BNB Plus Corp (BNBX) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the Applied DNA Sciences Fiscal Third Quarter 2017 Results Conference Call. (Operator Instructions) Please also note that today's event is being recorded. I would now like to turn the conference call over to Clay Shorrock, General Counsel at Applied DNA. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our fiscal 2017 third quarter results conference call. I'm 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 & Presentation section to the Investors page of the Applied DNA website.

With me today on the call 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 discussion may consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, 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 year 2016. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

Now it is my pleasure to introduce our first speaker to 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 third fiscal quarter and first 9 months of fiscal 2017. And then, Dr. James Hayward, our President and CEO, will provide an update to you on the company's progress, activities and strategies.

Starting with the statement of operations, total revenues for the quarter were $1.8 million. This represents a 175% increase compared to $653,000 reported in the third quarter of fiscal 2016 and approximately a doubling of our fiscal second quarter 2017 revenues of $905,000. For the first 9 months of this fiscal year, we recorded revenues of $3.6 million, an increase of approximately $1.1 million or 41% compared to revenues of $2.6 million for the first 9 months of the prior fiscal year.

Product revenues increased fivefold for the third quarter of fiscal 2017 compared to the same quarter of 2016 and 147% for the first 9 months of fiscal 2017 as compared to the same period in the prior year. The increase was driven primarily by the fulfillment of an initial order with Himatsingka for the upcoming ginning season, which represented gross revenue of $1.2 million.

As you may have seen in our previous press release, on June 23, we entered into a new licensing agreement with Himatsingka. This new agreement, among other things, provides for 60-day payment terms as well as a greater gross margin than similar sales under our previous arrangement for the sale of molecular tags to [more cotton].

We continue to build our recurring revenue stream in the textile industry with this arrangement as well as with the signing of several long-term agreements with non-cotton, textile manufacturers specifically GHCL and Loftex. These contracts add on to the 5-year supply agreement for bulk DNA manufacturing with a leading chemicals company that was signed this quarter and is expected to generate revenues of approximately $500,000 annually beginning in fiscal 2018.

Service revenues decreased 15% from 48% during the 3- and 9-month periods ending June 30, 2017 compared to the same period in the prior fiscal year. This is mainly due to the conclusion of the 2 government contract awards last fiscal year, which expired during July and August 2016.

During Q3 of fiscal 2017, we received a new government contract award for a total of $1.5 million that will be recognized over a 2-year period. Revenues from these new contracts were $62,000 for the quarter ended June 30, 2017. The decrease in service revenue was offset by increased revenue from development projects, which Jim will provide more detail on a little later.

Cost of revenue as a percentage of product revenue decreased for the first 3 months ended June 30, 2017, from 61% to 16% due to higher sales in the textile industry which have higher margins. Also during Q3 2017, due to higher products revenue, our production increased and as a result, our fixed production costs allocated to our production facilities were absorbed at a higher rate by product sales as compared to the same period in the prior fiscal year.

Total operating expenses were $4.2 million for the quarter ended June 30, 2017, an increase of $273,000 or 7% from $3.9 million for the same period in the prior fiscal year. This increase is primarily attributable to an increase in bad debt expense of approximately $265,000 as a result of the write-off of a portion of our accounts receivable.

For the first 9 months of fiscal 2017, total operating expenses increased 10% compared to the same period in the prior fiscal year from $11.6 million to $12.8 million. This increase reflects higher stock-based compensation expense of $1.2 million and an increase in bad debt of approximately $265,000, which are both noncash expenses. These increases were offset by decreases in professional fees, franchise taxes and research and development expenses.

Net loss for the third fiscal quarter of 2017 was $2.6 million compared with a net loss of $3.4 million for the same period in the prior fiscal year, an improvement of 22%.

For the third quarter of 2017, adjusted EBITDA was a negative $1.5 million compared to a negative $2.6 million for the same quarter last fiscal year and a negative $2.7 million in the second quarter of fiscal 2017. Year-over-year, EBITDA improved by $900,000 to a negative $6.6 million from a negative $7.6 million in the prior period. The improvement for the fiscal 2017 period primarily reflects the increase in revenue.

