BNB Plus Corp (BNBX) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Applied DNA Sciences second-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

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

Thank you. Good afternoon, everyone, and thank you for joining us today. With me on the call today are Dr. James Hayward, Chairman and CEO, and Beth Janssen, 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 expense, stock-based compensation expense, taxes, earnings-per-share and future products. Actual results or trends could differ materially.

For more information please refer to the risk factors discussed in Applied DNA Sciences Form 10-K for fiscal 2015. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

Before starting the call I want to inform you that Jim and our Chief Information Officer, Judy Murrah, will attend and present at the Malls and Economics Strategic Investment Conference in Dallas on May 24 through the 27. For any of you who will be attending and would like to schedule a one on one with management please contact my office.

Additionally we are scheduled to hold our Annual Meeting of stockholders in Stony Brook, New York, on June 8 at 10 AM Eastern time. All stockholders of record date April 1 are invited to attend and please be sure to complete and submit your proxy by Internet or telephone by 11:59 PM

Eastern time on June 7.

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

Thank you, Debbie, good afternoon, everybody. Let me take a few minutes to discuss the results of our second fiscal quarter after which time Dr. James Hayward, our President and CEO, will update you on the Company's activities and strategies.

Starting with the income statement, revenues for the quarter were $573,000, a 62% decrease compared with $1.5 million reported in the second quarter of fiscal 2015 and a 57% decrease as compared to $1.3 million reported in the first quarter of fiscal 2016.

For the first six months of this fiscal year, we reported revenues of almost $1.9 million which represents a decrease of 31% for the same period last fiscal year. The decrease in revenues for this fiscal quarter and the first six months was primarily from a decrease in revenues related to two government contract awards -- the Rapid Innovation Fund, or RIF project, and the SBIR Phase II contract that expire in August and July of 2016 and which Jim will speak more about in a few minutes.

When these contracts were established, the deliverables and corresponding payments were set to decrease toward the end of the contract term. And this is what we are seeing now.

In addition, we experienced a decrease in revenue from suppliers of the Defense Logistics Agency, or DLA, due to the consolidation of our contracts of multiple, individual suppliers of the DLA to one contract directly with the DLA. However, on a positive note, our cost to support the streamline customer base have decreased.

Lastly, there was a decrease in revenue from another federal agency, the same agency that awarded us a blanket purchase agreement subsequent to the close of this quarter. Jim will also provide more detail about this in a minute.

The decrease in revenue for the first six months of fiscal 2016 was offset by a $242,000 increase in revenue from DNA manufacturing for the diagnostics market.

Operating expenses were $4 million for the three-month period ended March 31, 2016, an increase of $623,000 or 18% from $3.4 million for the same period in the prior fiscal year. This increase is primarily attributable to an increase in research and development expenses of approximately $356,000 or 95%, and an increase of $219,000 or 8% in selling, general and administrative expenses.

Included in SG&A are fees associated with a textile-focused PR firm who has and continues to expand industry awareness of our DNA security solutions for cotton and the Pima Cot and Homegrown brands. The increase in R&D spending was mainly due to development costs incurred in relation to the two government contract awards as well as costs related to the Cooperative Research and Development Agreement, or CRADA, with the US Department of Agriculture for enhanced genotyping.

Increase in G&A expenses from $2.9 million in the second fiscal quarter of 2015 to $3.1 million in the second quarter of fiscal 2016 was primarily due to an increase in payroll expense as we expanded our headcount of full-time employees by 10. The majority of the headcount increases are cap to production and scientists who assist with converting our pilot studies to commercialization.

Depreciation and amortization expenses increased by 39% or $48,000 from $123,000 to $171,000 as a result of quarterly amortization expense relating to customer relationships and technology purchase from [Vandalia] during September 2015, as well as fixed assets purchased during the first six months of fiscal 2016.

For the first six months of fiscal 2016, operating expenses decreased slightly as compared to the same period in the prior fiscal year from $8.5 million to $8.3 million, due mainly to a decrease in SG&A expenses of $895,000 or 12%, offset by increases in R&D and depreciation and amortization expenses of $549,000 and $151,000, respectively.

