Debbie Bailey - Director of IR Beth Jantzen - CFO Jim Hayward - President and CEO.

Brian Kinstlinger - Maxim Group.

Good morning, ladies and gentlemen. Welcome to the Applied DNA Sciences' Quarterly Earnings Call and Webcast. This call is being recorded. At this time, I'd like to turn the call over to Debbie Bailey, Director of Investor Relations. Please go ahead..

Thank you. Good morning and thank you all for joining us today. We apologized for the slight delay; we're just waiting for some people to call in finance. My name is Debbie Bailey, and I'm the Director of Investor Relations. On today's call, we will be hearing first from Beth Jantzen, Chief Financial Officer for the company; and then from Dr.

James Hayward, our CEO and President, after which, they will together answer questions from our shareholders and analysts.

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 2014. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information. At this time, I would like to turn the call over to Beth Jantzen. .

Thank you, Debbie. Good morning everyone and thank you for joining us today. Let me take you through our financial results for the quarter.

Revenues for the third quarter of fiscal 2015 were record 2.3 million and increase of 170% compared with 841,000 reported in the third quarter of fiscal 2014, and a 49% increase compared to the second quarter of fiscal 2015, which ended March 31.

For the first nine months of this fiscal year, we've reported revenues of over $5 million which represents an increase of 142% from the same period last year. I would like to emphasize that year-to-date revenues exceed our fiscal year revenue to any prior year in the company's history.

In fact, our revenues for the first nine months of this fiscal year already represent an 85% increase over our revenues from the full fiscal year last year.

The increase in revenues for this fiscal quarter, as well as the first nine months were primarily the result of an increase in revenues from sales and a textile industry for protecting cotton supply chains as well as from our two government contracts. This is an exciting time for the company.

We believe that the increase in revenue represents an inflection point, to beginning of conversion of our pilot projects to commercialize programs which we referenced last quarter and which Jim will speak about in more detail in a few minutes.

Operating expenses were $3.9 million for the three months period ended June 30, 2015 an increase of $612,000 or 18% compared with $3.3 million for the same period in the prior fiscal year.

This increase is attributable to an increase in non-cash stock-based compensation expense, primarily associated with stock option modification offset by a decrease in legal fees as a result of dismissal of the Smartwater litigation.

On a sequential basis, total operating expenses increased 15% or approximately $500,000 from $3.4 million to the second fiscal quarter of 2015. This increase is primarily associated with non-cast stock option modification expense, resulting from the extension of certain stock options during the fiscal third quarter.

For the first nine months of fiscal 2015, operating expenses increased slightly due mainly to an increase in non-cash stock-based compensation expense of approximately $610,000, which primarily was associated with [claims] employees divested immediately and have a 10 year term as well as related to stock option modification.

This increase was also offset by decreases in our legal expenses. As a result of higher revenue, and lower cash operating expenses for the third fiscal quarter and the first nine months of the fiscal year, we have substantially narrowed our adjusted EBITDA loss.

For the third fiscal quarter adjusted EBITDA was a negative $480,000, an improvement of approximately 1.4 million compared to negative $1.9 million for the same quarter last year and an improvement of a little over $700,000 compared to negative 1.2 million for the second quarter of this fiscal year.

On a year-to-date basis adjusted EBITDA was a negative 3.4 million, an improvement of 3.5 million compared to a negative 6.9 million for the same period last year. Now turning to balance sheet.

We’ve continued to maintain strict control over our expenses and cash flow which in addition to our revenue growth is succeeding in lowering our monthly cash burn rate.

As of June 30, 2015, our average monthly cash burn rate for the first nine months of this fiscal year was approximately $620,000, which compared to approximately 720,000 for the same period in the prior fiscal year. As of July 31, 2015, our cash balance was approximately $10 million.

The cost savings plan implemented earlier this fiscal year which was designed to reduce our expenditures and cash burn continues to be an important part of our financial planning and budgeting process.

We’re closely monitoring our spending and our business plan to ensure that we have the capacity and expertise to meet our most immediate market needs, as well as being prepared for the needs of our customers in the near future.

So that means that we are doing some strategic hiring and beginning to incur other costs to support our growth while continuing to be mindful of our expenses relative to our revenues and cash balance. We will continue to watch our expenses looking to strategically manage cost in line with our current and near future market opportunities.

In summary, this has been another exciting and positive quarter for Applied DNA Sciences, as we are starting to see our pilot studies and early commercial projects turning to large scale commercial contract. We continue to closely manage our expenses as well as strategically manage the business for the benefit of lot of our shareholders.

Thank you for your attention and I would now like to turn it over to Jim for his comments..

Thank you, Beth. Good morning everyone and thank you for joining us today. I am pleased that we were able to report strong results today, revenue growth of the past five quarters has averaged approximately 35%, in comparison in the last three quarters has averaged approximately 55%.

