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

Brian Kinstlinger - Maxim Group Rob Stone - Cowen and Company Jeff Kessler - Imperial Capital LLC Josh Seide - Maxim Group David Rosenfeld - William Jones.

Good morning. And welcome to the Applied DNA Sciences' Fiscal Year End Conference Call. All participants will be in listen only mode. [Operator Instructions]Please also note this event is being recorded. I'd like to turn the conference over to Debbie Bailey, Director of Investor Relations. Please go ahead, ma'am..

Thank you. Good morning and welcome to Applied DNA Sciences conference call. My name is Debbie Bailey and I'm the Director of Investor Relations. I'd like to thank everyone for joining us today. On today's call, we will be hearing first from Beth Jantzen, our Chief Financial Officer 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 our Form 10-K for fiscal 2015. 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 a review of our financial performance for our fourth quarter and the full fiscal year which ended September 30.

Starting with the results for the fourth quarter of fiscal 2015, revenues were a record $3.98 million, a six fold increase compared with $646,000 reported in the fourth quarter of fiscal 2014. And a 76% increase as compared to $2.3 million reported in the third quarter of fiscal 2015.

Revenues for the quarter were driven primarily by our textiles and government vertical as well as an initial order for DNA manufacturing for the diagnostic market.

The textile vertical is a great example of how we can transition from pilot project to commercialization and we hope to be able to replicate this model in additional markets in the coming quarter.

I'd like to point out that as the cotton ginning in the United States takes place between September and December each year, it is possible that revenues from this business will be seasonal.

Also, the agreements with our cotton customers include extended payment term that will result in a longer collection period and slower cash inflows as compared to our current turnover. These payment terms are typical in the cotton industry.

As a result, approximately $1.5 million is included in long-term accounts receivable for the revenue recognized during the fiscal year ended September 30, 2015. Full payment of these receivables is expected within 12 months from now.

Operating expenses were $4.5 million, an increase of $978,000 (sic) [$979,000] or 28% from $3.5 million for the same period in a prior fiscal year.

This increase is attributable to an increase in research and development expense of approximately $458,000 as well as an increase in payroll expenses of approximately $486,000, and non cash stock-based compensation expense of $247,000, offset by decreases in consulting and investor relation expenses.

As a result of higher revenue and lower cash operating expenses for the fourth quarter we are reporting positive adjusted EBITDA for the first time in the company's history.

For the fourth fiscal quarter adjusted EBITDA was a positive $213,000, a substantial improvement over both a negative $2.4 million for the same quarter last year and a negative $478,000 for the third quarter of this fiscal year. Turning to the balance sheet.

We've continued to manage our expenses and cash flow via the cost savings plan implemented earlier this fiscal year. As of September 30, our average monthly cash burn rate for the fiscal year was approximately $619,000 compared to approximately $743,000 for the same period in the prior fiscal year and $600,000 for the third quarter.

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 costs to support our growth.

We intend to remain disciplined in our spending and seek to strategically manage cost in line with our current and near future market opportunities. Cash and cash equivalents totaled $7.3 million at September 30, compared with $10.7 million at June 30.

As you are aware, on November 25, we closed a registered direct public offering for approximately 2.5 million shares at $3.49 per share and the concurrent private placement of warrants to purchase shares of our common stock, each exercisable for a half a share of common stock aggregating 1.25 million shares issued upon exercise at an exercise price of $4.30.

These warrants were sold at $0.01 per warrant for total gross proceeds of approximately $8.75 million before deducting the placement agent fees and other offering expenses. We plan to use the proceeds for general and corporate purposes and working capital as well as to invest in growth opportunities today to drive growth in 2016 and beyond.

As a result of this raise, our cash balance as of November 30 was approximately $14 million. Regarding the timing of the capital raise, let me give you some background. As you are most likely aware on September 11, we acquired substantially all the assets of Vandalia.

This acquisition necessitated the filing of audited standalone financial statements for Vandalia as of December 31, 2014 and 2013 as well as reviewed financial statements as on for the nine months ended June 30, 2015.