Now turning to the balance sheet. Cash and cash equivalents totaled $2.4 million at June 30, 2017 compared with $4 million at March 31, 2017. The decreased cash balance is primarily a result of cash used to fund operations. On June 28, we entered into -- in 2 subscription agreements for an at-the-market private placement of our common stock with a group of investors. This group of investors included a key customer as an anchor investor as well as all of our executive officers and the entire Board of Directors. As a result of the private placement, we agreed to issue just over 1 million shares of common stock at a price of $1.76 per share for total gross proceeds of $1.8 million or total net proceeds of approximately $1.77 million. No discounts or warrants were given to the investors.

Also the issuance of the common stock is exempt from registration requirement and is, therefore, restricted for 6 months. We have received proceeds of $805,000 through the filing of the 10-Q and have agreed to extend the payment term of $1 million with respect to 1 investor for an additional 30 days until August 28.

As of June 30, 2017, we had an accounts receivable balance from Dreyfus related to the former MOU of approximately $2.78 million. Subsequent to the close of the quarter, we received proceeds with respect to this accounts receivable balance of $1.29 million, net of Himatsingka's portion of the tagging fee. As of June 30, there was approximately $560,000 of deferred revenue remaining from our prior cotton contracts.

Also as of June 30, 2017, excluding cash receipts from financing, our average monthly cash burn rate for fiscal 2017 was approximately $750,000 compared to approximately $895,000 for the same period in the prior fiscal year. The decreased burn rate for fiscal 2017 compared to fiscal 2016 is due to improved cash collection as well as a decrease in expenditures.

As of July 31, our cash position is approximately $2.1 million, which as noted above, does not include all proceeds from the private placement, of which $1.1 million was not collected as of 7/31, nor the payment received from Dreyfus of approximately $1.29 million.

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. As of June 30, 2017, we estimate that our cash and cash equivalents, along with the collection of our current receivables and the proceeds from the private placement, 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.

Well, thank you, Beth, and good afternoon, everyone. I'm pleased to speak to you today following Beth's report of an improved third quarter results.

Beth emphasized a number of performance parameters worth exploring because I believe that they signify our approach to inflection. Firstly, a fivefold increase in product revenues quarter-over-quarter. We are selling more, clearly.

Secondly, our relative cost of revenue decreased well before our fixed costs had been fully absorbed by breaking even. These healthy gross margins are a result of sales trending toward a product mix, which requires high quantities of DNA, our most profitable product line. This leverage means that once our fixed costs are fully absorbed, we should report quite profitably as a percentage of our revenue.

And thirdly, our recurring revenues are increasing. At the beginning of this fiscal year, recurring revenues were about $250,000 per quarter. The rest of our quarterly revenue came from new sales achieved only during that quarter. By Q3, however, recurring revenues were at a run rate of over $1 million per quarter, and we expect that number to rise by nearly 50% during early fiscal 2018. And of course, that would be influenced by any quarter-to-quarter variability in the seasonality of cotton DNA sales.

Now if we hold to our expenses to where they are today and maintain the gross margin mix from our current sales and products and services, we would become cash flow positive with incremental sales per quarter of only $1.7 million to $2 million. That is a total quarterly gross sale of about $3.2 million to $3.5 million.

Now as Beth noted moments ago, our revenue performance in the quarter was driven principally by cotton revenues. As we start the 2017-2018 ginning season, which begins in October, we believe that the broader base of business we have built since last year's ginning season will make itself evident in our results over the next several quarters. We believe that our successes today will be the foundation for our sustained growth tomorrow.

Now interest has steadily expanded in our DNA technology platform. We initially directed the value proposition of our DNA technology platform toward the top of the supply chain, leaving the brands and the retailers to pull our value proposition to the consumer. Brands and retailers want certainty that the products on their shelves are true to the label. In fact, they are also committing themselves to sustainability goals by 2020 that are integrated across their policies, processes and products and driving further demand for the means to ensure label compliance and consumer assurance. Manufacturers and other supply chain participants that deploy strategies to ensure their customers' brand protection do have a competitive advantage in the marketplace. With our success in purifying the supply chain for our first 2 major retailers, manufacturers are starting to view our molecular tag technology as strategic to their business goals. They see Applied DNA as a means of keeping their current business and winning new business.

