BNB Plus Corp. (BNBX) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Applied DNA Sciences Fiscal Third Quarter 2017 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note that this 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 am Clay Shorrock, General Counsel at Applied DNA. A copy of the Company’s earnings press release and the accompanying PowerPoint presentation to this call are available for download under the Events and Presentation section of the Investor page of the Applied DNA website. With me today 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 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 nine 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 nine months of fiscal year, we've 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 nine 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 nine months of fiscal 2017 as compared to the same period in the prior year. The increase was driven primarily by fulfillment of an initial order of 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 23rd, we entered into a new licensing agreement with Himatsingka. This new agreement among other things provides a 60-day payment term as well as a greater gross margin and similar sales under our previous arrangement for the sale of molecular tag PimaCott. 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 manufacturer specifically GHCl and Loftex. These contracts add on to the five year supply agreement for both 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% and 14% during the three and nine month periods ending June 30, 2017, compared to the same period in the prior fiscal year. This was mainly due to the conclusion of the two 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 two year period. Revenues from this new contract 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 little later. Cost of revenue as a percentage of product revenue decreased for the first three months ended June 30, 2017 from 61% to 16% due to higher sales in the textile industry, which have higher margin. Also during the Q3, 2017, due to higher products revenue our production increased and as a result our fixed production cost allocated to our production facilities were absorbed at a higher rate by products 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 nine 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 non-cash 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 fiscal 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 decrease cash balance is primarily a result of cash used to fund operations. On June 28th, we entered into a subscription agreement from an aftermarket 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 growth 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 six 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 one investor for an additional 30 days until August 28. As of June 30, 2017, during accounts receivable balances 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 30th, 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 cost collection as well a decrease in expenditures. As of July 31, our cash position is approximately $2.1 million, which is noted above does not include all proceeds from the private placement of which 1.1 was not collected As of July 31st, nor the payment received from Dreyfus of approximately $1.29 million. We continue to closely monitor our spending and intend to remain disciplined and continued to strategically manage cost 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.

Thank you, Beth, and good afternoon everyone. I'm pleased to speak to you today following Beth's report of 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 have been fully absorbed by breaking even. These healthy gross margins are result of sales trending towards the 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 will be influenced by any quarter-to-quarter variability and 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 growth 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 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 sustaining growth tomorrow. Now interest has steadily expanded in our DNA technology platform. We initially directed the value proposition of our DNA technology platform towards the top of the supply chain, leaving the brands and retailers to pull our value proposition to the consumer. Brands and retailers want CertainT that the products on their shelves are 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 market place. With our success in purifying the supply chain for our first two 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 and bringing CertainT 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 28th, we announced that they view of our SigNature T molecular tag in Bed Bath & 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 Bed Bath & Beyond stores and you will see PimaCott towels for sale. On June 23rd, we entered into a new licensing agreement within Himatsingka. From a business perspective, the benefits of this agreement to us are many. First, we secured a 25-year commitment Himatsingka, nearing the commitments they made to shared customers. Himatsingka, 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 collection 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 are 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 libratory 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 three years ago. The complexity of the cotton supply chain is such that if we could eliminate cheating in cotton than we can purify virtually any supply chain. Our go-to-market strategy for non-cotton textiles nears 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 market consumers will come to signify originality, performance and sustainability, much you can to Intel Inside. In Fact, we've received a trademark registration for "CertainT is only a molecule away" just last week. The first CertainT branded recycled PET towels are scheduled 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’s 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 a 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’s CertainT trademark for use on its products as well as for promotional marketing and sales materials. The agreement provides for minimum annual revenue 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 importantly at the backend 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 we were the recipient of a two year approximately $1.5 million contract that expands our current platforms to improve DoD counterfeit risk mitigation. I’d draw your attention to the fact that this was a competitive bid contract for which our technology platform was pivoted against other technologies and methodologies. Just this morning, we announced the start up 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 with the FDA in the next several months. Now, for an update on our pipeline of pilot products. As we move passed the early adaptor 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 two pre-commercial relationships and announced two customers that progressed directly to multi-year supply agreements without any pause for feasibility. Just last week, we made a new prospects on Wednesday submitted a pre-commercial proposal on Thursday and I signed the funding documents for pre-commercial pilot by Monday. Four days from first handshake to funded collaboration. Overall and as I have sited before, we continue to see a shortening of our sales cycle both on average and in verticals in which are experience is broader. Earlier this summer, we announced that we had completed initial work on a pilot project with Lilly of the Desert a leading U.S. producer of aloe vera products, which touches upon multiple markets from food and supplements the 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. And I'm pleased to report, very pleased to report that we were successful across all facets of the pilot and we've 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 uptick 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 expand the applications of our technologies within the personal care market and we are already benefitting greatly from her expertise. Now, thank you for your time and attention this afternoon. Operator, please open the call to questions.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brian Kinstlinger from Maxim Group. Please go ahead with your question.