So we are just beginning to tap the enormous opportunity for our DNA based authentication platforms. Now we have the resources to grow the businesses in a disciplined structured way with less emphasis on opportunities. This is what we are doing and what I want to talk with you about today.

We are a technology company with solutions and products directly applicable to a very broad range of end markets.

While we’re very excited about the profusion of opportunities we’ll be cultivating, our immediate go-to-market strategy requires that we narrow our aperture to earmark resources in the near-term to the highest return opportunities and that we were trying our strategies for penetrating each vertical market.

But we cannot lose our capacity for thinking big, a technology demands it, but short-term growth comes from compiling immediate successes and as the strategy these include firstly, successfully completing our steady supply of pilots.

It is a reflection of our proceed value that many of our customers now fund these pilots, yielding significant revenue even in the pilot phase. Secondly, we’re developing anchor customers that can pull our platforms and expertise through that supply chain.

The result is that the anchor partners also take up our technology and become customers themselves. Thirdly, we must transition from pilot to full commercial deployments. Our experience however is that successful pilots usually lead quite smoothly to commercial relationships.

The benefit of this repeatable or [cloneable] if you'll pardon the pun, go-to-market approach as that we cost efficiently broaden awareness for our brands and value proposition, cost efficiently scale the top-line and reduce our time to market.

In multi-party supply chains, the benefit is amplified by uptake of our platforms at all the nodes in the supply chain with the potential for multiple multi-year relationships.

We believe that because the impact of our platform on purifying supply chains is so beneficial, our technology will prove to be quite sticky, leading to long term sustainable relationships. Now you as you have seen from our revenues for the quarter we're starting to see reliable results.

Our revenues this quarter came primarily from two market verticals $1.2 million came from sales in the textile in industry for protecting cotton supply chains while $658,000 came from government contracts.

Until now the driver of the transformative growth we have seen over the past several quarters has been primarily our government and military vertical. To put this into context this vertical generated approximately $1.5 million in revenues in fiscal 2014.

The majority of which consisted of DNA marking of single federal supply class known as 5962 were semiconductors which are at the highest risk of being counterfeited for the Defense Logistic agency. In fiscal 2015 we anticipate we anticipate over $3.4 million in revenue from this vertical across four government agencies.

Although still very much early days I think this shows clearly just how quickly initial traction for the specific vertical can impact revenue in a very substantial manner. Our government contracts require that we demonstrate the ability to scale up, to be able to address high volumes of DNA marking for multiple items.

For the RIF contract the office of the Secretary of Defense has asked that we show the ability to mark up to 146 million items across six federal supply groups containing a total of 66 federal supply classes with total sales to DoD of nearly $22 billion.

We're forming these relationships now and beginning to work assembles the contractors to supply these items to the government.

It is important remember that all of these companies have supply the government also have commercial customers and typically these commercial customers account for far larger percentage of their business in the military business.

Our expectations is that once we have developed relationships with these organizations not only will they want to mark product so to the government. But they will also want to mark many of their products being sold to their commercial customers. The textile story has unfolded as the model of our supply chain business.

Within textile our closest opportunity is in cotton. Although we are actively developing DNA marking evolve and synthetic fibers as well.

We have partnered with Louis Dreyfus Commodities the merchant who buys and manages the logistics of our DNA marked cotton and Divatex the manufacture who produces finish goods and helps us to sale to brand and retailers.

Our trademark Pima DNA content brand called Pima Cotton, in the lines with DNA marked Pima cotton and for the first time offers Pima or extra-long stable cotton that can be verified from farm to customer. Our initial pilot championed by these [effects] and there customer who happens to be one of Americas largest retailers was an unqualified success.

Our FiberTyping assays at the gin in California ensure that only Pima cotton and due to our feedstock. Our partners at Divatex have likened the process to diagnosis with FiberTyping and then treatment for the supply chain with SigNature T which is more readily detected as the fibers work their way through the supply chain.

Once our SigNature T mark was applied in the gin it could be detected in every stage of manufacturing right through to the finished product.

Now I can't emphasize this enough, this is really an historic development resulting from visionary partners and courageous retailers who want to assure their consumer customers that their supply chain is pure and tightly controlled.

The commercial product from this pilot will be landing on their shelves this fall bearing our Pima Cot trademark on both the label and the package. Now people in the know claim that the product's quality as this purified supply chain is the best they ever have seen.

Working with our partners we have already lined up on next customers and secured demand for over 30 million pounds of DNA marking for cotton for the upcoming ginning season which produced shortly in September. We believe that incremental orders will come in from additional brand owners and additional retailers as ginning season begins.

Revenues from this business comes in different ways, both one time and recurring, we supply DNA and its applications, systems after ginning starts. We provide quality authentication services both from our Stony Brook lab and from our on-site machines for each of the supply chain businesses.

