SA Transcript
Applied DNA Sciences' (APDN) CEO James Hayward on Q2 2014 Results - Earnings Call Transcript
May 13 2014, 13:22
about: APDN
Applied DNA Sciences Inc (OTCQB:APDN)
Q2 2014 Earnings Conference Call
May 13, 2014 9:00 AM ET
Executives
Debbie Bailey – Head-Investor Relations
James A. Hayward – Chairman, President and Chief Executive Officer
Karol Kain Gray – Chief Financial Officer
Presentation
Debbie Bailey
Good day, 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 Applied DNA Sciences 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, and thank you all for your loyalty and interest and for joining us today. Our mission is to restore profits, taxes, jobs, and intellectual property to their rightful owners, by giving every item a way to prove its authenticity through its life cycle and through its supply chain travels. Humans have DNA or birth certificate and a passport. To do this we are making critical universe marking rather the critical universe with DNA, and providing individuals, enterprises and supply chain influencers a means to identify authenticity and provenance, commodity by commodity and location by location.
Now, commodity has traveled through supply chains and respond to stopping the leaks by interdicting touch points between trading partners and/or geographical borders. Locations are more self contained and respond to putting a ringer at them to stop the leaks and then enabling the turns typically by the law enforcement. We believe that we earn a piece of the stake holders benefit to be realized through their payment for marking and authentication products and services and for supplying business analytics related to supply chain leaks.
Industry mandates and government regulations accelerate our move up this curve as Applied DNA has seen in military electronics and Swedish DNA standard and our London home trials which by the way are now being picked up by other cities throughout Europe. When examples like these do not exist, typical and supply chains without a dominant stack holder, Applied DNA is championing their cause rather than waiting for all entities to agree by removing the barrier to entry of foundational DNA marking with an industry fast mover. This is kind of similar to the Walmart effect upon bar-coding.
Now we are the best of this because firstly no other company has stated this vision across both market types. No other company has technology which is universally suited to mark as many substrates as we can. No other company has technology which is un-copyable and DNA has recognized as the global forensic standard and no other company has the remarkable stability that our patented portfolio provides for DNA. Now we are in the early phases of marking with a breakeven or tipping point varying from market to market based on the investment required for our mark customization for substrates and on the overall build out of our marking detector and reader product families.
Like most biotechnology companies our growth has followed a pattern, we burst upon the scene with an un-copyable DNA marker that is and was unmatched. We are since then building our business and science incrementally, carefully. Now especially in the last two quarters we are seeing the fruit appear from the early seeds we have sown, to carry the oncology further, we are now beginning to harvest this fruit from our most mature markets. We are doing the heavy lifting to fertilize those in our early stage markets and we continue to serve others in markets where applications that look promising.
We had now seen our business ramp toward a much greater scale of DNA marking that we expect we will yield additional revenue and see accumulated demand for often take authentication begins to flow back to the company. The size of our customers is also growing with multiple customer who is now having revenues from $3 billion to $30 billion annually. So we are working with another peer, another class of customer altogether. Now our installed base had steadily increased for the last two years with a significant increase in slope over the last two years. As we increased the size of our sales team, we are training in global responsibilities and the number and sophistication of our channel partners.
Our technology has proved quite sticky, we almost never lose a customer and we have enjoyed a 100% annual renewal of our contracts in critical areas such as our military and government programs. Based on the growth we have enjoyed for the first half of this fiscal year, we should be very close to an installed base of 100 customers by the end of fiscal year 2014.
Now our update globally is proceeding exactly according to plan with successful sales across much of the globe. Our business development strategy is succeeding; we look for early adaptors in new industries. We prove a closed loop application with a definitive return on investment for our customer and then we clone our success through partners and sales channels.
We have every confidence in our near-term ability to sign more enterprises of large size and impact. We are growing an impressive “portfolio of assets under management” because the size of our customers greatly magnifies our own influence and our ability to penetrate and selling to their supply chains and their industry. The perfect example is our penetration of the textile industry. The technology is strong with the ability to follow marked fiber through every step of the supply chain from its birth to finish garments, to linens, to carpets and to home goods.
We have now gained experience marking fibers at a scale of 50 million kilos and we see that literally billions of kilos are well within our preview. As DNA-marked textiles proliferate throughout the world supply system more and more retailers, distributors and others are able to authenticate these marked items and assure their customers of their identity and authenticity. Federal agencies and large retailers have an interest in DNA marking with textiles since we can provide the very first lost time opportunity to ensure that the textile label claims are real and that are national trading partners live up to their agreements.
