BNB Plus Corp (BNBX) 2016 Q3 法說會逐字稿

Good day and welcome to the Applied DNA Sciences fiscal third-quarter 2016 conference call and webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Debbie Bailey, investor relations. Please go ahead.

Thank you, Bianca. Good afternoon, everyone, and thank you for joining us for our fiscal 2016 third-quarter results conference call. A copy of the Company's earnings press release is available for download on the investor relations section of the Applied DNA website. With me on the call today are Dr. James Hayward, Chairman and CEO, and Beth Jantzen, Chief Financial Officer.

As a reminder, please note that some of the information you will hear today during our discussion 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 section in the Applied DNA Sciences 10-K for fiscal 2015. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

Before starting the call, I want to inform you that Jim Hayward will be meeting with institutional investors in New York City on August 18. He will be in Los Angeles on September 7 and also in San Francisco on September 8 to present at the Liolios Gateway conference. If you would like to schedule a meeting with Dr. Hayward in either New York City, Los Angeles, or San Francisco, please contact me.

Now it is my pleasure to introduce Beth Jantzen, our first speaker.

Thank you, Debbie. Hello, everyone. Let me take a few minutes to discuss the results of our fiscal third quarter, after which time, Dr. James Hayward, our President and CEO, will update you on the Company's activities and strategies.

Starting with the income statement, revenues for the quarter were $653,000, a 71% decrease compared with $2.3 million reported in the third quarter fiscal of 2015 and a 14% increase compared to $573,000 for the second quarter of fiscal 2016. For the first 9 months of this fiscal year, we reported revenues of $2.6 million, which represents a decrease of 49% from the $5 million in the same period the last fiscal year.

The decrease in revenues for this quarter and the first nine months of fiscal 2016 was primarily from a decrease in revenues related to the textile industry, for protecting cotton supply chains, and the two government contract awards, the Rapid Innovation Fund project and the SBIR Phase 2 contract. The SBIR Phase 2 contract expired in July and the RIF will expire this month on August 28. Jim will be discussing the results and conclusion of these contracts in a few minutes.

When these contracts were established, the deliverables and corresponding payments were set to decrease toward the end of the contract term. And this is what we are seeing now.

These decreases were offset by an increase in revenues in our consumer asset marketing and fiberTyping businesses. The nine months ended June 30, 2016, also includes an increase in revenue in DNA manufacturing for the diagnostic market.

As you can see, we are now reporting cost of revenues on the statement of operations. The majority of these costs relate to the shipment of DNA concentrate for marking of cotton as well as the sale of DNA net asset marking solution.

Cost of revenues was higher as a percentage of revenue during the three or nine months ended June 30, 2016, as compared to the same periods in the prior fiscal year due to product mix, with lower sales to the higher gross margin textiles industry as well as the prior fiscal year periods, including more revenue from development contracts.

Operating expenses were just under $4 million for the 3-month period ended June 30, 2016, a slight increase of 4% or $143,000 from the same period in the prior fiscal year. This increase is primarily attributable to an increase in research and development expenses of approximately $611,000 or 131%, offset by a decrease of $515,000 or 16% in selling, general, and administrative expenses.

The increase in R&D spending was mainly due to development costs incurred in relation to the closeout of the two government contract awards as well as costs related to the cooperative research and development agreement, or CRADA, with the US Department of Agriculture for enhanced genotyping, which commenced during fiscal 2016.

The decrease in SG&A expenses from $3.2 million in the third fiscal quarter of 2015 to $2.7 million in the third quarter of fiscal 2016 was due to a decrease in stock-based compensation expense, primarily associated with stock-option modifications during the third quarter of the prior fiscal year resulting from the extension of certain stock options as well as reduced legal costs.

Depreciation and amortization expenses increased by 39% or $47,000 from $121,000 to $169,000 as a result of quarterly amortization expense relating to customer relationships and technology purchased from Vandalia during September 2015 as well as fixed assets purchased during the first nine months of fiscal 2016 for work performed on the RIF government contract.

For the first nine months of fiscal 2016, operating expenses decrease slightly as compared to the same period in the prior fiscal year from $12.3 million to $12 million. This was due mainly to a decrease in SG&A expenses of $1.7 million or 17%, offset by increases in R&D and depreciation and amortization expenses of $1.3 million and $204,000, respectively.

The decrease in SG&A expenses for the current nine-month period was primarily the result of a decrease in stock-based compensation expense associated with grants to employees during the nine-month period ended June 30, 2016, having a full-year vesting period, while similar grants to employees during the same period in the prior fiscal year vested immediately in lieu of cash bonuses being awarded to employees as well as from stock-option modifications. The increase in R&D expenses is primarily due to development costs incurred with the government contracts and CRADA, as discussed above.

