Applied DNA Sciences' (APDN) CEO James Hayward on Q1 2016 Results - Earnings Call Transcript

| About: Applied DNA (APDN)

Applied DNA Sciences, Inc. (NASDAQ:APDN)

Q1 2016 Results Earnings Conference Call

February 10 2016, 04:30 PM ET


Debbie Bailey - Director of Investor Relations.

Beth Jantzen - Chief Financial Officer

James Hayward - Chairman, President and Chief Executive Officer


Brian Kinstlinger - Maxim Group

Stone of Cowen - Company

Josh Seide - Maxim Group

Grant Zeng - Zacks Investment Research

Orin Hirschman - AIGH Investment Partners


Good afternoon. And welcome to the Applied DNA Sciences' First Quarter Fiscal Year 2016 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, that this event is being recorded.

I would now like to turn the conference over to Debbie Bailey, Director of Investor Relations. Please go ahead.

Debbie Bailey

Thank you. Good afternoon and thank you for joining us today. We are trying something new this quarter by issuing the press release and having our quarterly call on the same day that we filed the 10-Q.

You have been listening to a playback of a story that appeared yesterday on national public radio in California, home to most of Americas Pima cotton industry. I would urge you to visit the link shown in our first slide.

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 Sciences Form 10-K for fiscal 2015. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

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

Beth Jantzen

Thank you, Debbie. Let me take a few minutes to discuss the results of our first fiscal 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 $1.32 million, a 7% increase compared with $1.24 million reported in the first quarter of fiscal 2015, and a 67% decrease as compared to $4 million reported in the fourth quarter of fiscal '15.

As we discussed last quarter, the cotton ginning season in the United States takes place between September and December each year, and as we strive to ensure the availability of SigNature T DNA throughout the ginning season much of the production and delivery takes place before or at the beginning of the ginning season.

Presently, revenues from our current cotton customers – customer contract are seasonal. As we move forward, we are working to even out the seasonality with the expansion of revenues in the textile industry, as well as from other market verticals, which Jim will address in more detail in a few moment.

As mentioned last quarter, the agreements with our cotton customers include extended payment terms for the typical silicon industry, resulting in a longer collection period and slower cash inflows as compared to our turnover.

As a result, approximately $1.5 million is included in long-terms accounts receivable at December 31, 2015 for the revenue that was recognized during the prior fiscal quarter ended September 30. Full payments of these receivables is expected within 12 months from now.

The increase in our revenue for the quarter ended December 31, 2015, as compared to the quarter ended December 31, 2014 was primarily from an increase in revenue attributable to DNA manufacturing for the diagnostic market of approximately 242,000 related to the Vandalia asset purchase, an increase of approximately 55,000 from two government contract awards, as well as increase in consumer asset marketing sales of $60,000.

These increases were partially offset by a decrease in revenue from suppliers of the DLA due to the consolidation of our individual contracts to one contract directly with the DLA, as we have disclosed previously, as well as other decreases to military customer for a total decrease in military and government of approximately $200,000 and a decrease of approximately $81,000 related to industrial materials.

Operating expenses were $4.2 million, a decrease of $815,000 or 15% from $5.1 million for the same period in the prior fiscal year. This decrease is attributable to a decrease in selling, general and administrative expenses of $1.1 million, offset by increases in research and development of 194,000 and depreciation and amortization expenses of 109,000.

The decrease in SG&A is attributable to a decrease in non cash stock-based compensation expense of approximately $1.6 million, primarily associated with grants to employees during the quarter ended December 31, 2015 having a full year vesting period, where as the grant to employees during the same period in the prior fiscal year vested immediately.

The decrease in stock-based compensation was partially offset by increases in accounting and legal fees of approximately $113,000 and $129,000 respectively, as well as an increase in payroll expenses of $120,000.

Research and development expenses increased to approximately 472,000 for the three months period ended December 31, 2015 [Technical Difficulty] for the three months period ended December 31, 2014. This represents an increase of $194,000 or 70%. This increase is primarily due to development cost incurred in relation to the two government contract, as well as an increase in other laboratory supplies and material.

