Clay Shorrock - General Counsel James Hayward - Chairman and Chief Executive Officer Beth Jantzen - Chief Financial Officer Judith Murrah - Chief Information Officer.

Josh Goltry - Maxim Group Brian Kinstlinger - Alliance Global Partners Craig Pierce - Morgan Stanley.

Good day and welcome to the Applied DNA Sciences’ Fiscal Second Quarter 2018 Financial Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Clay Shorrock, General Counsel. Please go ahead..

Thank you, operator. Good afternoon, everyone and thank you for joining us for our second fiscal quarter 2018 financial results conference call. I am Clay Shorrock, General Counsel at Applied DNA.

A copy of the company’s earnings press release and accompanying PowerPoint presentation to this call are available for download under the Events and Presentations section to the Investors page of the Applied DNA website. With me on the call today are Dr. James Hayward, Chairman and CEO and Beth Jantzen, Chief Financial Officer.

As a reminder, please note that some of the information you will hear today during our discussions may consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expenses, stock-based compensation expenses, 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 filed on December 28, 2017 and our subsequent quarterly report filed on Form 10-Q filed a short while ago.

Applied DNA Sciences assumes no obligation to update any forward-looking statements or information. Now, it is my pleasure to introduce our first speaker on today’s call, Beth Jantzen..

Thank you, Clay. Good afternoon, everyone and thank you for joining us today. Let me take a few minutes to discuss the results of our second fiscal quarter and first 6 months of fiscal 2018. Then Dr.

James Hayward, our President and CEO will provide you with an update on the company’s progress, activities and strategies for the balance of the fiscal year. Starting with the statement of operations, total revenues for the second quarter ended March 31, 2018 were just over $1 million.

This represents a 15% increase compared to $905,000 reported in the fiscal second quarter of 2017 and an increase of 61% compared to $648,000 in the first quarter of 2018.

This year-over-year and quarter-over-quarter increase in revenues was primarily attributable to revenues from a government contract award as well as an increase in revenues generated from feasibility pilots.

For the first 6 months of this fiscal year, we recognized revenues of $1.7 million, a decline of 6% from the first 6 months of the prior fiscal year.

However, we have approximately $1.2 million in deferred revenue as of March 31, 2018, of which approximately $900,000 relates to milestone and/or phase payments under certain contracts, which will be recognized as revenue in future quarters as I will just discuss more on later.

Product revenues declined approximately 29% for the second fiscal quarter of 2018 to $486,000 compared to $689,000 in the same quarter of fiscal 2017 and increased approximately 39% compared to the first quarter of fiscal 2018.

For the first 6 months of fiscal 2018, product revenues decreased 40% as compared to the same period in the prior fiscal year.

The decrease in year-over-year product revenues is a result of a decrease in cotton textile revenue primarily from the recognition of deferred revenue for DNA concentrate previously shipped for the marking of cotton during the fiscal 2017 second quarter.

Service revenues increased 158% and 106% during the 3 and 6 months period ended March 31, 2018 as compared to the same period in fiscal ‘17 and 87% as compared to the 3 months ended December 31, 2017.

The increase in service revenues to the 3 and 6 months ended March 31, 2018 as compared to the same period in the prior fiscal year was due to an increase in revenue from a government contract award which we did not have during the prior fiscal year.

This increase is also due to an increase in revenues from a successful large scale feasibility pilot for BLC Leather Technology Centre Limited based in the United Kingdom as well as ongoing cannabis pilot under our TheraCann cooperation agreement entered into during January of 2018.

These increases were offset by a decrease relating to the completion of a feasibility study for fertilizer that matured to commercial supply during the 3-month period ended March 31, 2018.

Although they did not result in significant revenue in the current quarter, the signing of both the Colorcon and the TheraCann agreements were monumental events for the company as they are our largest paid commercial development projects to-date. We are currently working together with our new partners to secure customers.

These contracts also help us with diversifying our revenue stream for the future. Cost of revenue as a percentage of product revenue in our fiscal second quarter was 77% as compared to 43% for the year ago period.

This increase of cost of revenues as a percentage of product revenues is due to the product sales mix as product sales during the prior year’s fiscal second quarter consisted primarily of textile sales, which are at a high margin.

Total operating expenses declined in the second fiscal quarter of 2018 to $2.8 million compared to $4 million in the second fiscal quarter of 2017 and $3.5 million in the first quarter of fiscal 2018. The decrease on a year-over-year and quarter-over-quarter basis is primarily attributable to a decrease in stock-based compensation.

The decrease in stock-based compensation is mainly due to certain performance-based stock options being canceled. Therefore, the performance conditions were no longer probable and the options did not vest. And as a result, the related expense of $416,000 was reversed.