As a consequence of our success, our value proposition has expanded to demonstrate benefits to the brand and retailer and manufacturer alike. By showing value in bringing certainty to a $100 cotton shirt and not only the gin cotton fiber, this incentivizes brands and retailers to pull our technology platform through their supply chain. Himatsingka is the first manufacturer to capitalize on the disruptive nature of our technology platform to their economic benefit. On April 28, we announced the debut of our SigNature T molecular tag in Bed, Bath and Beyond's Wamsutta line of bed linens, featuring PimaCott. Himatsingka is the manufacturer of this line. Product and customer reviews of this line demonstrate that authenticity is good for business. Today, walk into most Bed, Bath & Beyond stores and you will see PimaCott towels for sale.

On June 23, we entered into a new licensing agreement with Himatsingka. From a business perspective, the benefits of this agreement to us are many. First, we secured a 25-year commitment from Himatsingka, mirroring the commitments they made to shared customers. PimaCott, Homegrown and all other tag cotton products from Himatsingka are now exclusively powered by Applied DNA platforms for the next 25 years. Second, we secured licensing revenue on apparel finished goods. Third, payment terms under the agreement will considerably improve our cash flow, reducing prior cotton collections from 12 to 18 months to just 60 days. Fourth, we are no longer required to revenue share back to Himatsingka. This means an immediate 20% to 25% increase on our profit from molecular tags.

Fifth, the agreement incentivizes Himatsingka to accelerate penetration of our platform into the apparel market, where Homegrown our shared upland DNA tag cotton brand is already receiving warm reception from major brands and retailers. U.S. upland cotton growers, of course, grown in America, yield about 7 billion pounds annually and count the apparel industry as their biggest users.

And finally, sixth, we anticipate opening our forensic laboratory in India early in calendar year 2018 to service our growing business in that part of the world. I think you will agree that this is quite an evolution for a company that tagged 5 million pounds of cotton just 3 years ago.

The complexity of the cotton supply chain is such that if we could eliminate cheating in cotton, then we can purify virtually any supply chain. Our go-to-market strategy for non-cotton textiles mirrors our cotton strategy. And in this area, we have executed to considerable effect in the third quarter.

Recall that in the second quarter, we launched CertainT, our program that integrates our commercial platforms into a licensable strategy to generate royalty fees. We believe that the CertainT trademark, a public-facing visible mark to consumers, will come to signify originality, performance and sustainability, much akin to Intel Inside. In fact, we received the trademark registration for "CertainT is only a molecule away" just last week. The first CertainT branded recycled PET towels are scheduled to arrive on U.S. retail shelves before the end of this calendar year.

In July, we signed a license agreement with Loftex Home, a well-respected manufacturer of high-quality towels to verify the authenticity and origin of recycled PET used in bath and beach towels. The response from retailers to the Loftex initial launch of a product line with CertainT that was announced in March, exceeded their expectations and accelerated their expanded use of recycled PET verified by our CertainT platform. The new multi-year agreement provides for long-term minimum annual revenues as well as trademark licensing royalties on finished goods to us.

Further, we signed a multi-year license agreement with GHCL, a global manufacturer of bed linens based in India. GHCL has also licensed Applied DNA CertainT trademark for use on its products as well as for promotional marketing and sales materials. The agreement provides for minimum annual revenues as well as trademark licensing royalties to us.

CertainT is today a cornerstone of our go-to-market strategy and a key component to building a diverse, recurring revenue base. With CertainT, we can participate not only at the front-end of the supply chain with the application of our molecular tags, but more importantly, at the back-end of the value chain where the cumulative value-add is the highest, and we can share in the economics with brands and retailers.

