BNB Plus Corp. (BNBX) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Applied DNA Sciences Fiscal Second Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Debbie Bailey, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us on our fiscal 2017 second quarter results conference call. A copy of the Company’s earnings press release and the accompanying PowerPoint presentation to this call are available for download under the Events and Presentation section of the Investor page on the Applied DNA website. With me on the call today are Dr. James Hayward, President 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 discussed in Applied DNA’s Form 10-K for fiscal 2016. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information. Before starting the call, I want to inform you that Dr. Hayward will attend and present at the 18th Annual B. Riley Institutional Investor Conference in Santa Monica on May 24 and at the 7th Annual LD Micro Invitational Conference in Los Angeles on June 6. Both presentations will be webcast and details to both conferences are posted to the Events and Presentation section of the Investor page at the Applied DNA website. Now, it is my pleasure to introduce our first speaker to today call, Beth Jantzen.

Thank you, Debbie. Good afternoon, everyone, and thank you for joining us today. I would like to start off by discussing the results for our second fiscal quarter and then Dr. James Hayward, our President and CEO will provide an update to you on the Company’s progress activities and strategies. Starting with the statement of operations, total revenues for the quarter were $905,000. This represents a 58% increase compared with $573,000 reported in the second quarter of fiscal 2016 and remains flat as compared to the first quarter of fiscal 2017. For the first six months of this fiscal year, we reported revenues of $1.8 million, which represents a slight decrease of $89,000 or 5% as compared to the same – as compared to the first six months of the prior fiscal year. Product revenues increased 268% for the second fiscal quarter of 2017, compared to the same quarter of 2016, and 50% for the first six months of fiscal 2017 with increases in textiles and consumer asset marking revenues, offset primarily by a decrease in military and government revenue. The majority of the increase in textile revenues was a result of recognition of previously deferred revenue as commitments were received. Service revenues decreased 45% and 50% during the three- and six-month periods ending March 31, 2017, compared to the same period in 2016 mainly due to the conclusion of the two government contract awards last July and August, offset by a new feasibility study for industrial material as well as authentication revenue. During the quarter, we have begun to see more recurring revenue streams from synthetic textiles to consumer asset marking and bulk DNA production as we have shared in press releases throughout the past few months. In the past quarter we have seen a high number of pre-commercial opportunities with customers across multiple market verticals. Our experience to-date affords us the ability to complete feasibility studies and to be ready for commercial launch in shorter time periods. While these are early stage, we believe this is exciting because it diversifies our revenue opportunities spreading out the risk. Cost of revenue as a percentage of product revenue was lowed during the three months and six months ended March 31, 2017, as compared to the same period in the prior fiscal year, due primarily to increase sales in the textile industry which have higher margins. Also, during the prior fiscal year, due to low product revenue our production decreased, and as a result, our fixed production costs allocated to our production facilities were not absorbed by product sales. Operating expenses were $4 million for the quarter ending March 31, 2017, an increase of $253,000 or 7% from $3.8 million for the same period in the prior fiscal year. This increase is primarily attributable to an increase in payroll expenses and to a lesser extent other general and administrative expanses mainly due to the timing of our annual meeting. These increases were offset by a decrease in R&D expenses related to the two government contract awards that expired during Q4 of fiscal 2016. For the first six months of fiscal 2017, operating expenses increased as compared to the same period in the prior fiscal year from $7.8 million to $8.6 million due to an increase in stock-based compensation expense and payroll, offset by a decrease in R&D expenses. Net loss for the second fiscal quarter of 2017 was $3.4 million compared with a net loss of $3.5 million for the same period in the prior fiscal year. For the second fiscal quarter of 2017, excluding non-cash expenses, adjusted EBITDA was a negative $2.7 million compared to a negative $2.8 million for the same quarter last fiscal year, and a negative $2.3 million in the prior fiscal quarter. Year-over-year EBITDA did not materially change. The increase in adjusted EBITDA compared to last quarter was primarily due to increased operating expenses as discussed previously. Now turning to the balance sheet; cash and cash equivalents totaled $4 million at March 31 2017, compared with $6.7 million at December 31, 2016. The decrease cash balance is primarily a result of cash used to fund operation. As I mentioned earlier, deferred revenue for the second fiscal quarter decreased as we were able to recognize revenue for commitments received by our customers for marked cotton. Accounts receivable were also down as of March 31, 2017, as payments were received. The Ginning season is now over for this year and we expect to see additional draw downs on ARs and deferred revenue balances in the ensuing quarters before the start of the 2017 Ginning season. As of March 31, our average monthly cash burn rate for fiscal 2017 was approximately $805,000, compared to approximately $893,000 for the same period in the prior fiscal year. The decreased burn rate for fiscal 2017 compared to fiscal 2016 is due to certain one-time cost incurred during the prior fiscal year period. As of April 30, our cash position is approximately $3.4 million. We continue to closely monitor our spending and intend to remain disciplined 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 the collection of our current receivables are sufficient to fund operations for the next 12 months from the balance sheet date. Thank you for joining us today, and I would now like to turn it over to Jim for his comments.