These were to be filed via 8-K within 71 days of the announcements of its acquisition by Applied DNA Sciences which was on November 27. We anticipated that the audit would be not be completed by November 27 which would render our active shelf filed last March ineffective.

As such we opportunistically chose to execute on the remainder of shelf before the 27. We and our auditors continue to work on completing the audits of Vandalia on a standalone basis as required by the SEC. Turning to the full fiscal year 2015.

Revenues for fiscal year 2015 were a record at just over $9 million, an increase of 231% compared with $2.7 million reported in fiscal 2014.

This increase is primarily attributable to an increase in revenue of $3.6 million from our textile vertical to secure cotton supply chain and two non-recurring government contract awards totaling an increase of approximately $2.8 million, as well as an initial order for DNA manufacturing for the diagnostic market.

This increase was partially offset by a decrease in revenue resulting from the consolidation of 32 suppliers to the United States Defense Logistic Agency to one contract directly with the DLA, which as we announced recently was just extended for an additional year through November 12, 2016.

Operating expenses were $16.9 million for the year ended September 30, 2015, an increase of 12% from $15 million for the same period in the prior fiscal year.

The increase is primarily attributable to an increase in stock-based compensation expense of approximately $2 million attributable to grants to employees that vested immediately as well as stock based compensation expense associated with stock option modification resulting from extending the term of certain stock options and to a lesser extent the acceleration of vesting terms.

The increase is also due to increased salary expenses of approximately $690,000 and $335,000 for research and development expenses. This increase was primarily offset by decreases in legal and consulting expenses. Legal expenses decreased by $691,000 due to the cost dismissal of the SmartWater limited litigation against us.

Consulting fees decreased by $375,000 primarily due to shares of common stock issued to a business strategy consultant and settlement of their fees during the prior fiscal year ended September 30, 2014.

As a result of higher revenue for the fiscal year, we narrowed our adjusted EBITDA loss; on a yearly basis adjusted EBITDA was a negative $3.2 million, an improvement of $6.1 million compared to a negative $9.3 million for the same period last year. In summary, fiscal 2015 was a year of tremendous growth for Applied DNA Sciences.

We parlayed pilot projects in government and other market and commercial skill deployment in textile market into significant revenue performance.

In concert, we've conducted capital raises they not only strengthened our balance sheet and gave us a financial means to undertake the strategic acquisition of Vandalia with which to scale the business and establish new markets, but also give us the financial flexibility with which to execute on our fiscal 2016 goals which Jim will go into greater detail in a moment.

Thank you for your attention. And I'd now like to turn it over to Jim for his comments. .

Thank you, Beth, really for a stunning year and a very exciting performance. And good morning to everyone and thank you for attending today's call. Let's just quickly look at the highlights of Beth’s report and then I'll review our activities undertaken that set the stage for incremental growth in fiscal 2016.

Debbie will then call for Q&A and we will welcome your questions. Our team is really quite proud to report an increase in revenues for the fourth quarter to six fold over the same quarter last year, truly a breakout quarter.

This is not only the first time in the company's history with revenues at a $4 million mark but it is also our fourth consecutive quarter of record revenues and 76% sequential improvement over the $2.3 million we reported in our third quarter. In addition, we are reporting positive adjusted EBITDA for the first time. That's a big deal.

Our quarter performance added to our already impressive performance across the first nine months of the fiscal year and culminated in 2015 fiscal revenues growing to three fold over the prior year to $9 million from $2.7 million in fiscal 2014. Now we believe that our top line growth is sustainable beyond our quarter based dependencies.

And that we can continue to diversify our revenue stream and that our disciplined approach to spending will facilitate our evolution to annual profitability. We believe that our balance sheet has us poised to respond to market opportunities and to lead the taggant industry especially with relation to supply chain security.

And with regard to my perspective on the current fiscal year. Really by every measure, operational, strategic and financial, we executed with a conviction in fiscal 2015 to transition Applied DNA Sciences from a development stage company to a commercial operating company.

Our approach leverages a decade long development effort to commercialize our substantial DNAintellectual property and to marry it to go to market strategy that addresses real life problems affective supply chains globally. Worth noting is the size of our IT, our intellectual property state.