In our government/military vertical, we announced in June that we were the recipient of a 2-year approximately $1.5 million contract that expands our current platforms to improve DoD counterfeit risk mitigation. I draw your attention to the fact that this was a competitive bid contract for which our technology platform was pitted against other technologies and methodologies. Just this morning, we announced the start of production scale tagging of bearings with a major U.S. manufacturer. This relationship is the product of our efforts to commercialize processes developed under our first Rapid Innovation Fund contract of the Defense Logistics Agency and it demonstrates the remarkable effectiveness of these awards. While our second RIF contract is just now in place, we are still commercializing projects that were funded via our prior contract, and we expect to announce full commercialization programs with new partners, who collaborated in that contract.

In our pharmaceutical vertical, we continue to progress pilots with our anticipated partners while we have prepared our facilities and our staff to operate under FDA guidelines. We are working with our future partners on the content of our drug master file and we expect to file this with FDA in the next several months.

Now for an update on our pipeline of pilot projects. As we move past the early adopter stage within our key verticals and take on a more strategic goal, this is reflected in our pipeline. In Q2, we serviced 9 new pre-commercial relationships. That grew to 14 in Q3. As a testament to the value of our accrued field-proven experience, in Q4 thus far, we have already added 2 pre-commercial relationships and announced 2 customers that progressed directly to multi-year supply agreements without any pause for feasibility. Just last week, we met a new prospect on Wednesday, submitted a pre-commercial proposal on Thursday and I signed the funding documents for a pre-commercial pilot by Monday, 4 days from first handshake to funded collaboration. Overall and as I have cited before, we continue to see a shortening of our sales cycle, both on average and in verticals in which our experience is broader.

Earlier this summer, we announced that we had completed initial work on a pilot project with Lily of the Desert, a leading U.S. producer of aloe vera products, which touches upon multiple markets from food and supplements to pharmaceuticals and personal care. Now the second phase of our work is nearly completed and we have begun planning commercialization at full scale.

Earlier this week, we announced the completion of a pilot project for the large scale molecular tagging of fertilizer that was successfully tracked through the West African supply chain of Borealis partner, Rosier. I am pleased to report -- very pleased to report, that we were successful across all facets of the pilot and we restored faith in the commerce of fertilizer to all parties. This has a very important humanitarian impact. We expect initial shipments in early calendar 2018.

Now I started this call by saying that as we continue to build our business, our success today will be the foundation for our sustained growth tomorrow. With the growing awareness of our technology platform and the increasing uptake within commercial ecosystems, we have never been closer to realizing our ambitions.

Finally, I am proud to welcome Elizabeth Schmalz Ferguson to our Board of Directors. Her addition aligns with our strategy to expand the application of our technologies within the personal care market and we are already benefiting greatly from her expertise.

Now thank you for your time and attention this afternoon. Operator, please open the call to questions.

(Operator Instructions) Our first question today comes from Brian Kinstlinger from Maxim Group.

Yes. So first I just wanted to make sure I understand the wording. The 14 and 9 are pilot customers, is that right? Or are those active engagements that are commercialized today? Because I just want to make sure I understand that.

No. Those are, as we call them, pre-commercial pilots. So they're a prelude to a commercial agreement, we hope.

Right. But is that the same as a pilot? Or is that something different?

Yes, same as a pilot.

So I guess, I'm curious, when we take a look at your pilots, once they're completed, how long does it typically take before they begin generating revenue? I know you talked about the fertilizer, for example. But in general, what is that time frame? And what percentage of companies that finished pilots actually do move forward like that?

Okay. I'll answer the last question first. The percentage of companies that move from pilot commerce is very high. I would estimate it's over 85% or 90%. So most customers continue to a commercial relationship. Now the time really depends on the relationship between the scale of the pilot and the scale of the commerce. So sometimes, the pilot is dedicated to working out chemistries, physics, to ensuring detections of our molecular tags after a product has gone through a commercial manufacturer. At other times, a pilot is dedicated to the issue of scale, to ensure all parties that this can be done at the scale relevant to commerce. If it's the latter, then there really is no delaying to move straight to commerce. So, for example, our fertilizer pilot was done at a scale of 3,000 metric tons. So that's large, that's not small. That was not a benchtop exercise. So the time required to go to full-blown commerce for something like that is very quick. It's just a matter of lining up customers.