To a lesser extent, the decrease in operating expenses for Q2 ‘18 relates to a decline in payroll, legal and advertising and marketing costs. Operating expenses were also slightly impacted from the opening of our laboratory in India during February of 2018.

The laboratory is now fully operational and started performing authentications and issuing reports in late April of this year. For the first 6 months of fiscal 2018, total operating expenses decreased 27% compared to the same period in the prior fiscal year from $8.6 million to $6.3 million.

This decrease reflects lower stock-based compensation expense of approximately $2 million primarily associated with stock option grants during the 6-month period ended March 31, 2017, which vested immediately as well as the result of certain performance-based stock options being canceled as discussed earlier.

It is also due to decreases in certain operating expenses, which were slightly offset by an increase in R&D costs from the government contract awards.

For the second fiscal quarter of 2018, adjusted EBITDA was a negative $2.3 million compared to a negative $2.7 million in the same period during the prior fiscal year and a negative $2.8 million in the first quarter of 2018.

The improvement in adjusted EBITDA loss is attributable to the increase in revenues as well as a decrease in certain operating expenses for the second fiscal quarter of 2018. Adjusted EBITDA remained flat for the 6 months ended March 31, 2018 and 2017 at a negative $5.1 million.

Turning to the balance sheet, cash and cash equivalents totaled approximately $3.7 million at March 31, 2018 compared with approximately $3 million at September 30, 2017.

The increased cash balance is primarily the result of approximately $4.2 million of net proceeds received from a registered direct offering, which closed on December 22, offset by cash used to fund operations during the period. As of March 31, we had an accounts receivable balance of approximately $1.5 million.

Of this amount, we collected approximately $1 million subsequent to the close of the quarter related to certain milestone and phase payments under contracts. As of March 31, 2018, we had $1.2 million in deferred revenue as compared to $351,000 at September 30, 2017.

This increase in deferred revenue represents fees paid under several contracts that includes specific milestone and/or phase payments and therefore we were not able to fully recognize the revenue during fiscal Q2.

For example, we will recognize the first milestone payment under the agreements with Colorcon evenly over the estimated time period it will take to receive regulatory approval.

As of March 31, 2018, our average monthly cash burn rate for fiscal ‘18 to-date, excluding the proceeds from the financing was $606,000, a decrease of approximately 25% compared to $805,000 for the same period in the prior fiscal year.

The improvement in the monthly burn rate for fiscal 2018 compared to fiscal 2017 is mainly due to increased cash receipts, coupled with slightly lower disbursements during the first half of fiscal 2018. As of April 30, 2018, our cash position is approximately $4 million.

Due primarily to cash receipts from the contracts discussed earlier, we had positive cash flows during the month of April 2018. April was one of three months in the last 12 months that we experienced positive cash flows.

We continue to closely monitor our spending and intend to remain disciplined and continue to strategically manage costs in line with our current and near future market opportunities. We have recently implemented cost saving measures that on an annual go-forward basis save roughly 10% of our current monthly cash burn rate.

Management has developed a plan that includes additional cost saving measures that would be implemented if revenue targets are not met by our fiscal fourth quarter.

As of March 31, 2018, we estimate that based on our aggressive revenue forecast model, our cash and cash equivalents, along with the collection of our account receivables, are sufficient to fund the operations for the next 12 months.

However, if we do not meet these forecasted revenues and if cost savings do not convert us to cash flow neutral, we may have to consider financing. Thank you for joining us today. And I would like to now turn it over to Jim for his comments..

Well, thank you, Beth and thank you, Clay and good afternoon, everyone. Thank you for attending on our fiscal 2018 second quarter earnings conference call.

Applied DNA made significant progress in the quarter in executing on our strategy to expand awareness of our molecular tagging platform and to develop new revenue opportunities based on strong foundations in multiple business verticals.

Having built a base of recurring annual revenue during the prior year and in the first half of fiscal 2018, our goal for the remainder of this fiscal year is to further expand the applicability of our technology platform to drive revenue in the near-term and add to our base of recurring revenue for the long-term, while we approach sustained profitability.

Now, as indicated previously by Beth, this fiscal quarter saw the largest non-textile, non-government-related initial deal flow in the company’s history, with the signing of multiple commercial feasibility contracts worth approximately $2.5 million in their aggregate over their terms.

This is clear evidence of the broader adoption of our disruptive technology and supports our current go-to-market strategy. Our more mature verticals provide the foundation to fuel expansion.

Building on those prior successes, companies, market leaders have come to acknowledge and adopt our technology and its value proposition, namely, that our platform enables them to increase the value of their goods throughout their supply chains by ensuring security, certainty and trust and to grow their market share by giving them a unique competitive advantage in the marketplace.

Let me briefly review our activities during our fiscal second quarter that reflect the progress we are making in building our base for future revenue and revenue diversity.

