Investor Conference Call - August 11, 2011

Debbie Bailey:

Good day and welcome to our Applied DNA Sciences Investor conference call.  My name is Debbie Bailey. I am the Director of Investor Relations and I would like to thank everyone for joining us today. Speaking today will be APDN President and CEO, Dr. James Hayward.

Please note that some of the information you will hear during our discussion today may consist of forward-looking statements including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share, and future products. Actual results or trends could differ materially.

For more information, please refer to the risk factors discussed in APDN's Form 10-K for 2010 and the Form 10-Q for the first three quarters of fiscal 2011.  APDN 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.

Dr. James Hayward:

Good morning and thank you for joining us. For those who are new to Applied DNA Sciences, welcome.  We also welcome back our long-term shareholders.

The past few months have been an unprecedented time for APDN. In addition to closing on our first Institutional Round of financing, we have announced a record number of new collaborations in a wide range of markets.

I would like to accomplish two things on this call.  First, I will discuss our numbers with you, both those from our most recent quarter and what they mean as part of a broader reflection of the company’s key strategies. Second, I want to share with you more details of our recently announced collaborations and what they mean for the company and for our future opportunities.

When you read our third quarter earnings statement you will see that for the three months ended June 30, 2011, we generated a rounded $230,000 in revenues from operations, principally from the sales of our core authentication services and of our backbone product, SigNature DNA.   This compares to roughly $170,000 for the same quarter in 2010 (an increase of 35%) and reflects the array of new business that we have described in press releases during the past few months.   

The fact is this: we are confidently moving to a higher degree of diversification and a more predictable revenue stream.  Our new contracts continue the diversification of our customer base and reduce our risk exposure from any single market vertical.  Each new contract, in addition to an upfront payment, provides a future stream of revenues that will help to improve our earnings for the next quarter and beyond.  

Other numbers worth considering: 

OurYear-over-year revenue for the first three quarters improved no less than 60% from $430,000 to $688,000. Furthermore, through the first nine months of the current fiscal year, we have already exceeded our total revenues for all of fiscal 2010 by more than 30%.  This comes as a consequence of a steady commitment to a strategy of exceeding expectations in situations that drive a high ROI for our customers, particularly valuable with marquee names, to consistently shorten our sales cycle and lower the barrier to entry for our expanding base of new customers.

For full information regarding the quarterly results, I should refer you to the quarterly report form 10-Q filed with the SEC yesterday. This report can be accessed on our web site under Investors/Stock Info.

As you are aware, we have been able to release good news recently and the stock market, despite very strong head winds in recent weeks, has reacted well, at one point reaching an intra-day high for the year, and overall our market cap has increased.   Our volume traded has increased significantly which we take as an indication of stronger interest in the stock. The 90-day average daily volumes traded have increased 166% in the last three weeks alone.  It’s worth mentioning anecdotally, that even yesterday, when the Dow Index dropped by more than 500 points in dramatic trading, APDN did rather well, rising by almost 15%.

It is no coincidence that we have attracted new institutional investors, who have vetted our company carefully and emerged with very positive conclusions about our future.

We successfully closed on our first Institutional Round of financing, securing $5 million which we will use to support the expansion of our business and infrastructure, including the enhancement of our Marketing and Sales groups.  In addition, we signed agreements with the secure packager Disc Graphics, Inc., a legendary high-value guitar manufacturer, C.F. Martin Guitar, a well-regarded textile organization and others, and we have continued to expand our ongoing relationship with the U.S. Department of Defense.  

Let me speak for a moment about each of these in more detail.

Our Institutional Financing

We were very pleased to announce our first round of Institutional Financing in July, which raised $5 million and will bring two new Board members to the company by August 15th.  Both new Board members, Mr. Gerald Catenacci, a successful hedge fund manager, and Mr. John Bitzer III, President & Chief Executive Officer of ABARTA, Inc., a private, fourth-generation family holding-company with operations in the media, soft drink, energy, and frozen food industries. Both gentlemen bring a wealth of expertise and experience, which will be of great benefit to the company as we enter this new and exciting stage of our development.