The decrease in SG&A expenses for the six-month period were primarily the result of a decrease in stock-based compensation expense associated with grants to employees during the six-month period ended March 31, 2016, having a four-year vesting period while similar grants to employees during the six-month period ending March 31, 2015 vested immediately in lieu of cash bonuses being rewarded to employees.

The increase in R&D expenses is primarily due to development costs incurred with the government contract [and] CRADA as discussed above.

Net loss for the three months ended March 31, 2016, was $3.5 million compared with a net loss of $1.9 million for the same period in the prior fiscal year.

For the second fiscal quarter of 2016, excluding non-cash expenses, adjusted EBITDA was a negative $2.7 million compared to a negative $1.22 million for the same quarter last year and a negative $2.25 million for the prior fiscal quarter. This is due mainly to the decrease in revenue and an increase in R&D expenses.

As you know, these non-cash items have no impact on our liquidity.

Turning to the balance sheet. Cash and cash equivalents totaled $9.8 million at March 31 compared with $12.4 million at December 31, 2015. The decrease in cash balance is primarily a result of cash used to fund operations. As discussed during prior quarterly calls, our cotton contracts included extended payment terms that will result in a longer collection period and slower cash inflows.

As a result, $1.5 million of revenue recognized during fiscal 2015 was included in long-term Accounts Receivable as of the prior fiscal quarter ended December 31 and September 30, 2015. However, effective January 31, 2016, this $1.5 million was reclassified to short-term making our total Accounts Receivable for cotton customers as of March 31, 2016 approximately $4.2 million and meaning that we expect these cash receipts within the next 12 months.

As of March 31, 2016, our average cash -- monthly cash burn rate for the first six months of fiscal 2016 was approximately $892,000, compared to approximately $709,000 for the same period in the prior fiscal year. The increased burn rate for the first half of fiscal 2016 compared to the same period of fiscal 2015 is due to increased -- due to decreased cash receipts primarily as a result of the extended payment terms for our cotton customers as discussed above, as well as certain nonrecurring expenses incurred during the first six months of fiscal 2016.

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. As part of this, we have in place a plan to control our expenses using a gated process. Basically, what this means that are order for certain expenses to be approved, the Company or department has to meet a certain threshold of cash receipts. We intend to remain disciplined in our spending and seek to strategically manage costs in line with our current and near future market opportunities.

We expect to finance operations primarily through cash received from the November 2015 public offering and concurrent private placement, as well as the collection of our current receivables. We estimate that our cash and cash equivalents, along with the collection of current receivables, are sufficient to fund operations for the next 12 months.

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

Okay, thank you, Beth. And thank you, everyone, for joining our call today. To begin, although our revenue is not where we would like it to be, timing of orders certainly played a role in our second-quarter results. We are pioneering a transformative DNA-based technology, and evangelizing its ability to purify and secure supply chains globally.

But, as with any first-to-market technology, adoption doesn't move in a linear fashion. Applied DNA Sciences has redefined trust, using the biology of authenticity. The global societal and economic future relies on clear definitions of identity. Of origin. Of claims. Of composition. And ethical sourcing.

Our convergence of biotech and information technologies enable DNA-based security solutions to answer the formidable macroeconomic and geopolitical challenges of our day and our future. Trust me. My remarks this afternoon will provide you with insight into several of our near-term business verticals, and will include an update on the potential for cotton to drive additional growth in the second half of the fiscal year.

I will also touch on our pipeline of pilot projects, which continues to expand even as we focus on near-term opportunities.

Our progress in the military and government sector can be measured across two fronts. First, we are seeing increasing awareness of our DNA-based security solutions within the federal government. This was most recently evident in our announcement this Tuesday of the five-year $2.5 million blanket purchase agreement from an undisclosed non-defense federal agency. Now this latest win builds on our current roster of contracts across six defense and government agencies and represents a 10-fold escalation in this agencies initial work with Applied DNA Sciences. Our technologies can help the federal government manage the risks associated with the supply chain for mission-critical infrastructure components.

To put our current success with the government into perspective, I am not aware of any authentication and anti-counterfeiting platform that has achieved the scale of our DNA-based platform with the US federal government. Our turnkey solutions provide an end-to-end system supported by our unique technical platforms at each of the three stages, DNA marking, rapidly validating the presence of our mark, and then soon to be able to forensically authenticate the unique DNA sequence that identifies an object as an original, especially in the field.