Although it’s at an early stage, we were very anxious to share with you the news that we had signed a term sheet with a provider of plastic raw materials or polyolefins. Today’s global polyolefin market has the size of about 140 billion kilograms per year. This is a tremendous opportunity in a new very large market vertical. With a potential to impact industries from automotive parts to typing and to medical devices. And last year we announced an agreement to marked copper for a large energy supplier in Europe.
Today, I’m pleased to report that our customer Vattenfall has reported an 85% reduction in metal test in the areas marked with our DNA. When our DNA net product has been used to mark property in concentrated urban areas, we have examples of reductions in burglary of up to 90%. We have really couldn’t ask for a more effective product.
Our cash in transit customers have reported a 75% reduction in cash losses and more than a 50% reduction in the attack rates. Recently, we announced the conviction of our 88 criminal, who committed cash theft from British ATM’s and very tangible ROI was clearly made in this case and the return of $40,000 in stolen cash to our customer.
Now cash in transit was one of the first markets we penetrated and we consciously chose this market as that offered proof of principle and helped us to build the reputation we have today for sound technology reliable products with forensic authentication and the ability to link criminals to their crime.
We are very proud of our military and government programs and our team that is leading these efforts. To date, we have 30 companies marking products each with a unique DNA mark that must be replaced annually, adding a time spend to overall security. Included in that list are now eight original component manufactures and one of the top four defense contractors.
Last week NASA’s Jet Propulsion Laboratory a legendary facility with influence throughout the largest defense contractors announced that if had begun training on SigNature DNA authentication to ensure authenticity of parts and training its facilities. JPL will also be including our platform in it’s highly part of training sessions throughout NASA and in its private contractor relationships.
The last two weeks, have seen some very strong wins on our backs originating from the federal government. On May 6, the Federal Register published new federal regulation governing of all defense contractors. They are known as the DFARS or defense-federal-acquisition-regulation systems. Now these results arguably implement the strictest anti-counterfeiting federal legislation in history. Suppliers particularly Prime-Contractor must implement anti-counterfeiting systems or face consequences and these are consequences we repeat. Prime-Contractor must slow down the anti-counterfeiting systems to their suppliers including some instances of commercial off-the-shelf product. Beyond only those that meet military specifications. In our opinion SigNature DNA will presume capable of fulfilling many of the requirements of the new legislations and we have already demonstrated it successfully by marking parts under the current DLA program. And related that independent development, the U.S. House of Representatives, Sentate, Armed Services committee called for a report on DNA marking of microelectronics from the Defense Department should point out that was from the house.
The language provides further, that the Department of Defense will evaluate expanding anti-counterfeit measures to additional classes of technology that are deemed high risk, an analysis of counterfeit alerts and problem advisories in the Government Industry Data Exchange Program, and a description of the Department of Defense efforts to collaborate with the defense industry and the development of standards associated with counterfeit parts risk mitigation.
Now here the explicit mention of DNA marking in the congressional document is really quite a break through. Currently Applied DNA is the only company DNA marking parts for a federal agency.
Now I hope that this has helped you to understand our value proposition and that you can feel the excitement here at Applied DNA Sciences from cotton fibers to missile payloads, we have the technology to mark and authenticated all leading to a safer and more secure world for all of us. Now it is my pleasure to introduce Karol Kain Gray our CFO, who will review our performance for the quarter. And then we will take some of your questions.
Karol Kain Gray
Thank you, Jim. Good morning everyone and thank you for joining us on the call today. I would like to take a few minutes to review the 10-Q financials filed yesterday on May 12 for the second quarter fiscal year ending March 31, 2014. Before I begin I have included three slides for your information. The first slide is the comparison of revenues by quarter and year-to-date. The second and third slide presents statement of revenues and expenditures for the third and six months ending March 31.
We closed the second quarter of our fiscal year reporting revenues of $637,000, which is an 85% increase from the same quarter of the prior fiscal year. These are the highest revenues we’ve been able to report for the second quarter in the history of the company. This increase was a result of revenues from the recently announced agreement with a provider of plastic materials, an increase in sales to suppliers of components selling to the Defense Logistics Agency and the company’s efforts in the textile industry.