In addition, we are pleased to announce the appointments to our Board of Directors of Dr. Charles Ryan who is the Sr. Vice President, and Chief Intellectual Property Counsel at Forest Laboratories, and Ms. Karol Gray who is Vice President for Finance & Administration and the Chief Financial Officer at the University at Stony Brook. Each of these individuals brings expertise in their chosen fields, which will be invaluable to APDN, both now and in the future.

We believe that this financing not only boosts the company’s balance sheet, but also further validates the company’s technology and its commercial efforts to build a company of enduring value. We believe with this round of financing, we are well poised to dominate the anti-counterfeiting market.

With regard to Business Development

As the company has increased its product offerings and expanded its sales force, our visibility has been raised while our technology and product advantages are increasingly recognized by customers and prospects widely in our target verticals.  One simple indicator of our rising profile, is that visits to our website have doubled year-to-date as compared to the same time period last year.

We have already begun to see our increased visibility in a variety of verticals, especially in the forensic, electronics, and textile industries. We believe that early user adoption of the Company’s products and technology will further accelerate in the coming quarters due to our focused marketing efforts. Against the background of an alarming explosion of the counterfeiting black market worldwide, we feel that we are well positioned to boost our top and bottom lines in the coming months and years.

Martin Guitar

On July 19, 2011, we announced our collaboration with C.F. Martin & Co., an iconic American brand that has been creating acoustic guitars that are among the finest in the world for over 175 years.  This is a collaboration that I have alluded to in the past, but that I am very pleased to be able to speak about with candor at this time.  As a result of our ongoing collaboration, Martin’s customers will be protected by our DNA markers, the gold standard in forensic anti-counterfeiting systems. The two companies plan to announce further details about the partnership, later this year. But the gist of the agreement is that we both want to stop the infiltration of counterfeit guitars into the United States. We hope that our agreement with Martin will be a template that we can use with many other musical instrument companies facing the same issues.  Moreover, we plan to extend this template to luxury goods manufacturers in other segments.

Disc Graphics, Inc. (known as DISC)

On July 14, 2011, APDN and DISC signed an exclusive distribution agreement. We are very excited about this collaboration witha market leader in its field. DISC has been granted rights by us to distribute a unique DNA marker exclusively for the folding carton offset print sector and nonexclusively for pressure sensitive labels in North America. We received an initial payment from DISC and will receive minimum payments annually to maintain exclusivity. DISC has a dedicated sales force, which will be trained by APDN, with extensive selling experience to promote this technology. Additional revenue will accrue to APDN from licensing arrangements.

DISC is well known in the industry for creating custom solutions for customers like pharmaceutical and retail drug outlets, where the use of DNA taggants offers a forensic package which will sharply differentiate their product from competitors. This is a huge market in which anti-counterfeit packaging solutions are estimated to reach a value of $82 billion by 2015. This represents our first entry into the packaging market, with an initiative of potentially enormous scale.

3SI

Just yesterday, we announced a new a long-term agreement with 3SI, a global provider of cash security equipment. Commercial supply of DNA has already begun with repeat orders to be fulfilled on a monthly basis.

This agreement is exciting for a number of reasons, including:

• With the signing of this deal, we will grow over three years from having 1,000 marks in the field guarding cash-transport boxes, to 45,000 marks now guarding ATMs, banks and cash transport boxes.
• It is the Company’s entry into the ATM markets, which represent a huge untapped market for our DNA markers.  One recent study forecast that by 2013 there would be 2.5 million ATMs in use throughout the world.
• Given our existing marketshare in the UK of over 25% of the Cash-in Transit market, and our growing strength in Sweden, our partnership with 3SI greatly enhances our role in the whole of Europe.

Department of Defense

The US Department of Defense has now approved public disclosure of our work for them.  As I have stated before, this government partnership represents a huge opportunity, even larger than may initially be apparent.  Microchips, or semiconductors, represent a $300 billion industry.  According to a highly credible report this year, the semiconductor market will grow by 4.5 percent to $313.8 billion in 2011, following the even more astounding 32.7 percent increase to $300.4 billion that took place in 2010.  By including the various supply chain participants, APDN can partnerboth with government and industry to build a forensically secure supply chain from the source to the end-user.