Namely 35 patents issued with 74 pending complimented by carefully controlled trade secrets and a portfolio of trademarks. We believe that the accrued value in this state not only justifies our 10 year effort but is also a solid reflection of our total invested dollars to date.

I'd like to summarize our strategic goals for this last year and how we accomplished them. Namely first, we sought to expand our pipeline of pilot projects and convert more mature pilot projects across near-term business verticals to commercial scale deployments. Our pipeline of pilot project has expanded over the course of the year.

And I think it is important to note that our customers themselves fund many of them. Notable among these are Patronus with whom we signed a five year exclusivity agreement to incorporate our SigNature DNA for use with the new bonding agent for the cash handling industry.

Patronus has made payments to us for the first five years and is providing its share of associated product development cost. We entered into a two year contract for a pilot project with fifth U.S. government agency and, subsequent to the close of the quarter, were also awarded a contract extension by the U. S.

Defense Logistics Agency for DNA-marking with SigNature DNA. Our recent partnership with Techmer applies DNA tagging to synthetic fiber applications.

The partnership reflects our strategy to replicate our model for the cotton industry for application to the synthetic textiles market and is a beneficiary of our working closely with the major plastic supplier with whom we are also progressing our efforts to commercialize.

Our textile vertical really sets the paradigm for success in converting pilot projects to commercial scale deployment in fiscal 2015. In our first quarter, we were rewarded an initial pilot project to mark 5 million pounds of Pima cotton.

In our fiscal fourth, we provided sufficient SigNature DNA to mark 70 million pounds of cotton and in total we provision SigNature DNA sufficient to mark 100 million pounds of cotton. We are clearly in a commercial scale deployment of cotton.

What we have enabled in the cotton supply chain is nothing short of revolutionary as there could be no more difficult supply chain to secure. I'll speak more on this shortly but I want to stress our cotton as cost efficient model for which to scale the top line.

Now our recent acquisition of Vandalia also serves to expand our pipeline of pilot projects.

This was an opportune transaction for multiple reasons but specific to our pipeline Vandalia gives us the established supply relationships with key companies in the biotech, pharmaceutical and diagnostic markets and the ability to manufacture DNA sequences valuable in gene therapy, DNA vaccine and diagnostics.

Subsequent to the close of the fiscal quarter, we began to deliver on Vandalia's backlog of orders with our first diagnostic orders totaling $400,000. Second, we wanted to establish and expand our ecosystem of partners with which to extend our penetration of key verticals.

To that end in the textile vertical, we established partnerships Louis Dreyfus and Himatsingka formerly known as Divatex to penetrate the global supply chain of cotton.

These partnerships have results as I mentioned in the shipment of SigNature DNA sufficient to mark 100 million pounds of cotton and of these figure 70 million is for Pima cotton and 30 million is for Upland.

To put this in perspective, the US typically grows about 300 million pounds of Pima cotton per year but for Upland cotton the annual US production is closer to 10 billon pounds. While the total global market of cotton is generally closer to 50 billion pounds.

Now given the amount that we marked, clearly we are at the infancy of this market opportunity and as we continue to use Louis Dreyfus and Himatsingka to pull us through the supply chain, we expect our performance in cotton in fiscal 2015 to be our baseline for fiscal 2016.

Now other clients like American Bread or American-Grown, organic sustainable, free of the efforts from child labor et cetera. Our claims they can be verified when DNA mark is generated that corresponds to that claim which can be done in association with a certifying body.

In our government vertical, I think it is understood that the US government and Federal Agency and the OEMs that sell to them represent a significant opportunity for us. However, there is significant incremental opportunity for our DNA base technology via the same OEMs to additionally secure their commercial supply chains.

And third, we need to scale the production of SigNature DNA to meet commercial scale requirements and the acquisition of Vandalia does precisely that. With Vandalia's PCR technology we now possess we believe the world's largest manufacturing capacity of DNA in bulk using PCR.

In conjunction with our inhouse production capabilities we can now deliver DNA for virtually any commercial scale deployment now and in the future and across any vertical. Fourth and last. We needed additional financial flexibility with which to pursue our growth opportunities.

