BNB Plus Corp (BNBX) 2019 Q1 法說會逐字稿

Hello, and welcome to the Applied DNA Sciences Fiscal First Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Clay Shorrock, General Counsel. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone, and thank you for joining us for our fiscal first quarter 2019 financial results conference call. A copy of the company's earnings press release and accompanying PowerPoint presentation to this call are available for download under the Events and Presentations section to the Investor page of the Applied DNA website.

With me on the call today are Dr. James Hayward, Chairman and CEO; and Beth Jantzen, Chief Financial Officer.

As a reminder, please note that some of the information you will hear today during our discussion may consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, 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 filed on December 18, 2018, and Form 10-Q filed a short while ago. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

Now it is my pleasure to introduce the first speaker on today's call, Beth Jantzen.

Thank you, Clay. Good afternoon, everyone, and thank you for joining us today. I would like to begin to with a review of the financial performance for our first -- our fiscal first quarter 2019, which will include a summary of our financial results as well as our financial condition following the completion of our financing during this past December and the recent deficiency notices received by NASDAQ. Dr. James Hayward, our President and CEO, will then provide you with an update on the company's progress, activities and strategies for the balance of the fiscal year.

Starting with the statement of operations. Total revenues for the first fiscal quarter ended December 31, 2018 were $884,000. This represents an approximate 37% increase compared to $648,000 reported in the first quarter of fiscal 2018 and down approximately 26% compared to the $1.2 million in the fourth quarter of fiscal 2018. The year-over-year increase in revenues was primarily from an increase in service revenues from precommercial projects. The quarter-over-quarter decrease in revenues resulted primarily from decreased sales to the textile industry as well as a result of the implementation of the new revenue recognition accounting standard. As required, we adopted accounting standards update number 2014-09, revenue from contracts with customers, or topic 606, at the beginning of the first quarter of fiscal 2019, using the modified retrospective method.

We applied the new guidance to those contracts that were not completed as of September 30, 2018. Based on our valuation of the new standard, we identified certain customer contracts which require different recognition under the new guidance. For example, the shipment to our cotton customer in June 2018, that included extended payment terms and was included in deferred revenue as of September 30, 2018. We would have continued to recognize revenue of $383,000 per quarter for our quarters ended December 31, and March 31, 2019 if we were under the old guidance. Under the new guidance, the order would have met the criteria to be recognized in full as revenue upon shipment in June. I want to emphasize, however, that while revenue in recognition of this 1 cotton order has changed, cash payments are being received in line with the terms of the order, and we expect our third and final payment by March 31. Also, revenues under certain of our research and development contracts now are being recognized over time on a cost basis based on the work performed during the period as compared to evenly over the contract term, as we did historically. If we had not adopted topics 606, we would have recognized additional revenue of approximately $391,000 during the first fiscal quarter of 2019, which would have resulted in total revenue for the first quarter of fiscal 2019 of approximately $1.3 million. However, because the accounting periods have passed, the impact of adopting the new guidance is recorded to retain the earnings in the period of adoption. The total growth impact to retain earnings during the first fiscal quarter of 2019 was $494,000.

Product revenues declined approximately 8% for the first fiscal quarter of 2019 to $322,000 compared to $350,000 in the same quarter of fiscal 2018 and decreased approximately 46% compared to product revenue of $597,000 in the fourth quarter of fiscal 2018. The decrease in quarter-over-quarter product revenue was as a result of the new revenue recognition standard. If we had not adopted the new guidance, our product revenue would have been $705,000 for an increase of 18% as compared to the fourth quarter of fiscal 2018.

Service revenues increased 89% to approximately $562,000 during the fiscal first quarter ended December 31, 2018, compared to approximately $298,000 for the same period in fiscal 2018, and declined by 6% on a sequential basis with the fiscal fourth quarter of 2018. The increase in service revenues on a year-over-year basis was due to increases of $108,000 within our pharmaceuticals and nutraceuticals market with precommercial projects as well an increase this quarter of approximately $120,000 for our cannabis precommercial project.