We utilize our digital DNA software platform for internal and customer facing operational transactions and we earn a share of raw cotton sales. Licensing our on-site DNA authentication technology to provide real time testing of cotton fiber and greige goods, yields an end to end supply chain solution to guarantee quality and support product claims.

Licenses will be offered to supply chain members at every node at which the DNA marked cotton changes hands. In addition to marking Pima cotton, along with our partners, we're already taking the marking of upland cotton with the launch of our HomeGrown trademark. Upland cotton proudly grown in the U.S.A.

American grown upland cotton fibers will be tagged at the source and verified from grower to consumer. Upland cotton accounts for at least 95% of cotton grown in the U.S. each year and there has been significant interest from large brands and retailers from this application as well.

And we believe an initial order for the marking of upland cotton will come in the fourth quarter. This would also create demand for additional gin DNA transfer systems. So, to sum up we have groundbreaking technology, multiple revenue streams and a replica full model that we plan to implement in other textile markets over the next few years.

In Home Asset marking, we are focused on securing anchored customers in the insurance industry or large channel partners that can distribute our products to a broad customer base. At the same time, we're building interest through variety in grass roots campaigns.

In total, we had now provided DNA kits in multiple countries, multiple states and municipalities to insurance companies and multiple industries, including hospitals and pharmacies. We have marked on almost 1 million private items in people's homes.

Our initial success has been in Europe, in Sweden, which is our most developed market, DNA marking was approved as a National forensic standard by law enforcement and has been trained throughout the country, thousands of homeowners are now using our DNA net product, protecting their property.

Interest for the automobile dealers who have now marked over 5,000 vehicles, a large hospital is marked over 6,000 IP assets and an insurance company has initiated a promotional [amounting] to 350,000 stock home customers.

We're also seeing this product gain traction in other countries with an increasing list of distributors, including the Caribbean, France, Belgium and Denmark. We see this pattern repeating now in the United States, we've trained police in over 30 counties and 38 police departments to date and a 500 home deployment is underway on Long Island.

We have [indiscernible] in use in county and federal agencies and early discussions are underway with insurance and security companies for broader distribution.

The enthusiasm has been palpable everywhere we go, our ultimate goal of course, is to train police forces throughout the country to get buy in at the local level by law enforcement to complement the promotional efforts of channel partners and to make this product as successful as we know it can be.

Now, plastics represent another process industry with leaky supply chains that we believe follows the same model as our textile business. Source marking of excluded polyester fibers for using garments has now been proven with an industrial partner. Together we are actively recruiting customers for commercial deployment.

[Source] marking has also been proven in polyolyfins in our work with [indiscernible] we are working together to recruit customers to till the product through to finish product stage with same model that is in place for cotton.

This has been going over a little slower than we'd hoped but we're still very excited about this opportunity and hope to have more news for you by the next quarterly earnings webcast. And we have other early opportunities in plastic, where we have just successfully completed a factory pilot study.

What is significant for you to know is that as a result of our experience with our two earlier customers, we have been able to show you the time from idea to pilot to just several months. Another market vertical which I have not spoken much about in the past is the print and packaging market vertical.

Here we have created a certified partner program for print and packaging equipment and services companies as an indirect sales channels.

Our already seven partners who [indiscernible] has underground expensive evaluation and formulation with our DNA have primed the pump in the industries including pharmaceutics, cosmetics, wine and other consumer packaged goods. We are pleased to be participating in pharmaceutical labeling evaluations with two partners in our pipeline.

And finally in cyber security, it is one of the most critical issues facing our nation and each of us. The threat of our personal information being stolen, not to mention the threat of cyber warfare and this problem is only going to get bigger.

We had Applied DNA Sciences have been sowing the seeds of protection against these attacks for many years as protection against the physical pieces of IT infrastructure.

Working with both federal agencies and more recently with commercial computer hardware companies, we’ve active pilot studies in place to be part of the solutions of this growing scourge. Because of the sensitivity of the work however, we are limited in what we can share but I hope to be able to tell you more in the coming quarters.

And with that, I would like to open this up for questions from the audience..

Thank you very much. [Operator Instructions] Our first question today will come from Brian Kinstlinger, Maxim Group..

I was just hoping you would mention and it was helpful to know you had 1.2 million of sales for cotton orders of Pima Cot, could you tell us how much cotton orders that ordered that generated that amount of revenue?.

Sure that was approximately 30 million pounds of cotton generated that revenue..

And was that all from one large -- that one large retail or did [LDC] provide any revenue as well?.

No that was a consolidated order from multiple brands from the retailers..

