BNB Plus Corp (BNBX) 2015 Q4 法說會逐字稿

(audio in progress) 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 verticals 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 projects to commercialization, and we hope to be able to replicate this model in additional markets in the coming quarters.

I would 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 in this business will be seasonal. Also the agreements with our cotton customers include extended payment terms 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 or 28% from $3.5 million for the same period in the prior fiscal year. This increase is attributable to an increase in research and development expenses 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 have 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 to strategically manage costs 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 of $3.49 per share and the concurrent private placement of warrants to purchase shares of our common stock, each exercisable for 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 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 stand-alone financial statements for Vandalia as of December 31, 2014 and 2013, as well as reviewed financial statements as of and for the nine months ended June 30, 2015.

These were to be filed via 8-K within 71 days of the announcement of its acquisition by Applied DNA Sciences which was on November 27. We anticipated that the audit would 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 the shelf before the 27th. We and our auditors continued to work on completing feet the audit 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 chains and two nonrecurring 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 modifications 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 court's dismissal of the Smart Water Limited litigation against us.

Consulting fees decreased by $375,000, primarily due to shares of common stock issued to a business strategy consultant in 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 markets and commercial scale deployments in textile markets into significant revenue performance. In concert we have conducted capital raises that not only strengthened our balance sheet and gave us the financial means to undertake 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 would now like to turn it over to Jim for his comments.

Thank you, Beth, really for a stunning year and a very exciting performance. 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 the $4 million mark but it is also our fourth consecutive quarter of record revenues and a 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 threefold over the prior year and $9 million from $2.7 million in fiscal 2014.

Now we believe that our topline 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 [Tagent] 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 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 DNA intellectual property, and to marry it to a go-to-market strategy that addresses real-life problems affecting supply chains globally.

Worth noting is the size of our IP -- our intellectual property estate, namely 35 patents issued with 74 pending, complemented by carefully controlled trade secrets in a portfolio of trademarks. We believe that the accrued value in this estate not only justifies our 10-year effort but is also a solid reflection of our total invested dollars to date.

I would like to summarize our strategic goals for this last year and how we accomplish 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 projects has expanded over the course of the year and I think it's 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 of the five years and is providing its share of associated product development cost. We entered into a two-year contract for a pilot project with a fifth US government agency and subsequent to the close of the quarter we were awarded a contract extension by the US 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 a major plastics 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 deployments in fiscal 2015. In our first quarter, we were awarded 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 provisioned 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 a cost-efficient model for which to scale the topline.

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 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 vaccines, 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 over $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 with Louis Dreyfus and Himatsingka, formerly known as Divatex, to penetrate the global supply chain of cotton.

These partnerships have resulted, as I mentioned, in the shipment of SigNature DNA sufficient to mark 100 million pounds of cotton and of this 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 billion pounds while the total global market of cotton is generally closer to 50 billion pounds.

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, etc., our claims that can be verified when an 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's understood that the US government and federal agencies and the OEMs that sell to them represent a significant opportunity for us.

However, there is significant incremental opportunity for our DNA-based technology via the same OEMs to additionally secure their commercial supply chains.

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 own in-house production capabilities, we can now delivered 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 companies maturation from 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 uplisting and growing investor interest to undertake a series of capital raises that set us on a firmer financial footing.

The most recent capital raise via the Register Direct offering, as Beth 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 not only meet growing demand for our securities solutions 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 for home asset marking in April 2015, and it has elicited a strong response in the marketplace. 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 a commercial scale deployment. While not as mature an opportunity as our government or textile verticals, we do expect home and valuables asset marking to be a material driver of revenue in the future.

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 carmaker BMW, demonstrated the marking of the cars with our DNA net product, the largest insurer in Scandinavia, [IS], 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 high-res group and, more recently, SAS industries to incorporate our SigNature DNA technology into their products shown on this 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 radiofrequency 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 a commodity that changes hands multiple times across multiple countries, there 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's 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 mix shifts towards cotton, our quarterly performance becomes more sensitive to the disproportionate seasonal impact of cotton's growing season. So, 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 the mitigator of this 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 markets for the transportation of cotton and as such gives us a very strong entree into the global cotton market.