Second, we continue to execute on our existing development contract. I like to share with you some exciting developments about one of them, the Defense Logistics Agency, which is on the cusp of a major milestone that should have ramifications well beyond the government sector.

In prior calls, I had described our work to develop DNA-based anti-counterfeiting across a broad array of federal supply classes that together represent the $146 million individual commodity purchases by the Defense Logistics Agency. Now DLA uses these purchases that represent expenditures of over $20 billion to support the military. And the DLA is concerned with counterfeits entering its supply chain.

Under our contract with DLA we have been focused on marking procured microcircuits, a single federal supply class at its product test center in Columbus Ohio. Now this is high variability, but low throughput DNA marking. And we have proven they are the efficacy of our technology.

But shortly, DLA will deploy a semi-automated ink deposition system we have developed, the turnkey solution for marking high variability items at low to medium throughput volumes. The system allows for the precision marking of an additional federal supply class of semiconductors known as FSC 5961. And as you can see on the far right of this slide, some of these components are as small as a grain of rice.

This improved process and equipment will allow DLA to take on more types of products in this category with little impact to their time or manpower. The government procures approximately 80% of what it buys from the commercial world. Because marking up to 146 million commodities hat DLA's facility is inefficient.

The next step is to develop ink deposition systems capable of marking at low variability and high throughput, a system that mirrors what is commonly found at OEM production lines. Once developed, we will have entry into the much broader commercial community which is really our goal. Most of our government contracts to date have funded development that will eventually enable us to mark as a part of the production line at an OEMs factory rather than at the doorstep of the DLA.

Since the government wants to ensure safe and secure supply chain, driving adoption of a proactive counterfeit mitigating solution by the commercial OEMs would be in their best interest. In fact, counterfeit mitigation requirements are already written into government contracts with prime contractors. We have already announced partnerships with commercial OEMs who want to use our DNA marks to ensure the authenticity of their product and we anticipate more such partnerships in the coming quarters as OEMs come to better understand the value proposition of our solutions and as we build out our ecosystem of partners.

Our performance record at the federal level really speaks for itself. As our reputation spreads within and across agencies, as engaged creative solution providers and partners, we gain new federal customers. Our new blanket purchase agreement will allow rapid deployment with new applications without the need to negotiate individual contracts.

Now turning to textiles, the demand for authentication of cotton is growing. From conversations with partners such as Louis Dreyfus and Himatsingka, I believe the demand is present above last year's levels and growing stronger and is being driven by brands and retailers who are becoming increasingly aware of the systemic cheating taking place in their supply chains and who are also moving to ensure that what they are delivering is in line with the consumers' and regulators' expectations.

But predicting the timing and size of orders for textiles can be challenging as these are fast fashion-driven markets, where decisions about SKUs and colors are made in the last minute, and obviously the uncertainty has ramifications on our outlook for growth, driven by cotton orders in the second half of the fiscal year according to the seasonality we have discussed before.

The demand is there. What we don't know is when demand will turn into purchase orders. Nonetheless, early interest from brands and retailers has in some cases become absolutely crystalline and market forces are surely coming together to our advantage.

For example, companies are adopting shareholder resolutions that mandate that their supply chains are sustainable, and free of child labor or other social concerns. Our Signature T technology can enable this by marking their sources of acceptable cotton and any unmarked cotton found by means of our authentication process can be deemed unsuitable.

As brands and retailers create demand, we are on boarding the cotton manufacturers that supply them. We announced in the second quarter the on boarding of six new cotton manufacturers for Pima Cot and Homegrown consumer goods.

The addition of these new manufacturers will expand our cotton footprint in the retail marketplace from 10 SKUs to 1,000, and from 500 stores in the US, Canada and Mexico to 1,700. We now expanded our revenue of DNA compliant manufacturers beyond home textiles to include apparel manufacturers of well-known brands. We are now on boarding several apparel manufacturers and have put in place the first experienced members of our offshore compliance team. Apparel customers are just beginning to authenticate their cotton label compliance with our DNA.

