to $692,000 from fiscal year 2013. The expense of 87% was due to the cost of commercialization that is required to meet the deliverables of the two contracts that was just mentioned to support the expansion of our business market. In particular, we continue to post the development of new products of seal detection of DNA and rapid leading of optical mark which uses SigNature DNA product.
Total operating expenses increased to $14.9 million for the fiscal year ended September 30, 2014 from $12.2 million in the same period of 2013 or an increase of $2.8 million or 22.8%. This was primarily attributable again to an increase in salaries and research and development expenditures as discussed above.
The net loss or non cash transaction up approximately $3.4 million has no impact on our liquidity. While we still have not caught up to our expenses, we currently have a number of pungent pilot studies ongoing, which if successful could generate revenues in line with our current expenses. We believe some of these pilots could come to the closure within the next calendar year. We continue to manage our expenses, looking to strategically lower cost in line with our current and near future market opportunities. We are on the process of lowering cost via strategic measures ensuring that we have the capacity and the expertise to meet our most immediate market needs as well as being prepared for the needs of our customers in the near future. With the uplisting is fine -- is completed and the SmartWater lawsuit behind us, we believe we should be able to reduce our legal expense. On a positive note, as some of you might recall, during fiscal 2014 management developed and implemented its action plan that fully remediated our previously reported material weakness. As of September 30, 2014, our internal controls over financial reporting were operating effectively.
In summary, it has been a very busy year and a positive year for Applied DNA Sciences. We are working hard to manage our expenses, turn our pilot studies into commercial contracts and strategically manage the business to the benefit of our all shareholders. Thank you for your time and attention. And I'd like to wish all of you a happy and healthy holiday season. I'll turn the report back to Jim for questions and answers.
Our first question comes from Shailesh.
The recent reverse split, the listing on NASDAQ and the S1 offer have not helped the cause of long-term investors who have stayed with this company through years. The price of the stock currently is at less than $0.05 level pre split. This is not what we had expected? The company has not bothered to even address its stockholders and reassure them that all is well. Why this lack of concern for long-term investors?
Now it's terribly-- we understand the frustration of our long-term shareholders and please remember that I am a long -term shareholder too. As I believe you are aware, our management team makes it a point of addressing our shareholders on our quarterly basis and at year end in the form of a webcast such as we are having today. It is not been our policy of addressing shareholders' mid quarter. And further when a company is in middle of financing such as we were, we were in a quite period that restricts our ability to speak. I can assure you that there is no lack of concern for long-term shareholders. Quite the contrary, we are thankful that they share our long-term vision. I hope that all the information that Karol and I have discussed today should have helped you to understand our strategic plan for the company and why we believe and still believe that the reverse split and subsequent uplisting for NASDAQ has made us all better off as long-term shareholders of Applied DNA.
This question is from Eric.
Please provide us as much color as possible about the new revenue relationship with DLA including forecast for quarterly and annual revenue?
As mentioned earlier, effective yesterday DLA will no longer issue solicitation requiring that their suppliers DNA mark FSC 5962 parts. Instead DLA will mark these high risk components in house at their own labs in Columbus, Ohio where we have been training them extensively. What this means is that all components will physically filter through their lab in Columbus, allowing for 100% inspection and random testing of subsets based on visual inspection. This is a dramatic difference, affording DLA a unique opportunity to enhance quality. Once parts have passed the visual inspection, they will be DNA marked. Some current contracts have been extended and a few new ones awarded. Centralized marking by DLA will streamline our operations, through an operation here at Applied DNA reducing redundant costs in areas of logistics, training, PUC support and even production. While the impact for us will be less revenue initially, the program will transition over the course of at least a year. So we are really unable to predict precisely what the effect will be on our revenues beyond that. But as Karol just said a moment ago, our relationship with the military has yielded an element of predictability for our revenue for the next two years that we never had before. And that's a substantial improvement.
This next question comes from Roger.
Could you kindly tell us the present stage of development of the DNA seal decoder?
Sure. Our strategy is to evaluate DNA readers on the market today that are targeted for health sciences applications. And work with the vendors to adopt to our small volume DNA marks. There have been enormous changes in bedside and in feel diagnostics that we want to leverage and take advantage of. We are currently evaluating three units, each with the different purpose, a different performance and price. And each of the different stage of development. For DNA point of care companies, this was the lowest price and lowest resolutions. They will allow us to identify a target APDN mark with the low degree of adoption required. And we are testing these right now. For the medium priced units with medium resolution, it will allow us to identify a range of marks not just the single one. And medium amount of adoption will be required and right now these are at the evaluation stage. We are also proud to say that we've signed with the leading, in fact, perhaps the leading DNA sequencing company. It is highly priced, super highly resolved, high information content from DNA, high degree of adoption required; this is more developmental stage and may prove to be a more relevance to companies that require higher degree of content from their DNA such as the US government.
This next question comes from Eric again.
What value does Joseph Ceccoli add to the Board of Directors?
Karol Kain Gray
If you don't mind Jim, can I take this?
Karol Kain Gray
Joe Ceccoli has a wealth of experience both strategically building and running companies and managing operation. We are sure he will be able to improve at Applied DNA as we grow and strive to be best managing our research and development pipeline and production processes. His history in transforming small growth companies into significant enterprises is valuable to the company at this critical juncture in our development. Since Joe has been with some large companies such BASF and Engelhard, we look forward to tapping his expertise in this area as well. I have met Joe recently and I really believe he will be an asset to the board because he brings very strong operational experience. Thank you.
This question comes from the Robert.
APDN has done a good job adding people and getting contracts. When does this activity start to return profit?
Did I say us before? Well, we have not and do not intend to project revenue or profitability. We are not at the stage of being able to provide guidance. As Karol mentioned in her discussion a few moments ago, we currently have a number of funded pilot studies ongoing which if successful could generate revenues more in line with our current expenses. Some of these pilots could come to closure within the next 12 months. Now if you look back historically at our earlier pilot, it was much more difficult as a disruptive technology to get our clients to fund those pilots, and so many of them were done in a mercenary way and they frankly kept our capacity for revenue. But we've matured well passed that. And so pilots now are source of revenue and they are highly focused and move much faster. But we also continue to manage our expenses and are in the midst of managing them quite tightly now. We are looking to strategically lower our cost in line with our current and new future market opportunities. We are in the process of lowering cost via strategic measures, ensuring that we have the capacity and expertise to meet our most immediate market needs, as well as being prepared for the needs of our customers in the near future. With the uplisting and financing completed and SmartWater lawsuit behind us, we believe we should be able to reduce our legal fees and our budget overall significantly.
And I think we have time for one more question, Karol.
How low can APDN remain under $4 before it is de-listed? And what requirements must be met to get APDN listed again if it happens?
Karol Kain Gray
Thank you, Debbie. We are very mindful of this issue. Once listed on NASDAQ Capital Markets, the bid price of common stock must be at least $1 per share in order to remain listed. The de-listing process is set in motion when a company trades a 30 consecutive business days below the minimum bid price or market cap. At this point, NASDAQ listing qualification department will send efficiency notice to the company, informing it that it has 90 calendar days to get up to standard in the case of the market value listing requirement or 180 calendar days if the issue is regarding the minimum bid price listing requirement.
Okay. Well, thank you very much for attending our yearend investor call. It's been a pleasure to chat with you. We hope you found the information informative and fulfilling. And we hope you continue on our exciting ride into the future of DNA security. Thank you.
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