We also expect to begin to deploy our on-site suite of cotton authentication solutions 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'll show you in a 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. Farsighted organizations are directly addressing new threats and opportunities presented by this question, where does this stuff come from?

And it's a 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 portion is and what it signifies including claims for the products, such as sustainability.

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

Throughout that supply chain, there are multiple opportunities for revenue at each node in the supply chain, and as we deploy our on-site 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 referred to a 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 would like to ask the operator to open the call to questions.

(Operator Instructions)

Brian Kinstlinger, Maxim Group.

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 how long do you think that 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 contracts that give us the kind of reliability that would put us in the position to better provide guidance.

Our intention in 2016 and as we're doing even as we speak, in close relationship with Himatsingka, is we are pulling more and more brands toward our SigNature marking program 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 levels 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 systems that help control the technical ecosystem we were implementing, so we grew to something much more. That's a very clonable 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'm 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 ones you expect will be the one or two outside of cotton because growth drivers in fixed -- fiscal 2016 and maybe where they are in the sales cycle? Are they clients, are 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 cottons and into plastics and other natural materials as well.

We expect to grow our cash in 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 pharmaceutics marketing strategy and we do think 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 pilots, if you can discuss that at all?

Well, we are hopeful to be able to promulgate our experience in plastics to cover more pilots in plastics and that's no small feat to render DNA so that it's soluble in plastics and so that it's recoverable when it comes time to authenticate. We've been able to do that very efficiently and we do believe that that will impact many industries. And by involving ourselves in pilots such as these that affect really a mainstay ingredient for a particular industry, we also open the doors to 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, these synthetic fiber marketplace 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 has greatly facilitated the speed with which we have 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.

Thanks so much for a good quarter.

Great. Thank you, Brian.

Rob Stone, Cowen & Company.

I wanted to follow up with a couple more questions regarding cotton, Jim. One, with respect to the Pima market, do you have the 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're not in a position to reveal who are committing to the DNA we shipped 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 farmers upstream?

We're actually seeing it come from all of those. So the commitments we're getting from farmers throughout the United States because this actually allows the farmer to presell 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 DMA marked cotton is presold 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? What might be the differences, I guess, is what I'm 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 as 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's used in durable items, it's used in items that sell well like denim dungarees and jeans and it can be associated with a whole host of variable claims. So, for example, a sustainable claim or an organic claim, or a child labor free claim.

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 meets those specifications, which would allow the consumer 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-month 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 have started by shipping $400,000 worth of product really in the first quarter.

Right.

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.

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

So, that $400,000 -- when you say the first quarter, do you mean the first quarter since the acquisition that was recognized in your fiscal fourth quarter, right?

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

Okay. Great.

So the trailing quarter we are in.

So with respect to the business model going forward for that, Jim, do you mainly expect to see that supporting expanded capacity for your business or for growing the existing Vandalia customer base? 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 which might be in terms of investing in fixed assets to grow that capacity? Thanks.

Sure. We don't think -- I'll start with the latter question -- we don't think that we will need to invest significantly in further growing that capacity. It's a 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 to FDA 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 freestanding. If we need to produce 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, polymerase chain reaction, whose starting materials are only in enzymes, some nucleotides, a primer, and a small number of salts in buffer. As a consequence -- and it is an iterative process that, more or less, doubles the quantity of DNA with every cycle so that after 30 cycles, 2 to the 30th, you can have 1 billion fold increment in DNA.

A great value from our point of view is the purity of product. Other methods of producing DNA using plasmids and E. coli, for example, or large-scale fermentation involve complex media, which leaves materials behind, and the hosts themselves are loaded with their own DNA which can contaminate the DNA objective you have in mind.