Now, the looping video that played before we began, portrayed the signature DNA-branded Videojet 1860 continuous inkjet printer and the technology we provide for both their visible and invisible inks.

We are moving to broaden the exposure of our security print platform solution within Videojet itself and within their customer base and our combined efforts have generated for us a pipeline of prospects. One area of particular focus with Videojet is in regard to its fit within track-and-trade serialization solutions for the pharmaceutical industry.

Bar codes and other form of serializations are copyable and our value to Videojet’s customers is that our DNA ink will allow them to tell the difference between real and fake drug packaging.

This is the perfect complement to our work with Colorcon and ACG in tagging the doses themselves that combined will offer the pharmaceutic industry what we believe to be the first multilayered supply chain traceability and security solution.

Our partnership with Videojet is on track and each party is highly motivated and we will bring our unique and disruptive solution together to the market.

In our pharmaceutical vertical, the signing of definitive agreements with Colorcon creates a clear path for long-term revenue for Applied DNA with approximately a 60% share of the global market for film coatings used on solid oral dose tablets. Colorcon gives us unprecedented access to pharmaceutical and nutraceutical manufacturers worldwide.

Under the terms of the agreements, we will supply tagging and authentication materials to Colorcon in exchange for long-term royalties on the sale of Colorcon products incorporating our molecular tags and on the sale of related authentication services.

Now as Beth noted in her remarks, first of two milestone payments became due with the signing of the agreements and was paid in early April. The second milestone payment of an equal amount will be triggered upon regulatory approval of a solid oral dose pharmaceutical incorporating our taggings.

We are working very closely with Colorcon’s substantial regulatory and sales teams to position ourselves for regulatory approval and to engage customers and our early customer meetings have been very promising.

Last quarter, we also entered into a Memorandum of Understanding with the Associated Capsule Group, or ACG, for the marking of solid oral dose capsule shells.

ACG, the world’s second largest manufacturer of capsules, together with Colorcon, gives us visibility into a very significant share of solid oral dose drugs and nutraceuticals being manufactured today. Now with the announcement of our results today, we are also announcing the filing of our drug master file just last Friday.

It will be reviewed by FDA for administrative conformance to their filing requirements at this time. It will be accessed by FDA for technical review upon a customer’s request to use the Applied DNA product within the customer’s pharmaceutic product.

Pharmaceutical industry interest in our platform is helped by the FDA’s November 2018 deadline to manufacturers and other supply chain stakeholders to comply with its Drug Supply Chain Security Act and the associated serialization enforcement requirements.

Our platform of multilayered tagging, testing and tracking offers the platform of data to the world of pharma, one that’s proactive, not reactive, one that offers insights and intelligence, not just transactions. Now, we leveraged our cotton textile expertise in an agricultural supply chain to enter the burgeoning legal cannabis market.

Following the completion of the successful pilot project, we announced an initial 2-year $1 million contract with TheraCann to integrate our molecular tagging and testing technology into TheraCann’s blockchain-based seed-to-sale legal cannabis ERP platform.

With nearly 3.5 million square feet of cannabis operations under management, TheraCann is a recognized technology solutions and services leader to the international cannabis market. Ours is a commercial feasibility contract under which we are working with TheraCann to develop molecular tracking systems for legal cannabis worldwide.

Given TheraCann’s global footprint, our collective solution is relevant to all countries around the globe in which cannabis is either being grown or distributed.

Here in the U.S., with growing momentum in Congress to decriminalize marijuana and with approximately 20 states moving to legalize it by 2020, our supply chain solution is timely and supports proactive testing by growers and processors as well as by the regulators.

Other near-term North American opportunities are also in due, with Canada said to have a final vote on nationwide legalization by June 7, 2018. Countrywide recreational sales of cannabis in Canada are expected to begin by September of this year.

Our partnership with TheraCann is progressing nicely, with meetings underway with state legislators and administrators in parallel with our platform development. We have already seen early success in the tagging, testing and tracking of legal cannabis and its derivatives in the laboratory pilot.

The ability of our molecular taggings to be detected throughout key points in the legal cannabis supply chain and for the tagged products to be forensically analyzed is an important strategic advantage for our platform.

We will soon test the first prototype of our unique cannabis tagging system that will deliver a safe and automated way to consistently tag cannabis at large scale.

This system, which leverages our know-how derived from the design of our cotton DNA Transfer System, will be anchored by TheraCann’s seed-to-sale software solution and will offer a first-mover advantage to early adopters across the legal cannabis supply chain.

Performance under this 2-year contract, we believe will put us in a position to secure commercial cannabis tagging opportunities. Now, textiles are our most advanced business vertical. The synthetic textiles market is many times larger than the global cotton market.