The increase in depreciation and amortization of $109,000 for the quarter ended December 31, 2015, as compared to the quarter ended December 31, 2014 is primarily attributable to 69,000 of amortized customer purchase orders acquired as part of the asset purchase agreement with Vandalia that were fulfilled by the company during the first quarter of fiscal 2016. The remaining increase relates to amortization expense for customer relationship and technology also purchased from Vandalia during September 2015.

For the first fiscal quarter of 2016, adjusted EBITDA was a negative $2.2 million compared to a negative $1.7 million for the same quarter last year and a decrease over the positive 213,000 in the prior fiscal quarter, due mainly to a number of non-recurring expenses incurred during this past fiscal quarter.

Turning to the balance sheet. Cash and cash equivalents totaled $12.4 million at December 31, compared with $7.3 million at September 30, 2015. The increase cash balance is as a result of the registered direct public offering and concurrent private placement we closed on November 25. That raised gross proceeds of approximately $8.75 million which we discussed in more detail last quarter. Net proceeds from this offering after deducting the placement agencies and offering expenses were approximately $7.9 million.

As of December 31, our average cash burn rate for the fiscal quarter was approximately 954,000 compared to approximately 864,000 for the same period in the prior fiscal year and 619,000 for the fourth quarter of fiscal 2015.

The increase burn rate for this past quarter is primarily due to the extended payment terms for our cotton customers, as well as certain non-recurring expenses mentioned above.

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. This also means that we are and will continue doing some strategic hiring and are beginning to incur other cost to support our growth.

We intend to remain disciplined in our spending and seek to strategically manage cost inline with our current and near future market opportunities. We expect to finance operations primarily through cash flows provided by operating activities, provided that we have a – we achieve a sufficient level of future revenues. We estimate that our cash and cash equivalents are sufficient to fund operations for at least the next 12 months.

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

James Hayward

Thank you, Beth. And thank you everyone for joining our call today. I'll begin with a quick review of our strategic goals for last year, which I reviewed with you last quarter, each of these goals was achieved with a high degree of success that will drive our performance in fiscal 2016 and keep us on a high growth rate as we demonstrated last year.

With our core technology solid, we see last year as the playbook to linking our vertical market solution offerings and domain knowledge, with our horizontal products in our core markets as catalyst for growth.

Now as to our strategic goals for 2016. To achieve growth this year we are expanding our sales force in key verticals. Today, we announced the formation of a strategic advisory board that will provide guidance in specific market verticals, initially the SAB will be comprised of two former executives with decades of experience in the pharmaceutical field who will assist the company in its entry into the pharmaceutical industry and they globally recognize leader of energy utilities, who will guide the company's expansion into the protection of the critical infrastructure in power grids and railways.

We will support our sales effort with an enhanced marketing plan, consistent with our business plan for 2016, which was developed under the watchful eyes of Judy Murrah, our Chief Information Officer.

We produced a comprehensive demand creation plan that has three core pillars, thought leadership, as represented by the formation of our strategic advisory board, lead generation and sales enablement. This framework will drive revenue, nurture our opportunities and accelerate our leads. Our programs will be highly targeted, integrated across all our communication channels and will support our selling efforts in these core markets.

With the opportunities for our technology seemingly endless, we have made tough decisions on our focus and our channel strategies in order to align our resources against the areas where we see the fastest and largest growth.

Although early stage, we are a growth company and as opportunities with sure, we must narrow our aperture and let the largest and fastest opportunities subsume our working assets. Now this is typical for an early stage growth company and has always been our strategy.

Our goal is to obtain larger contracts with larger customers and with longer terms. These goals have already taken root in textile and military and government verticals, with a larger revenue base and more of it coming via predictable contracts and less via purchase order, we can more readily forecast our business, invest in our growth with budgets that are gated by income and better ensure our profit goals.

We've gained significant benefit from our military contract business for product realization that links our SigNature in digital DNA solutions. Commercialization efforts are underway in high volume electronics, the marking of elastomers and other industrial materials and high speed ink jet printing.