Our Homegrown initiative designed to DNA mark uplink cotton to support growing in America claims has received strong receptions from multiple retailers. Our existing business with a big-box retailer has signaled its intention to deploy our technology across multiple cotton programs which is very encouraging, even though we don't know today when this retailer will place orders with our partners.

A second retailer has as of a few weeks ago begun to sell a Pima Cot branded comforter shell. This retailer has the capacity to consume significant amounts of DNA marked cotton and we are hopeful this will be evident in the DNA orders placed to market the coming harvest for Pima and for Upland cottons. Here, too, the demand is there, but has not yet translated into a purchase order. For that we must get closer to the cotton harvest, when we expect to see DNA orders begin in late June.

In addition, subsequent to the close of the quarter, we received an order and payment in advance for 1,500 authentication and fiber typing tests. This is a very strong indicator of the commitment of our customers and allies.

Demand for DNA testing in India is so strong that we are contemplating the placement of an Applied DNA Sciences laboratory in India. This may be especially useful, given the concentration of textile and pharmaceutical businesses located in India. Our demand for DNA marked cotton is strong and getting stronger. In the next few months we expect to be installing DNA transfer devices adequate to double the installed base we had at this time last year.

While cotton represents a substantial opportunity for us, there are other textile opportunities in our pipeline that we believe can support revenue diversification and the dilution of concentrated risk.

One of the opportunities in the near term is with synthetic fibers. Our partner, Borealis, is Europe's second-largest manufacturer of plastics and the world's eighth largest. Its plastics are made into everything from gas pipes to automotive parts and more. Our pilot project with Borealis has concluded successfully and we anticipate the next step will be the launch of a commercial scale plastics program. And we continue to evaluate opportunities to introduce our plastic tagging at scale alongside Borealis.

With Techmer, our other synthetic fibers partner, I am pleased to report that we are in the last phase of our pilot project to incorporate our DNA into polyester pellets to be extruded and woven into fiber. Successful completion of the pilot will give us an opportunity for commercial scale projects for automotive applications.

The value proposition to end automotive customer is simple. Use DNA marked polyester to ensure that your products are genuine and adhere to safety regulations to mitigate product liability risks stemming from the use of counterfeit or unsafe components.

Now with regard to home asset marking and cash and valuables in transit. We continue to generate traction in the home and valuables asset marking and in the CVIT markets during the quarter. In home and valuables asset marking we secure the largest US private installer of security services as a customer. This follows the launch of our partnership with SMR, which serves as an indirect sales force and the introduction of this DNA security.net portal that features information and training videos on our DNA products for security professionals, law enforcement, commercial organizations and community members and it serves as a conduit to sales of our DNA net kits.

We continue to pursue an anchor customer for this business vertical, which ideally would be an insurance company. An insurance company would subsidize the cost of the kits, use and registration of the kits with Applied DNA would trigger a discount on the homeowners policy, and as we believe DNA acts as a deterrent to crime, the insurance companies payouts would be reduced thereby making their venture more profitable.

Now this strategy is not without precedent at Applied DNA Sciences. Some of you may have heard me previously report that a certain brand of luxury cars imported into Scandinavia are marked by our security partner in Sweden, which is underwritten by a large Scandinavian insurance company. The program has been such a success that I am pleased to report that we expect to more than double the number of kits sold this fiscal year to support an equivalent increase in cars expected to be marked.

We have successfully authenticated DNA marks in our first stolen vehicles case and provided the evidence to the relevant police. In addition, our expert witness report help to convict two additional ATM criminals, bringing our successful convictions to 103 cases and jail sentences to 490 total years.

Turning now to pharmaceuticals, we are aggressively building out this business vertical. Last week we announced the appointment of former Strategic Advisory Board member, Bob Miglani, to the position of Chief of Business Development. In his new capacity, Bob is responsible for creating opportunities for us within FDA-regulated markets, including pharmaceuticals, food, personal care and medical devices.

Bob comes to us from Pfizer, where he was most recently Senior Director, External Medical Affairs. He led Pfizer's efforts to partner with external medical scientific and consumer organization. His addition is timely as we are seeing a seismic shift globally in the implementation of governmental regulations, governing the serialization of pharmaceuticals to ensure supply chain security and to offer the ability to track and trace pharmaceuticals from production lines to pharmacy shelves.