Building on our successes with synthetics customers like Techmer PM, Reliance Industries, GHCL and Loftex, we have just added a new CertainT customer to our list in the form of WestPoint Home, who service the hospitality industry.

At the New York Home Fashions Week in March, we launched a line of CertainT verified recycled PET products together with GHCL and Reliance, the latter being the largest integrated producer of polyester fiber and yarn in the world.

In just the 3 last years, our marketing and sales programs in this industry have truly paid off as we now continuously are invited as speakers at key industry events and we feel frequent inquiries from manufacturers, brands and retailers, which have converted to pilot projects that are not – that we are not able to announce at the current time.

And the proof of CertainT value is in the pudding as they say. Our latest three contracts in synthetics include royalties on finished good sales, revenue that goes to our bottom line.

Leather is another segment of our textile opportunity and we were very pleased to announce just a few days ago that we had successfully completed our sponsored pilot project with British Leather Technology Centre based in the United Kingdom on schedule at the end of March.

This funded pilot proved that our technology can be used in the harsh leather production environment to provide forensic traceability for leather from farm to shop.

In the week since the pilot project’s conclusion, we have begun working with pilot sponsors on detailed plans for funded commercial pilots to prove the technology at a commercial scale over the next several quarters. Therefore, we seek to convert these commercial pilots into commercial scale revenue opportunities.

The applicability of our platform to leather has captured the attention of the National Wildlife Federation, Puma, the Scottish Leather Group and Tong Hong Tanneries, among others whom we are not able to announce. The latter are comprised of a range of businesses from major suppliers of leather to global footwear brands.

Turning to our fertilizer tagging business, we received our first commercial scale order for tagged fertilizer from Rosier in the second quarter. Now, this order has already been delivered and it is our understanding that the DNA-tagged fertilizer is destined for use in Africa and in Turkey.

And with regard to Turkey and its mandate to DNA-tagged fertilizer, following our recent visit there, we believe that Turkey continues to be a potential source of sales for us. In recent weeks, we have filed additional U.S.

and international patent applications addressing our proprietary methods to tag, test and track fertilizer of products to prevent fertilizer diversion, to quantify fertilizer dilution and even to recover fertilized DNA tags from the environment after fertilizer application whether that tagged fertilizer was applied to enhance crop yields or to disrupt society.

We have additional meetings planned in the coming weeks in Turkey to further refine our go-to-market strategy. Now with all of the technology we have just described, there is one more that is seemingly invisible, but very powerful. It is what gives CertainT its value both to us and to our customers.

It is what extracts value from DNA and that is data, information, insight, intelligence. Our IT platform now has close to 300,000 records related to electronics marking and collects over 650,000 data points per day, when all 9 gins are operating.

By the way, we had the first international DNA system up and running, including integration with the gin systems, within 3 months from the time that they said go. This is a performance of which we can all be proud.

The last two quarters have been particularly insightful for us as the data from our cotton tagging, testing and tracking systems have brought new insights to our merchant and manufacturer, allowing them to better manage their business.

We reconciled marked balance against contracts, we have provided source traceability, we acted as third-party arbiter in contract fulfillment, we monitored gin operations with key alerts to personnel from our remote access industrial Internet of Things design. We are now sharing data with a customer’s ERP system.

We are applying our know-how from cotton to cannabis as the first models of tagging systems and testing designs are emerging. We continue our prototyping with blockchain designs and are exploring new data visualization platforms for customer use, particularly in pharma.

So, our IT roadmap continues to build a platform that brings proof positive to our customers in security claims and traceability. And I am very pleased to say that the person leading these valuable initiatives, our Chief Information Officer, Judith Murrah, will be available for your questions at the end of our prepared remarks.

As those of you who have followed Applied DNA for sometime are aware, our ability to produce ultra-pure linear DNA at scale via the PCR method forms the value of our biopharmaceutical business. Much like in pharmaceuticals, once a supplier is baked into a diagnostic or therapeutic, these suppliers are often engaged for the lifetime of that product.

Now, we have received many inquiries from companies in the biopharma market. A good example is Evivax, an Italian biotech company focused on healthcare for companion animals.

Late last year, we entered into a research and development project with Evivax to quantify the advantages of PCR product over alternatives for use in DNA-based pet vaccines and eventually in human vaccines. The project is on schedule with results of this study expected over the next several quarters.

We have also provided feasibility scale product to well-known European Life Sciences institutes to American Cancer Therapeutics companies and to others with whom we continue through the steps of paid feasibility work that we are not able to announce at this time.

But to quantify the market opportunity, the global DNA vaccines market is predicted to grow at a compounded annual growth rate of 45%, generating $22 billion in sales between 2017 and 2025. We believe that our ability to create DNA at scale can be a game changer for the biotherapeutics market.

The forefront of medical science research today is immunotherapy, therapies that enlist and strengthen the power of a patient’s immune system to treat cancers and other diseases such as sepsis.

