BNB Plus Corp. (BNBX) Q3 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Applied DNA Sciences’ Fiscal Third Quarter 2016 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 Angles 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 of fiscal 2015, and a 14% increase as compared to $573,000 for the second quarter of fiscal 2016. For the first nine 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 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 chain and the two Government contract awards, the rapid innovation fund, project and the SBIR Phase 2 contracts. 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 said to decrease towards 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 marking and fiber typing 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 related 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 and nine months ended June 30, 2016 as compared to the same period 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 three 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 close out of the two government contract awards as well as costs related to the Cooperative Research and Development Agreement or CRADA with the U.S. 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 compression expense primarily associated with stock option modifications during the third quarter of the prior fiscal year. Resulting from the extension of certain stock option 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 decreased 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 four year vesting period. While similarly grants to employees during same period in the prior fiscal year vested immediately in lieu of cash bonuses being rewarded to employees as well as from stock option modifications. The increase in R&D expenses is primarily due to development cost incurred with the government contracts in CRADA as discussed above. Net loss for the three 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 nine 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 is 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 periods 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 nine 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 non-recurring 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 continues to strategically manage costs in line with our current and near future market opportunities. We estimate that our cash and cash equivalents along with the collection of our current receivables are sufficient to fund operations for the next twelve 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 audits. Thank you for joining us today. And now I would like to turn it over to Jim for his comments.

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's been a year of change. Ours is a disruptive platform with a broad commercial relevance across many industry verticals. We've 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 office is unique and protected value. Our ending DOD contracts that help 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 than their suppliers to raise the speed and efficiency of DNA tagging, through a longer list of military commodities. We have qualified and scaled three new methods for a high speed tagging.These methods such as inkjet and ink deposition and dispensing methods. Tell 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 of the system of record for DNA marking and more recently for a textile customers, has been enhanced with track trace and authentication capability using over or covert tagging methods. It supports our multi-mode spectral reader, DNA readers and other third-party devices such as smartphones for data capture. The 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 U.S. and have started dialogue with many others. Our DNA manufacturing business for diagnostics continues to perform well. As a result of improvements and compliance in CGMP quality methods, we have become an approved vendor for a diagnostics manufacturer for two important customers. Current revenue from these two customers are is expected to double between 2016 and 2018 and again before 2020. Our rigorous compliance with the 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 U.S. Cotton and over the last two years, we have turned this into a solid foundation. Continuing our progress, we've subsequently announced an agreement in synthetic fibers with Techmer and their customer of Palmetto, excuse me and quite soon you can expect to see us involve. Earlier this week, we announced expansion into the leather supply chain, and 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 at 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 provider is needed to order DNA from us and have it on hand to ship DNA tags cotton in response to retailer demands. Usually, in fact almost every time just in time. But in any rollout year, neurosis is high then buyers may over order with such tight timeframes. Consequently, our partners had access 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 year's 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 demand than last year. In addition, we will be marking two new varietals, excuse me – of Upland that is roller gin to Acala and plains cotton. We have increased the number of gins where we are marking by 50% and we have primed our DNA production by tripling 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, excuse me – production and improved operations we haven't neglected our science. You will recall that 7 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. Dump 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 DNAs patented genotyping of cotton which we trademarked at 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 of fiber into a finished product. We continue 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 far away places. It's an educated debt, 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 repeated 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 Nu [ph] 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 cotton. 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’s 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 for forensically assured under the Pimacott 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. The global outcry arose, as exemplified by this tweeted photo taken just one week ago at the U.S. 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 the 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, there 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’s 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. The 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, in 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’s 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.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Kinstlinger with Maxim Group. Please go ahead.

Great, thanks. How are you?

Good. And you, Brian?

Good. So we're almost halfway through the September quarter, I heard your comments about, last year maybe some of the customers are little too much DNA and have some excess. And that will have a backend loaded year and even some slips in the next year or 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'll sell?

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

Is there anyway 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's not a bunch, but it's hard to quantify a bunch or a little less 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 maybe talk about how you maybe see that revenue trajectory. Maybe cotton that will have itself, but its something similar in terms of a two to three year timeframe that was announced still how cotton played out, is that how you kind of think about it or should we think about it definitely?

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's 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 that’s the total harvest per year. The American market for Upland is about £7 billion it’s about 25 times the 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's very promising.

Right. So I guess the market is larger. I guess I'm wondering for you now what you've commercialize that. Do you see the first two years to three years in terms of what you can generate in revenue, that’s a similar kind of trajectory as cotton, while it might be a larger market or are you suggesting it should be and could be much faster.

It's more the latter than the former. The applications were synthetic fibers range from automotive applications to composite products to huge market is athletic wear. And once we have a toehold in the 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. It depends on the customer, okay. Last question I have, you had a quick discussion on a pharmaceutical industry. Can you talk about how far you are to commercialization – through you need to get through regulation or whatever else you need to do – a year away we more like two years away. Just give us a sense for where we are now for pharmaceutical?

Sure. I think this kind of two opposing forces. What we have to offer is really unique in the pharmaceutic industry. It's safe, its 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 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're hopeful that we have got the story just right, and we already have the attention very significant players and the people we have involved on our side couldn't be better. So I'm very optimistic. I think if anyone addressing the issue of pharmaceutic security is capable of moving fast it should be us.

Great. Thank you.

You're welcome.

Our next question comes from Rob Stone with Cowen and Company. Please go ahead.

Hi. Thanks for taking my question. I want 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 businesses in terms of things that are contracted 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 the 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, towards 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've now conquered that problem capable of marking at very high speed and the pilots done under the aegis of the two contracts we are all very successful. So now it's just a matter of scale up and being able to offer the government the product that satisfied with. So I'm optimistic that will 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've 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're optimistic that our relationship with DLA will remain the same or better, likely will grow across a broader range of federal supply groups. And we think that our engagement with the federal government will only increase in depth and breadth.

You mentioned that the time to revenue you hope it 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're not giving some 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 questions for you or Beth whoever is better to answer. One is on operating expenses, is up a little bit this quarter from the year ago. Can you comment on sort of how you're thinking about the run rate going forward, you mentioned sort of managing resources carefully? Should we thinking about additional modest increases or staying at this level for a while?

We are trying to monitor that, sorry, as I had said, so we are expecting to say at similar levels that are currently on, some of the declines and the fluctuations have been due to non-cash items such as stock-based compensation. So I would envision it saying fairly flatter consistent.

Okay. The question about the cash usage, at least in terms of thinking about the seasonality of it, you mentioned the cash should 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 a roll off of 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?

You should see – but we also did put inventory on our books at this year and luckily the cotton business is one of our higher gross margin runs. 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 have. Thank you.

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.