In Japan, the Ministry of Health, Labor and Welfare has indicated a deadline of this July for all pharmaceutical companies to display new barcodes on all packaging. Our partnerships with Nissha and KGK are geared precisely to this opportunity. We recently attended a medical expo in Osaka with both partners and I'm pleased to report that interest in our solution is very strong. Similarly, Europe has its EU falsified medicines directive which require serialization and barcodes on the smallest available units of drugs by the first half of 2018. Here in the US the FDA's Drug Quality and Security Act became law in November 2014 and mandates a series of milestones until full implementation of the Act by 2023.

Further underscoring our view of this business vertical's long-term opportunity to us, we intend to devote a part of the lab I mentioned previously that will be established in India to fiber type cotton to also serve as the local presence for pharmaceuticals as India is the largest manufacturer of active pharmaceutical ingredients provided to the global pharmaceutical industry.

Now we recently presented a paper at a biotechnology industry for him in which we presented the capacity of our patented polymerase chain reaction chemistry to support ultra large DNA production, even under conditions required by FDA for drug manufacturing.

This technology is patented and these conditions are known as cGMP or current good manufacturing concepts. This is a technology we acquired last year from [Vandalia] where we compared the production labor and machine time required to manufacture at large scale. And as you can see in this slide, our platform is extremely competitive, requiring only single-digit percentage's of the time and effort required by conventional PCR to manufacture therapeutic or diagnostic DNA sequences. Of course, the ultimate arbiters of competitiveness are costs and quality. Our technologies allow us to set the bar for both.

Since presenting these results, we had recruited strong interest in our DNA manufacturing and have provided additional services to existing customers.

Now a quick word about our pipeline. Our pipeline of opportunities also represents opportunities to diversify our revenue. Though we must do so only with the greatest of care. To achieve the growth rate and the revenue we have in mind, we are now highly focused on execution and on cloning our successes as we are in cotton. Simultaneously we need to control our risk concentration.

Above all, we must obtain predictable, high-value, multiyear contracts that allow us to maximize our future and our real-time performance.

So in conclusion, my remarks this afternoon have, I hope, given you a flavor of the burgeoning demand in our mature businesses and how we continue to nurture that demand. Progress is rarely linear, but our conviction in our technology, our people and their ability to convert new markets into growth remains true.

With that, I conclude my prepared remarks. Operator, please open the call to questions.

(Operator Instructions). Rob Stone, Cowen & Company.

Hi, thank you for taking my question or questions, I have a couple. I wanted to focus on the blanket contract that was just announced this week. And you mentioned that the significant increase in the level of activity for the unspecified agency.

How does a blanket contract like this work? Is this essentially an all-you-can-eat buffet over five years for a fixed amount or does it allow them to just issue purchase orders under a single contract until they've used up that notional amount and then pay more if the volume is higher?

To be honest, I didn't see the great distinction between the two options. I think it's something of both.

It's kind of a credit card that allows them to make purchases against a reserve of $2.5 million with no necessary relationship between the timing of their spending and the elapsed time over the five-year contract.

The real goal is flexibility. And the ability to respond quickly to changing times. This is an agency we can work very closely with, and can develop new technologies, new applications of existing technologies very, very quickly, and the opportunity in working with them is getting them into the field just as fast.

I understand the benefit of flexibility, certainly in dealing with bureaucracies and whatever amount of time and effort is consumed by paperwork takes away from the value-added. I was just trying to understand whether one should think of the notional value of this contract as the maximum you could earn from this relationship over that time, or whether it is, as you say, sort of an account that they can use until it's exhausted and it could be more than the $2.5 million over five years.

No, I don't think it can be more than the $2.5 million over five years, so it's to a maximum. But I can imagine that if our working relationship was going swimmingly and if we were providing good service, which is really what we live for, and we spent where they spent to their limit in three years, they might be looking to replace such a contract. And we at Applied DNA Sciences really do everything we can to provide the highest level of service to all of our customers, particularly important with the federal government, and I think the spread of our platform across six agencies is a testimony to that efficacy.

Okay. Another question related to government is the revenue segment, so you've been feeling the effects of the transition with DLA moving to a streamlined process. And you talked about expanding to additional classes in higher volumes.