Net loss for the 3 months ended June 30, 2016, was $3.4 million compared with a net loss of $1.7 million for the same period in the prior fiscal year. Net loss for the 9 months ended June 30, 2016, and 2015 was $9.8 million and $11.4 million, respectively.

For the third fiscal quarter of 2016, excluding non-cash expenses, adjusted EBITDA was a negative $2.6 million compared to a negative $479,000 for the same quarter last year. This was due mainly to the decreased revenues and an increase in R&D expenses. Adjusted EBITDA was a negative $2.8 million in the prior fiscal quarter.

Now turning to the balance sheet. Cash and cash equivalents totaled $7.1 million at June 30 compared with $9.8 million at March 31, 2016. The decreased cash balance was primarily a result of cash used to fund operations. At June 30, deferred revenue was $849,000 compared to $282,000 at September 30, 2015. This is mainly a result of the SigNature T DNA that was shipped this quarter to mark 10 million pounds of Acala cotton not yet being recognized and DNA transfer systems that are scheduled to be installed in Q4, as previously shared with you.

As discussed during prior quarterly calls, our cotton contracts include extended payment terms that result in a longer collection period and slower cash inflows. As a result, our total accounts receivable for cotton customers at June 30, 2016, was approximately $4.6 million, of which $360,000 is recorded as long term.

As of June 30, we have inventory of $127,000 on our balance sheet. We have produced some inventory primarily in anticipation of orders in our cotton business as well as for scheduled future shipments in our DNA net consumer asset marking business.

As of June 30, 2016, our average monthly cash burn rate for the first 9 months of fiscal 2016 was approximately $895,000 compared to approximately $616,000 for the same period in the prior fiscal year. The increased burn rate for the first nine months of fiscal 2016 compared to the same period in fiscal 2015 is due to decreased cash receipts, primarily as a result of the extended payment terms for our cotton customers discussed above and the decreased revenue from the SBIR and RIF contracts as well as certain nonrecurring expenses incurred during the first nine months of fiscal 2016.

We continue to closely monitor our spending while ensuring that we have the capacity and expertise to meet our most immediate market needs. And that we are preparing for the needs of our customers in the near future. We intend to remain disciplined in our spending and continue to strategically manage costs in line with our current and near-future market opportunities. We estimate that our cash and cash equivalents along with a collection of our current receivables are sufficient to fund operations for the next 12 months.

Finally, I wanted to share with you that we successfully completed the Vandalia audit and filed the 8K/A on July 22. We were also able to recover $50,000 of escrow funds related to costs of the audit.

Thank you for joining us today. And now I would like to turn it over to Jim for his comments.

Okay. Well, thank you, Beth and Debbie. And thank you to those listening. As the CEO of your Company and as one of its largest investors, I can tell you that our team is not satisfied with our results so far this year.

It has been a year of change. Ours is a disruptive platform with a broad commercial relevance across many industry verticals. We have spent this year executing on a strategy I discussed with you almost a year ago. To become a solutions provider in supply chains of process industries, in which contracts are larger and of longer duration. Where the benefits to customers and consumers are significant and where our forensic security offers a unique and protected value.

Our ending DOD contracts have helped build our marking, validation, and authentication platforms for continued growth in discrete product supply chains where contracts are also larger in value and of longer duration. In the highest risk military supply chains, we are helping our agency customers and their suppliers to raise the speed and efficiency of DNA tagging through a longer list of military commodities.

We have qualified and scale three new methods for high-speed tagging. These methods, such as inkjet and ink deposition and dispensing methods, solve the military requirements of our contracts, offering a uniform authentication method across agencies. But also opening many commercial opportunities in the commercial industrial products market. We expect to see these applications contribute to our revenue in the near future.

Also as a consequence of our military contracts, our cloud-based digital platform, used for 2.5 years as the system of record for DNA marking and more recently for our textile customers, has been enhanced with track, trace, and authentication capability using overt or covert tagging methods. It supports our multimode spectral reader, DNA readers, and other third-party devices such as smartphones for data capture. A simulation of supply chain traceability was conducted under the recent RIF contract.

We are making rapid progress in pharmaceuticals and our strategy is now more refined. Our DNA platform offers pharmaceutical companies several paths to risk reduction, our primary value proposition in this vertical.

We recently met with eight drug companies in Japan and we are already conducting validation studies in funded pilots there. We have met with some of the largest drug manufacturers in the US and have started dialogue with many others.