And if we use that or actually let we start with, I realize you get paid in many different ways from Pima Cot, however, I am curious if we use that sort of ratio of 1.2 million to 30 pounds is that what we should think about long-term, is that a discount as you're offering initial sales kind of more cheaply so you can get adoption, how should we think about that?.

The nature of our relationship is that we apply a slight discount as the volumes increase with particular customers. So that price could go down a small amount. We expect the volume to increase annually at least over the next foreseeable years I think two to three years and we also expect that that business will grow beyond United States as well..

Now I assume that large retailer buy substantially more than 30 million pounds of cotton.

So I guess how you think about the long-term potential of a large retailer like this take two to three years from now, could that be a $10 to $20 million customer by itself of is that way too much in terms of what they order?.

I think it would be difficult for us to provide the kind of guidance that would go out two or three years based on particular retailer's needs.

The first thing we have to do is demonstrate that the impact of purifying their supply chain has impacted their product and it seems this though that has already happened, that the product is cleaner, better, has a better hand and likely to last longer retain value longer as well.

But that happens, we expect the orders to increase, but remember because we have a limiting -- the cheating that takes place in this industry, we’ve also eliminated the savings that some of the [cheaters] can offer to the supply chain.

And so it will result I am sure in a slight price increase to get what you pay for and so I think we'll have to see how the market equilibrates in order for us to understand exactly where we're in..

One more on the cotton side I'm curious how some of those other retailers -- how the relationships were established, was that Divatex, was that direct sales, do they hear about through their supplier that were already adopting your technology. That would be helpful. Thanks..

Sure we have been evident in this arena for the last year or two. So there are a number of brands who already know us quite well and retailers. But in our relationships Divatex is actually acting as our sales channel.

And so it’s a very convenient relationship they are very, very close their business brings them to interface with those users in the market directly. So for us it's a very efficient use of the skill sets of each of the players and trilogy of partners [who are at work]..

And then a few more first of all on the chip side. You had mentioned obviously the commercial market is much larger.

I'm curious have those discussions began with suppliers and how far before you might receive a commercial pilot for sort of that DNA marking for chips?.

Yes those conversations are underway. Difficult for me to predict exactly when the business will spill over. But if you stop to think about it the chips that are often use to help fly fighter jets are the same chips used currently in commercial aircraft.

And if we demonstrate that we have a tangible benefit in the military market it seems to me it won't be long. Before that technology spills over to related commercial markets that is commercial aircraft.

But for that matter we see it also spreading to medical devices and to automobiles, there have been recent demonstrations in the press of back towards available in chips, in automobiles that I think giving us all a little applause and reasons to authentic the semiconductor supply chain to both automobiles, cars and of course to commercial aircraft..

And then finally is it too early for you to think about M&A? Are you thinking about M&A and if so what you would be looking for in terms of enhancing your products. .

I'd say it's never too early for a company to think about M&A. The question is what do you do about M&A and it's essential for any company such as ours who are commercializing their organically grown product, to remain as focused as possible on serving their organic business before they are potentially distracted into other areas.

Now when the M&A helps with the development of the organic business especially for a company at our stage of our growth that’s a perfect combination. So we have to be cautious of our cash reserves we have to be cautious of the rate of growth of our revenue.

We have to be cautious of our market cap and we keep all of that in line as we consider our opportunities but we never stop thinking..

Our next question will come from J. Rogers with J. Rogers Investments..

The 980,000 I think I saw on one of the slides earlier bad debt expense.

Is that something we should see again or what was that?.

That actually was not bad debt expense it was loss on a conversion of promissory notes. When we originally have the promissory notes they were converted to stock and wires as part of the financing in November of 2014 so it's basically a non-charge essentially in accounting entry. Our bad debt for the nine months was approximately $22,000. .

Wonderful so that’s all behind this..

Correct..

And I understand our hosts are going to have a quick question at this time..

Yes we have a question from [indiscernible] an analyst at Benchmark, he asked the pima cotton cost has been badly hurt in California due to the drought.

What is the effect on Applied DNA Sciences?.

Yes the drought is likely to obviously decrease a yield of extra-long staple or pima cotton. And as a consequence demand will increase the price of pima cotton in the phase of the diminished supply cause by the drought. It's likely that the increased prices will hurt the margins of the entire supply chain.

Now keep in mind this is a supply chain that has been prone to substitution of cheaper product or the pima or extra-long staple brand. So, my suspicion is that the demand for a pima cot or for DNA marked extra-long staple cotton would actually increase in this scenario to limit the likely increase in cheating that takes place from limited supply. .

And at this time, we all turn the conference back over to Mr. Jim Hayward for any closing or additional comments. .

Okay. Well, that will be the end of our Q&A and we're really very grateful for your participation today and for your support of Applied DNA. Together we'll make life real and safe. Thank you very much. .

End of Q&A:.

And that does conclude today's conference call. Thank you for your participation..