And we are being steadily have added for additional work with federal agencies with whom we are currently working now six in number. Our asset marking, which touches consumer’s life’s well being is a close embodiment of our brand model, keeping life real and safe.

Our soon to launch DNA Security Initiative with SMR, who are also known as Security Marking Resources of California will access 500 US security dealers who collectively service over 500,000 commercial and consumer customers.

The company's asset protection program has advanced westward, from our Long Island headquarters to inclusion in four states, over 250 communities and over 100 law enforcement agencies.

Future sales in these regions will also be supported by our relationship with SMR. This is a perfect channel selling force for us, as the firm maintains relations with law enforcement agencies and with security firms. They are very well produced videos help us gain mindshare quickly and allow us to train police and security installers quickly in any location and do it remotely.

Now our forensic value stands above all other security markers, evinced in our military applications and a 100% conviction rate in European ATM cash desk. Our performance has attracted the attention governments, insurers, auto manufacturers and car owner associations.

Our focus on supply chain risk management has produced incredible yield, that’s a term borrowed from our cotton allies in textiles. Our partner Louis Dreyfus Commodities has recruited more farmers to a long-term commitments to DNA marking because the farmers want to be sure they and their cotton remain the icons of quality.

In addition to Costco more brands and retailers are committing to origins [ph] and quality. But beyond assuring label content for the types of fibers used in garments and home goods, our DNA platform can be used to answer the social and ethical question on amounts of today's consumers, such as where does this stuff come from, does it conform with my expectations for ethical conduct and social responsibility, is it organic, is it sustainably grown.

These questions are now embedded in the DNA of a culture questioning global commerce. Their answers are demanded by consumers of the brands they buy and the brands are turning to our company for answers.

We have expanded our fiber typing business to a global marketplace. New customers include luxury European men’s and women’s apparel, top denim lines, outdoor and performance sportswear and apparel lines, and boutique and large retailers of premium cotton products.

These customers use fiber typing to diagnose if they have a problem in their supply chain, whether the opportunity to solve the problem by using SigNature DNA tagging to ensure traceability from point of origin to point of sale. So the fiber typing actually leads to an incremental sales base in SigNature T.

The forces of label compliance, ethical consumers and responsible sourcing are driving brands for technologies that they can trust and they trust DNA, consequently we expect the businesses that take on SigNature T to continue as our customers and we expect our cotton business this year to build upon our performance of last year.

On January 12, the company announced that it had signed a Cooperative Research and Development Agreement, the so called CRADA with the United States Department of Agriculture. The agreement will enhance Applied DNA Sciences identification of cotton cultivars, including the ability to identify key cultivars from specific cotton growing regions, including those with questionable labor practices.

Our platform will enable the discrimination of cotton sources by country because of child labor issues, shareholder resolutions have been passed by the owners of Target and Costco that forbid the use of cotton from Uzbekistan.

Now paper trails will not suffice, but we will be in a unique position to help manufacturers comply with these in similar demands for ethical sourcing. In the last vertical I will comment on today's plastics.

We have successfully completed pilots with Borealis, Techmer and others and right now we are in pre-commercial stages examining issues of scale and supply chain control. Our position is unique and the addressable markets very, very large. We feel these markets could be important to us - as important to us as natural textiles and we anticipate that this business will begin this fiscal year.

In sum, our roadmap is clear and our goals attainable, our allies are strong and getting stronger. We look forward to growth in our core markets with robust consumers.

And now operator, can you open the line for questions.

Question-and-Answer Session


Yes, sir. We will now being the question-and-answer session. [Operator Instructions] And our first question comes from Brian Kinstlinger of Maxim Group. Please go ahead.

Brian Kinstlinger

Hi, good evening. How are you?

James Hayward

Very well. Thank you, Brian.

Brian Kinstlinger

Great. So I am wondering as we head into just the beginning of the year, but we're always looking at the backend of the year since it will be seasonally strongest for you. How much visibility do you have on cotton orders and how they are shaping up for the second of the year to year?