Our DNA manufacturing business for diagnostics continues to perform well. As a result of improvements in compliance and cGMP quality methods, we have become an approved vendor for diagnostics manufacturer for two important customers. Current revenue from these two customers is expected to double between 2016 and 2018 and again before 2020. Our rigorous compliance with cGMP and iso-9001 standards as approved by NSF will also facilitate our growth in pharmaceutics.

And we continue to engage in asset protection, security, and law enforcement, since these verticals are helpful to society. They provide for us a good run rate business and they validate our technology, especially in the eyes of the court. But as we support these businesses, we are building supply chain capabilities to ensure integrity in supply, in honest claims, and ethical and sustainable sourcing.

Now, for several years, we have been involved in textile supply chains, some of the most complex supply chains in the world. Our first success was with US cotton, and over the last two years, we have turned this into a solid foundation. Continuing our progress, we subsequently announced an agreement in synthetic fibers with Techmer and their customer Palmetto. And quite soon, you can expect to see us in wall.

Earlier this week, we announced expansion into the leather supply chain, an engagement aimed at using our platform to prove ethical sourcing practices. The experience here will demonstrate solutions that can be used in other industries to prove ethical and sustainable sourcing, issues so critical to our society and our planet today.

Last year was our first in which we began shipping significant orders of SigNature T DNA, a molecular tag that allows a brand owner, retailer, or consumer to track a cotton fiber almost literally back to its root. The tag is applied in the cotton gin, usually within days of the cotton being picked from a local farm.

You will recall that last year, our partners placed initial orders in the third quarter of our fiscal 2015. Now each year, there is only one ginning season. So the cotton providers needed to order DNA from us and have it on hand to ship DNA-tagged cotton in response to retailer demands. Usually -- in fact, almost every time -- just in time.

But in any rollout year, neurosis is high and buyers may over order with such tight time frames. Consequently, our partners had excess DNA on hand to start this season, slowing down initial orders in 2016.

The good news is that demand is increasing in volume and in diversity, but the slope of demand has changed compared to last season, pushing demand back. All of the retailers from last years have maintained and expanded their involvement in our DNA tagging programs.

This year, we will be tagging both Pima and delta Upland cottons to meet greater demands than last year. In addition, we will be marking two new varietals of Upland that is roller ginned Acala and Plains cotton. We have increased the number of gins where we are marking by 50% and we have primed our DNA production pumps by tripling our DNA production capacity, which was already the largest in the world.

I believe that our peak seasonality is shifting toward the end of our fiscal year and into the first quarter of our fiscal 2017 to coincide with the ginning season that starts this September and runs through January.

Now as Beth said a moment ago, we are carrying inventory on our balance sheet for the first time in our history in order to be able to respond to a diversified larger demand from a greater number of customers. While we expanded production and improved operations, we haven't neglected our science.

You will recall that seven years ago, we announced the detection of a deceptive labeling practice in which textiles labeled 100% Pima were found to contain a less expensive species of cotton called Upland cotton. Some samples contained Upland fibers exclusively without even a trace of Pima.

The basis of proof for the species of cotton fiber comes from a simple concept known as genotyping. This process examines differences in DNA composition that can discriminate between Upland and Pima species. Now what made Applied DNA's patented genotyping of cotton, which we trademarked as fiberTyping, so novel was our identification of DNA fragments native to the cotton fibers that could still be found after all the processing that renders a fiber into a finished product.

We continued to refine our patented process, and as this slide shows, now our fiberTyping assay is capable of detecting the dilution of Pima fibers by less than 1% of the Upland fibers. Since the great majority of the process of converting fibers to textiles takes place offshore, this dilution happens when the fibers are converted to finished goods in faraway places.

It is an educated bet, but it is likely that these Upland -- it is unlikely, rather, that these Upland fibers come from America, which is where the story gets really worrisome. Much more about that in a moment.

We recently reported a follow-on survey, and as this slide shows, found similar results to those we obtained seven years ago. In a day when consumers push for transparency in their supply chain and want to know, as Steve New famously said, where does my stuff come from, I find it really amazing that mislabeling of textiles takes place.

Now in working with our partners, we helped to create a brand of plant-DNA-tagged Pima fibers called Pima Cot. Several large retailers and brand owners are using this DNA system to purify their supply chains and to prevent their vendors from using anything but Pima cotton. We supported their efforts by training their vendors, implementing strict good manufacturing practices with regular audits, and DNA testing.

Now what were the results? It is instant compliance, as shown on this slide. And as demonstrated in over 1,000 fiberTyping assays since SigNature T was implemented. Testing for SigNature T is done at every stage of the commercial supply chain. Quality is now forensically assured under the Pima Cot brand.