We have already successfully completed an initial program to DNA-mark microchips for one of the U.S. Department of Defense’s chip manufacturers. Used systematically, DNA marking prevents counterfeit microchips, which might be defective and possibly dangerous, from entry at any point in the Department of Defense supply chain.

The initial results were so successful that we have been awarded a follow-on contract valued at nearly $1 million to fully engage one of the government’s microchip supply chains. With interim deliverables that must be met, this final phase will include several Original Chip Manufacturers, distributors, board builders, system integrators and the Armed Forces.

This project could be a significant first step for the company toward a major role in supply chain defense with government, and in business-to-business relationships with Original Chip Manufacturers, distributors, and the manufacturers of printed circuit boards and finished electronics.

As you can tell, we have made great strides this past quarter.  We are partnering with companies established in their fields, where we can offer them a competitive advantage to the benefit of both parties (DISC is a good example of this). We are working with consultants who bring years of experience and a wealth of contacts in their area of expertise.  And as our reputation grows, with more case studies and successes in the field, our ability to attract larger customers will continue to increase as well.

We have recently hired additional personnel in our manufacturing facility and we anticipate hiring more people in our finance, marketing and sales and business development departments in the near future.  With these staffing additions, we are able to meet all of our current and anticipated customer needs for the foreseeable future.

And now for some select questions submitted by listeners:

Q.    What is your main market focus right now, where do you see your sweet spot for sales?

A.     We are highly focused on the markets we serve: security, and anti-counterfeiting for brands and government. We will continue to build business in these categories by cloning our successes. We will expand our product offerings and breadth of service to our current customers leading to further diversification and risk mitigation and a more predictable revenue stream. Simultaneously, we will cautiously penetrate new markets, such as secure logistics.

Recently, we have made inroads into the musical instruments markets, the microchip markets, and the print sector.  At the same time, we have expanded our presence in the Cash in Transit and textiles market and enhanced our relationship with the Defense Logistics Agency and the Department of Defense. The business model that we are using is clonable and easily implemented in virtually any market.

Q.   What are the biggest hurdles facing the company in the next 12 months?

A.  I believe that the biggest hurdle facing the company in the next 12 months is making sure that we stay focused on the needs of our current customers while attending to the needs of our new and potential customers. We will be hiring a limited number of additional employees to assist us in this endeavor, as we continue to grow and expand over the coming year.  We will continue to be fiscally responsible at this critical juncture of our development and we will make every effort to keep you, our investors, informed of our progress and successes as we move forward. These are the challenges that success brings, but they are challenges nonetheless.

Q. Can you give us a forecast or estimate as to when you will be profitable?

A.  We do not provide guidance at this time.  What I can tell you is that in the last nine months we have brought more contracts to the closing table than at any other time in our history.  Overall, the number of agreed contracts, which will eventually enable us to cross the profitability barrier, is larger by far than it has ever been. 

The dollar value of our contracts, and that of our near-term opportunities is very significantly higher.  Consider our relationship with the Department of Defense: we are being asked by one of the most important contractors in the world, the U.S. government, to protect an industry that did some 300 billion dollars of business last year. This is certainly a validation of the relevance and veracity of our platform.  And it is already bringing to us new customers, fully vetted thanks to the time they spend on our website.

Finally, the contracts we are signing are for products and programs that are highly scalable.  We have moved, in fact, from highly customized data-tested products to highly scalable products.   Our efforts to protect wine, military parts, automobile parts, are all highly scalable.  Our success with musical instruments is scalable.  Our exposure to financial institutions and insurers in Sweden involve products that are scalable.  So this trend, which puts powerful downward pressure on costs, is a tremendously important one that investors should look at, and which will work to bring us to profitability sooner than later.

In Conclusion…

We believe that this is just the beginning.  We continue to be sales-driven. We have reached a watershed in the development of the company and as we continue on the present path, we expect to have more announcements, more and bigger collaborations and continued growth in revenues in the company for the foreseeable future. 

We encourage you to visit our website at www.adnas.com, for up-to-date customer news, blogs and business developments and to follow us on Twitter at @APDN.

WE THANK YOU FOR YOUR CONTINUED BELIEF IN AND SUPPORT OF THE COMPANY. 

Thank you.