Got it. Okay. And then can you talk about how many customers are in commercialization at this point?

I would say in the neighborhood of 40 customers that are routinely purchasing on and off throughout the course of the year.

Great. And then the -- you mentioned that Himatsingka is incentivized to penetrate the apparel market, can you outline or explain how they're incentivized?

Sure. Himatsingka, as you know, is a home textile manufacturer. But thanks, in large part, to the success that our first program which was the molecular tagging of Pima to create a product known as PimaCott. PimaCott is used throughout the Himatsingka facility to manufacture home textiles. And the response of the marketplace was so tremendous that Himatsingka has invested a very significant investment to create what will be the largest under-one-roof spinning facility in the world. And that is thanks to the pull that our technology had for their manufacturing. So now their business in linens is humming along. But they had that spinning capacity where they can provide yarns necessary for other customers, and we have been working with spinners all over the world to qualify them for the last 3 years, ensuring that they're DNA-compliant. And all of those spinners are capable of supplying tag yarn to the apparel industry. So we really had our first coming out as it were only last month in Chicago at a very well-attended apparel meeting, and the response was overwhelming. So the apparel industry is very, very interested, and Himatsingka is very interested in selling them their yarn. And if they can't provide the yarn, they're very interested in our selling them DNA-tagged cotton.

Okay. Got it. You mentioned, obviously, fertilizer. You said -- was that a Borealis subsidiary or a Borealis customer? I missed that.

Because they are something of both, I suspect.

Okay. How did you spell it? What was the name of it? Maybe it was in the press release and I missed it. What was the name again?

Sure. It's Rosier, spelled R-O-S-I-E-R, and they're in Belgium.

Got it.

And Borealis has the right to distribute their products around Europe. And Rosier can distribute throughout the rest of the world.

So as we think about Rosier then, can you just kind of size how much fertilizer they sell so we can kind of size the opportunity? And then as we think about the ramp there, should we think like cotton, it starts pretty small in year 1, and then if things go well, year 2 could be pretty big? I mean, how do we think about that?

Okay. Well, let's try to put the 2 markets for cotton and for fertilizer in perspective. The total addressable American market for upland cotton is 7 billion pounds of cotton a year, for upland. For American Pima, it's 300 million. So the total American output is about 7.3 billion pounds of American cotton. Globally, the requirement for fertilizer is just short of 500 billion pounds. So the demand for fertilizer globally is roughly 100x the size of the cotton market. Now the fertilizer market is distributed throughout the world. Very often, a petroleum manufacturer also has a fertilizer manufacturing operation that they co-operate with some of the ethylene from their petroleum operation. So there are many players we can talk to in the fertilizer market. The demand globally for fertilizer is higher than it's ever been before. The impacts of deforestation and of poor farming technologies has caused the loss of the fertility of the top 6 inches of soil in many of the Third World countries. And there is a recurring problem with the distribution of fertilizer, so much so that the banking industry has stepped away from financing fertilizer. And by the time a farmer in a Third World country requires fertilizer, every penny they have is invested in their crop. They can't afford to buy fertilizer and the bank won't finance it because of the degree of corruption. Well, banks attended our presentation in West Africa and on the spot said they would finance molecular-tagged fertilizer. So the opportunity, I think, is very, very strong.

That's great. Last question I have. It's always difficult, but fourth quarter is seasonally strong, at least how we understood it as we started this tagging of cotton. Obviously, there's been some inventory issues back and forth that have impacted it. But how do you think about the fourth quarter in terms of seasonality for cotton from what you know so far with half the quarter pretty much done, in terms of revenue, of course?

Well, I have my fingers crossed as I answer. But I can tell you, I'm hopeful. It is difficult to know with certainty. We face a period in New York that's coming up known as Market Week, in which case, the demand by the retailers and the brands is made a little clearer. That just predates the beginning of the harvest, so we'll know much more then. But if I were to judge the inquiries from the brand owners that we're fielding nowadays, I have reason, I would say, to be optimistic.