Now, conflict is the adjective applied to any materials whose supply chain uses forced labor. Today, it refers to diamonds, to emeralds, and other precious stones as well as to specialized minerals. But conflict cotton is the term applied to cotton products that have used forced labor, particularly in the cotton field.

The prospect is really appalling. In Uzbekistan, children were taken from their schools, forced to work the fields during cotton harvest, and often literally forced to sleep in the fields. A global outcry arose, as exemplified by this tweeted photo taken just one week ago at the US Chamber of Commerce.

And that outcry forced the Uzbek government to find an alternative, and they did. The children's parents, often professionals like physicians, are forced now to take their children's place or risk firing or arrest. Uzbekistan is not the only offending country.

Now over 260 companies have signed a well-intended cotton pledge to halt the use of conflict cotton. But how can any retailer ensure that conflict fibers have not been leaked into their offshore supply chains? This is especially worrisome when the manufacturing is done in locations like Bangladesh or Pakistan that are too risky to be frequently visited by inspectors representing brands and retailers.

So our first priority for retailers is to know where their cotton comes from. Tagging with SigNature T DNA tells you where your cotton comes from. So you know it is not conflict cotton, and SigNature T does that forensically.

Now, Applied DNA has been collaborating with USDA in a project aimed at genotyping and discriminating most of the world's cotton fibers at high resolution. The platform has been trademarked by us as GEOTYPING, a forensic process associating the native DNA of a cotton fiber to its cultivar.

Now, cultivar is our subtypes within a species that are typically restricted to use in a geographic region. To ensure that there is not a trace of conflict cotton, Applied DNA would need to be able to detect DNA that is unique to conflict cotton cultivars. For example, an Uzbek Upland fiber that is a cultivar of Upland, different from the American Upland cultivar.

Today, for the first time, that diagnosis seems possible. Applied DNA scientists have just identified DNA markers that can be detected in mature cotton fibers, markers that can discriminate between the varietals or cultivars within a cotton species that is a geographically restricted varietal.

Previously, Applied DNA could discriminate at the fiber level only between species. That is between, for example, Pima and Upland. But now Applied DNA can discriminate within species. For example, between American Upland and Uzbek Upland.

This now means that in the near future, Applied DNA's platforms will be able to detect and exclude the invasion of conflict cottons within retailer supply chains. This is a great demonstration of how our platform can improve global trade and the human condition.

Now this concludes my prepared remarks. Operator, please open the call to any questions. Thank you.

(Operator Instructions) Brian Kintslinger, Maxim Group.

So we're almost halfway through the September quarter. I heard your comments about last year maybe some of the customers ordered a little too much DNA and have some excess. And that we'll have a back-end loaded year and even some slips into next year -- early next year.

Can you talk about thus far in the quarter if you've had any cotton sales? And then maybe how you see the split in this quarter versus maybe how it feels for the March quarter in terms of overall percentages of what you will sell?

Well, as you know, Brian, it is not our habit to give guidance, and we have not announced any cotton sales. Perhaps I could just say that I am optimistic about the pull we're getting from the marketplace, and I am very optimistic about the activities of our current customers.

Is there any way to communicate the existing customers how much inventory has been communicated to you they have left of DNA to mark? Very little, maybe? Is it still a bunch?

No, it is not a bunch, but it's hard to quantify a bunch or a little in either case. So I'm afraid I can't really give you a satisfying answer just now.

Okay. And then on the synthetic fiber being commercialized, can you maybe talk about how you maybe see that revenue trajectory? Maybe cotton got a little ahead of itself, but is it something similar in terms of a two- to three-year time frame from when that was announced to how cotton played out? Is that how you think about it, or should we think about it differently?

Sure. Cotton occupies a kind of emotional place in the consumer's heart and mind. But since the movie The Graduate, plastics have played an increasing role in the global economy. And that is certainly true in the textile business. Plastics occupy a very large multiple of the total cotton business.

So in fact, for us to participate in the plastics business is a very good thing. If you contemplate what the total American market is right now, the American market for Pima is 280 million pounds. That's the total harvest per year. The American market for Upland is about 7 billion pounds; it's about 25 times that size.

The plastic fiber business is a very -- I can't remember the precise number, but it's a very large multiple of the total cotton business. So in terms of total addressable market for our platform, it is very promising.

Right, so I get the market is larger. I guess I'm wondering for you, now that you have commercialized that, do you see the first two years to three years in terms of what you can generate in revenue. Is that a similar kind of trajectory as cotton, while it might be a larger market? Or are you suggesting that it should be and could be much faster?