These therapies have captured the attention and imagination of researchers and the public alike because of the remarkable responses they have produced in some patients, both children and adults, for whom other treatments had stopped working. All CAR therapies, however, use plasmid DNA as their basis.

Plasmid DNA production is slow and contains toxic byproducts that require it to be extensively cleaned. So in 2018, we are building on the success we have had in the diagnostics market to-date to establish PCR-produced DNA as a viable and in many cases better alternative to plasmid DNA for use in the biotherapeutics market.

Now, we have recently demonstrated the ability to use our linear DNA in transfection models, resolving one of the most significant hurdles, slowing the implementation of DNA vaccines, gene therapy and personalized medicine. And that is the availability of large-scale linear DNA as an alternative to less desirable plasmid DNA.

Moreover, we have developed and filed patents on new methods to ensure PCR-produced DNA used in therapy is absolutely error-free. We currently have multiple projects underway with commercial allies to validate PCR-produced product as a better alternative to plasmid DNA.

And as this slide shows the market available to our technology is very large and extremely relevant to current personalized medicine therapies. We see this market as synergistic with that of our generalized pharmaceutical base from marketing and sales resource utilization points of view.

Our go-to-market approach is cautiously measured at the current time to work in concert with regulatory and other data that will accrue from our proof-of-concept initiatives.

Now, I hope that the prepared remarks we have given you provide a sense of the growing applicability of our technology platform across multiple verticals and how our penetration of each vertical is beginning to generate revenue today and laying the foundation for greater and recurring revenue tomorrow.

We are seeing growing acceptance of our disruptive platform’s value proposition and are converting that interest into commercial opportunities. We remain committed to leveraging our technology platform to meet the needs of the markets we serve and others that have the potential to generate significant value for Applied DNA and our shareholders.

With our platform, together with the business development foundation and the base of business we have built to-date we are on the path to ensuring our long-term success. Now, this concludes our prepared remarks. Operator, please open the call for questions..

Thank you. [Operator Instructions] Our first question comes from Josh Goltry with Maxim Group. Please go ahead..

You answered a lot of my questions, but I want to clarify a few things.

So once the FDA approves of DNA marking for the Colorcon deal, where do you expect the revenue recognition to occur as in more in 2018 or 2019?.

Okay. First of all, thank you for your question and I just want to use it as an opportunity to ensure that we make clear the process of FDA approval.

So now that we have finaled our DMF and once it goes through administrative review, it is formally accepted for storage-only by FDA and it does not undergo review until such time as the FDA receives a second request, which we enable from a pharmaceutic customer who references our DMF in the application for their drug.

So that would be when we obtain a new customer and that begins the FDA’s process of reviewing the secret content of our DMF currently in storage at FDA and hopefully getting past the administrative review. That could be months from now and we don’t know – we can’t vouch for how long the FDA’s process may take.

And so the path to revenue is really not in our hands and we will just have to see how long that takes them bring in as many customers as we can in the interim..

Okay, thanks.

And just another thing to clarify, would you say that the completion of the BLC research project is a leading indicator for entering the leather market as well?.

We hope it should be. I mean, the market leaders who participate in the consortium that BLC represent are really world leaders and they have shown an appetite for our platform and a willingness to support the trials.

So, one would expect that if our continuing trials are successful, it would lead straightaway to commercial deployment, that may not be true for the entire group of sponsors that we currently have and we haven’t been able to reveal all of the companies that have expressed strong interest or willingness to participate just yet.

But our expectation is that it will be a stepwise sequence from this next pilot to commercial deployment and we would expect that would take place hopefully for at least one of those customers, if not more..

Okay.

And so services ramped a lot this quarter, so should we expect that to continue in the future or is that because you had an increase in deferred revenue?.

What’s recorded of why it increased was all of our feasibility and development contracts are recorded in service revenue for now..

Okay..

So as long as we keep having a pipeline of feasibility and development contracts, service revenue will stay increased, but then as they convert to commercialization that’s when product revenue would – it would change over to product revenue..

Got it. I just wanted to clarify that. Thank you.

And have you also gained anymore traction with the new customers in the pharmaceutical industry?.

Yes. We have had a very strong response from the pharmaceutical industry with regard to anti-counterfeiting and serialization efforts that is to the track and trace and tagging motif. So yes, we are very encouraged by the size of those companies and their breadth of interest.

Likewise in a related area, we are also encouraged by the responses from the biopharmaceutic interest in our basic PCR-manufactured DNA platform..

Okay.

And are – so I mean the interests coming from manufacturers or wholesale distributors, should it be packagers as well?.

We are not seeing strong interest really from the repackagers or the distributors. Although it could well be those companies that eventually provide the pull through the manufacturers. It’s the manufacturers who will have to use DNA during the production of these solid oral dosage forms. Those are the companies we are initially selling to.