Well, thank you, Beth, and good afternoon, everyone. Thank you for joining us on our quarterly update call. On prior calls I have discussed our pursuit of commercial rollouts of our SigNature DNA technology platform across very large addressable markets. The quantification of our efforts is reflected by our revenue and performance, which with the publication of our fiscal second quarter financial results today evidences continued adoption by the cotton synthetic fiber and consumer asset protection markets. The revenue alone however does not quantify our volume of business activity on our path to greater growth. We want to give you a clearer review of the progress we are making to expand market awareness of our technology platform and to drive future adoption. Supply chain security in a global marketplace is an imperative, and we are increasingly being recognized as a trusted partner. Our pipeline of pre-commercial opportunities along with new agreements and recurring orders experienced in the first half of the year, correlate directly to the level of interest in our platform. Now as you know from prior calls, we are preparing to enter into business with commercial ecosystems that are regulated by FDA. Categories in the order of increasing compliance standards include supplements, foods, personal care, and OTCs over the counters, DNA diagnostics, prescription tablets, injectable medications and DNA for vaccines. Participating in the verified supply chains legitimate drugs opens a parallel universe of tracking with law enforcement agencies illegitimate drug supply chains, such as those that have contributed to our nation’s opioid crisis. We believe the application of forensic tracing methods in a legal supply chains could aid interdiction of illegal prescription and counterfeit opioids across broad, deep and widely dispersed illegal supply chains. In fact, we’ve just this week seen a very real and rewarding application of our molecular SigNature to break cross border trading between gangs of car thieves and car part thieves throughout Europe and other continents. You will read more about this via press release next week. Now I spoke at the annual shareholder meeting in March about the evolution of our technology from a tool box to a platform, and our capacity to address the most vexing problems of companies today, risk and uncertainty. With the introduction of our certainty platform we have taken the next step, perhaps we should call it a leap in this developing story. Let me begin by saying that we initiated nine new feasibility studies, and initiated or expanded five commercial opportunities in the second quarter. I believe that we are moving past the early adopter phase and we are now looking forward to more commercial uptick on our pipeline of opportunities to support this. Now let me put our pre-commercial activity in context. Our pipeline today represents expanding market awareness of our technology platform and its applicability in solving the risks and uncertainties, plaguing today’s global supply chains. The pace of pre-commercial activity we are engaged in reflects an elevation in the discussion on supply chain security and authenticity, and the certainty of brand promises that are being driven by industry events, such as the Welspun incident last fall that focused national attention on cheating in the cotton supply chain, by our own marketing efforts and those of our partner ecosystem. In most cases, this sponsor is either paying for sharing the costs of these feasibility studies. To pick up in the pace of pre-commercial activity we are experiencing, correlates directly with our technology roadmap. You can see a detailed road map on this slide of our product genealogy. Ours is a cloneable platform where methods developed to tag, trace and track one material are transferred either within an industry or adjacent to another market. As an example, we have extended our cotton business into related industry synthetic fibers. Cotton also leads us – excuse me to enter into the nutraceutical, pharmaceutical and personal care markets. Within synthetic fibers, we began with polyethylene and polypropylene and have move to PET, the plastic from which water bottles are made. And now more important in this massive circular economy, we are securing recycled PET supply chains. Let’s take a closer look at this quarter’s high volume of pre-commercial activity. We signed nine pre-commercial engagements in our fiscal second quarter compared to one in our first fiscal quarter and two in our 2016 