It's more the latter than the former. The applications for synthetic fibers range from automotive applications to composite products to a huge market is athletic wear. And once we have a toehold in that market, my expectation is that we have the opportunity to grow quite rapidly.

And do you think that in fiscal 2017, that will be the first year of material revenues from that industry?

Fiscal 2016 is not yet over, so let's --

If you had orders there in hand already, would you have announced them?

That has been our typical habit, but it's not what we do every time.

Right. Depends on the customer, okay.

Last question I have -- you had a quick discussion on the pharmaceutical industry. Can you talk about how far you are to commercialization through -- needing to get through regulation or whatever else you need to do? Are we a year away? Are we more like two years away? Just give us a sense for where we are on the map for pharmaceuticals.

Sure. I think there's two opposing forces. What we have to offer is really unique in the pharmaceutic industry. It is safe, it is content rich, and it's forensic. And we can offer to the pharmaceutic industry content that can't be had any other way and flexibility of use that can't be had any other way.

So the response is great intrigue. And I think that causes a drive to move quickly. However, there probably is not a more conservative industry in terms of moving quickly. So we have those two opposing forces. We are hopeful that we have got the story just right, and we already have the attention of very significant players. And the people we have involved on our side couldn't be better.

So I am very optimistic. I think if anyone addressing the issue of pharmaceutic security is capable of moving fast, it should be us.

Great. Thank you.

Rob Stone, Cowen and Company.

Thanks for taking my question. I wanted to start out on the topic of your government business. You had a couple of contracts maturing last month and this month. Can you comment on first sort of what the run rate of your remaining government business is in terms of things that are contracted or in backlog?

And then the second part of that question would be how do you think about the time to revenue from some of the newer opportunities that you are working on, such as high-speed marking and covering a wider part of the government supply chain?

Sure. Keep in mind that the two government contracts we had were not discovery and development contracts; they were much more commercially oriented. The idea was to take a platform to market.

And the notion was of having a single uniform authentication platform that would be applicable across multiple industries. And we worked with a host of commercial partners, all of whom were superb. So we feel we are quite well poised toward a broad range of applications.

When we first started DNA marking for the government, the in-line processes were difficult to accommodate for DNA in terms of volume per minute. And we have now conquered that problem, capable of marking at very high speed. And the pilots done under the aegis of the two contracts were all very successful.

So now it's just a matter of scale-up and being able to offer the government a product it is satisfied with. So I am optimistic that we'll be successful in ramping those up with some speed.

Our relationship with the DLA remains extraordinarily strong. We talk with them once or twice a week. We have offered them new technologies to increase their scale. And we have now moved from a single semiconductor federal supply class FSC 5962s to FSC 5961s as well, which are much greater in number, require the methods to move much faster.

So we are optimistic that our relationship with DLA will remain the same or better. That likely it will grow across a broader range of federal supply groups, and we think with that, our engagement with the federal government will only increase in depth and breadth.

So you mentioned that the time to revenue you hope is fairly short for some of these high-speed applications, including things that are outside the government. Can you put a scale on that? Are we talking about some number of quarters; within another year? I know you are not giving guidance about this specifically, but any color would be helpful.

Yes, I would say certainly we should achieve commercialization within the next 12 months of a number of these. Now some may be much faster; some may take the full 12 months.

Okay. A couple of questions for you or Beth, whoever is better to answer. One is on operating expenses, up a little bit this quarter or from the year ago. Can you comment on how you're thinking about the run rate going forward. You mentioned managing resources carefully. Should we be thinking about additional modest increases or staying at this level for a while?

Rich (sic), hi. We monitor it, as I had said, so we are expecting to stay at a similar level that it currently is. Some of the declines in fluctuations have been due to non-cash items, such as stock-based compensation. So I would envision it staying fairly flat or consistent.

Okay. And a question about the cash usage, at least in terms of thinking about the seasonality of it. You mentioned the cash would be adequate for a year. As you go into the busier part of the season for cotton, with the extended payment terms and building up some inventory, would you expect working capital to consume cash for a while and then see it roll off as that inventory and accounts receivable turns back into cash?

In other words, is it reasonable to think that cash consumption might be greater for the next couple of quarters as you go into the high season?

Right. You should see it, but we also did put inventory on our books at this year. And luckily, the cotton business is one of our higher gross margin ones, so although we will consume some cash for the raw materials to produce the DNA concentrate, it won't be as high as maybe you would expect it to be.

That's all I had. Thank you.

This concludes our question-and-answer session and the conference as a whole. Thank you for attending today's presentation. You may now disconnect.

Okay. Thank you.