Do your customers give you a sense of how much they are going to order and if so can you give a sort of sense for how much more you might expect to deliver this year?

James Hayward

Sure. Well, remember our customer, our partner in the business is Louis Dreyfus and Louis Dreyfus is the one who buys and sells the cotton. They also purchase our DNA. Our other partner Himatsingka is the one who is at the exact opposite end of the selling trail and that is they have direct contact with most customers, although a few have – a few customers do contact Louis Dreyfus.

What we do know is that we have the attention of many, many brands and that those brands are expressing strong interest in placing orders. Of course, the orders are not placed directly with us, the orders are placed with Himatsingka and with Louis Dreyfus who transfer cause and order to be placed with us.

So all of that said, our expectations are that our performance last year is the baseline from which we start this year and that we can expect to see additional incremental business that appears from this distance to be quite strong. So we're bullish on the sale of our cotton, but really can't say much about the quantity.

Brian Kinstlinger

So then, I think it’s out that Costco is a customer you had with on your kind of – on that piece that you had before the conference call. So with Costco out buying and now selling authenticated marked cotton or textiles are you seeing other customers feel the need to speed up the sale process in order to get competitive or has that not sort of kicked in yet for Costco's competitors?

James Hayward

Well, I really can't speak to the sense of competition between Costco and others in the marketplace. Costco really occupies a very unique position with their membership model. I can tell you that the attention is there, as witnessed by the NPR segment that aired yesterday.

We see the interest coming from the consumer phase, as well as from the retailers and from the brands. I wouldn’t say it is a competitive rates to the market at this stage, but I can tell you that the brands are very concerned about the security of their supply chains and what they want to deliver is fewer ethically resource product.

Brian Kinstlinger

Great. One more on the textile/cotton supply chain. In fiscal 2015 when you had your order and even through now, your supply chain wasn’t fully set up, I think you talked about increased adoption of your technology.

I guess, I am curious in fiscal '16 as you receive the orders for cotton, as your partners do as well, how much more of the revenue do you think you'll be able to collect and the supply chain will be more built out in - well before you built out or at least significantly more built out this time around?

James Hayward

That’s great question. And you may recollect in our last investor call, we discussed the issue the company' maturation from being a product base company we made, designed and sold DNA. To being a process based company, we had to inspect and correct conditions in the supply chain to make sure that the DNA marked components in the supply chain where as effective as they could be.

And then we evolved also to include systems, systems for the DNA marking at scale, systems for the DNA authentication remotely or at our facilities. And that development of process or system is marked really an evolution step [ph] for the company, SigNature DNA is a system it’s not just a molecule.

And so as we implement with more brands and those brands have additional supply chain, they are not all using the same spinners of course, then all using the same weavers. We have to onboard those locations, right the SOPs [ph] train them, inspect them, audit them throughout the course of the year. So we have a certain responsibility that goes beyond the bio tech component, but really makes us - what makes us a company is the fact that this is a system.

And so, we are busy now, strengthening those systems, implementing them and building the team that will maintain the security of those systems throughout the year.

Brian Kinstlinger

Great. One last question I've got is you highlighted Borealis and I though you said in conjunction, I think it was Techmer, you have now - are moving into commercializing that process for that customer. So maybe if that’s right highlight how you expect to see maybe revenue trickle through the income statement are we a quarter away or too away from seeing the first bits [ph] of revenue and when might we see be meaningful similar to maybe compared to the process of textiles please? Thank you.

James Hayward

Sure. Plastics of course are different than textiles and the introduction of DNA into the large scale manufacture takes place in a different manner all together. Now that’s been largely already worked out, but not yet performed that scale and that’s the goal before us.

Our expectation that is that before the fiscal year is up we'll see some impact from the commercial scale implementation of our plastics business with one or another of the several partners we have in the category.

Brian Kinstlinger

Thank you.

James Hayward

You're welcome.


And our next question comes from Rob Stone of Cowen and Company. Please go ahead.

Rob Stone

Hi. I wanted to ask you sort of strategic question, I touched your remarks at the beginning, the strategic advisory board and so forth unveiling these opportunities were very good.