fiscal second quarter. Interest is highest for synthetic fiber applications where the need to implement and substantiate traceability and particularly sustainability claims is driving customers to our technology platform given our success in securing the cotton supply chain. Within synthetic fiber market forces are fueling the use of recycled fiber and creating what is becoming a significant tailwind for us. We are currently engaged in three feasibility projects and received new agreements from an additional two textile companies in the second quarter, including pre-commercial activity on multiple types of synthetic and natural fibers and within our well established cotton market for the marking of organic cotton and cellulose. Staying with textiles, one of the feasibility projects announced was a proposed extension of our platform to facilitate the traceability of leather from farm to finished products. This program is fully funded by five global brands including Puma and Clarks. I would note that while leather is an incremental opportunity for us, the feasibility study with the British Leather Consortium could be our gateway to the substantial Athleisure market that these brands serve since synthetic fibers are the basis for the Athleisure apparel. We are increasingly interested in our bulk DNA manufacture and we see that interest reflected in our customer base. As we expand our marketing in sales reach, we recently attended the World Vaccine Congress and the feedback and sales leads were absolutely tremendous. Our ability to mass produce DNA for vaccines and diagnostics is unprecedented; it just doesn’t exist in the world. And it is only beginning to be understood by the uses of more traditional fermentation methods. We are able to provide cleaner DNA more efficiently and more cost effectively than our competitors. Along with the recent announcement, I hope you saw the five-year supply agreement signed with a leading chemical company and by the way for which we already receive the purchase orders for the next 12 months, totaling approximately $550,000. We also filled our first order for another customer in this field last quarter. We expect these will become long-term customers providing recurring revenue streams as once our DNA is incorporated into the production process it is very sticky and costly to change the manufacturing relationship and keep the FDA satisfied. We believe this business which leverages the assets and technology acquired from Vandalia can build a high margin, high cash flow, recurring revenue business. As we are validated by other diagnostic and pharmaceutical customers, we anticipate additional similar recurring revenues orders. Now additional feasibility projects were initiated in personal care, in fact we signed one just few moments ago, pharma, industrial materials and consumer products last quarter. Another exciting milestone, we achieved last quarter that we sold our first two in-field readers. One to a government agency and one to our partner in the area of fertilizer, now had mentioned, the marking of fertilizer in past call, so I’m very pleased today to report that we have completed a fertilizer marking production run at a customers factory at a pilot project level measured in thousands of tons. Our next step is to demonstrate how authentication would occur at various steps in the supply chain all the way to the farmers we’re having in-field DNA authentication system is also important. One product two very different and substantial marketing opportunities, by proving the business case the customer sees our tag and in-field detection as key differentiators for their products. Now as you can tell there are multiple exciting opportunities in our pipeline. The timing of conversion from pilot to commerce is unpredictable, but we are actively expanding our opportunity set and we expect will get our fair share and that will lead to revenue generation. I noted that synthetic fibers are generating the highest interest in our pipeline. We have and continue to expect to see pre-commercial activity here convert to commercial deployment. In our second quarter, we secured two notable synthetic fiber orders. And they are firstly, our second, third and fourth orders from Techmer each to mark 1 million pounds of polyester mass production fiber. Our fifth order as arrived since the second quarter closed. These latest orders show continued adoption of our mark after we trained their salesforce on our product offering in calendar 2016. Secondly with Loftex, we are