But just as we did in the evolution of our cotton business, we began selling to the manufacturers and we developed a significant pull from the retailers and we think we will see the same kind of things in the evolution of our pharmaceutic business.

We are focusing right now on the people who would buy our DNA and we will focus thereafter on the people who will benefit by it..

Okay.

Just the last thing, are there anymore cannabis projects in the pipeline for 2018?.

Yes. We have a great relationship with TheraCann and TheraCann provides some key core services to cannabis growers, processors and the dispensaries. And so our business with TheraCann, we expect to expand as we recruit growers, processors and dispensaries across the world.

Initially, perhaps in the U.S, and Canada is looking very, very strong as I said in my remarks and also South America and Europe.

Now, we are already seeing responses from regulators, senators and assembly men in the United States who represent states that want to do a good job, a responsible job of compliance for the cannabis industry in those states.

So, our hope is that we will grow in our relationship with TheraCann by both companies TheraCann and us gradually acquiring more and more direct customers that is the growers, the processors and the dispensaries..

Okay. Okay, guys. I appreciate you taking time and I will speak to you soon..

Thank you. You are welcome..

Our next question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead..

Hi, good evening guys.

How are you?.

Good evening, Brian. Thank you..

So let’s start with Colorcon, obviously the most significant news that we have been waiting for obviously to penetrate this market. The second piece of the approval process you talked about came when your DMF is called upon by a company where the drug is being coded.

So have you identified that company? And then yes, well I guess that’s the first question.

Is there a company that already wants – and has lined up to use the product?.

Sure. In some ways, the management at FDA of DMFs can be something of a model like the Russian dolls. That is our DMF is referenced by Colorcon in the assembly of their coding and the DMF that describes their coding. So, it’s a DMF within a DMF. Now together, we would sell that DNA-tagged coding to a pharmaceutic customer to a manufacturer of a drug.

And either it’s a new drug that might be involved in the filing of an IND or an ANDA or it could be an existing legacy drug where FDA is informed during an annual report for that drug. So, it’s only then that our data will be reviewed.

Now, we have not been spending much money in the advertisement and marketing of our platform to-date, we wanted to get through our DMF filing. But what we have been doing is talking to the industry and the response in the industry has been strong.

Does that answer your question?.

It does. So but that leads to me to my next question, I mean, I believe one of the clear benefits to partnering with them is the use of their significant sales force and significant contacts.

So while clearly, you haven’t put much in terms of marketing to it, maybe talk about their plans they have communicated to you in terms of the sales process and the pipeline? And then maybe talk about what you think the sales process will be in terms of sales cycle once they do start selling that product?.

Sure. I also want to highlight another quality and benefit of our working with Colorcon. It’s not just their substantial sales team and marketing, but it is their substantial regulatory and compliance team with experience globally.

So of course, FDA is one issue, but Europe is a very attractive market as well as the rest of the world and a truly global pharmaceutic company that sells additives like Colorcon, needs to have customers that are truly global as well. So it means they need to be familiar with all the world’s compliance issues and we get that.

We are very lucky to get that from Colorcon. Now in terms of our go-to-market at the moment, it’s been quite simple. We are making four-legged sales calls on the big pharmaceutical companies across the industry.

And with those sales calls, we have seen a great response and we are developing a pipeline as we speak and I am pleased with the quality and number of potential leads in that pipeline..

Great.

Moving to the cotton market, I know in the past you have really – you really early indications of the cotton market’s plans and demands, but maybe if you can discuss any early indications as we head into the second half of the year, what demand looks like for your DNA or more cotton or whichever one of the products you are selling in that market?.

Sure. We – this is a kind of a movable feast the cotton market, because it responds to fashion, it responds to demand and some of those demands only become clear in the fall of ‘18.

So we always have a rough assessment of what we are expecting for the coming DNA demands and we are pleased with what we hear is the potential and we are pleased with the opportunities we are seeing internationally.

We talked about one installation that we just completed internationally and we have similar interests in other countries that have not progressed to the point of purchase orders, but we are continuing to develop those leads. So, we think there is global market. Our partner, Himatsingka, has been a wonderful ally through all of this.

They work together with us not just to penetrate the market as we have so effectively in home textiles, but in apparel now as well.

So, the world of apparel has become very much apprised of what we can do for them and now as the season approaches harvest in September and eventually ginning in October through March, we will know more and more about what those orders are likely to be, but at this stage, all we have our rough estimates and we are prepared to meet them..

Okay. One quick numbers question before I have a few others. As it relates to the cotton industry, I believe the first year you made $20 million of either markings or delivery of PimaCott and the second year was roughly $100 million plus or minus.