For the first six months of this fiscal year, we have generated over $1.2 million of revenue, an increase of 86% or [$572,000] (ph) from the same period last fiscal year, and highest revenues we’ve been able to report for the first six months of any fiscal year. Approximately 390,000 of these revenues come from an increase in sales to suppliers of the US Defense Logistics Agency. We now have 30 contracts signed and to date we have had a 100% customer retention in its vertical market. Each customer must renew the contract annually in order to receive a new unique DNA mark. Each DNA market is only valid for a 12-month period. In summary, this fiscal year-to-date Applied DNA Sciences as recorded over $1.2 million of revenues as of March 31, 2014 $416,000 has been recorded as deferred revenues which will be recognized over the next 12 months.
Last year for the same period Applied DNA Sciences don’t record any deferred revenue. The increasing revenues earned is an indicator that our sales are continuing to grow and demonstrates the company’s ability to close contract in a shorter period of time. When we compare the first two quarters of this fiscal year, we had a slight increase of revenues of $39,792 or 7%.
I know 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 implementing efficiencies wherever we can. The comparison of operating expenses from the same quarter last year does not tell the whole story. Operating expenses for the three months ended March 31, 2014 increased by $811,000 compared to the same quarter last year. The increase is primarily attributable to the highest salary expense due to the growth and our staff from 38 as of March 31, 2013 to 52 as of March 31, 2014.
The number of employees is only increased slightly since the third quarter of 2013. We experienced an increase in our research and development expenses due to our upgraded laboratory space in our new corporate headquarters. We continue to focus our efforts on research and development project to support the expansion of the company's new market opportunities.
The company incurred a net loss of approximately $9 million and generated negative operating cash flow of $9.3 million for the six-month period ending March 31, 2014. The $9 million loss includes non-cash adjustments of approximately $4 million, which includes the loss on a change in the fair value of wide liability of $2.2 million and stock-based compensation of 1.65. These non-cash items had no impacts on our liquidity.
At March 31, 2014 the company had cash and cash equivalents of $1.98 million. Before I return back – report back to our CEO I would like to spend a few minutes discussing the amended 10-K for fiscal year 2013 and 10-K for the first quarter of 2014 which was recently filed with the SEC. As I stated in our last call Applied DNA Sciences have been classified as an accelerated filer. It is important to note there is no change to the financial information provided in the initial 10-K or 10-Q filings.
The company was a smaller reporting company for fiscal year 2013, subject to slated disclosure requirements afforded to a smaller reporting company. When the company is required to exit as a smaller reporting company, which Applied DNA Sciences did at the end of fiscal year 2013 it may continue to provide sales disclosure as a smaller reporting company to the filing of the annual report. But as an accelerated filer which required to include an auditor attestation report on the company’s internal controls.
Our public flow as of March 31, 2013 was an excessive $75 million. As a result of the company’s transition from its smaller reporting company to an accelerated filer at the end of fiscal 2013 the company was required to include the auditor attestation report on internal control over financial reporting. At the time the company filed the original 10-K in December 2013, we believe that the contents of the original 10-K were governed by the disclosure requirements applicable to a smaller reporting company and omitted the auditor attestation report required for an accelerated filer. Thus the amended 10-K and 10-Q were filed in early May. It’s important to note there was no change to the financial information provided in the initial 10-K or the 10-Q filing. I appreciate your time and I would like to now give our CEO, Dr. Hayward an opportunity to address some of your questions. Thank you very much.
James A. Hayward
Great thank you, Karol.
Question-and-Answer Session
Debbie Bailey
Our first question, what is your most important low hanging fruit in terms of gaining revenue?
James A. Hayward
Well, this one is straight forward in these supply chain assurance area marking and authentication of cotton and other large textiles as well as marking of industrial materials such as copper, and plastics are our immediate goals. And we have marketing operations already underway in all these verticals with multiple customers and potential customers in each. Moving into our authentication along the supply chains and finished product where we expect to bring additional revenues to Applied DNA Sciences. And as I explained earlier the more products marked with DNA, the higher the demand for authentication all along with supply chain. That is increasing the amount of marked DNA products in the universe. In the physical security verticals, anti-theft products such as DNA net, home asset marking and our Sentry 500 spray have demonstrated good traction and an immediate benefit in Europe and are gaining attraction in the U.S. Cash and valuables in transit also continues to expand from the UK market across all of Europe.
Debbie Bailey
What are the margins on your various products?