Well, let me ask a follow-up to that. First of all, suggesting much stronger than the June quarter because like 2 years ago, obviously, it was much stronger. And in tandem to that, is there any issues with your customers having a plethora of inventory likely the case to hurt you in fiscal '16?

Yes. That's -- I'm glad you brought that up. That hurt us in fiscal '16, in large part, because of the particulars of our contract with Louis Dreyfus. Now Louis Dreyfus was a wonderful partner, really helped us penetrate the industry and formed a strong relationship with the farmers and the ginners, break into that culture which was not easy. However, our payment terms favored Dreyfus very much so that payment was delayed. And that's what happened in '16 is they overbought and then did not pay for quite a long time, such that we had a very large accounts receivable and that was the accounts receivable that Beth spoke to earlier in her session. So that's not going to happen to us again because we're paid in the very short term. Our partners are not going to overbuy and then have to pay immediately. They're going to buy against the very real expectation for DNA-tagging in that current season. We won't be building a future inventory. We'll be responding to a current demand. And for me, that's very reassuring because it means we can begin to forecast coming years a little more reliably, not being impacted by having built up an inventory in warehouses we don't get to audit. So we don't know how large it is. So I think that we will be much more even-keeled and have a much better expectation. I don't think what happened to us in 2016 will ever happen again, and that was why we put so much effort into renegotiating our cotton distribution agreements and we did so very successfully. So in sum, I'm very optimistic. We haven't seen the demand for 2017's harvest really come in just yet. Our fingers are crossed. We're talking to everyone, and let's see what happens.

Our next question comes from Jeff Kessler from Imperial Capital.

I -- you enumerated a number of both cotton and non-cotton guaranteed -- guarantees that are under -- that you're under contract with. Is there some estimate you could provide or some range of what that base of guarantees would be on an annual basis?

Yes. Right now, we are just maturing into what we feel is about $1.5 million per quarter or roughly $6 million annually, is the recurring revenue base we see. Now, of course, that's subject to the lumpiness of cotton to a degree. Even though we've smoothed it out a bit in our new agreement, it's still a matter of the demand that comes in. But we're very happy to have built that recurring revenue base. And that's really only built in over the last 2 quarters, and it will mature in the third quarter. So we think that is one of the best indicators of our performance, our future stability and the potential for us to build future revenue.

Great. Now granted most of what your revenue base will be, will be revenues as they're sold and under contract -- will be product-related as I should say. You did talk about a recurring service base. Can you describe that a little bit in terms of if you can, dollars, but most importantly -- but more importantly, what it does for you in branding, in the sense getting your brand into the, not just the mindset, but the actual day-to-day work of the, again, both cotton and non-cotton businesses?

Sure. And in fact, the announcement today of our securing the supply chain for the bearings is very relevant to your question. Our service revenue came 2 years ago, or came a year ago, from 2 military contracts we had that were to develop methodologies and applications relevant to protecting the supply chain of the Department of Defense. A harmonic benefit of those contracts was that all of those technologies had equal or much larger applications in the commercial world, as is the case, for example, with bearings. The 2 RIF contracts that ended last July and August were very impactful, impacted our ability, for example, in marking silicone elastomers, in marking bearings, and we still have applications that evolved from those contracts that we have not yet announced and expect to in the not-too-distant future. Now to be the lucky beneficiary of another competitively won contract, at $1.5 million over 2 years, that's service revenue that we'll recognize for the next almost 24 months. And above that, of course, comes some of the service revenue that comes from our DNA authentication business. And to that end, we have been working with a wonderful infield model that allows us to do quantitative PCR and not only identify our tags, but quantify them. And that's proving very popular with our customers, and we expect to see a fair amount of that uptake. It's one of the reasons why we are building our laboratory in India.

Okay. Can you describe where you are in both PCR and field infrastructure capability when you compare to, perhaps, a year ago, so that we have some confidence that if, one -- if somebody -- if a client or some part of the supply chain needs somebody on the spot to do it there, you can provide it without having to be stretched completely?

