Investor Call on May-17-2011
Applied DNA Sciences hosted a call to investors on May 17, 2011 at 9:00 AM. The following is a transcript of the introduction to the call and remarks by CEO and President, Dr. James Hayward.
Good day and welcome to this 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 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 two 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.
I would like to accomplish two things on this call. First I will discuss our numbers with you, both those from last quarter and what they mean as part of a broader, more meaningful view of our data. Second, I want to share with you some of the exciting new business, and the solid new trends in our business that are even now growing and being nurtured by us.
If you read our earnings statement this morning you know that for the three months ended March 31, 2011, we generated a rounded $140,000 in revenues from operations, principally from the sales of our core authentication services and of our backbone product SigNature DNA. This compares to roughly $318,00 for the prior quarter, the best quarter in our company’s history.
I am not happy about our most recent numbers. The second fiscal quarter is a frank disappointment, especially after the very exciting quarter previous. But I want to be very clear: do not read too much into the current figure. Our Chief Financial Officer, Kurt Jensen, and I have pored over those results, sliced and diced them, and I can tell you that they do not represent our strong overall direction and sales progress, and in some ways they reflect one-time revenue-realization events.
Expected revenue from some specific sources fell short, but this was not the main driver in those results.
Some other numbers are also worth considering. I’ll call your attention to our cost of sales for the Q: a rounded $14,000, netting us a gross profit of 90%. By any standard this is a significant margin, and one that has remained steady since this time last year, when gross profit was 92%.
But there is something more that needs to be spotlighted, something about which I hinted earlier. Year-over-year revenue for the first two quarters improved no less than 76% from 260,000 to 458,000. Furthermore, even folding in the current revenue number, the first six months revenue for fiscal 2011 represents 88% of last fiscal year’s total revenue or 458,260 for the first six months of 2011 vs 519,844 for all of 2010.
Moreover, the sales context for these solid longer-term gains is important. What we are deliberately growing, and what we are increasingly seeing is a strategic and successful diversification of our customer base, where we will not be dependent on any single revenue source. We have gained important new customers in the UK, Belgium, and Sweden. And we see a concomitant trend to the diversification of our product line, having added high profile security products such as SmartDNA, and DNANet
The overall plan and impact has been that our risk concentration, in both our customer base and product line, has significantly diminished. That is also why we have continued to bring new expertise into the firm, hiring world-recognized talent in diverse areas. In this way, we have built a far more steady foundation for growth, even compared to two years ago. We recognize the need to enhance our income, and I think you will see that. But this must be done strategically, in a way that will sustain that income growth.
My CFO, Kurt Jenson, tells me to state that for full information regarding the quarterly results, I refer you to the quarterly report form 10-Q filed with the SEC yesterday. This report can be accessed at www.adnas.com/investors/stock_info
We also encourage you to visit our website at adnas.com, for the top customer news, and business developments.
I’m eager to share with you how specifically our sales initiatives have been developing.
Perhaps our most exciting announcement and the one that we have been alluding to and working towards for some time, is our partnership with a major U.S. government agency. The first phase of this partnership program aims to demonstrate the unmatched ability of DNA marking to block counterfeit microchips in mission-critical government supply chains. As nearly everyone knows by now, the infiltration of microchips and other electronic components in the supply chain is drawing great concern, from a pending Senate Investigation, to dire warnings from industry leaders and logistics experts.
Early evidence from our programs has already demonstrated the ease of implementation of our DNA systems, which require no major investments or interruptions in the existing government supply chain logistics. This means that DNA marking is eminently doable. And it proves the ease of adoption of our DNA marking protection into the private sector as well--into the semiconductor industry and others.
To say the obvious, this government partnership represents a huge opportunity. Microchips, or semiconductors, are produced by a $300 billion industry. To be exact, according to the World Semiconductor Trade Statistics in 2011, the semiconductor market will grow by 4.5 percent to $313.8 billion in 2011, following an even more astounding 32.7 percent increase to $300.4 billion that took place in 2010.
As we progress our partnership with the government agency, we will provide detail, naturally within the security protocols of the projects at hand. We think you will understand the basis of our confidence in this opportunity.
We also are eager to share with you a security business development which impacts an entire country: Sweden.
There, an intensive security campaign, based on our SmartDNA product , has been officially launched as a collaboration between the Swedish police, the IF insurance company and Applied DNA. This program was developed, in part, as a response to the 2009 robbery of a major cash depot outside Stockholm, in which helicopter-borne gunmen from pulled off a Hollywood-style heist against the depot, in a paramilitary style operation.
The Swedish police have made great strides in revamping their cash protection programs, prominently including adoption of our SmartDNA system. SmartDNA has already been installed in the first few stores of a large chain of Swedish jewelry stores as a first step.
SmartDNA is the kind of law enforcement product that has become emblematic of our company, especially in the UK. We will release a video at some point, but imagine: this is a water-based, non-toxic spray which may be triggered during a crime, marking the perpetrator and remaining on their person for weeks after the crime. When a break-in occurs, the system is activated either by an automatic detection trigger or at the push of a button by the store clerk. In the event of a robbery or other crime, SmartDNA is forcefully released, marking the robber in various locations. Upon capture, police and detectives use a special detection device to visually see that the spray from the scene of the crime is present and sample the spray remnant for DNA verification.
The program has been widely covered in the Swedish press and TV and links can be found on our website.
We have good reason to report that these introductions are just the tip of the iceberg and will lead to significantly more sales in the near future both in Sweden, Europe and the rest of the world.