How do you think about for instance a pretty granular approach to things like enabling asset marking, community-by-community with law enforcement et cetera or working with some of these other lower volume opportunities versus mass manufacturing of textiles and synthetic fibers and so forth, how do you balance those?

James Hayward

Sure. Even the production of mass quantities of DNA to mark textiles began at a smaller level. Now our view of the consumer market is that its massive and that the opportunity is entirely scalable and we're preparing to do exactly that. We've not really begun a formal launch into that market and that won't take place until closer till the end of this month.

But when that happens, our expectation is that this is just as scalable, both from a revenue point of view and a social impact point of view. We think it will have an impact on crime. We think it will have an impact on return of assets. We think it will have an impact on the insurance industry and their annual payouts.

So although what may seem, although it may not be quite as scalable because if it comes to consumers you're selling them one consumer at a time, but we have a lot of them. So we do think it’s very scalable, both in Europe, the UK, and US.

Rob Stone

I guess, that’s going to depend relatively more heavily on channel partners?

James Hayward

Absolutely. That’s the model we want to take to the market. So dialogue with insurance companies, dialogue with groups of automotive owners, dialogues with communities, all hinge on having discreet channels to get to those markets.

The value of SMR is that they really coast-to-coast training facility, so they have the capacity to remotely train police. There are 12,000 police departments in the US as kind of a trial we began the by foot alone the movement of this platform westward, from Long Island, all the way to Pittsburgh.

We were struck by the enthusiastic uptake by the chiefs of police. They really spread by word of mouth from community to community via the chiefs of police because they were so impressed with its potential.

Now having done that kind of grassroots groundwork, we are ready, you can call out our focus test, we're ready for addressing a mass market and for doing a Pan US launch.

Rob Stone

So in terms of modeling that or pricing that, is it something – apparel example might be a vehicle for instance where if you put a retrievable system on your new car, you get that value back in lower cost for your IO [ph] insurance, is this something where consumers in the end are going to essentially breakeven on insurance cost or who is bearing value I guess and ultimately paying you?

James Hayward

Yes, it’s a matter of evolution I think, I think initially the benefit will inure to the consumer who can sleep more confidently knowing that their marks are returnable, that they won't reside in a police storage room for years awaiting identification.

But beyond that, that’s just a tip of the iceberg. Beyond that is the turns of the crime itself, which we think will be extraordinarily impactful socially and on communities and that’s just what we've seen in large scale deployment in the UK, in Sweden and in Denmark.

Now following that as has already happened in Sweden, once it was demonstrated as a viable concept and that the law enforcement agency supported it, the insurance company stepped right up and now we have the largest insurer in Scandinavia supporting the program and using its impact to deter the rate of theft of BMWs as they are imported from Germany to Sweden.

So I said that I thought it was a process of evolution, now I think its benefits that will be realized first by the consumer ultimately by the police and finally by the insurance company who should have fewer crimes to deal with and when they do lower payouts.

Rob Stone

Great. My next question has to do with also keying off the advisory board. Could you elaborate a little bit on how you see the specific application on opportunity in power and other critical infrastructure as your technology vehicle?

James Hayward

Sure. Well, we already for example have a contract through a sales channel with the – with an electrical distributor in Sweden who supplies virtually 50% of the power. And the purpose there is to protect the infrastructure.

Now the FBI regards threat to the US infrastructure as terrorism. And that can be a small, as well as a pick up truck time or rope to a copper line visible at railway station and pulling the copper line out given the cost of copper and the ease with which its recycled and the anonymity of those transactions where we remove the anonymity by using DNA.

So it’s an opportunity to protect the infrastructure of these power distributors, of these energy utilities. And so we brought on some who is globally recognized, will have more to say about this tomorrow, who is globally recognized, who has access to energy authorities in the United States and in Europe and who finds the concept very compelling.

And this is a person who is chaired large boards, who has a high degree of influence is a wonderful mentor and will be able to help our business vertical head within the company develop that business.

