Applied DNA Sciences, Inc.
Q4 2014 Earnings Call Transcript

Published: 16 Dec 2014

[Debbie Bailey:]

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.

[James 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

[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.

[Debbie Bailey:]

Our first question comes from Shailesh.

[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?

[James Hayward:]

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.

[Debbie Bailey:]

This question is from Eric.

[Eric:]

Please provide us as much color as possible about the new revenue relationship with DLA including forecast for quarterly and annual revenue?

[James Hayward:]

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.

[Debbie Bailey:]

This next question comes from Roger.

[Roger:]

Could you kindly tell us the present stage of development of the DNA seal decoder?

[James Hayward:]

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.

[Debbie Bailey:]

This next question comes from Eric again.

[Eric:]

What value does Joseph Ceccoli add to the Board of Directors?

[Karol Kain Gray:]

If you don't mind Jim, can I take this?

[James Hayward:]

Yes. Sure.

[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.

[Debbie Bailey:]

This question comes from the Robert.

[Robert:]

APDN has done a good job adding people and getting contracts. When does this activity start to return profit?

[James Hayward:]

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.

[Debbie Bailey:]

And I think we have time for one more question, Karol.

[Tim:]

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.

[James Hayward:]

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.