So, sort of a two-part question. One, do feel like you are nearing the bottom of the valley that you had to cross on the transition? And two, it sounded like there was some development that needed to be completed with respect to these higher volume marking systems in order to go after higher volume of devices.

So what does the timeline look like for that?

Sure. Let me tackle the first question, because I think there is something of a misperception in our investor base. The change in the relationship with DLA was a change we were very much in favor of. Really all parties were. We went from relationships with nearly 30 contractors supplying one agency to -- and marking at each of those 30 locations or very nearly 30 locations, which was a heck of a lot of work for the dollar.

And in fact, there was a significant increase in the efficiency and in our efficacy by person in being able to do the marking at a single location instead of multiple locations. So it wasn't a gap we had to bridge. We negotiated with and for it, and it has turned out exactly as we had hoped.

Now the two contracts that are nearing there, and of the SBIR Phase II and the RIF contract, were both contracts that really favor development and commercialization. They were directed towards commercializing a platform. And what they end up doing is having us working side-by-side or directly with the OEMs.

And as those two projects wind down and the revenue from them decreases, the notion is that our relationships with the OEMs get more solid, one-on-one, and increase in number. And we are on course doing that. And you've seen that in some of our recent announcements.

That's not something that happens quickly, because we have to, in some cases, customize our technology to the platform. But as I said in my remarks, we are also looking at methods of applying DNA that are very broadly applicable and that are very scalable, like things like inkjet, for example. And that will allow us to commercialize with more partners and faster.

Great. And I also had a question about cotton and then I'll jump back in the queue. So I recognize until you get purchase orders, visibility is limited.

But it sounds like with the increase in the number of manufacturers, the increase in SKUs in stores and additional major retailers stepping up that there could be a quite significant year-to-year increase, given the relatively short lead time it sounds like between when you're going to start getting orders and the season itself.

Are there supply constraints or lead times? How do you address the potential bulge of activity going through in just a couple of quarters?

Right. I have to say it worried us, and we have addressed it. We have the capacity, thanks in part to the acquisition of Vandalia, to manufacture a very large scale and very quickly. So, it's unlikely we would find ourselves rate limited at any time in the future by the availability of the DNA required to mark.

And if it's cotton we are marking, then that involves marking at a gin, which means we have to have a DNA transfer device at that gin. We already have a strategy in place to be able to essentially double the number of marking gins we have this year, relative to the same time last year. And we've taken steps to provide those products, have them at the ready the moment the knife switch is thrown.

The backend of that business is a little more complicated, and that involves the authentication side. We were very much gratified to see one of our allies purchase 1,500 authentications and pay for them in advance which allows us the flexibility to prepare the kits and get ready. And another part of our steady development here at the Company is in methods that accelerate our forensic authentication, so we can get more done per person per day, and in automation, so that it takes fewer people to do more.

And as that falls in place, we really have most of the aspects of implementation covered except for the on boarding. Now, the on boarding is a process where we go to each of the manufacturers involved in the supply chain. Let's say a spinner, a weaver, a dyer, a sewer. And we have already designed old recipes for each one of these nodes in the supply chain and we turned it very much into a solid reproducible process. But there is some training involved and there is the high volume of sampling for which we get paid.

So the training we have now taken on, hired new compliance officers to help us with offshore locations and we will expand that force if we have to as the number of manufacturers on boarding goes up.

Great. So I assume when you start to receive orders that we will probably see some announcements along those lines before you get all the way out to announcing the June quarter. (multiple speakers)

I'm not asking you to predict when the orders come in, I'm just suggesting that when you get substantial purchase orders you're likely to announce them.

I would say when we ship the DNA, we will ring the bell.

Thanks, I'll jump back in the queue.

Brian Kinstlinger, Maxim Group.

(technical difficulty)

Thanks. Jim, I'm curious. In a short concise answer, while the quarter was disappointing, probably for all a little bit, does this in any way, shape or form change how you feel about the second half of the year of fiscal 2016 or how you feel about the future for example, in 2017? Did a short revenue quarter impact that at all in your opinion?

You asked for a simple answer. No. However, we see the inquiries from the front end. We are involved in the meetings with the brand owners, with the retailers, and we know how much pull there is. We know how much tension there is in the system, and we also are very much aware of how much noncompliance with labeling there is in the system, and we know that the federal agencies are aware of that.