Cost of revenue as a percentage of product revenue in our fiscal first quarter of 2019 was 48% as compared to 95% for the year-ago period. The decrease in cost of revenues as a percentage of product revenues is due to the product sales mix during the 3-month period ended December 31, 2018, being primarily comprised of textile sales which were at a higher margin as compared to the sales in the same period in the prior fiscal year.

Total operating expenses increased in the first fiscal quarter of 2019 to $3.9 million compared to $3.5 million in the first fiscal quarter of 2018 and declined as compared to $4.4 million in the fourth fiscal quarter of 2018. The increase on a year-over-year basis is primarily attributable to an increase in stock-based compensation associated with employee option grant modifications. To a lesser extent, the increase also relates to an increase in legal and professional fees, consulting expenses and advertising and marketing expenses. These increases were slightly offset by a decrease in R&D and depreciation and amortization expenses.

For the first fiscal quarter of 2019, adjusted EBITDA was a negative $2.6 million compared to a negative $2.8 million in the first fiscal quarter of 2018. This improvement was due to the increase in revenue.

Turning to the balance sheet. Cash and cash equivalents totaled approximately $3.1 million at December 31, 2018, compared with approximately $1.7 million at September 30, 2018. The increased cash balance is primarily from the net proceeds received from a financing.

On December 26, we closed on a confidentially marketed public offering for gross proceeds of $2.75 million before underwriting fees and certain other deal-related expenses. The deal was for the issuance and sale of an aggregate of 5.5 million shares of common stock together with warrants to purchase an aggregate of 5.5 million shares. The public offering price for each share, together with the accompanying wire, was $0.50. Subsequent to the quarter-end, on January 25, we closed on the partial exercise of the underwriter's overallotment option for an additional 500,000 shares of common stock for gross proceeds of $250,000. The total net proceeds, including the overallotment, were approximately $2.5 million. As of December 31, we had $1.4 million of deferred revenue as compared to $1.9 million as of September 30, 2018. The deferred revenue balance as of December 31 was mainly comprised of milestone and/or phase payment under certain of our research and development precommercial projects that are being recognized to revenue over time based on the cost incurred. As of December 31, 2018, our average monthly cash burn rate for fiscal 2019, excluding the proceeds on the financing, was approximately $528,000 compared to approximately $879,000 for the same period in the prior fiscal year. This represents a decrease of approximately 40%. The decrease in monthly burn rate for the first fiscal quarter of 2019 compared to the same period in the prior fiscal year is mainly due to higher cash receipts and slightly lower disbursement during the first quarter of fiscal '19.

As of January 31, 2019, our cash position is approximately $2.3 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. However, based on our historical financial results, we disclosed in our fiscal 2018 10-K, and have also disclosed in our fiscal first quarter 10-Q, that there's substantial doubt about the company's ability to continue as a going concern for 1 year from the issuance of the financial statement. The ability of the company to continue as a going concern is dependent on our ability to further implement our business plan, raise capital and generate revenues.

As a result of our stock price and financial results, on January 29 and 30, we received written notices from the Listing Qualifications Department of the NASDAQ stock market, notifying us that we are not in compliance with the minimum bid price requirements as well as a market value of listed securities requirements or the alternative standards of the NASDAQ listing rule, which requires us to have minimum stockholders' equity of $2.5 million or for us to have had net income from continuing operations of at least $500,000 in the latest fiscal year or in 2 of the 3 last fiscal years. These notices do not impact the company's listing on the NASDAQ Capital Market at this time. Both notification letters state that we have 180 calendar days or until July 29, 2019, to regain compliance. There is a possibility for an additional 180-day compliance period for the bid price compliance violation. However, no additional compliance period is applicable to the market value noncompliance. We intend to monitor the closing bid price of our common stock and may, if appropriate, consider implementing available options, including, but not limited to, implementing a reverse stock split of outstanding securities to regain compliance with a minimum bid price requirement. We will also consider available options to resolve the other listing deficiencies and regain compliance with all applicable NASDAQ rules.