Hi Jim, how are you. Yes, so first I just want 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? I just want to make sure I understand that.

No, those are as we call them pre-commercial pilots. They’ll lead to a commercial agreement we hope.

But is that same as a pilot or is that something different?

Yes, same as a pilot.

Okay. So I guess I am curious when we take a look at your pilots, once you are completed. How long does it typically take before may begin generating revenue? I know you talked about the fertilizer for example. But in general, what is that timeframe and what percentage of companies that finished pilots actually do move forward like that?

Okay, I will answer that 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 commercial relationship. Now the time 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 commercial manufacture. 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 ladder 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 bench top exercise. So the time required to go to full line commerce with something 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 are incentivized?

Sure, Himatsingka as you know is the home textile manufacturer, but thanks in large part to the success that our first program which was the molecular tagging of Pima, to create the product known at PimaCott. PimaCott is used throughout the Himatsingka facility to manufacture home textiles. And the response of the market place was so tremendous that Himatsingka 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 pool that our technology had for their manufacturing. So now their business in linen is homing along. But they have 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 three years insuring that they're DNA compliant and all of those spinners are capable of supplying tagged yarn to the apparel industry. So we really add 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 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 tag cotton.

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

Because they are something of both I suspect.

Okay. How do you spell it? What was the name of it? Maybe it was in the press, if I missed it. What was the name?

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

Got it. So thanks for the questions, yes.

Borealis has the right to distribute their product throughout Europe and Rosier can distribute throughout the rest of the world.

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

Okay. Well, let's try to put the two 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 300 million, so the total American output is about 7.3 billion pound of American cotton. Globally, the requirement for fertilizer is just short of 500 billion pounds. So the demand for fertilizer globally is roughly 100 times the size of the cotton market. Now, the fertilizer market is distributed throughout the world very often a petroleum manufacturer are also has a fertilizer and manufacturing operation that they co-operate with some of the affluent from petroleum operation. So, there are many players we can talk to in the fertilizer market. The demand globally for the fertilizer is higher than it's ever been before. The impacts of deforestation and of poor farming technologies have 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 still 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 buying 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 its always difficult, but fourth quarter seasonally strong, at least how we understood it as we started this tagging of patent. Obviously, there has 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 am 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 clear up that just predates the beginning of the harvest. So we will know much more then. But if I were to judge inquiries from the brand owners that we are fielding nowadays. I have reason I would say to be optimistic.

Let me ask a follow-up to that. First of all, suggesting much stronger than the June quarter because two years ago obviously it was much stronger? And intend into that, is there any issue your customers having a cluster of inventory likely the case that hurt you in fiscal ‘16?

Yes. That’s I am 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 form strong relationship with farmers and the ginners, breaking through that culture which 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 would be accounts receivable that Beth spoke to earlier in her session. So that’s not going to happen to us again because we are paying in the very short-term. Our partners are not going to overbuy and then have to pay immediately. They are going to buy against a very real expectation for DNA tagging in that current season. We won’t be building a future inventory. We will be responding to the 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 build up an inventory in warehouses we don’t get orders, so we don't know how large units. So I think that we will be much more even keened and have a much better expectation. I don't think what happened to us in 2016 and will ever happen again. And that is why we put so much effort into renegotiating our cotton distribution agreement 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 cross. We're talking to everyone and let's see what happens. Welcome.

Our next question comes from Jeff Kessler from Imperial Capital. Please go ahead with your question.

You've enumerated a number of both cotton and non-cotton guaranteed, guarantee that are 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 subject to the lumpiness of the cotton to degree. Even though we've smoothed out a bit in our new agreement it's still a matter of the demand that come then. But we're very happy to have built that recurring revenue base and that's really only built and 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.