I have to add that, although I did not prepare this in my original remarks, this has already begun to happen. This morning our company signed an agreement to with RedWeb Technologies is giving our company the exclusive rights in North America to distribute the Sentry 500 Intruder Spray Systems embedded with SigNature DNA. This system is part of the SmartDNA family we just discussed. The market potential for this product here is vast and as yet untapped. Jewelry stores alone have the potential to bring in revenues of $32 million for initial installations with the potential for renewal fees every 18 months. SmartDNA both deters thieves breaking in to properties, and assists in the recovery of stolen goods so that they can be returned to their rightful owners. The system is easy to use and inexpensive compared to the possible cost of a robbery. These Spray Systems are being used throughout Europe with great success. We are obviously very excited about this product.
SmartDNA is closely related to another fast-growing product, also utilized by the Swedish police and other security groups outside of Europe: DNANet.
DNANet is a suite of uniquely coded products designed for covert operations and property control. It can be affixed permanently onto a specific location, or can also be used to transfer from object to person, providing a forensic evidentiary trail. Developed in conjunction with police forces throughout the world, DNANet is being implemented in situations where absolute proof of authentication is required. We believe that DNANet may be applicable to other security driven groups and organizations, globally, and even for certain government or military driven covert operations.
Meanwhile, our award-winning Cash and Valuables in Transit (CViT) business continues to grow,as witnessed by our successes in securing convictions in this field. The basis of this business is that at the moment of theft from a cash box, our DNA markers are forcibly sprayed over all the cash. Th3 DNA marker contains additional taggants that allow police to identified the cash as marked by Applied DNA, whereupon the police submit the cash to us for analysis. With over 22 convictions to date, Applied has a 100% conviction record for captured criminals who have stolen cash from our security licensees within the UK. The return on investment for the security company is a significant drop in attacks, helping to eliminate cash losses more than one hundred times the cost of annual licensing. Based on success in cash-in-transit, Applied DNA has introduced a range of products and solutions, from the vault to the cash machine or to the cash register, that significantly reduce the risk to this cash supply for all stakeholders, including, banks, insurance companies and government.
I think investors will be interested to know that our cash-in-transit business employs not one, but a family of products that represent ground-breaking technology for fighting crime…these include SigNature® DNA, DNANet™, SmartDNA™, and Cashield. The payoff for crime-fighting organizations: powerful crime deterrence and the ability to create an unbreakable forensic evidence trail. Through partnership with key players in the cash in transit industry, we will be moving aggressively ahead to market and sell this globally. APDN has already received several awards from UK Police Forces that are currently using these products on a daily basis.
Meanwhile, a long-time mainstay, our protection of the textile industry, continues to make solid gains.
In January, we announced a new customer, Prestigio en Moda, the major uniform manufacturer in Mexico, who supplies government agencies, including security groups and police departments. The problem of counterfeit police uniforms in Mexico is serious and deadly…we are proud to be a part of its solution and encourage you to read some of our web site blog and features on the situation there.
Our textiles group is also working with various partners in the textile and apparel industry in the US and Europe, that provides a definitive means for verifying genuine product, at various touch-points within a given supply chain. In addition, requests for our FiberTyping program for cotton continue to be fulfilled for yarn manufacturers from India, Pakistan, China, and Supima, the promotional organization of the American Pima cotton growers.
Finally, a strong new business with brand names I know you will recognize when we can reveal them: premium musical instruments.
In March this year, we received an order for our SigNature DNA anti-counterfeiting taggants to be embedded in musical instruments produced by an elite manufacturer. We have strong reasons to believe that this partnership will pave the way for broader use of our anti-counterfeiting programs in the musical instruments industry. Believe me, our staff can’t wait for the day when we are allowed to tell you more.
Regarding our Growth in Sales, and Forensic Expertise:
With the introduction of new products into new markets, and the positioning of DNA as the standard in security, government and business circles, we believe that gaining expertise in sales, forensics and experts in specific verticals, is essential. Additionally, we continue to collaborate with recognized experts who are as excited about our products as we are. These include Safe Solution in Sweden, Printcolor in Germany and other strategic partners around the globe.
WE AT APDN CONTINUE TO BE SALES DRIVEN AND CONTINUE TO STRIVE TO IMPROVE AND GROW OUR BUISINESS. WE THANK YOU FOR YOUR CONTINUED BELIEF IN AND SUPPORT OF Applied DNA Sciences.
Question and answer portion:
Dr. Hayward: It seems as if we have time for only a single question. For those of you that have emailed questions, we will make every effort to respond to you.
I will choose one which I take to be much on investors' minds. It is from an unknown sendeer, and reads:
Can you give us a forecast or estimate as to when you will be profitable?
We are not at liberty to divulge our internal studies which would estimate that. But I do believe we are at a watershed moment in the history of this company. We have transitioned in only two years from a largely technically-driven company to a sales-driven one. Yet, in the last three months we have brought more contracts to the closing table than at any other time in our history Overall, the number of contracts on the table which would enable us to cross the profitability barrier is larger by far than it has ever been.
The dollar value of our contracts, and our near opportunities is very significantly higher. The notion of having a contract to protect an industry that did some 300 billion dollars of business with one of the most important contractors in the world, the U.S. government, is for us a validation of the relevance an veracity of our platform. And is already bringing to us new customers, fully vetted by 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. . Whether wine, military parts, auto parts, these are all highly scalable. Our success with an elite musical instruments business is scalable…we have already been contacted by others in the industry. Exposures to financial institutions and insurers in Sweden are products that are scalable. So this trend, which puts powerful downward pressure on costs, is a tremendously important trend that investors should look at, and which will work to bring us to profitability much sooner than later.