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, Clay, and good afternoon, everyone. Thank you for joining us today. As you've just heard Beth state, new revenue rules put in place at the start of the fiscal year don't give you a complete picture of the progress we are making to monetize our DNA taggant platform technology. We continue to see the market with customers that can scale their orders as their confidence in our taggant technology builds. Over the past several quarters, we have shared with you details of our robust pipeline of precommercial studies, each reflective of new interest in our platform and each representative of an opportunity to generate incremental revenues, if adopted at a commercial scale.

Today, I will focus my prepared remarks on our opportunities in the near term that offer us the potential for additional growth and diversification. Now we have restructured and improved our global sales organization, but with a special focus on textiles, with 2 stellar additions to our teams, Wayne Buchen as Vice President of Strategic Sales; and Steve Birkhold as a member of the Strategic Advisory Board and a special consultant to our sales team, but especially with regard to brands.

Now many manufacturers and brands are increasing the transparency of their supply chains to better control their quality and compliance to the criteria for sustainability, the circular economy, and ethical sourcing and to keep their consumers and advocacy communities better informed.

In fact, Wayne Buchen just returned from the Outdoor Retailer show in Denver last week, where we had a great reception. We are already in discussions with leading sportswear and lifestyle brands on evaluations of the initial scope of strategic projects. Now cotton will remain integral to our business. And it is being rapidly complemented by other natural fibers and a number of synthetic fibers. Despite the change in revenue recognized from the adoption of the new guidance, the demand for taggant has remained consistent as compared to the prior years' ginning season. We continue to move aggressively to open new cotton opportunities, including in the apparel market and in offshore markets. Steven Birkhold offers a stellar pedigree to help hone our strategies and network in the apparel market. He's a 30-year veteran of the fashion industry and formerly Chief Executive Officer of Bebe Stores, Co-Chief Executive Officer of Diesel USA and Lacoste, President of Earl Jean brand and VF Jeanswear. He is ideally qualified to lead the development of the new go-to-market strategy for us in the fashion and luxury apparel and accessory markets, utilizing his industry contacts to facilitate the introduction to and adoption of our technology with key decision-makers across all of these markets. Our newly organized sales team has already built increased demand for our CertainT platform. And we have been very actively fielding inquiries and preparing for much larger tagging volumes and executing precommercial runs at some of the largest sites in the world.

Now turning to synthetic fibers. This market represents an addressable market that is a large multiple of the annual cotton market, and it's growing aggressively. Moreover, in the sustainable and circular economy, synthetic fibers are more readily recycled than natural fibers. Whereas our authentication platform protects cotton brands against counterfeiting and ensures providence, in synthetic fibers, our platform protects claims of participation in the circular economy, speaking to replace today's disposable textile culture with one that emphasizes, supports and promotes a more sustainable fashion apparel and home textile industry. We continue to execute on our strategy to engage key ecosystem participants along multiple points in the global synthetic textile value chain to more broadly drive adoption of our authentication technology platform.

Now I just returned from several key meetings with large synthetic fiber manufacturers and recyclers in India. And I am very encouraged by our commercial progress.

Beginning about 2 years ago, we first contacted synthetics fiber manufacturers. The length of the sales cycle is such that only recently have we seen a maturation of precommercial pilots in our progress toward a next level of revenue generation. We are today on the cusp of generating our initial CertainT licensing revenues as retailers begin to stalk GHCL and Loftex products made of recycled PET tagged with SigNature DNA. GHCL will soon be initiating first shipments to Amazon for a recycled PET made into bedding products and sold under its Rekoop brand. Loftex, which manufactures towels made of recycled PET, will soon have product on shelves at several major U.S. retailers. We expect our first royalty income for the use of our CertainT brand this year.