That's an excellent question, really, because it's often a key part of the dialogue even in the early phases of a relationship with a new customer. So for example, in our fertilizer pilot, which was done in the backcountry of Western Africa, that was assayed, quantified in front of an audience in the field. And we have now sold those devices to the federal government. We've sold those devices to our commercial customers. We've established a method for developing and building inventory on a per-assay basis. And the equipment is extraordinarily reliable. It's roughly the size of a 1-pound coffee can. It's battery-operated. It is Internet-based. It allows us to track and accumulate big data. So we're there very much, Jeff. And so now, it's a matter of rolling it out to more and more customers.

Do you have some idea based on the -- based on this, if you want to call it your base revenue, what do you need in terms of X, in terms of, let's -- if you want to call it, new lumps in the business or perhaps -- or new -- consistent recurring revenue in the business to get you to a point at which you are either cash flow, or what you might term -- or a little bit less exact, EBITDA-profitable?

Sure. We have a very good handle on that. We have announced relationships with customers with far-ranging applications. For example, something as simple as aloe vera faces a serious challenge in the marketplace. And the same is true even for nutraceutical supplements. It can be extremely difficult to track, using conventional chemical methods or other DNA methods, the persistence of a product, like aloe vera, into finished goods or like a food supplement into finished goods. But we've demonstrated at scale that the inclusion of DNA in the original supplemental extract of our DNA tag, it's present in more copies, although present at a level of one part per trillion because it's a small piece of DNA, and it's eminently detectable. So we're able to prove the persistence of that raw material and those whole families of raw materials throughout complex supply chains. And consumers are mounting more and more class action suits against retailers, manufacturers and brand owners that use natural commodities when it can be extremely difficult to quantify their presence in finished goods. Now on a completely further end of the spectrum, we talk often about the tagged universe. And we are working with manufacturers and service providers who have methods that allow us to tag in very great volume, such as inkjet printing. And those methods would allow us to increase the volume of the DNA-tagged universe participating across many, many different industry verticals. And it truly is a demonstration of our capacity to service large commercial ecosystems. All we need is one or 2 of those kinds of opportunities and we derive that EBITDA neutrality.

Okay. And that leads to my final question. You folks from day 1, from the time that this technology was developed some 25 years ago or so and the time that you've been at the helm, have been trying to pull in business, so to speak, out there on the hustings with as many salespeople as you can, mainly, it seems like, mainly executives of the company going out there and doing it. Are you reaching a point -- have you -- do you have concrete examples, but you probably can't share specifically, but do you have a point at which industries or vertical markets are coming to you now and asking you to do things without you having to market yourselves?

Yes, absolutely. There was a German economist in the '60s who said, for things to get going, often take -- I'm paraphrasing, much longer than you expect. But then when it happens, it often goes much faster than you're prepared for. And we see the work we've been doing as, yes, it's taken a while for us to cross the chasm as it were in the famous model and get our early adopters. But our early adopters have been passionate and able to pull our technology through their companies or through their supply chains, and we're encountering more and more of them. And we're finding that they are coming to us. And so that's another reason why the sales cycle has diminished. In the example I provided just today of us -- this, in fact, was a customer we'd wanted to work with and did not yet have the opportunity to contact, they contacted us, and 4 days later, we had a signed pilot arrangement. So we've invested our time, our blood, sweat and tears, and we've managed to carry the patience of our investors and our Board and our staff and executive management. And I believe that we're there, where our phones, laptops are very busy.

All right. I'm sorry. And one final question. This is just a clean-up question. If we want to look at the seasonality of your business given there's still a big part of a percentage of your business will be in the ginning area, can you provide what quarters are expected over the next year to be stronger, which quarter should be weaker?

Well, we are doing everything we can to smooth out the lumpiness that comes from our natural commodity business. And that's happening because of uptake in lots of synthetic fiber and synthetic materials. We have relationships where DNA has been incorporated into polyethylene, polypropylene. Of course, the phthalates, PET, but also rayon and a wide variety of other materials. And they're not just used in the construction of fabrics or in textiles, but in the construction of automotive parts and other materials. So that lumpiness, which still prevails, which begins really, to a slight degree, in the third quarter, typically continues to the fourth quarter and even to the first quarter of the following year, comes from the fact that the cotton harvest begins in October and can proceed in long years through the end of February.

