Applied DNA Sciences, Inc.

Good afternoon, and welcome to the Applied DNA Sciences Fiscal Second Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Clay Shorrock. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us on our fiscal second quarter 2019 financial results conference call. I am Clay Shorrock of the law firm of Allen, Dyer, Doppelt, and Gilchrist Legal Counsel for Applied DNA. Okay. A copy of the company's earnings press release and accompanying PowerPoint presentation to this call are available for download under the events and presentation section to the investor page 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, Stuck-based compensation expense, taxes, earnings per share, and future products. As a result, the trends could differ materially. For more information, please return to the risk factors discussed in Applied DNA Sciences Form 10-K, filed on December 18, 2018, and Form 10-Q, filed a short while ago. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information. Now, it is my pleasure to introduce you to our first speaker on today's call, Beth Jantzen.

Thank you, Clay. Good afternoon, everyone, and thank you for joining us today. Today I will take you through a review of our consolidated financial results for the fiscal second quarter and the first six months of 2019. Then Dr. James Haywood, our president and CEO, will provide you with an update on the company's progress, activities, and strategies for the balance of the fiscal year. As we previously announced on March 28th, we entered into an exclusive licensing and cooperation agreement with Thuracan International. This agreement was filed as an exhibit to our 10Q filed earlier this afternoon. I wanted to spend a few moments providing highlights from this agreement. This agreement calls for a $5 million licensing fee payment payable to us over four months, of which we received the first $1 million payment during April. and the second payment of $2 million is due on June 30th and the final $2 million payment is due mid-August. The agreement also has minimum annual payment requirements to maintain license exclusivity starting at $7 million in year three and scaling to $20 million in year 15. Starting with the statement of operations, total revenues for the period were $778,000. This represents a 25% decrease compared to $1 million reported in the second quarter of fiscal 2018 and down approximately 12% compared to $884,000 for the first quarter of fiscal 2019. The year-over-year decrease in revenues was primarily from a decline in product revenues of $315,000, or 65%, offset by a 9% or $50,000 increase in service revenues. For the first six months of fiscal 19, we recognized revenue of $1.66 million, a $29,000 or 2% decrease from $1.69 million during the first six months of fiscal 18. This decrease was driven by a decrease in product revenue of $343,000, or 41%. This decrease was offset by an increase in service revenues of 37%, or $315,000, from the cannabis pre-commercial feasibility project under the cooperation agreement with Theracan entered into during January 2018. as well as pharmaceutical and nutraceutical pre-commercial pilot signed in March 2018 with ColorCon. As a reminder, we adopted accounting standards update number 2014-09 revenue from contracts with customers or topic 606 at the beginning of fiscal 19 using the modified retrospective method. We applied the new guidance to those contracts that were not completed as of September 30, 2018. Had we not adopted Topic 606, we would have recognized additional revenue of approximately $440,830 during the three and six months ended March 31, 2019, which would have resulted in total revenues of $1.2 million and 2.5 million for the three and six months ended March 31, 2019, roughly a 15% and 49% increase compared to the same periods in fiscal 2018. These changes were primarily comprised of the recognition of 383,000 and 766,000 during the three and six months ended March 31, 2019, respectively, from a $1.15 million cotton order shipped during June 2018 with extended payment terms. I wanted to emphasize, however, that while revenue recognition of this one cotton order changed, cash payments were received in line with the terms of the order and have been paid in full as of March 31st. Product revenues declined 65% for the second fiscal quarter of 2019 to $171,000 compared to $486,000 in the same quarter of fiscal 18 and decreased 47% compared to product revenue of $322,000 in the first quarter of fiscal 19. The year-over-year decrease in product revenue was primarily from a decrease in biopharmaceutical revenues of $157,000 This decrease is mainly due to a customer having decreased demand and therefore delaying the issuance of its annual purchase order. However, the purchase order for the current fiscal year was received during this test quarter and shipments are expected to commence in the second half of fiscal 19. The remaining decrease in product revenue was primarily from decline revenue in our consumer asset marking vertical. The quarter-over-quarter decrease in revenues reflects the fulfillment of a second cotton order shipped during the first quarter of fiscal 2019. Second quarter service revenues increased 9% to $607,000 compared to $558,000 for the same period in fiscal 2018 and increased by 8% on a sequential basis for the first quarter of fiscal 2019. Cost of revenue as a percentage of product revenue in our fiscal second quarter was 78% as compared to 77% for the year-ago period. For the six-month period ended March 31, 2019 and 2018, cost of revenues improved as a percentage of product revenues to 58% as