So, demand is not decreasing, demand is increasing. It's just a matter of timing. And the timing didn't work for us in Q2.

I'd like to touch on the cotton orders. I realize that it's difficult to predict; if you had to purchase orders you would announce them obviously.

However we had a huge ordering and last year and you've got this announcement of all these additional channels if you will. And so, I'm curious, is it reasonable to assume 100% growth -- obviously could be much more and much less, but could you give us some sense of what a target is for you for second half of the year orders?

It's difficult, Brian. As I said in my comments, we have two partners in this deployment. It's Louis Dreyfus and it's Himatsingka. And these are -- this is an industry of textiles in general, that responds to the changes that have become associated with the phrase fast fashion. And so those changes are made very late in the ordering cycle. And as a consequence, PO's are only cut at the very last moment.

And so, while we expect growth to quantify it at this stage without orders in hand, and just the basis of dialogue, we have dialogue that is compelling, but we don't have purchase orders. So, I really have no legal basis to answer your question.

Last quarter, and in this call you talk about the industrial plastics with both Borealis and Techmer. And I guess I'm curious, it seems like last quarter going to the next industry that could begin that process that cotton started a year ago. And so I'm curious when you think that division may generate in the millions of dollars, $1 million, $2 million, do think that still is going to be this year or has been pushed off now to next year?

My hope is that it's this year but I have no reason to forecast it as such. The reason for my hope is that we are working, as I described, with Techmer in a very specific pilot that has gone very well. But there's still a matter of obtaining the order. And so, we find the results compelling, the science type executable, scalable, the pricing competitive and the value proposition to the customers and the industry very compelling.

But we are really not in a position to go from that to a forecast.

Maybe comment also on Borealis. I think we have been waiting for a little bit for that relationship to move forward; I know you had to sign some of the partners along with it. Where are you with that relationship in terms of commercializing?

To be frank, I'm a little disappointed, it's taken as long as it has as well. But we are very close to the management of that firm. We meet with them often, we have considered applications, some of which we think are compelling and others of which we think the value proposition is not quite strong enough.

So right now we are in the process of evaluating those, and we hope -- we believe our relationship will sustain these discussions, and that one of them when the time is right will call us and become a scalable, deliverable opportunity. So I am still very confident in our relationships, in the management of Borealis, and in our capability to serve the ideas that they have in their mind.

You mentioned on the pharma side that it complies with [how] the FDA regulations. But I guess my question is has there been any process that started with the FDA and the ability to use your technology on drugs?

The typical way one would approach a project like this is by first informing FDA of what we have, which is what we have done. And we have also applied for [graph] status, which is generally recognized as safe. Coming from the finance world, you might recognize the way FDA responds to applications for graph is kind of similar to the way the SEC responds to an S1.

They either give you a comment, which means they are not so happy, or they give you no comment, which means, move ahead at your own risk. And we've had no comment. And we've had advice from probably America's most recognized regulatory affairs attorney who was formerly the General Counsel for FDA himself and who has written American law concerning drug manufacturer and design.

And so, we believe we are in full compliance with the FDA guidelines for physical chemical indicators of originality. And we believe that what we have is the most compelling offer for assurance of identity and for compliance with serialization laws, and others in the industry. We think we are in the best spot we could be in.

Last one. Can you give us the total number of pilots you have active right now, and maybe outside of plastics acid marking, which we've talked about, what other industries you think have the opportunity to add meaningful revenue in the next 12 to 18 months, and when I say meaningful I'm talking about more than $1 million.

Sure. At one stage, cotton was considered a pilot. It's not any longer, and it's moved on to full-scale production. And at full-scale production, we are steadily evaluating new opportunities that would go rapidly to full scale.

So we have been cautious about overgrowing our pilot list. And that is -- we are given lots of opportunities, it takes a certain wisdom to say no at this stage. Because what we really have to focus on, as I said at the end of my comments, is on the growth of our revenues and on the negotiation of long-term predictable contracts.

So we are keeping our pilot project list running at around I would say 10 or so. And we are very conservative about adding additional pilots, what we want to do is clone are successful experiences right now.

Great, thank you.

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