Our next question comes from Craig Pierce from Morgan Stanley.

I had a question or a couple of questions looking further out. I know you're very familiar with the experience of another Long Island company by the name of Symbol that took the barcode scanner technology about as far as they could go and then sold out to Motorola. My first question is, how far do you think you guys can carry the load before you would potentially need a bigger partner or to join a bigger company?

I have lived through that kind of development myself, and I don't think that we are being forced down that same path. I think that the application for our platform is much, much broader than it was for barcoding and barcode-reading. We entered the business highly focused on counterfeits and how to deter them. But since then, our molecular tags have come to be interpreted based on their intended use. So for example, you can't simply test a product, be it produce or fiber, to prove that it was organically grown. But if we're present when an NGO certifies that it was and is organic, we can tag it to indicate as such. When it comes to human trafficking and foods or products that are made through the benefit of illegal human slaves and human traffic, if an NGO can prove to us that, that product was made without that effort, then we can tag to indicate as such. Our tags can be used to facilitate diminished excise tax on reimportation into the United States. They can be used to indicate the product was cultivated under a free trade. We have not yet met a large CPG company that does not have a 2020 sustainability strategy. Our tag can indicate the sustainability of a very large commodity supply chain. So we have a wide, wide use -- huge range of applications that will allow us to generate revenue. I don't think we will be reliant on an investor to fund that expansion. Our cost of goods are controllable. And as we work out the range of applications, we have the staff, the experience here, to be able to take that to market very quickly and without a huge developmental investment. Yes, we've had to raise a lot of money but this company was public long before it should have been. And so we've had to fund ourselves in small tranches. But of course, our intention is to fund ourselves through profit.

Second question, along those lines, I think you've got, what about, 27 million shares outstanding at this point?

Correct.

What's the potential for somebody coming along and pushing a hostile takeover? I mean, it's pretty cheap at these prices if they can get their hands on the shares.

Yes. Well, management has been the largest investor, historically, behind the company. The management team is determined to grow this company in the way we have through our own efforts. And we would resist, with every fiber, a hostile takeover at any point in the future.

And our next question comes from Paul Cooney from Joseph Gunnar.

A bunch of my questions have been answered. But I know you don't break down revenue specifically by category. But would you say still that the majority's in cotton, with the second largest being synthetics?

Yes, at this time.

Okay. And you said fertilizer would start hitting the first quarter of next year?

I would say that was basically the calendar quarter though, not necessarily...

Yes. Right, right. Calendar quarter, not fiscal.

Okay. And based on your prior answer, it just seems like that's a pretty huge market. Could that actually eclipse the cotton market for you guys?

It's all a matter of timing and market response. But I would say, that's plausible.

Okay. And then, lastly, you have about 14 -- you said you're up to 14 different customers that are piloting with you guys. How many of those are in the pharmaceutical business?

First of all, that number is 16. And at this stage, I'd have to say we consider that number confidential.

Okay. All right. And -- but are more than one of them pharmaceuticals or...

Yes.

Okay. And as far as that market is concerned, maybe you could just address the issues in that market and what the potential could be for you guys in that market.

Sure. Our interest is in addressing that market the way we do large industries. That is, our interest is not working with a single industry player, but viewing pharmaceutics as a large commercial ecosystem and developing the systems that would allow us to move the industry as a whole. We're doing the same in cotton. We hope to do the same in fertilizer. And in pharmaceutics, we believe we can do the same as well. We needn't protect a single drug at a time, but we can predict -- protect whole types of drugs, tableted drugs, for example, et cetera, et cetera.

And ladies and gentlemen, we've reached the end of today's question-and-answer session. At this time, I would like to turn the conference call back over to management for any closing remarks.

Yes, first of all, speaking for my colleagues here around the table and in management, we would like to thank our stoic investors. The management team, the Board of Directors were very grateful for your enthusiasm and look forward to working with you further as time goes on. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.