Rob Stone

Great. My last question has to do with - just sort of a budgetary question, you talked about expanding the sales force in key verticals and I know there are some puts and takes on the run rate of expenses because of one time items?

But how should we think about the size of the incremental investment that you expect to make in particularly sales and marketing?

James Hayward

Well, what we intend to do as best described is utilize a gated budget, to the growth of our sales force. We've spent a number of years and a large amount of money developing our intellectual property and productizing that and preparing for the market. Now are targets need to be turn towards sales and that’s the most important area to develop in the company right now.

How quickly we develop it, is a function of the opportunity and so we will use a gated method, I don’t know if Beth if you want to add anymore to that?

Beth Jantzen

No, I think that was insightful, so I am just – they made backup, the gated budget in a strategic plan, they also have detailed forecast and projections modeling out our expenses and stem inline with revenue.

Rob Stone

I wonder if that could translate to roughly you know, headcount at the end of fiscal '15 versus where you think it will be end of this year something like that?

James Hayward

I see as hiring five or perhaps six key sales individuals over the course of the year. We have already begun to add to those sales tasks, so far we have three on, but we are determine to hire only the best and so we're being very, very careful about those positions.

Rob Stone

Great. Thank you.

James Hayward

You're welcome.


And our next question comes from Josh Seide of Maxim Group. Please go ahead.

Josh Seide

Hi. Thanks for taking the questions. I guess, firstly, would you mind helping us quantify the number of large pilots that you have that are ongoing and maybe share the progress or notable feedback that you are receiving?

James Hayward

Sure. We have operated under kind of informal model for the last 2 years of managing about a dozen. That’s about the right burden for the size path we have and those are significant pilots, pilots that require some significant development. And we look to close those pilots in a period of three to six months and we also look to get them financed by our partner in that case.

And so we have some kind of state of roughly that level that’s I would consider that healthy. That’s not all that comes to – due to our pipeline. However, there once we have closed on a particular pilot, even if it’s not a current one, of course, it remains in our corporate memory and it becomes a clonable event, we can repeat it with the next similar application that comes along.

Josh Seide

I appreciate it. Thanks. And also would you elaborating a bit on the size of the opportunity in pharmaceuticals and maybe specifically in terms of 2016 and what could be – if it could be recognized in revenues, given that timeframe or its something that will be more longer term? Thanks.

James Hayward

Sure. Well, as you could imagine, the total addressable market is huge. It is an industry that is reflected by high rate of the diversion and a high rate of counterfeiting. But that yields results measure only dollars, and this is an area where the results will be measured in large saved as well, and in accidents avoided, hundreds of thousands of people died last year in Africa as a consequence of counterfeit drugs and our desire as a company is to have both kinds of impact. We want to do well and do good at the same time. And we're certain that pharmaceutics is that market.

So I wouldn’t want to put a cap on the size of the total addressable market, its of course, many billions, its one of the largest single counterfeited categories out of $1.8 trillion counterfeited economy. But – and there are also significant barriers to entry. We think we've already encountered those barriers and begun to clear them.

And so we think that our time possible time to deployment is actually quite short. And so it’s a matter of finding the right partner, getting through a successful pilot and commercializing. But our experience in cotton or experience in plastic in the production of DNA and its implementation will help us enormously there.

Josh Seide

All right. Thank you. And also I am curious if the federal government is any closer to having APDN market authenticate any additional items or components?

James Hayward

Yes, they are. We have two federal contracts, one with the office of the Secretary of Defense and one with their Missile Defense Agency. And both of those are contracts meant to facilitate commercialization.

And so we are steadily examining new opportunities, new outlooks for our DNA marketing and everything ranging from bearings, to conceals, gaskets, to electronic components, to wiring rigs et cetera, et cetera.

Josh Seide

Great. Thanks. And lastly, can we just – or would you mind going over just directionally how we think about the next quarter in terms of seasonality and maybe how that will play out on a go forward basis for the rest of the year?

James Hayward

Yes. I think we will as we predicted in Q4, we will be impacted by seasonality, I think quite strongly this year and we are doing all that we can to smooth that out both this year and for the following year.