From our recent announcements, you've seen that our business development efforts have focused on partnerships with supply chain companies that are working with textile brands and manufacturers that are based in Taiwan yet serve China, Asia and supply chains across 3 continents. Taiwan is known as the hub of textiles innovation in Asia, producing 50% of the world's synthetic fabrics. The MOUs we have signed with Sun Chemical and Tex-Ray give us an instant presence and access to this important market to break impediments in distance, language, culture and logistics without incurring the costs associated with slowly building a physical presence there. Sun Chemical, with over 20 salespeople located throughout Asia, will be trained in our platform and as a reseller of textile, chemicals or related services and will serve as a reseller of our CertainT platform. Tex-Ray, which has a global footprint, is a textile innovator both of products and processes that gives us entrée into established supply chains in service of large, global brands utilizing synthetic fibers.

Turning now to pharmaceuticals and nutraceuticals. Let me update you on progress being made in penetrating the excipient market with our taggant technology. Since the completion of product development followed by the filing of our Drug Master File with the FDA, we've worked closely with Colorcon to put the operational infrastructure in place to ultimately be ready to deliver our mutual first order. We are now readying for our first large-scale manufacturing run with Colorcon Opadry to take place in the coming weeks for process validation.

Concurrently, we are working with Colorcon on an early-stage study for a multinational biotech company. The time line to our first order is yet to be determined and will be contingent on customer interest and the preparations for regulatory review including stability and other testing regimes and the approval of the customers' drug candidate. We believe that pharmaceutical and nutraceutical excipients are a natural home for our taggant technology. And to that end, we are moving to request participation in the emerging technology program at the FDA to seek guidance on the FDA's regulatory requirements and road map for our technology platform with a goal of ensuring readiness for the regulatory approval process when it occurs. The emerging technology program seeks to promote the adoption of innovative approaches to pharmaceutical product design and manufacturing. Through the program, industry representatives, like us, can meet with the emerging technology program members to discuss, identify and to resolve potential technical and regulatory issues regarding the development and implementation of a novel technology, such as ours, prior to filing a regulatory submission. Now I will have more to say about this as this initiative progresses.

We have been working very closely with our valuable go-to-market partner, TheraCann International, to develop a robust pipeline of tagging opportunities with growers and processors. As a reminder, our DNA technology platform is the basis of ETCH biotrace, 1 of 4 key services offered by TheraCann. ETCH biotrace is a verification technology that employs molecular tagging methods to ensure the integrity and prognosis of ingredients and components in the cannabis supply chain from seed to point of sale, and is supported by cloud and block-chain technology.

We launched our demand-generation campaign this past June with an industry webinar that was well attended followed by print, online and social media programs with industry-leading media properties. Then we launched our first cannabis tagging system this past July at the National Cannabis Industry Association in San Jose, California. Our patent pending concept of using a cold micron-sized fog to tag the cannabis plant and then track it through the supply chain to retail shelves was very well received by the large industry players. We then launched the second version of the tagging system at the November MJBiz trade show in Las Vegas. That also received a great deal of interest. Over 29,000 people attended the event. We also attended the CannaTech event in Sydney, Australia, in October that is hosted by iCAN. And I will attend the CannaTech event next week in Panama. TheraCann is the sponsor of the CannaTech shows and will also be launching its cannabis center of excellence that same week in Panama that will feature the ETCH biotrace solution powered by our CertainT platform.

Now the 2018 United States Farm Bill, signed in December, makes ETCH biotrace more of an urgent need for the industry. The Farm Bill legalizes the regulated production of hemp, which until now has not been differentiated from other cannabis plants. The industry needs to be able to track legal cannabis and THC-based products, and now legal hemp and CBD-based products, back to their source to prevent the incursion into those supply chains by black market sources of the same materials that are often contaminated with toxins or to mitigate tax avoidance. As an example of the latter, in 2017, growers in California grew 13 million pounds of cannabis and used 2 million pounds in the State, illegally exporting 11 million pounds. We believe our platform would curb or eliminate interstate transports and allow states to track and verify their cannabis tax revenues.

Now our near-term opportunities include 12 accounts across the globe. I hope to share news of our progress in cannabis very soon that will likely have a direct impact on our top line.