What is the total right now you have delivered in terms of pounds of cotton that you have marked?.

I would say it’s roughly a total of 200 million pounds of cotton, maybe as much as 250 million..

Great. That’s helpful. So moving to something that we talked about – and we have talked about it for a little bit is fertilizer.

Has the new regulation in Turkey been enacted? And then maybe what progress are you making there as well as other countries given the world problem with fertilizer?.

Yes. The mandate for DNA tagging was enacted and then the government seemed to rethink its strategy for tagging. It remains committed from what we can see to DNA tagging and we, as I said in my remarks, feel that Turkey is still a significant opportunity for us.

And the government, we expect will begin the tagging of fertilizer once again anew, but while they declared a mandate effective the 1st of January that mandate went into moratorium not longer thereafter sometime in March.

And we are told to expect that moratorium to be lifted and be – the country will be back for all 1,000 of its manufacturers of fertilizer to be facing a need for DNA tagging..

Okay, got it. And then moving – I got to more, moving to WestPoint Home, it sounds like a commercial product – a commercial program obviously now.

So maybe discuss – are you delivering DNA to mark their textiles? And if so can you discuss how you kind of see that ramp if there is any visibility to it over the next maybe 6 to 12 to 18 months?.

Yes. So we have completed pilots with WestPoint Home and we now have a firm contract. And the issue for them will be to sell to their customers. And the opportunity is primarily in the form of recycled PET, they use a fair amount of cotton as well.

We will have to see if that becomes part of their program, but they are very attractive because of the nature of their sales base, which is hospitality which means that they sell to the hotels, to the cruise ships even to hospitals themselves.

What’s very appealing and validating for us is that this is 1 of 3 recently signed supply agreements that involve licensing revenues, the use of our brand, CertainT.

And so that gives us a percentage of revenue of the finished goods, that of course goes to straight to the bottom line and we are looking to continue to develop this style of business as a go-to-market strategy and we are very happy with the folks at WestPoint Home and with their customer base is very impressive..

Just so I am clear, are you – you are getting paid for a percent of your finished goods? Are you also getting paid for delivering DNA or marking their product?.

Yes, we are..

Yes, we are..

Yes. Okay, good.

Last question I have in mid-February you reported I think on your conference call that your recurring base was about $6.5 million at that point in time, given all of this news, is that – has that increased or maybe is there an update of where you kind of see that?.

Sure. We have decided not to revise that guidance in midyear until we have gained more experience in recruiting customers with our new partners and until fiber demands are a little clearer as the relevant seasons approach in both natural and manmade fibers..

With that said, I think it’s not less than $6.5 million at this time?.

Well, as I say, we haven’t revised it. So, our last report was $6.5 million..

Got it, okay. Thanks very much. Exciting to see some of those pilots really moving forward..

Yes. Thank you very much..

[Operator Instructions] Our next question comes from Craig Pierce with Morgan Stanley. Please go ahead..

Hi, Jim, Judy and Beth.

How are you guys doing?.

Very well, Craig and you?.

Good, good. First off, I want to just express my sadness that those stock options expired. I am sure that they were well earned and well, that’s no fun to see that happen and I feel for whoever individuals or institutions that happened with. So, I just mentioned – comment on that.

You had in times past suggested that based on your current, at that point, revenue expenditure ratio, you were thinking, Jim, that breakeven was at around $15 million in revenue.

Has that materially changed?.

Well, it was more in the neighborhood of $14 million. It has not materially changed. But that said, we have been pleased by our efforts at cost control and by the averaging down of our monthly burn over the course of the current fiscal year. So I think we are on the right track both in terms of controlling cost and increasing revenue.

So I think between the two it gives us an opportunity to accomplish what we need to do..

Second question is do you have a breakeven number, EBITDA breakeven number?.

It’s essentially around – it would be similar to the $13 million to $14 million because that’s a – that’s essentially the number we have quoted before it was an EBITDA meaning a cash positive number..

Okay.

Well, I mean is that cash positive or is that earnings breakeven or both?.

It should be similar. The only time it wouldn’t be similar is if there is some sort of contract where we can’t recognize the revenue in the quarter we receive the cash..

Okay, thank you. Next question is the milestone revenue point for Colorcon.

Am I hearing that none of that occurred in March that it’s all – it’s – well whatever has come in, has come in, in April and is it the full amount of that milestone point or is that spread out over a couple of months or even quarters?.

The cash was collected in April, but the revenue will be recognized over the time period that we expect to receive regulatory approval..

Okay.

Next question is you had mentioned a positive cash flow month, did I hear that you had three in a certain period in time or what – could you repeat that again?.

Sure. So we stated that April was a cash flow positive month and that we had three cash flow positive months with – 3 within the last 12 months..