I think it will be smooth out by virtue of experience alone, but by other incremental incomes, don’t forget, the seasonality is for DNA supply whereas DNA authentication on those products takes place throughout the year, there are other businesses we have which are not seasonal. And so I think we'll begin to see the spike smooth out, but I expect that this year will show some strong impacts of seasonality.

Josh Seide

Great. Thank you.

James Hayward



And our next question comes from Ken Valk [ph] of The Benchmark Company. Please go ahead.

Unidentified Analyst

Hello. I guess, I have some questions, actually I am just trying to get a hit on the one but, what the revenues are and likely to be next year, where they are going to come from. And my first question is, you mentioned that you're trying to move from purchase orders to contracts, how many purchase orders you have now, how many contracts and what's your expectation for the number of contracts by the end of the year, fiscal year?

James Hayward

Right. Well, the bulk of our business has been in the form of both purchase orders. We do have contracts with some key accounts that we manage very closely and we're looking to increase those by a multiple.

I would rather not give an accounting of the simple number, but to say that I can easily see us amplifying the number of contractual relationships we have for multi-year large volume contracts increasing two or threefold over the course of the current fiscal year.

Unidentified Analyst

Okay. And secondly, and just as you're about to – you're attacking the supply chain forward, let say in the cotton, or some other textile, maybe this probably relate to plastics and mills as well.

I just – what are the percent - who is going to pay for it and why would somebody have to change, pay for something that was way for actually paid for down chain is that initiative or am I thinking about this incorrectly?

James Hayward

You cut in and out a little bit, but I think I got the bulk of your question and from what I heard, it’s a very good question. And that is what benefits us and our customers we believe, is that marking as high up in the supply chain as we possibly can. So that we can benefit every element of the supply chain and so that we can secure every node [ph] in that supply chain.

However, our business experience suggest that its most successful when there is a retailer at the far end opposite end of the supply chain pulling the technology through with a strong motivation and that motivation either being that they want an ethical supply chain, they want to know where their product comes from.

They want to ensure that they are selling to the consumer, what the consumer things they are buying and when that motivation is strong enough and when we can go high enough back into the supply chain that’s the perfect system for us and that has happened for us a couple of times and we are looking forward to replicating that model as often as we can when we have the chance to address an entire industry really by working within that vertical.

Unidentified Analyst

Okay. Thank you. I guess, just trying to get your sense of 2016, you said that you think, you have baseline which is this year, there is going to be some increment, and you said it was going to be strong.

What does that mean, would you know, double or triple for sales, what's your thinking will be at the end of this fiscal year?

James Hayward

Yes. I am really not in the position to provide that kind of guidance and I wouldn’t dare now really have the basis to predict that, if I could I would, would be beneficial to you, to me an to all of our shareholders, but we're not quite yet there.


And our next question comes from Grant Zeng of Zacks Investment Research. Please go ahead.

Grant Zeng

Hi, guys. Thanks for taking my question. First, congratulations on the strong quarter. Actually my question has been answered. It was related to the pharmaceutical industry, actually I was not [indiscernible] timeframe and I know you guys have been [indiscernible] revenue?

James Hayward

Yes. Good question and its one we watch very carefully, so the question dealt with what is our expected time to the pharma market and what kind of customer might we expect and what kind of reward? Well, we were tied in anticipation both in trials, which have gone very well and in our own programmatic development and working with the regulatory lawyers.

And our position is that we are fully in compliance with the FDA now, so there is no regulatory barrier to our being used in the packaging, or actually in or on the drug product itself.

And we are one of the only company's who can actually protect the unit dose in addition to the packaging and that can become very important. For example in markets like Africa where its not uncommon for a patient to go to their provider to get a days dose, one dose at a time, so being able to authenticate doses can be very, very important.

So we've think we've gotten the bulk of the barriers out of the way, now it’s a business process and the business process is having a high enough visibility, making sure that we have the right thought leaders which is why we have constructed our strategic advisory board to help guide us, to help connect us to the other leadership within the industry, and we will begin to show at all the trade shows.