Yesterday, we shared 2 announcements from iCAN or Israel Cannabis. That concerns firstly the approval by the Israeli parliament, or Knesset, of the exportation of medical cannabis, and secondly, also concerned an agreement between our partner, TheraCann International, and iCAN. This bilateral agreement enables iCAN to offer our DNA tagging to control gray market diversion and to secure Israeli intellectual property that protects their cannabis business. Now, as you know, Israel leads the globe in security and in agricultural technology. So we regard this as a very positive pair of related developments.

Finally, let me briefly update you on our LinEAR RX subsidiary. Following the introduction of LinEAR RX to the world, via our webinar in early December, we attended the JPMorgan Healthcare Conference in January, which is the seminal conference for biotech and healthcare companies that seek to draw the attention of Wall Street, potential industry partners and strategic investors. I believe it's actually attended by over 100,000 people. The LinEAR RX platform was very well received, and it is clear from our presentations there that there is an urgent need to replace plasmids as a means of manufacturing DNA at volume.

Our research activities for LinEAR RX, adopted for nucleic acid-based therapies, are steadily progressing. Early results are promising. Our ongoing development of anticancer, linear DNA-based vaccines continues to show strong immunogenicity in mice. And a tumor challenge in mice is on the near horizon. We're very excited about that.

Our CRO-funded work projects are performing well and attracting new companies, especially in the field of RNA template design and bulk manufacture. We are beginning to see larger-than-typical dollar value for new opportunities that are entering our pipeline, particularly as our CRO customers face maturation into longer contract manufacturing relationships. The company recently received a purchase order in excess of $500,000 for linear DNA and diagnostics to be delivered over the next 12 to 18 months.

Now in the field of adoptive cell therapy, or CAR-T, our early results are very encouraging and show that transection of human T cells with linear DNA at high efficiency is possible and can produce strong and persistent expression in vitro. Now this microscope image is of human T cells grown in primary culture. The image was derived only 24 hours after the modification by electroporation with a linear DNA amplicon produced, designed and manufactured by us via LinEAR RX PCR technology. This amplicon contains the complete gene, which encodes the production of green fluorescent protein or GFP. The microscope image you saw is of that green florescence generated from the synthesis of GFP protein in the cell. Each cell that has taken up the linear amplicon in a functional form is converted to a 10-micron diameter green cell. And as is striking from this microscopic image, hundreds of such T cells have taken up the linear GFP amplicon, thus generating a constellation of kinds of a green fluorescent cells in the micrograph. Now to our knowledge, these are the first data to demonstrate the uptake and subsequent gene expression of a PCR-generated gene fragment in human T cells facilitated by commercially scalable high throughput electroporation.

The GFP system is well known in cell biology to be an excellent surrogate for optimizing human gene expression in cells. Along these same lines, LinEAR RX has begun taking the lessons learned from the present GFP studies with human T cells and will now begin corresponding studies with a linear amplicon that LinEAR RX has designed and already manufactured for the anti-CD19 CAR-T cell therapeutic candidate we recently licensed from iCell. We anticipate these studies will begin in mid-February. We will soon be transecting human T cells with our anti-CD19 LinEAR RX CAR-T construct, which, if successful, will be proof of our concept of our viral and plasmid-free CAR-T manufacturing platform.

Now during the fourth quarter of fiscal 2018, we had closed on a $1.65 million round of secured convertible notes with certain members of the management team, the Board of Directors, including me. During the first quarter of 2019, we closed on an additional $550,000 of the secured convertible notes with participation by me and another member of management. The participation by management and the Board of Directors serves to further align our interest with those of our shareholders. As Beth noted, we also closed on a public offering during December 2018 for total gross proceeds of $2,750,000. During January, Maxim Group exercised most of their overallotment for an additional $250,000 of gross proceeds. And we've also seen a small degree of warrant conversion.

We remain committed to maximizing the value of our platform with the benefit of you, our shareholders. The management team and employees of Applied DNA are singularly focused on bringing the opportunities I have discussed to revenue. Adoption of our platform has taken a long time, but we are starting to see the initial fruit of our many years of labor. Along the way, we have honed our platforms' value proposition around responsible sourcing, sustainability, compliance to supply chain management, quality assurance and verification of marketing claims to manufacturers and brands across our select target verticals.