Leveraging our improving financial performance itself the result of the company's maturation from the development stage to commercial operating company, we uplisted the company to NASDAQ, a further testament of our maturation, we joined the Russell Microcap Index this past summer as part of its annual rebalancing.

We leveraged our raised investment profile resulting from our uplifting and growing investor interest to undertake a serious of capital raises that set us on a firmer financial footing. The most recent capital raised by the registered direct offering as best discussed was opportunistic in nature.

The enhanced financial resources we now have with this transaction, coupled with our expanded manufacturing capacity through the acquisition of Vandalia, places us in an excellent position to only meet growing demand for our security solution but to fully pursue every opportunity our technology affords us.

In summary, fiscal 2015 was a year of tremendous accomplishment for Applied DNA Sciences. These results came from the near-term drivers of revenue we have listed here. We launched the DNA program home asset marking in April 2015 and it has elicited a strong response in the market place.

40 communities across four states have been trained with an additional 27 communities awaiting training. You too can purchase your DNA kit from the Applied DNA website. Replicating our cotton model, we are seeking an anchor customer for this vertical with which to launch our commercial deployment.

Well not as mature an opportunity as our government or textile vertical, we do expect home and valuables asset marking to be a material driver of revenue in the future. And speaking of future revenue, here are the potential drivers of incremental longer term revenue that we believe will impact 2016 and beyond.

We have begun to lay the groundwork in all of these markets and I'll give you just two recent accomplishments. Last week on Swedish TV our partner in Sweden, Safe Solution along with representatives from the police and from car maker BMW, demonstrated the marking of the cars with our DNAnet product.

The largest insurer in Scandinavia IF is underwriting the program keeping with our model. We hope that this program extends in Europe and elsewhere and eventually reaches the manufacturing line.

Subsequent to the close of our quarter, we expanded our ecosystem of partners within our government vertical and announced collaborations with both the Hi-Rel Group and more recently SAS industries to incorporate our SigNature DNA technology into their product shown in the slide for both military and commercial grade applications.

As an example, we worked with SAS to incorporate SigNature DNA into a proprietary SAS process for the manufacture of military grade, conductive metalized silicone composites used for electromagnetic interference and radio frequency interference shielding.

Now these commercial applications or commercial applications for this technology include electronics, medical devices and even toys. Now I alluded earlier that our model for the cotton industry has been revolutionary in its ability to secure textile supply chains.

With its propensity for mislabeling and cheating and the enormous complexity of authenticating our commodity that changes hands multiple times across multiple countries, there are really is no more difficult supply chain to secure. But we have done it. And if we can do it for cotton, we can do it for other supply chains.

And this is exactly our intention in fiscal 2016. Our most recent capital raise affords us additional financial resources to pursue opportunities across our near-term drivers and long-term drivers of revenue especially in government and textile verticals.

It is important to note that while our DNA solutions are applicable to many verticals, many are longer-term opportunities. We remain committed to growing the business in a disciplined structured way that carefully selects for higher return opportunities with the associated expense of achieving them.

Further, we are mindful that as revenue makeshifts toward cotton, our quarterly performance becomes more hesitative to the disproportionate seasonal impact of cottons growing season.

For example, our performance in the fiscal third and fourth quarters were impacted positively as cotton in the US is harvested beginning in July and extends through November, sometimes even January.

Revenue concentration and seasonality is very typical in the lifecycle of a growth company and our answer to this is to seek to expand our penetration of near-term verticals as mitigator of the seasonality. In cotton, I noted earlier that the US market for Pima this year was 300 million pounds. For Upland it was 10 billion pounds.

While the opportunity exists for us to scale across US cotton, we also look towards cotton grown in the rest of the world with different growing seasons. Our partner Louis Dreyfus dominates the global market for the transportation of cotton and as such gives us a very strong entry into the global cotton market.

We also expect to begin to deploy our onsite suite of cotton authentication solution in India via our partnership with Himatsingka. This should over time bring online a recurring revenue stream to the company which can then be extended to every node in the supply chain as I will show you in slide in just one moment.