We are in fact in this coming month about to participate in a trade show in Japan of the major pharmaceutical industry. So we feel this is the year for us to be entering pharma and how long it will be for the first sale cycle to be complete, is at the moment a matter of speculation.

Grant Zeng



And our next question comes from Aaron Martin of AIGH Investment Partners. Please go ahead.

Orin Hirschman

HI, this is Orin Hirschman for Aaron. I just wanted to go back and confirm, you also saying there is heavy growth this year, you're just not sure as to what level is growth, is that a fair way to state it?

James Hayward

We're very bullish about the performance of the company and we think a large portion of our business is in fact the base line for that business that is where we're starting sales from this year. So we are expecting growth.

Orin Hirschman

Okay. Can you just go through the seasonality, I mean, not so familiar with it, but again the seasonality in the cotton space, and can you also – somebody started with this question, let's talk about the prospects for additional growth within cotton and especially growth do you think you'll have even that growth formative - massive growth, but to get another textile this year?

James Hayward

Sure. The cotton grows in the United States predominantly in a few high productivity states and typically the harvesting period for those states begins from September and can run as long as October, November. The ginning season which is where the cotton is cleaned and ultimately availed [ph] and tested for purity and certified and qualified and then stored, runs from about October until January.

It’s during ginning that we DNA mark. So that the seasonality comes from a requirement for DNA that typically begins around July and run through December or yes, around December I guess. And that’s the reason for the seasonality.

A question on how is that seasonality with synthetic fibers and where you have a very strong interest in synthetic fibers we feel that market could be just as large and in some ways more predictable because the ginning doesn’t occur when you are exposed to the weather, the processing of those fibers is under very controlled conditions. So we're very optimistic about entering those markets as well.

We are receiving attention from lots of different brands and retailers and so based on that attention our hope is that it translates into revenue in subsequent quarters. But as I explained in – with a prior question, we are not – the team that does the selling, we are the provider of DNA to Louis Dreyfus and we don’t cause those contracts to be less, it’s the other way around.

So what we do however is bring attention to the issue and to the fact that we have the solution and we aid the sales process in that regard.


And our next question comes from Ben Visitar of Ascending Capital [ph] Please go ahead.

Unidentified Analyst

Hi, Jim. Thank you for taking the question.

James Hayward

My pleasure.

Unidentified Analyst

Regarding the cotton kind of pre-sale was done in Q4, so the sales in Q1 were zero it looks like, any of these pre-sales will affect sales in 2016? Meaning, everything you sold in 2015 was from marketing in 2015 only?

James Hayward

You know, forgive me Ben but the – your voice was not too clear and so no one around the table here could quite understand the question. Could you try again please? I apologize for that…

Unidentified Analyst

Okay, sure. The sales in Q4 of cotton, it looks like there was kind of pre-sale because there weren’t many sales in Q1, with the advance, with extended payment terms, so my question is the cotton that’s going to be market in 2016, is any of that going to be from sales made in 2015, are they going to be able hold that in storage and use that in 2016 at all?

James Hayward

There is a very, very small chance of marketing inventory from the year before. It’s much likely because that inventory has already been ginned and our cotton suppliers don’t like to gin cotton more than one time in order to get the DNA mark.

So instead it’s much more likely that our feedstock for DNA marketing would come from the current year. And that is the reason as I explained a moment ago, for the seasonality because it happens from September to December.

Unidentified Analyst

Okay. Great. One other question regarding Borealis and Techmer, last year at this time there was only about 150,000 in cotton sales, and that kind of exploded throughout the year to $3.6 million. Is that kind of growth trajectory possible this year in 2016 with commercialization of Borealis and Techmer partners?

James Hayward

I wouldn’t comment in such a way that my comment is implied as a promise, but those huge industries, in some aspects larger than cotton, more controllable in some ways and their end products are just subject to counterfeiting. So I would say it’s an opportunity at least as equal to cotton.


And ladies and gentlemen, this concludes our question-and-answer session. I'd like to thank you for attending today's presentation. You may now disconnect.

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