Now this concludes my prepared remarks. Operator, can you please open the call to questions?

(Operator Instructions) And the first question comes from Anthony Vendetti with the Maxim Group.

Jim, I was just wondering -- congrats on getting the first order for linear DNA. Can you tell us what's the revenue recognition for that? How you recognize that?

Sure. Well, first of all, what's exciting about this order is the fact that it speaks to a clinical BenchTop platform that is being promulgated around the world. And its testing resource really amounts, at this time, to but a single assay. And as this instrument becomes entrenched as a tool within the clinical lab setting, we are expecting further development of DNA-based assays. And I'll let Beth speak to the issue of recognition of the revenue as the order came in, in a single tranche, but will be -- tranche will be shipped over the course of several quarters.

Okay. So the purchase order has 4 scheduled shipments within it. And since it's the supply of a DNA product, we would recognize revenue upon their receipts of the products.

Over what time period do you think that would be, approximately?

Between, I believe, 12 to 16 months.

12 to 16 months, okay. And in terms of the relationship with TheraCann, how do you share in that revenue?

Well, currently right now, we have a precommercial development contract with them that was funded by them in January of last year. So right now, we are recognizing that as one of our research and development contracts over a period of time based on the cost incurred, similar to what the old accounting guidances called percentage-of-completion model. The new commercial revenue that's out of it is in development and hasn't currently happened yet, so I can't really speak to the recognition of it.

And then, maybe, Jim, you could speak about this a little bit. Obviously, anything cannabis right now whether it's CBD-infused or the cannabis industry in general, attracts a lot of investor attention. Can you try to quantify the revenue opportunity for Applied DNA in the cannabis industry? Maybe quantify it, and what do you think the opportunity is over the next 12 to 18 months? And what do you think that opportunity is out 3 to 5 years from now?

Sure. Well, TheraCann has been very active in obtaining the voice of the customer in this rapidly changing marketplace. And we have received from them their estimates of revenue over the short and medium term that are really very, very encouraging for us. We personally feel our platform is relevant to all sources of cannabis where growers, the chemical derivative producers, and the dispensaries want to be able to assure their client of the original source. So we think we're relevant really to virtually all cannabis supply chains. It would be premature for me to attempt to put any guidance on our opportunities there. Suffice it to say, we feel they are compellingly large.

Okay. And then, can you just, as a last question, talk about the increasing gross margin with it? Was that due to one specific contract for the quarter because there's a pretty sizable increase from prior quarters?

It really had to do with the mix of products. So our products revenue during the fiscal -- first fiscal quarter of 2019 was primarily made of textile and cotton revenue, which is at a high gross margin versus the product revenue mix -- sales mix that was in this quarter of last year.

(Operator Instructions) And the next question comes from [John Samuelson] from Cantella & Co.

Two questions for you. One, as far as TheraCann goes and I know we can't estimate anything near, but were the margins on that type of business be traditionally what we've seen along the cotton lines and some of our other business or do we expect it to be, if and when it comes, a little higher?

We expect those margins will be at least equal to our cotton business, likely a little higher.

Okay. If nobody else has any questions, I'll ask 1 more. I'm not sure if you can answer it. We have a -- you have acquired a new shareholder, and I was just wondering if he has had any contact with the company at all, or do you know what his intentions are at this point?

Yes, I actually have a statement from that shareholder, who I have spoken to. And he has authorized me to read it if the question arose. So I'd be happy to actually. It reads, "I am a private investor with nearly 4 decades of experience. I first learned about Applied DNA Sciences in late 2016 and gradually accumulated about 1 million shares mostly in 2017. In December 2018 and January 2019, I bought another approximately 4 million shares and became a 10% beneficial owner. While I understand and share the pain of my fellow shareholders regarding Applied DNA's dilutive just-in-time capital raise and the negative effect it's had on the stock price, I also appreciate that APDN management runs a very lean cost-conscious operation, including relatively low executive compensation, while still making significant and worthwhile R&D investments with enormous long-term potential. I trust that management has gotten the message of the slumping stock price -- as an aside, we have -- and will improve on their financing strategy. I have become a 10% investor in APDN because I strongly believe in the enormous long-term growth potential of both DNA tagging and LinEAR RX, both with that scale and profit margin potential. And relative to this potential, this is, by far, the most undervalued and underappreciated company I've ever invested in. I have no intention whatsoever of being an activist investor. On the contrary, I intend to continue to be supportive of management by being a patient investor with a very long-term horizon."