James A. Hayward
Well in general, our cost of materials is very low, the product we’re making is used at very, very low levels. However, as a biotech company our fixed and variable cost tends to be frontloaded therefore with time and scale we think our margins will certainly week the benefits of both these factors. Our margins are fundamentally pharmaceutical in nature and very advantageous to our shareholders.
Debbie Bailey
Why do you rarely disclose numbers on your announcement?
James A. Hayward
Well, in fact we do disclose numbers, when we received permission; problem is that doesn’t happen very often. Many of our customers asked for confidentiality when we make these announcements, not only in numbers, but sometimes even in names, we are a security company and certain constraints come along with the kinds of customers we are likely to sign.
Debbie Bailey
Karol I believe this one is for you, what is the breakdown of revenue?
Karol Kain Gray
Thank you, Debbie. Last year for an example 55% of our revenues came from the electronic companies providing a certain type of electronics to the military, 26 from the cash and valuables in transit business, 5% from textiles, and the rest from a variety of areas such as branding and grant activities. For your information the second quarter of 2014, military related revenues accounted for approximately again 46% of total revenues for the quarter. Textile accounted for 11% and our cash value in transfer accounted for 9%.
Well also for the second fiscal quarter approximately 50% of our business was in the U.S. 30% in Europe and the remainder in other parts of the world such as Asia.
Debbie Bailey
Do you foresee needing to rent or build more space in the immediate future, if so when?
James A. Hayward
Less than a year ago, we moved into our current location, which is really state-of-the-art and perfectly suited to the work we do. We have plenty of office laboratory and production space, at that time we updated all the facilities, which we believe should be adequate for the foreseeable future.
Debbie Bailey
What are you doing to raise company awareness in the public market?
James A. Hayward
A lot, we maintain active efforts in investor relations, media relations, government relations, social media and our web presence. In the last 18 months, no less than 92 nature articles have been written about your firm. We are active and maintain accounts in Facebook, Twitter, YouTube, Flickr, (indiscernible). Senior figures in the company is (indiscernible) and speakers conferences in all major verticals, having established reputations as thought leaders in those spaces. And I’m very proud of our positions as thought leaders and we are thoroughly recognized for that position.
Senior management also appears at four or five large investor conferences each year and issues approximately 40 press releases each year.
Debbie Bailey
What do you expect to be the next evolution of your technology?
James A. Hayward
Well, we are working on several tracks at once, and the potential is as both a businessmen and the scientist, really quite thrilling. If I had to pick one, I believe real time forensic reading of our DNA marks in the field, will be an enormous breakthrough for our business and for the safety of the world economy and for the ease of working with Applied unit.
Debbie Bailey
How big is your market?
James A. Hayward
The impact of the counterfeiting market on a global economy has been estimated to be on track to reach $1.7 trillion and almost (indiscernible) of all number by 2015 according to The International Chamber of Commerce. In addition to the loss of sales and damage to IP this figure includes loss of jobs and tax interviews. Our platform produces an ROI and the market in both of the private and public sectors. As can be seen in our relationship with DLA especially a second way to gauge the market is by accessing the anti-counterfeiting spending that in industries rather where the spending is publically known. For example, globally in pharmaceutics, the anti-counterfeiting spend is about $80 billion annually. We think that this maybe taken as an indicator of the spend in other verticals such as electronics and industrial media.
Debbie Bailey
How many sales peoples do you have?
Karol Kain Gray
Currently we have seven sales people and staff.
Debbie Bailey
What are you plans for growing the sales force?
Karol Kain Gray
Well we’re planning to grow sales in military, textiles, sports memorabilia and physical security.
Debbie Bailey
How do you compensate your sales people?
Karol Kain Gray
We compensate our sales people by paying them salary and commission.
Debbie Bailey
And about how long does it take to train a sales person?
Karol Kain Gray
I would say approximately three to six months.
Debbie Bailey
Are you looking to hire more sales people outside of your core industry?
Karol Kain Gray
Always, we’re certainly we want to find the right person, we would pursue with dozen opportunities.
Debbie Bailey
And our last question do you foresee any future government grant.
Karol Kain Gray
Yes, we do. In the past we’ve been awarded grants from NDA and DLA and have durability to secure and successfully execute grant projects.
James A. Hayward
Thank you, very much everybody. And we look forward to hearing from many of you, and potentially meeting you we look forward to our next Investor Call. Thank you.
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