So if you contemplate our opportunity and take some words of wisdom from Steve New who in writing for the Harvard Business review stated consumers, governments and companies are demanding details about the systems and sources that deliver their goods. They worry about quality, safety, ethics and the environmental impact.

Far sighted organizations are directly addressing new threats and opportunities presented by these questions. Where does this stuff come from? And it is problem we are in a unique position to address.

The value which we bring is our marks can provide certainty of origin regardless of where that origin is and what it signifies including claims for the product such as sustainability.

Cotton for us presents a wonderful traceability case study and here you will see that in the study we began in Q1 of 2015, our cotton traverse the globe before returning to the US to be sold by one of America's largest retailers under our shared brand with Himatsingka called Pimacot.

Throughout that supply chain there are multiple opportunities for revenue at each node in the supply chain.

And as we deploy our onsite systems, we expect to see that model propagate which resembles the razor blade model and we expect the revenue on the backend of cotton marking coming from authentication to gradually over the course of one to two years soften the seasonality I refer too moment ago.

I expect fiscal 2016 to be a year of continued growth across all of these verticals. In summary, fiscal 2015 was a banner year for Applied DNA and fiscal 2016 sets up to hold even more promise.

With cotton serving as our replicable model to other verticals and a deeper penetration of near term verticals, coupled with the financial resources to pursue them, our prospects have never been better. Now I'd like to ask the operator to open the call to questions. .

[Operator Instructions] Our first question today comes from Brian Kinstlinger of Maxim Group. Please go ahead. .

Hi, guys. Great results.

Can you talk about the long-term goal of revenue per pound of cotton secured over the course of the supply chain? And then how long do you think it will take before you approach that sort of rate per pound secured?.

Sure. Well, as you know, we don't provide guidance at this stage. However, our goal is to establish long-term contract that give us the kind of reliability that would put us in a position to better provide guidance.

Our intention in 2016 and as we are doing even as we speak in close relationship with Himatsingka is we are pulling more and more brands toward our SigNature marking programs who are also very interested in purging their supply chains of any cheating.

As we establish higher and higher volumes for DNA marking, we will also be simultaneously establishing on the backend higher level of DNA authentication.

Now all of this has served a marvelous function for our company in that we evolved along with this project from providing a product namely DNA, to implementing control processes at each of the vendors using our DNA to providing whole system that helped control the technical ecosystem we were implementing. So we grew to something much more.

That's a very clone-able experience and we think we will be able to do that with cotton. .

Great.

And then are there any early indications of how much cotton you think might be ordered next season, or is it too soon to tell?.

No. We are already seeing positive indications that the number will go up. But at this point in time I am not in a position to estimate. .

Okay. You talked about a lot of different industries and how they’ve grown up per se in DNA marking.

Can you highlight which one you expect will be the one or two outside of cotton biggest growth drivers in fiscal 2016 and maybe where they are in the sale cycle, are they client or they pilots?.

Sure. Well, we have existing commercial business that we expect will continue to grow. That is our government business, our textile business. We expect that will spread our textiles beyond cotton into plastics and other natural materials as well. We expect to grow our cash and transit industry.

Our government contracts are bringing us closer to more and more OEMs who provide the government and for whom we would be doing DNA marking and we believe strongly that the value that we bring to those OEMs is strong enough that they will end up using it for their commercial supply as well.

Of course we are hopeful to be able to implement in the future of pharmaceutical marking strategy and we do think that the demand there is very, very high and we think we are in a unique position to help save lives, to lower the morbidity and mortality especially in places like Africa caused by counterfeit drugs.

And then finally our automotive industry, we think will also show growth and we just cited some early signs that that is likely to happen. .

And then maybe if you can talk about -- we've been hearing about pilots for a while, some of them commercialized obviously with cotton. What industries do you expect might in fiscal 2016 turn commercial from pilot? If you can discuss that at all. .

Well, we are hopeful to be able to promulgate our experience in plastics to convert more pilots in plastics. And that's no small feat to render DNA so that it’s soluble in plastics and so that it is recoverable when it comes to time to authenticate. We have been able to do that very efficiently and we do believe that that will impact many industries.