(Operator Instructions) And the next question comes from Brian Kinstlinger with Alliance Global Partners.

So about a year ago, you had, at a conference, said you had $6.5 million of recurring revenue, I think it was in your K as well. And $4.5 million or so, maybe a little bit lesser from cotton. So in fiscal '18, you were a bit away from that in the first quarter, even adjusting for the accounting changes you're still a bit off that pace. What's changed in your business that you have -- that $6.5 million recurring hasn't been able to be achieved for the year or on an annual basis right now?

Yes, I understand your issue completely. So our business foundation in cotton remains very consistent. However, the nature of the cotton of business and its seasonality means that there is only one time in the course of the year or one period, during which a manufacturer can effectively order cotton. And they either underorder and risk not being able to service new customers as they appear in the course of the year or they overorder it and wisely, I think, establish a buffer for the period before the next harvest and ginning season. And over the last couple of years, we have been caught in 2 complexities. One is our prior customer was Louis Dreyfus and we switched to Himatsingka becoming our customer. And the second is an approach to equilibrium in the amount of cotton that's tagged and remains behind in inventory after the tagging season is complete. And remember that after the tagging season is complete, the supply of cotton to the manufacturers is pretty much JIT. And that demand ebbs and flows over time. But generally speaking, our cotton business has really not diminished over time. Its impact on our revenue has been variable. But our ultimate users of tagged cotton have remained at fairly constant levels. Now we are working hard to increase those levels by approaching global markets and by focusing very much on apparel.

But given you've had some really large big box retailers behind your product, I mean, Bed Bath & Beyond has been pretty public about it. What has been the biggest inhibitor to growth in expanding this business? Even if you said you were flattish, I'm wondering why there are so many other retailers you can contract with and procure -- they would procure it as well. So what has been their biggest inhibitor to moving forward with your products as well?

I wouldn't say there has been an inhibitor. We have reached the tipping point with several customers who are interested in using our platform. And I think the fact that we've been able to parlay our initial cotton business into business with synthetic fibers of many types and across many countries, it's kind of indicative of the effect of the impact -- positive impact that cotton has had on that. And when it comes to manufacturers and brands that have established supply chains, it takes a fair amount of time and work in order to penetrate into new customers. And we are very actively doing that. So we're still optimistic about our cotton business. Our partner is working hard to develop the business for us. And as I say, we're looking forward to emerging into apparel, which is a very important aspect of cotton all the way around.

Great. I have one more question. And I've asked it many times, I think, over the years. We've seen many press releases over time about the variety of pilots. A lot of them, if not all of them, make a ton of sense in terms of counterfeits and protection. We've talked about synthetics for a while now, I'm not sure I've seen that in the evidence of revenue growth. So I'm wondering, what is the next leg of growth. Is it synthetics? Is it cannabis, fertilizer, the capsules for pharmaceuticals? There are so many, but which one are you most confident in fiscal 2019 might be the next leg of growth for the company?

Sure. Thank you. We're very confident in the growth of our textile business, in particular, in the synthetic fiber category. We are also excited by our entry into new geographies, our relationships reflected in the recent MOUs. With certainty, our entry into cannabis is bound to affect our top line. And precisely when, I can't say, but we're hoping that sooner rather than later. We're very optimistic about our pharma business as well. So I would say those are 3 primary industry verticals that we expect to have the most dramatic change on our short term.

And as there are no more questions at the present time, I would like to turn the floor over to Dr. Hayward for any closing comments.

Okay. Well, thank you all for participating, and thank you for your interest and loyalty. I hope you are as excited as we are about our prospects. And we look forward to interacting with you over the coming quarter. Thanks, very much.

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