introducing CertainT, an integrated supply chain platform to verify the authenticity of recycled components in towels from source to retail. This new relationship is especially significant to us for the following reasons. First, it highlights the transferability of our technology, our success in PimaCott brought Loftex to us and because of the inherent transferability we secured the agreement less than one month from our initial meeting. Second, we are going where the market is going. Loftex highlights a shift in consumer acceptance of recycle PET in home textiles, which traditionally have been made only with cotton. Loftex’s use a recycled PET helps produce faster drying towels that use less energy and water to manufacture and maintain. Walk into any store today and you will see many synthetic fused as an alternative to cotton. By marking this synthetic fiber used in the Loftex towels, we enable Loftex to substantiate its claims to sustainability with the use of recycled PET in their towel line. This also allows Loftex to differentiate their product line from those of their competitors. And thirdly, Loftex encapsulates the markets need for an integrated supply chain platform with a public facing visible mark to consumers whose purchases are predicated on their preference for earth friendly and sustainable products. In the quarter, we launched CertainT, a program that integrates our commercial platforms into a licensable strategy. We believe that our CertainT logo are keen to the good housekeeping seal of approval will account to signify originality and performance. Now I would like to take a minute to talk to you about our CertainT platform. As the global economy expands, we have seen a shifting focus on supply chain security. Following a paper trail, the typical way to ensure compliance does not offer security. Our CertainT platform is a way to offer global compliance to supply chains, certifying to the end customer that the product they are buying is authentic. We offer a tag, test and track system that follows the product all the way through the supply chain yielding traceability with trust. CertainT consolidates our technology into a platform that is easy to explain and is attracting much attention to our company. Our most recent feasibility studies include the opportunity to license the CertainT platform. A typical CertainT agreement will include fees who are DNA concentrate and authentications plus royalty payments and license fees for the use of our CertainT trademark. Now looking ahead to the second half of the fiscal year, we are focused on expanding our base of business across all key revenue generating verticals to further and expand and diversify our income. Longer-term the opportunities are many folding supported by our pipeline of pre-commercial opportunities. In cotton, Bed Bath & Beyond recently announced PimaCott as the new standard of pima cotton purity and launched its Wamsutta PimaCott collection that utilizes our SigNature T technology. We anticipate an increase in SKUs at Bed Bath & Beyond for this line moving forward. Now as you may know our contract with Louis Dreyfus will expire at the end of this month and we have already initiated negotiations and will update you once they are concluded. Supporting our market awareness efforts is a very active hard working media, conference and advertising program. Before I conclude my prepared remarks, I would like to let you know, we have just appointed our newest Board member Betsy Schmalz Ferguson, Betsy brings to the board a record of accomplishment as a strategist and a product leader within the cosmetics industry. Her appointment should give you insight into the importance we assign on personal care and the cosmetic business and its potential impact on Applied DNA in the future. Now we welcome Betsy to the board and look forward to her contributions. In conclusion, I firmly believe that our technology platform is moving past the early adopter phase successes in cotton reverberant and open us to adjacent and new markets. Our pipeline of opportunities is expanding and supports an expectation for greater levels of revenue and revenue diversification going forward. We have the right people. We have the technology and the markets are coming to understand our value proposition. The pieces are coming into place for Applied DNA to uphold everything that our SigNature DNA technology promises. Now this concludes my prepared remarks. Thank you for your time and continuing support. And now operator, we are ready for any questions.