Okay. Now granted most of what your revenue base will be revenues, as they're sold and under cotton 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, if you can dollars the most important -- but more importantly, what it does for you in branding in the sense given 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 bearings is very relevant to your question. Our service revenue came two years ago or can a year ago from two military contracts that we had, that we're 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 the technologies had equal or much larger applications in the commercial world, as is the case for example with bearings. The two IRF 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 evolve some of those contracts that we have not yet announced and expect in the not too distant future. Now to be the lucky beneficiary of another competitively won contract at 1.5 million over two years that service revenue that we’ll recognize for the next almost 24 months, and above that of course come some of the service revenue that comes from our DNA authentication business. To that end, we have been working with a wonderful in-field 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 uptick. 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 compared to perhaps a year ago, so that we have some confidence that if one is somebody -- if a client or some part of the supply chain need 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 there’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 -- that country 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 have sold those devices to our commercial customers. We have established a message 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’s Internet based. It allows us to track and accumulate big data. So we are there very much Jeff. And so now it’s a matter rolling in-out to more and more customers.

Do you have some idea based on this, if you want to go to your base revenue, what do you need in terms of X, in terms of -- let’s 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 which you might term or a little bit less amount, little bit less exact EBITDA profitable.

Sure, we have a 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 as 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 small piece of DNA and it's imminently detectable. So we're able to prove the persistence of that raw material and now whole families of raw materials throughout complex supply chains. And consumers are mounting more and more class actions 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 tag 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 tag universe participating across many, many different industry verticals. And it truly is the demonstration of our capacity to serve us large commercial ecosystems. All we need is one or two of those kinds of opportunities and we derived at EBITDA neutrality.

Okay. That leads to my final question. You folks from the day one from the time that this technology was development some 25 years ago so, and the time that you've been at the helm having trying to pull in business so to speak, out there on the hustings with as many sales people as you can, mainly it seems like main executives of the Company going out there and doing it. Are you reaching a point have you -- do you have the concrete examples which you probably can 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 yourself?

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 are 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. Our early adopters have been passionate and able to pull our technology through their companies or through their supply chain and we’re encountering more and more of them, and we are finding that they are coming to us. And so that’s another reason why the sale cycle has diminished in the example I provided just today of us, this in fact was a customer we wanted to work with and did not yet have the opportunity to contact. They contacted us and four days later we had signed a pilot arrangement. So, we have invested our time, 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 are there where our thumbs and our laptops are very busy.

Alright, I am sorry, one final question, this is just leading question. If we want to look at the seasonality of your business given there is still a big part of your -- a big part 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 aren’t doing everything we can to smooth out the lumpiness that comes from our natural commodity business. And that’s happening because of uptick 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 are not just using the construction of fabrics or in textile, 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 into the first quarter of 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. Please go ahead with your question.

Hi, Jim. I had a question, 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 by as far as they could go and sold that 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 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 application is much, much broader than it was for bar-coding 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 via produce or fiber to prove that it was organically grown. But if we're present when an NGO certifies that it was and it is organic, we can tag it to indicate as such. When it comes to human trafficking or 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 re-importation into the United States. They can be used to indicate the product was cultivated under free trade. We have not yet met a large CPG company that does not have a 20-20 sustainability strategy. Our tag can indicate the sustainability of very large commodity supply chain. So we have a wide, wide 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 huge development build investment. Yes we have to raise the lot of money, but this company was public long before it should been. And so we have to fund ourselves in small tranches. But of course, our intension is to fund ourselves for the profit.

Second question along those lines, I think you've got what about 20 million shares outstanding at this point?

Correct.

What's the potential for somebody coming along and pushing a hostile to 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 the minor company. The management team is determined to grow this company in the way we have through our home efforts, and we would resist with every fiber hostile takeover any point in the future.

And our next question comes from Paul Cooney from Joseph Gunnar. Please go ahead with your question.

Hey, guys. About 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 majorities in cotton with the second largest being synthetics?

Yes, at this time.

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

Fiscal calendar quarter though not necessarily.

Yes, right, calendar quarter not fiscal.

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

It’s only a matter of timing and market response, but I would say that's possible.

Okay. And then lastly, you have about 14 -- you said you were 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 would have to say we consider that number confidential.

Okay. Are more than one of them pharmaceuticals or?

Yes.

Okay. As far as that market is concerned may be you could address the issues in that market and what potential could you guys have in that market?

Sure. Our interest is in addressing that market the way do large industries, that is -- our interest is not working with a single industry player, but viewing pharmaceutics there is a large commercial ecosystem, and developing the systems that would allow us to move the industry as a whole. We are 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 need not to protect a single drug at a time, but we can protect whole types of drugs, tableted drugs for example et cetera, et cetera.

Ladies and gentlemen, we have 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, I am speaking for my colleagues here around the table and in management. We would like to thank our stock investors, the management team, the Board of Directors. We're 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.