When you are growing plasmids it's only a fraction of the plasmid you want to have as DNA. So, the risk of having less pure products with traditional DNA manufacturing methods are quite high. We actually believe with this first-time scale-up of PCR-based 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 textiles represented approximately $2.5 million of our Q4 revenue and military in total was approximately $985,000.

And the balance was the diagnostic?

There's diagnostics and then a mix from our cash in transit and home asset [marketing] make up the rest of it.

Okay. Thank you very much.

Jeff Kessler, Imperial Capital LLC.

Thank you. Up till now, you've had a cash in transit business that's been marking essentially boxes and caches of dollars mainly 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 in transit manufacturers as you broaden the base of your services? And number two, are there separate stand-alone businesses within the bank transfer information 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 a degradation dye that at the moment of theft from either a cash box or an ATM marks 80% of the cash -- or rather 100% of the cash -- over 80% of its surface with an intensely colored dye. And, in Europe, the retailers have been trained to recognize this dye and are intended to either confiscate it or reject it as stolen.

Now that has, by itself, not done enough to deter the crime. We introduced 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 efforts go awry where what we get shipped as currency looks more like a Kleenex tissue after it's been so aggressively bleached and chemically treated.

I should note that, in those samples, we still find evidence of our SigNature DNA notes 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 effect, 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 is identified who owns it.

The long-term goal is that by quote unquote taking the prize from the criminal that the rate of that crime will diminish.

Now the market for degradation dyes has really only been Europe and South America and, to a smaller extent, Africa. Our feeling is that this technology is industry changing and as a consequence stands a very good chance of coming to the United States as well.

Added to that is the fact that the marketplace for ATMs 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 dyes work in the ATM -- they are self-contained. It's delivered by a cassette. The cassettes are carried in the armored vehicles that carry the cash in the cassette, and they are already charged with the binding agent and it's a simple matter of inserting it into the ATM or the cash box.

Okay. Final question -- can you give some idea of you are becoming essentially -- as it becomes kind of unwieldy 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 is the nature of their 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 paid mark by mark by mark anymore but you will probably be getting paid a recurring revenue 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 -- 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's 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 whereas 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 the 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.

All right. So essentially, 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 just the way we feel. The challenge for us still is we have to develop those commercial partners to service DOD in general and we are; and that's why we announced our association with Hyrel and our association with SAS and others.

Okay. Great. Thank you very much.

Thank you for your question.

Josh Seide, Maxim Group.

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. It 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 Pima Cot. So we currently have Pima Cot product on the home textile shelves of one of the US's largest retailers and the Upland cotton will be labeled with the DNA content label, Homegrown, signifying that this Upland cotton originates from the United States.

Great. Thank you.

David Rosenfeld, William, Jones.

Hi, congrats on the cotton product. We were able to find the Pima Cot brand under Costco's private-label -- I think it's the Kittredge brand, in their bedsheets. Can you just talk about what kind of validation process that required to get that contract and just go through the process?

Well, let me start by saying there's nothing that stops our investors and fans from investigating the relationships we have with our customers. But you do recognize as sure that many listeners do that because of the nature of our business we are sometimes not allowed to reveal to our customers to 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 selling extraordinarily well.

I can tell you that in the implementation of DNA authentication and the fiber typing, essentially all of our sampling -- once we have 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. And then if I could just switch gears -- so this Techmer -- can you just talk about what type of synthetic textiles does that relate to? Is there a pilot there? Is it already proven? I'm just trying to figure out, where in that kind of pilot to pre-commercialization to commercialization that synthetic textile business is?

Sure. Well, what we have been able to do is demonstrate the inclusion of DNA in plastic and the inclusion of DNA in extruded plastic for that matter. And what we're 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 through finished product.

And those are the kinds of products used by many famous sporting brands -- those that are counterfeited at a 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.

Thank you.

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

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

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