Okay. Have you tracked that number? Let’s say in terms of, I mean obviously, negative months can more than offset – 1 negative month could more than offset 3 or 4 positive months.

Have you got a sense of tracking or are able to track which out of the fiscal year, say ‘16, how many, if any, were positive months, ‘17 same thing ‘18, so far?.

Right. So we had two so far in fiscal ‘18, I believe one in fiscal ‘17, and I don’t believe there are any in fiscal ‘16, but I would have to go back and confirm..

It’s a good trend..

Well, I remember several years ago, when you were practically hopping for joy, Jim, over a, I guess, a positive – I mean a breakeven plus quarter. I think there are extenuating things and that was kind of the first time the plane rising through the clouds saw a little bit of blue sky and then there has been cloud since then.

But yes, I think that, that would be a nice number to monitor, okay. In regards to the DMF administrative review, the – okay, what I think I heard is that you are – you ideally have – I mean you get the DMF files with the food and drug.

And then when pharmaceuticals want to use the product, they go to them to seek comfort that there is no harm in this, that it would be its fine and it could be a case if you have got several pharmaceuticals pushing to go through that process, so it’s not all riding on one at any given point or at least ideally they pile up on each other.

Is that a fairly accurate picture?.

Yes. That would not be a complication, Craig. So what happens is with the DMF on file after administrative review at FDA when a company wants to refer to our DMF, we provide a letter of access to FDA. That does not give our DMF to the company.

It allows FDA to review our DMF for the sake of safety and compliance and as used within the drug company’s drug, does it in anyway impact safety? Now, our position of course – our belief is that there is no way our DNA would impact safety, but it’s not for us to judge, that’s for FDA to judge and that is done drug company by drug company by drug company.

So, it really doesn’t matter if we were successful and we had a team of pharmaceutic companies approaching FDA at the same time. It would be – have no impact on us at all. We just have to be ready to supply in the event they are approved. All of that work is within under the aegis of FDA, not us..

Well, I was thinking of it in the analogy of a horse race.

You have got several horses on the track and you don’t really care which one finishes first just that one finishes, because at that point, then you have got the second milestone with Colorcon, correct?.

Yes, that’s correct, but we also think we will have a significant proof-of-concept in the marketplace and that the barrier to entry by other pharmaceutic companies will be both emotionally and practically lowered significantly so that we would hope the dominoes began to fall..

The Maxim analyst asked about interest of pharmaceuticals companies in your product, that’s not really – interest is great, but they have got to go through the process that you just talked about before any pharmaceutical would generate revenue for you.

Is that correct?.

That’s correct..

Okay. Quite often with other – I mean with pharmaceuticals, not other pharmaceuticals, the – I am clear that you actually are in a way – not in a way – you are entering that market yourself with a seemingly side effect free approach, which is wonderful.

But looking just at the traditional pharmaceuticals today quite often we have seen something approved abroad, Japan is a primary example and that expedites approval through the FDA. I am guessing that, that model does not really work for you being that you have got to go through the DMF process.

Is that – am I on track on that?.

Well, the process for excipient approval in Europe and the United States is not exactly the same. So, we regard them as independent, but related markets and many pharmaceutical companies that are truly global utilize a European deployment strategically as their first deployment before coming back to the United States for approval.

All of that is in the hands of our first customers, not us. So, our big goal was to get our technology before FDA. We have now done that and now it’s to simply close on the first customers..

So that then leads to the possibility of a foreign FDA equivalent approving the use of your marking ahead of our FDA, some company or country in Europe or Japan. So, if you have got drug companies knocking on several FDA equivalents, you could actually have a breakthrough abroad before in the United States.

Is that a possibility?.

It’s a possibility. But in full disclosure, we have begun no filings anywhere beyond the FDA..

Does it make sense at this point to start that path?.

It does. Our bigger concern is approaching the marketplace, selling and preparing for dialogue with FDA and trying to raise our visibility before FDA in the time between now and our first sale..

Okay.

There has been in this call no discussion of Southern Hemisphere cotton sales, how is that market developing?.

Well, as I did mention in my prepared comments, our installation of our DNA transfer unit went swimmingly and we are already tagging. The tagging we are doing is at our risk. We have been very active in selling to the retailers and brand owners in that market. And our hope is that we find a home for that DNA-tagged cotton this year.

So I can tell you that the cotton growers are extremely interested and motivated. The cotton ginner is a superb ally for us and we have everything we need, except the customer and we are working on that..

And it looks like – it sounds like to me that customers are working towards you..

From your mouth to God’s ears..

Carry on guys. You are doing great. Thank you..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Hayward for any closing remarks..

Yes, thank you very much. I would like to thank all of the investors and analysts who participated in our call. This is a very exciting time for Applied DNA. We are really looking forward to the uptake of our platform in multiple industries and we are very grateful for your support. Have a good evening..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..