And by involving ourselves in pilot such as these that affect really a mainstay ingredient for a particular industry, we also open the doors of being able to protect the brands that utilize these materials. The brands that use the fibers that are well known to the consumers but that are counterfeited all the time. .

To that end and my last question maybe you can update us on the progress of the Techmer partnership.

Has that yielded any revenue yet and maybe how you expect that partnership might ramp through 2016?.

Sure. We are really excited about the Techmer opportunity because in many ways the synthetic fiber market place can be as large and as quick moving as the cotton industry.

And our experience as I said a moment ago in plastics in general is greatly felicitated the speed with which we've been able to demonstrate the relevance and utility of DNA marking of extruded plastic fibers. So we think Techmer and their customers and their associates could actually grow very, very quickly. We are quite excited about it. .

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

Good morning, everyone. I wanted to follow up with a couple more questions regarding cotton.

Jim, one with respect to the Pima market, do you have ecosystem partners now to address all of those pounds or is market share distributed in such a way that you need to sign up some additional partners?.

No. We are in pretty good shape because we already have multiple brands that we are not in a position to reveal who are committing to the DNA reshift for marked cotton in this coming year. And we think that as the reputation of the success of this program propagates that more and more industries just as Steve New quoted will hop on..

So you see the demand really coming from the brand owners at the end as opposed to constituent parts of the supply chain? Or the farmer sub chain?.

We are actually seeing it come from all of those. So the commitments we are getting from farmers throughout the United States because this actually allows the farmer to pre-sell their cotton to a brand who has declared their established demand. So we see demand coming from the farmer.

We see demand coming from the brands as well and in some cases the cotton is - actually the DNA marked cotton is pre-sold before the cotton has even been harvested. .

With respect to the dynamics of Pima versus Upland obviously many times larger market.

Is that positioning more about locally grown as opposed to premium fiber or what might be the differences I guess is what I am asking between Pima and Upland with respect to the market opportunity for you?.

Sure. In the case of Pima, the claim that we help verify is first of all it seems though this is the first arrival of Pima back in the United States as pure Pima in 30 years. In the case of Upland because the product is considered by most to be different enough in characteristics that it isn't used typically in luxury items.

However, it is used in durable items, it is used in items that sell well like denim dungarees and jeans and it can be associated with the whole hose of variable claim. So for example, a sustainable claim or an organic claim or a child labor free claims. Now all of those claims have no impact on the chemistry or DNA of the plant.

But if we are working with a certifying body we can generate a mark that corresponds to that claim and ensure that all the cotton grown under those conditions meet those specifications which would allow the consumers to ensure that and this is the motivated perhaps millennial consumer that he or she is actually buying with the social objective they had in mind and accomplishing it.

.

Sounds great. I wanted to shift for a moment to the Vandalia acquisition. I know you are working on the audited numbers that you have to file eventually.

Can you give us some sense of what the trailing 12 months sales were for that business?.

Sure. In years prior that business has done on the order of $700,000 per year. In the current year we started by shipping $400,000 worth of product really in the first quarter. And we are only just beginning to market Vandalia's prior assets now under Applied DNA and we believe that we can expand those markets pretty effectively.

And improve the yield of the product. So we are very excited about what we can do with this asset. We think it will have a significant income on the shape our business and on our sources and diversity of revenue. .

So that $400,000, when you said the first quarter you mean the first quarter since the acquisition that was recognizing your fiscal fourth quarter right?.

Part of that was recognized in our fiscal fourth quarter and then some of it is in our first fiscal quarter of 2016. .

Okay, great. .

So this current quarter we are in. .

So with respect to the business model going forward for that Jim, do you mainly expect to see that supporting extended capacity for your business or growing the existing Vandalia customer base, sort of what's the business model going forward? And you talked about having the largest capacity globally for this type of production.

Where does that stand in terms of capacity utilization and what you might need in terms of investing fixed assets to grow that capacity? Thanks. .

Sure. We don't think -- I'll start with the latter questions. We don't think that we will need to invest significantly in further growing that capacity. It is wonderful platform because it provides us with a number of flexibilities.