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

Hi, guys. Good evening.

Good evening.

You mentioned Louis Dreyfus partnership; can you talk about what diversifying your partners would do for cash collections? What’s specifically outside of Louis Dreyfus? What’s the typical cash collection cycle for other partners?

Well, merchants in general operate under very thin gross margins. And the reason for that is they have to make very significant investments in the mass of cotton that they store in a rapidly collected and very short harvesting period. That cotton often lasts for 18 months to 24 months in inventory before it shipped overseas. So what Dreyfus and other merchants tend to do is negotiate agreements in which the payment is extended because in our case our DNA is on their cotton, but their cotton represents the bulk of their costs. And so they’re carrying an awfully heavy debt and overhead in order to maintain those thousands and thousands or really probably millions of belles of cotton. So there’s not going to be a tremendous difference from merchant-to-merchant. But that said, we’re pursuing a solution to the problem that we rather not talk about in depth just now, but we’re trying very hard to come up with a system that will allow us to see a cash return in a much faster pace than the rest of the industry typically sees. So stay tuned, Brian, and we hope to be able to give you good news with time.

Okay. In regard to Bed Bath & Beyond, how much of the old and discounted inventory remains? And how long do you expect you’ll take before the sales of the Wamsutta product begins ramping? There’s not a competing product on the shelves.

Well, I can’t give you a precise answer to that question, but I can intuit one. So, for example, I had a colleague, member of staff at their flagship store in New Jersey and the penetration of the Wamsutta PimaCott line is about three times what it was just a few weeks ago. So that I think is a pretty good indication that last year’s inventory is moving quickly and we can expect to see new PimaCott based inventory begin to fill those shelves. I’ve heard the same from our partner in the sheet manufacturing business, Himatsingka.

Okay. Now we had thought before there was seasonal purchasing. Obviously, there has been some inventory issues that you’ve talked about in the past. So I’m wondering if the excess inventory you discussed for some of your customers is still an issue or is the DNA inventory for them mostly depleted.

I would say that it is mostly depleted. There is still some excess inventory, but it’s not at the levels that it was at this time last year.

So with that said, can you talk about early indications of the second half of the year demand for – in the cotton season for your products?

Well, the way that demand excuse me – is created Brian is that during market week or market weeks in New York orders are placed. But we’re at a stage now where cotton is not yet planted. Never mind harvested. So it’s got to go through a period, before the cotton is available and during that period the big box retailers, the big brands are all predicting their future demands for the fall for the winter, for the spring, for the next 12 months. And so the requirements that they place with the merchants have not yet been placed. And we all have to wait for that to mature. However, we can get an inkling. The way we do that is by talking to the manufacturers with whom large retailers have already placed orders and everything we’re hearing is quite optimistic when it comes to both PimaCott and Homegrown Cotton for the U.S. So we’re optimistic but at this stage I can’t quantify it for you.

Okay, can you – we’ve talked a little bit about military pro in the past, more recently we talk about problems that ended. So I’m curious if what the prospects are in the near-term for new government contracts. Obviously, the opportunity is great, the government takes a very long time maybe take us through what you’re seeing in that pipeline.

Sure. Well we’ve had our DLA contract renewed. Our relationship with DLA remains very strong as it does with OSD and as it does with the Missile Defense Agency. We’re in frequent contract with the other agencies in the federal government with whom we have an interest, we visit them often. And they include us in many of their programs suggestions. So I would into it. You know just a visceral estimate that we’re not far from seeing increase commitments between some federal agencies and ourselves.

Great, lastly is the feasibility study a pilot and if so how long do you expect it last on average?

Sure. We view these often people use the words research and development and as a company, we’ve done most research which we need toward 10 years already. And instead what these pilots represent is a highly focused development that is taking our technology and molding it. So that it’s rapidly deployable within a particular framework or particular process maps that a manufacturer may have to go through. So sometimes those are very short measured in weeks, two or three weeks, sometimes they are longer measured in months. Sometimes there are half a year not too often are they longer than that.

Great. Thank you.

It’s actually given the experience base we have now, that was my point in the genealogy slide, that we can take the experience and transfer that to deployment in new related areas.

Great, thanks guys.

You’re welcome. Thank you.

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.