compared to 58% from 84%. The decrease in cost of revenues as a percentage of product revenues for the first half of fiscal 19 is due to the product sales mix, as sales during the first half of the current fiscal year were primarily comprised of textile sales as compared to biopharmaceutical and consumer asset marketing sales during the first half of the prior fiscal year, which are at a lower margin. Total operating expenses decreased in the second fiscal quarter of 2019 to $3.3 million compared to $3.9 million in the first fiscal quarter of 2019, an increase compared to $2.8 million in the second quarter of fiscal 2018. The decrease in operating expenses on a quarter-over-quarter basis is due to a decrease in payroll expense of approximately $200,000 as well as decreases in stock-based compensation of $118,000 and decreased R&D expenses of $70,000. The decrease in payroll was the result of certain realigning and cost-saving measures implemented by management during the first half of fiscal 19. The increase on a year-over-year basis is attributable to an increase in stock-based compensation expense related to certain performance-based stock options being canceled during the quarter ended March 31, 2018, and therefore the related expense of $416,000 was reversed. The remaining increase in stock compensation relates to grants to employees during the three-month period ended March 31, 2019 that vested immediately. Fiscal year to date, Total operating expenses have increased by $900,000, or 14%, as compared to the first six months of fiscal 2018. This increase is primarily due to an increase in stock-based compensation as a result of the credit for the canceled options during the prior fiscal year, as well as expense for stock option modifications during the current fiscal year to date. The increase also relates to increased legal and professional fees of $315,000 and increased filing fees of $53,000. To a lesser extent, these increases were offset by decreases in payroll of $178,000 as well as decreases in both R&D and depreciation expenses. Excluding non-cash expenses, adjusted EBITDA was flat at a negative 2.3 million for the quarters ended March 31, 2019 and 2018 and decreased to a negative 4.9 million from a negative 5.1 million for the six months ended March 31, 2019 and 2018 respectively. Turning to the balance sheet, Cash and cash equivalents totaled approximately $1.5 million at March 31, 2019. During the quarter, we received proceeds of $714,000 from the exercise of warrants as well as approximately $200,000 in net proceeds from the partial exercise of the underwriters over allotment option associated with the financing completed during December 2018. We also received the last payment of $383,000 from the June 2018 Cotton Order. As of March 31st, we had $1.2 million of deferred revenue as compared to $1.9 million as of September 30th, 2018. The deferred revenue balance at March 31st was comprised primarily of milestone and or phased payments under certain of our research and development and other pre-commercial projects that are being recognized to revenue over time on a cost-to-cost basis. As of March 31, 2019, our average monthly cash burn rate for fiscal 19, excluding the proceeds from the financing, was approximately $393,000, compared to approximately $606,000 for the same period in the prior fiscal year. This represents a decrease of approximately 34%. The decrease in monthly burn rate for the first half of fiscal 19 compared to the same period in the prior fiscal year is mainly due to higher cash receipts and slightly lower disbursements. As of April 30th, our cash position is approximately $1.8 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. However, based on our historical financial results, we disclosed in our fiscal 2018 10-K and have also disclosed in our fiscal first and second quarter 10-Qs that there is substantial doubt about the company's ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the company to continue as a going concern is dependent on our ability to further implement our business plan, raise capital, and generate revenue. As noted during last quarter's call, as a result of our stock price and financial results, on January 29th and January 30th of 2019, we received written notices from NASDAQ notifying us that the company is not in compliance with the minimum bid price requirements as well as the market value of listed security requirements or the alternative standards of the NASDAQ listing rule, which requires us to have minimum stockholders' equity of $2.5 million or for us to have had net income from continuing operations of at least $500,000 in the latest fiscal year or in two of the three last fiscal years. These notices do not impact the company's listing on the NASDAQ capital market at this time. Both notification letters state that we have 180 calendar days or until July 29, 2019 to regain compliance. There is a possibility for an additional 180-day compliance period for the bid price compliance violations. No additional compliance period is applicable to the market value non-compliance. We are exploring every option available to maintain our NASDAQ listing and may, if necessary, consider implementing available options including, but not limited to, implementing a reverse stock split of outstanding securities to re-engage compliance with the minimum bid price requirement. We are also considering available options to resolve and the other listing deficiency to regain compliance with all applicable NASDAQ rules. Thank you for joining us today, and I would now like to turn it over to Jim for his comments.