First of all, each manufacturing unit is an enclosed separate entity as such it is the kind of production which lends itself quite well throughout A inspection and should allow us to be able to make DNA more readily than we can right now under cGMP conditions. Secondly, the units are free standing.

If we need to product DNA steadily or with a very short delivery time we can actually move the units to wherever DNA production is required. Thirdly, it uses PCR, Preliminary Chain Reaction whose starting materials are only an enzymes and nucleotide or primer and a small number of salts and buffer.

As a consequence and it is an iterative process that more or less double the quantity of DNA with every cycle. So that after 30 cycles to the 30th you can a billion fold increment in DNA. The great value from our point of view is the purity of product.

Other methods of producing DNA using plasmids and eco life for example or large scale fermentation involve complex media which leave materials behind. And the host themselves are loaded with their own DNA which can contaminate the DNA objective you have in mind when you are growing plasmids it is only a fraction of plasmid you want to have as DNA.

So the risk of having less pure product with traditional DNA manufacturing methods is quite high. We actually believe with this first time scale of PCR base production, we can soon offer a better product to those industries such as diagnostics or DNA vaccines or gene therapies by working closely with partners who have the vectors for those systems. .

Great. And my last question if I could please is just some detail on the quarter.

Can you give us the breakdown of the Q4 revenue between the cotton diagnostics business and the one time government contracts or just government in general as a category?.

So at the textile represented approximately $2.5 million of our Q4 revenue and military in total was approximately $985,000..

And the balance was the diagnostic?.

It was diagnostics and a mix from our cash and transit and home asset marketing make up the rest of it. .

And our next question comes from Jeff Kessler from Imperial Capital LLC. Please go ahead. .

Thank you. Up till now you had a cash and transit business that's been marking essentially boxes and cashes of dollars mainly for -- in during the transport. The agreement with Patronus takes you into other areas.

What is the number one, what is the relationship that you can have with the existing cash and transit manufactures as you move as you broaden the base of your services? And number two, are they are separate standalone businesses within the bank transformation area and the ATM area that you can get into with Patronus?.

Okay, very good. Thank you, Jeff. So the nature of the CViT business we think is about to undergo serious change.

For the last decade the business has utilized a deterrent called the degradation dye that at the moment of theft from either a cash box or an ATM marks 80% of the cash or rather a 100% of the cash over 80% of its surface with an intensely color dye.

And in Europe the retailers have been trained to recognize this dye and are intended to either confiscated or reject as stolen. Now that has by itself not done enough to deter the crime. We introduce the inclusion of DNA in that ink which had a significant impact on crime deterrents.

But the problem is that some creative criminals have developed methods of removing the degradation dye from the currency. In fact, in forensic evidence we've seen their effort to awry where what we get shipped as currency looks more like clean x tissue after it has been so aggressively bleached and chemically treated.

I should note that in those samples we still find evidence of our SigNature DNA note and are able to repatriate that money with its original owner. But the point is that degradation dyes do not effectively deter the crime.

Our relationship with Patronus which is a partnership allows us to include DNA in their bonding agent and what their bonding agent does is it too is deployed as an alternative to the degradation dye at the moment of theft. It results in an extremely rapid bonding of the currency to form in a fact a solid brick of notes.

And that bonding system is resolutely insoluble. And our DNA in that system will help to serve to identify the original owner and the central banks all throughout Europe have shown great enthusiasm and they will help us to repatriate that money once the forensic marker has identified who owns it.

The long-term goal is that by taking the price from the criminal that the rate of crime will diminish. Now the market for degradation dye has really only been Europe and South America and to a smaller extend Africa. Our feeling is this technology is industry changing and as consequences stands a very good chance of coming to the United States as well.

Added to that is the fact that the market place for ATM is about to undergo a very significant increment globally. The number of ATMs worldwide is expected to go up by almost one third in the coming year so that the total addressable market will become very large indeed. So we are quite excited about it. .

How does this work within the ATM?.

The same way that the degradation dye is work in the ATM. They are self contained, it is delivered by casket, the caskets are carried in the armored vehicles that carry the cash in the caskets and they are already charged with the binding agent. It is simple matter of inserting into the ATM or the cash box. .

Okay. Final question, can you give some idea-- you are becoming essentially as the -- as become kind of un- wealthy for you to deal with just the first group of DLA companies one by one.

You are obviously becoming more of a service company to the DLA in their marking and if that business does expand, do you have some idea of what's your -- what type of -- what is the nature of the recurring stream that you are going to be getting from the military if you can begin to quantify the number of items that might be marked and what you would be getting for the service for marking them since you won't be getting in paid by mark anymore but you would be probably getting paid a recurring revenues fee for the service of doing that marking.

How big can that be if extra other categories get included in that marking?.

Sure. Our current contract with the office of the Secretary of Defense is called a Rapid Innovation Fund contract calls for the expansion just as you point out and it sounds like you want to be sure it is not something to worry about.

From a single federal supply class to 66 federal supply classes and that single federal supply class right now has for us about a total addressable market of 100,000 chips where as the 66 federal supply classes represent more than 146 million purchases made by DLA per year.

Now right now our relationship with DLA has become greatly simplified and is working extraordinarily smoothly. We provide DNA to DLA on a regular basis and DLA itself does the marking.

We provide the technology to do that marking and we've recently developed several very exciting methods that greatly enhance the scale of that marking and the speed and output.

So that we believe all that the new business coming from those commercialization efforts is quite doable and doable not only in service to DLA but doable in service to for example the commercial airline business as well. .

Right.

So essentially what the level of business that you are doing with the DLA today serves more as a baseline than as a one off event?.

Yes. That's the way we feel. The challenge for us still we have to develop those commercial partners to service DoD in general and we are and that's why we announced our association with high rail and our association with SAS and others. .

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

Hi. I just had one more quick question on the cotton shipped this year.

So of the 100 million pounds of cotton that was marked this year or will be marked with the DNA that was sold this year, will that cotton ultimately be branded with APDN's own logo and brands to the downstream end users?.

Yes. We will not be branded by our corporate logo but by our shared content logo which we share with Himatsingka and for Pima, that's called Pimacot so we currently have Pimacot product on the home textile shelves of one of the US largest retailers.

And the Upland cotton will be labeled with the DNA content label home grown signifying that this Upland cotton originates from the United States. .

And our next question comes from David Rosenfeld of William Jones. Please go ahead..

Yes, hi. Congrats on the cotton product. We were able to find now Pimacot brand under Costco's private label, I think it is Kirkland brands and their bed sheets. Can you just talk about what kind of validation process that required to get that contract and just say it go through that process. .

Well, let me start by saying there is nothing that stops our investors and fans from investigating the relationships we have with our customers but you do recognizes I am sure many listeners do that because of the nature of our business we are sometimes not allowed to reveal who our customers are.

But the validation of the product you are referring to went superbly well. There are many who feel the resulting product is really the first time that a pure Pima arrived back in the United States and that it is detectable aesthetically. So it is gone extraordinarily well.

I can tell you that in the implementation of DNA authentication and the fiber typing essentially all of our sampling once we had procedures established at each of the vendors to ensure compliance, all of our sampling has turned out to demonstrate that the product is in fact pure Pima. .

Thanks for that.

If I can just switch gear so the Techmer so can you just talk about what type of synthetic textiles does that relate to? Is there a pilot there or is it already proven? I mean just trying to figure out where in that kind of pilot to pre commercialization and commercialization that synthetic textile business is?.

Sure. Well, what we've been able to do is demonstrate the inclusion of DNA in plastic and inclusion of DNA in extruded plastic for that matter. And what we are doing with Techmer is demonstrating that those extruded fibers can easily be woven into finished goods and that we will be able to track the DNA from fiber to finished product.

And those of the kinds of products used by many famous sporting brands, those that are counterfeited very high frequency and we believe that this will be a way of ensuring the integrity of that supply chain in the same manner as we have in Pima cotton. .

This concludes our question-and-answer session. I'd like to the turn conference back over to management for any closing remarks. .

Okay. Well with gratitude to all of our employees, our customers and our investors, it is now time to close. We wish you the best of the holiday season and a life that is both real and safe. Thank you. .

And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect..