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Edited Transcript of APDN earnings conference call or presentation 13-Aug-19 8:30pm GMT

Q3 2019 Applied DNA Sciences Inc Earnings Call

STONY BROOK Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Applied DNA Sciences Inc earnings conference call or presentation Tuesday, August 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Beth M. Jantzen

Applied DNA Sciences, Inc. - CFO

* Clay Shorrock

Applied DNA Sciences, Inc. - General Counsel

* James A. Hayward

Applied DNA Sciences, Inc. - President, CEO & Chairman

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Conference Call Participants

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* Craig Pierce

Morgan Stanley - VP of Wealth Advisor

* Jeremy Pearlman

Maxim Group LLC, Research Division - Equity Research Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Applied DNA Sciences Fiscal Third 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, legal counsel for Applied DNA Sciences. Please go ahead.

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Clay Shorrock, Applied DNA Sciences, Inc. - General Counsel [2]

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Thank you, operator, and good afternoon, everyone, and thank you for joining us for our fiscal third quarter 2019 financial results conference call. I'm Clay Shorrock of the law firm of Allen, Dyer, Doppelt, & Gilchrist, legal counsel for 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 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's Form 10-K filed on December 18, 2018, and on our 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.

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [3]

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Thank you, Clay. Good afternoon, everyone, and thank you for joining us today. Today, I will review our consolidated financial results for the fiscal third quarter and the first 9 months of fiscal 2019. Then Dr. James Hayward, our President and CEO, will provide you with an update on the company's progress, activities and strategies for the balance of the fiscal year.

Before starting our review of the financials, I wanted to walk you through some transactions that have occurred since June 30. As recently disclosed in an 8-K filing, on July 30, we received notice from NASDAQ indicating that based upon our continued noncompliance with the minimum bid price as well as the market value of listed securities requirement, NASDAQ has determined to delist our securities from the NASDAQ Capital Markets unless we timely request a hearing before the NASDAQ Hearings Panel.

We requested a hearing, and it is scheduled for September 19. Our request for a hearing stays any further action by NASDAQ pending the ultimate conclusion of the hearing. Also during the pendency of the hearing, our securities will remain listed on NASDAQ. Jim will provide more detail on our evolving plan to regain compliance with all applicable requirements for continued listing on NASDAQ a little later.

On July 19, we closed on a $1.5 million secured convertible note. Simultaneous with the new issuance, we also amended our existing secured convertible note to, among other things, reduce the conversion price to $0.54. This was primarily done to facilitate the conversion to equity. The amendments also included modifying the August 2018 convertible notes, so that all of the convertible notes now have the same expiration date of November 28, 2021.

Last week, we announced that on August 5, we signed a nonbinding term sheet with TheraCann that outlined certain amendments to our exclusive licensing and cooperation agreement, which was originally entered into this past March. The nonbinding term sheet is expected to be followed by a definitive agreement.

Upon the signing of the definitive agreement, we will receive $4 million in TheraCann convertible preferred stock with an annual dividend yield of 10% compounded quarterly as well as a $1 million convertible promissory note that is guaranteed by all of TheraCann's operating subsidiaries. These will be received in exchange for a waiver of the remaining $4 million in payments that were due to us, $2 million on each of June 30 and August 15.

At our option, the convertible preferred stock can either be converted into common stock or redeemed for cash. Upon the signing of the definitive agreement, we will be able to recognize $4 million in revenue as the preferred stock is accounted for as consideration under the revenue recognition guidance.

Starting with the statement of operations, total revenues for the period were approximately $2.1 million. This represents over a 100% increase compared to $1 million reported in the third quarter of fiscal 2018 and up approximately 154% as compared to $778,000 for the second quarter of fiscal 2019. The year-over-year and quarter-over-quarter increases in revenues were primarily from $1 million in revenue from our licensing agreement with TheraCann as we received the first cash payment of $1 million in April.

For the first 9 months of fiscal 2019, we recognized revenue of $3.7 million, an increase of 37% from $2.7 million during the first 9 months of fiscal 2018. This increase was driven by the increase in service revenues of $1.4 million or 92% offset by a decrease in product revenues of 28% or $344,000.

Product revenues remained flat at $393,000 for the third fiscal quarters of both 2019 and 2018 and increased 129% or $221,000 compared to revenue of $171,000 in the second quarter of fiscal 2019. The quarter-over-quarter increase in revenues reflects the fulfillment of $121,000 for shipments of DNA concentrate and DNA Transfer Systems for the marketing of Egyptian cotton as well as an increase in biopharmaceutical revenue of approximately $135,000.

Third quarter service revenues increased 157% to $1.7 million compared to $623,000 for the same period in fiscal 2018, and increased by 174% on a sequential basis with the second quarter of fiscal 2019. The increase in service revenue was due to the $1 million of revenue recognized from our licensing agreement with TheraCann as mentioned earlier.

Cost of revenue as a percentage of product revenue in our fiscal third quarter of 2019 was 69% as compared to 64% for the year ago period. For the 9-month period ended June 30, 2019 and 2018, cost of revenues improved as a percentage of product revenue to 63% from 78%. The decrease in cost of revenues as a percentage of product revenues for the first 3 quarters of fiscal 2019 is due to the product sales mix as sales during the first 9 months of the prior fiscal year were primarily comprised of consumer asset marketing sales and biopharmaceutical sales, which are at a lower margin.

Total operating expenses decreased in the third fiscal quarter of 2019 to $3.2 million compared with $3.6 million for the same period in the prior fiscal year and decreased slightly as compared to $3.3 million in the second quarter of fiscal 2019. The decrease in operating expenses on a year-over-year basis is from reduced payroll expenses of $409,000 due to a realignment of the sales force and reductions in overall head count. The decrease in payroll was offset by increases in legal and professional fees as well as an increase of $95,000 in R&D expenses.

Fiscal year-to-date total operating expenses have increased by $486,000 or 5% as compared to the first 9 months of fiscal 2018. This increase is primarily due to an increase in stock-based compensation as a result of the credit for canceled options during the prior fiscal year as well as expense for stock option modification during the current fiscal year-to-date. The increase also relates to increased legal and professional fees of $430,000. These increases were offset by decreases in payroll of $659,000 and decreased depreciation expenses.

Our net loss for the third quarter of fiscal 2019 decreased by 90% on a year-over-year basis and decreased 82% compared to our fiscal second quarter of 2019. This improvement was a result of increased revenues and, to a lesser extent, our reduction of expenses. The reduction of our net loss, coupled with an increase in shares outstanding, contributed to a decrease in our net loss per share to a negative $0.04 per share for Q3 of fiscal 2019 compared to a negative $0.10 for the same period in the prior fiscal year and a negative $0.08 as compared to Q2 of fiscal 2019.

Excluding noncash expenses, adjusted EBITDA decreased to a negative $1.2 million for the quarter ended June 30, 2019, as compared to a negative $2.5 million and $2.3 million for the quarters ended June 30, 2018, and March 31, 2019, respectively.

Turning to the balance sheet. Cash and cash equivalents totaled approximately $500,000 at June 30, 2019. As discussed earlier, subsequent to the quarter end, we received $1.5 million in proceeds from the issuance of a convertible note.

As of June 30, we had $803,000 of deferred revenue. The deferred revenue balance at June 30 was comprised mainly of milestone and/or phased payments under certain of our research and development pre-commercial projects that are being recognized to revenue over time on a cost-to-cost basis.

Subsequent to the quarter end, the cashless exercise provision of the warrants issued in conjunction with the December 2018 financing was triggered as a result of our stock price falling below $0.50 per share. As a result, $4.7 million warrants have been cashlessly exercised. These exercises resulted in the issuance of 3.3 million shares of our common stock.

As of June 30, 2019, our average monthly cash burn rate for fiscal '19, excluding the proceeds from the financing, was $407,000 compared to $526,000 for the same period in the prior fiscal year, a decrease of 23%. The decrease in monthly burn rate for the first 9 months of fiscal '19 is due to higher cash receipts and slightly lower disbursements. As of July 31, 2019, our cash position is approximately $1 million.

As noted on our prior quarterly call, based on our historical financial results, we disclosed in our 2018 10-K and have also disclosed in our 10-Qs for fiscal 2019 that there is substantial doubt about the company's ability to continue as a going concern for 1 year from the issuance of the financial statements. 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.

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

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [4]

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Okay. Thank you, Beth. Good afternoon, everyone, and thank you for joining our call. First, just an encouraging comment about our Q3 numbers. Beth has already reported that our losses were dramatically reduced. But from a revenue perspective, Q3 was our best quarter in the past 15 quarters.

Now, as all of you are undoubtedly aware, last week Applied DNA announced a nonbinding term sheet with TheraCann that amends the exclusive licensing and cooperation agreement between our 2 companies. Just prior to that, we filed an 8-K on the status of our continued listing on the NASDAQ.

Now given the significance of these 2 developments and how they are intertwined, I'll start today's call talking about these developments. I'll then update you on the activities in our key verticals before I open the call to your questions.

To summarize the nonbinding term sheet announced last week in lieu of $4 million in cash due to us by TheraCann under the agreement, TheraCann will provide us $4 million in convertible preferred stock and a $1 million convertible promissory note upon the signing of a definitive agreement, adding a benefit worth $1 million to our original agreement. Now, Beth has already reviewed for us the financial details.

We have agreed with TheraCann to amend our licensing and cooperation agreement for 2 reasons. First, it is to the long-term benefit of Applied DNA and our shareholders that we support our exclusive cannabis partner. We received the first $1 million in cash in Q3 of their total obligation to Applied DNA. Now over the past 2 years, we've developed a cannabis track and trace system under the auspices of our original $1 million R&D contract from TheraCann. This system now powers TheraCann's seed-to-sale solution known as ETCH BioTrace. We believe that the ability to use DNA to tag and trace cannabis at any point in the supply chain is the gold standard of diversion control and intellectual property control.

We have witnessed firsthand the expansion in TheraCann's business pipeline since the start of our relationship. It is very clear to us that the cannabis marketplace agrees that ETCH BioTrace, powered by Applied DNA, is a game-changer for the industry. TheraCann continues to impress us with the top-tier customers they bring to the negotiating table.

In fact, it is on the basis of its expanding pipeline, global operations and disruptive technology portfolio supporting the cannabis and hemp industry that TheraCann is pursuing a listing on the Toronto Stock Venture Exchange or TSXV. We learned yesterday that the TSXV has completed their review and confirmed their meeting with the executive leadership council on Thursday of this week. That should pave the way to TheraCann's listing in the second half of September, which, according to our amended term sheet, would result in the payment to us of the $4 million a few days thereafter following our demand for redemption of the TheraCann preferred stock plus the accrued dividends.

Now second, TheraCann's issuance of their preferred equity to us increases our shareholders' equity as it is considered payment under our licensing agreement. This is important because it helps us to approach the $5 million minimum threshold required by NASDAQ to meet the equity requirement and cure one of our deficiencies and maintain our listing. We'll have more about that in a moment.

So in sum, our faith in TheraCann has never wavered, and they have been good partners throughout our mutual development and in all stages of our negotiation. We will have more to say about TheraCann and our cannabis business later in my remarks.

Now regarding our NASDAQ listing. As Beth noted, on July 30, we received a notice from NASDAQ stating that based on our continued noncompliance with the 2 NASDAQ listing rules, the NASDAQ staff had determined to delist our shares and publicly-traded warrants effective the 8th of August, if we had not requested a hearing with the NASDAQ Hearings Panel. Well, we have requested a hearing before the NASDAQ Hearings Panel that starts the delisting process as it is our right as a NASDAQ-listed company. And I am pleased to report that we have been assigned the date of 19 September to present our appeal to the Hearings Panel.

The panel generally issues a written decision within 30 days after the hearing. However, the decision could be received sooner. The panel has the authority to either delist a company or allow for continued listing. In the meantime, our shares and warrants will continue to trade on the NASDAQ.

As Beth discussed on prior investor calls, we are noncompliant with the listing rule which requires companies to have a minimum market capitalization of $35 million. However, this breach can be cured either by a return of the share price above $0.84, which gets our market cap above $35 million, or by passing a threshold of stockholders' equity of $5 million and then maintaining a minimum of $2.5 million in stockholders' equity thereafter.

We have developed and we are executing on a multiphase plan to improve our liquidity and balance sheet and cure the company's deficiency with the NASDAQ listing standard for minimum stockholders' equity. Under this plan, we will have added $4 million of shareholder equity to our balance sheet upon the signing of the definitive agreement and receipt of the TheraCann preferred shares.

We have also amended the terms of our convertible notes to incent the current noteholders to convert their debt into equity. Doing so would raise our shareholders' equity and is a further step in achieving listings compliance.

Now in our acquisition of the assets of Vitatex, our shareholders' equity also grew by approximately $500,000. Additional steps we will be taking between today and the 19th of September will be disclosed via our public filings and press releases.

Finally, we should note that if the definitive agreement with TheraCann is signed and the preferred shares issued prior to the 30th of September, it would result in Q4 being the best revenue quarter in the company's history. With the addition of $4 million of revenue upon signing of the definitive agreement, we would expect to have positive EBITDA in Q4 as well. So let me be clear. Our NASDAQ listing is an absolute corporate imperative.

Now, as I stated last quarter, we continue to monetize our LineaRx diagnostic and therapeutic platforms and our molecular taggant platform with particular focus on textiles and cannabis during Q3 and thereafter. Let me update you on our progress across key verticals that will catalyze our growth going forward.

Now, we're very optimistic about our prospects for growth in textiles whose foundation began for us with cotton. This year, we plan to see the addition of apparel to our home textiles to comprise our global cotton business. Now home textiles in cotton continues with a steady drumbeat. The introduction of new senior management at Himatsingka America, our exclusive licensee, is bringing the development of new market expansions in coming seasons. At this time, for the upcoming U.S. ginning season beginning this October, our partners have communicated a steady demand for PimaCott products. While the less clear demand for HomeGrown products is still being shaped, it will soon be communicated to us. We expect orders shortly, and we are just preparing our first manufacturing runs.

We have worked diligently with our partners, Himatsingka, to expand the addressable market with new tagging of Egyptian cotton. During Q3, Himatsingka shored up contracts with local Egyptian trading and implementation partners, while we shipped SigNature DNA and our DNA Transfer System to a cotton gin outside of Cairo. In July, a quantity of extra-long staple Egyptian cotton was tagged to be converted to demonstration products to generate demand in European and U.S. markets.

Now, kudos to all of our partners who are involved in this initiative where we brought complete infrastructure to a gin enthusiastic to become part of the solution for Egyptian cotton and traceability. It included bale serialization, bale scanning, quality monitoring, remote Internet access with e-mail alerts and SigNature DNA taggant uniquely marked for this cotton in this market. The cotton is now traveling through the supply chain at this time, so we should hear more from this marketplace before long.

Now, synthetic textiles are a much larger, more diverse market than cotton. Demand has increased broadly, thanks to the use of synthetic materials in fast fashion and in the outdoor apparel and fitness apparel movements. We are led by an experienced sales team aided by a technical operations crew that has traveled all over China, Taiwan and India integrating complex supply chains, but the prior expense and hard work has been worth it, as we're announcing brands begin to integrate our CertainT platform to provide end-to-end material traceability in multiple categories, including weather, wool, down and feather, specialty coatings and additives, recycled PET, viscose and other synthetics.

As one platform, brands and retailers can utilize our traceability tools to best fit their supply chains that are cost-effective, flexible and sustainable. Only through traceability can brands and retailers best communicate how they intend to fulfill their sustainability goals and enable them to inspire confidence and supplier transparency, and reinforce brand loyalty and trust to the end consumer.

This strategic approach taken by our textiles group to develop the structure to support the large-scale deployment of products that all need identity preservation also helps brands and retailers tell the compelling, sustainable, responsible and traceable story that is both authentic and meaningful to a growing proportion of end consumers. We really see great things ahead for this vertical.

Now, our regulated road map takes us from the least regulated products to the most. Regulatory complexity increases as we move from cannabis and hemp, the latter being used to make a diversity of textiles, skincare and nutritional supplements, to noncannabis nutraceuticals, to food and pharmaceuticals. We continue to make progress in the world of regulated markets. We continue executing on our road map from least to most regulated, and that corresponds roughly to the shortest and longest times to market.

In pharma, our work with Colorcon continues with a comprehensive stability testing to which only extended times can attest. The good news is that our intent is to be market ready for all versions of Colorcon's core Opadry product. But the not so good news is that this requires extensive testing and time.

Now, to date, we have completed all the stability testing on one Colorcon product family that represents about 40% of this product portfolio. Colorcon is leveraging this ability to supply pharmaceutics that offer an on-dose track and trace capability. In effect, Colorcon is leveraging our platform to raise its profile with pharmaceutical manufacturers to win more business. And we are now pursuing the remaining 60% of their portfolio to give us more shots on goal to generate material revenues from Colorcon.

In nutraceuticals, we have been working with an organization on the development and validation of a tagging solution for a product that's already marketed on store shelves. This firm's goal is brand protection of its patented product with the capability for forensic legal evidence of adulteration, should it ever occur. We have completed lab feasibility studies and a trial production run. We are in final preparation for a commercial scale trial this month. And if successful, it will result in incorporation to their products already in early 2020.

Now, at the start of my remarks, I stated that we've witnessed firsthand the expansion in TheraCann's business pipeline since the start of our relationship. The global legal cannabis market is set to reach over $63 billion in value by 2024 as reported by Statista 2019. We continue to build out our pipeline of opportunities with TheraCann across the globe. Our demand funnel has a mix of opportunities at various maturity levels with short, medium and long horizons. The potential opportunities in front of us are significant in size and scope, especially with the larger global entities. The team has been meeting with these significant industry players, having detailed technical discussions and lining up pre-commercial pilots over the next several quarters.

Just to provide you with a sample snapshot of opportunities, we are pursuing 29 spread across North America, Latin America, Europe, Asia, Oceania and Africa. The interest level is still coming from cultivators, processors and government entities focused both on the CBD and THC products. The value proposition is still from multiple angles to protect their brand and their IP, the verification of origin of source biomass for raw materials and finished products.

The pipeline of our opportunities marries both commercial and regulatory such as those that have been publicly announced at CannAcubed, Israel Cannabis and House of Hemp, but also pursuits catalyzed by regulation centered on track and trace and authenticity at the level of individual states in the U.S. As the industry matures and scales, the ability for ecosystem participants to differentiate their product from those of their competitors becomes the central pillar of their business plan.

As an example, a grower who has cultivated a specific low THC content will want to defend their IP and protect their product from counterfeiters in the marketplace. We have line of sight to initial revenue associated with the development stage activities that, if successful, would graduate to commercial-scale opportunities with each target customer.

As the cannabis industry matures and scales, both domestically and internationally, we and TheraCann are positioning ETCH BioTrace powered by Applied DNA to sit at the nexus of regulatory compliance, supply chain certainty and consumer safety.

Now turning to LineaRx. The volume of LineaRx-related news you have seen from us over the past several months correlates to our growing profile within the biotechnology industry since the launch of our majority-owned subsidiary last October. In these short 10 months, we have seen accelerating interest in our diagnostics and therapeutics platform. And with our acquisition of the assets and IP of Vitatex just last week, we have taken a substantial leap forward in raising an already elevated profile. I think it is fair to say that the leaders in the biotech marketplace have really taken notice.

LineaRx holds the key and has the opportunity to replace plasmids in the routine manufacture of viruses to deliver nearly every single form of gene therapy. Plasmids have been the backbone of genetic research and gene therapy for decades, and they were the singular source of DNA until the arrival of us, of LineaRx. Plasmid use comes with multiple risks, all of which are linear DNA produced by our PCR platform they eliminate. The potential market for us is almost too large to estimate.

In Q3, we saw increased activity in the diagnostic and therapeutic components of the LineaRx business. On the diagnostics side, we shipped the first of 4 quarterly shipments to an existing customer in the in vitro diagnostics market. These quarterly shipments will total over $500,000 annually and should be eventually moved from the Applied DNA's revenue to that of LineaRx.

In addition to that shipment, we are developing new custom amplicons for that very same customer. So you know you have a happy customer. These new amplicons are expected to be components of assays that are expected to come to market in 2020, which will drive increased revenue through our existing supply chain.

On the therapeutic side, we receive multiple purchase orders from developers of gene and cell therapies, including some marquee companies. The linear DNA we'll provide for these orders will be used across a variety of preclinical therapeutic development applications, including CAR-T. It's worth noting that the recent approval by the Centers for Medicare and Medicaid Services approved for reimbursement CAR-T therapies that should increase the market size rapidly.

Our shipment to Evotec was in support of their research efforts regarding Huntington's disease. Evotec is representative of a growing number of therapy developers coming to LineaRx and placing research quantity orders to evaluate the benefits of linear DNA in their therapeutic development pipeline. We are producing linear DNA for the Institute of Hematology and Blood Transfusion at Prague University for potential use in CAR-T-related therapies.

The growth we are seeing in interest and more importantly purchase orders for both diagnostic and therapeutic applications is expected to deliver strong revenue growth in Q4 over Q3 and even stronger from a year-over-year perspective. In addition to revenue growth in Q4, we are expecting additional orders from key developers for CAR-T and RNA vaccine therapies. These orders will drive 2020 revenue in the first half of the year.

Now within LineaRx, we brought in Vitatex, and Vitatex aligns perfectly with our capacity to generate DNA that can be used in immuno-oncology. Vitatex allows us to isolate invasive circulating tumor cells, which can be used in very early diagnosis or late diagnosis or as a general diagnostic. Our platform is unique because it relies on this functional aspect in a blood tube that mimics the behavior of metastasizing cancer cells. When combined with our ability to mass produce custom DNA, we become a formidable force within the entire universe of CAR-T cell therapies in the development of personalized therapies that are based on engineering a patient's own immune cells to treat their unique cancer.

With this acquisition, we believe we entered on the ground floor of a technology that holds the potential to effect reverberations throughout immuno-oncology. As an example of its potential and a key reason for our acquisition of its assets and IP, Vitatex has line of sight to contracts and grants that are impressive for such an early-stage company. But it's not all that early stage. It's worth noting that in the last financial raise of Vitatex some 2 years ago, it was given a pre-money valuation in excess of $20 million. We are very fortunate to have them join our team.

So in conclusion, we have near-term challenges. We're moving very aggressively to overcome them. At the same time, we remain focused on executing on revenue opportunities across cannabis, textiles and biotherapeutics that will support our growth in the near and long term. Biotherapeutics, in particular, we believe, offers our shareholders a compelling path to higher value.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first session today comes from Brian Kinstlinger with AGP.

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Unidentified Analyst, [2]

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This is [Andrew Chang] in for Brian. First off, could you quantify what percent of revenue is related to the cotton industry?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [3]

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Historically, our cotton business has been around 20% to 25% of our revenue. That's what it was in fiscal '18 and then typically, our larger cotton order comes in, in the last quarter of the fiscal year.

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Unidentified Analyst, [4]

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Got it. Outside of the cannabis license, could you talk about maybe what are the next 2 largest revenue verticals for you guys?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [5]

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Next 2 largest verticals, was that the question?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [6]

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Yes, outside of the cannabis licensing.

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [7]

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Sure. Our focus is on textiles as a large source of revenue, in particular, on the growing utility of synthetic textiles. And added to that is the business we call, LineaRx, and that has an interesting future in terms of its revenue source. The customers that come to us initially come to us as CRO customers, contract research customers, and those tend to be lower-priced relationships and short term. They're really valuations of technologies that, just a year ago, most scientists didn't believe were available at scale, that is linear DNA.

They then revert to a CMO relationship where they need larger quantities and their revenue can expect it to go up 10 to 100x. But as they develop faith in this new platform, it's likely to lead to licensing relationships with large onetime licensing fees, not unlike the TheraCann deal we just finished talking about, but different in that they are typically followed by milestones as we work together with the customer to approach the clinic or achieve the clinic or achieve results in the clinic. So those are the 3.

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Unidentified Analyst, [8]

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Just talk about -- a little bit more about also the progress you've made on the Colorcon pilot and what more still needs to be done before you can commercialize that program. I know you mentioned there's still a lot of extensive testing that has to go on, but can you just talk into more detail about some of your expectations around that and some timing about that as well?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [9]

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Sure. The portion of the Colorcon portfolio where we have completed stability studies that I said represented about 40% of their offering, those are essentially ready to bring to market now and we have filed the DMF with FDA that makes that possible.

Meanwhile, we have plans of improving that DMF and are meeting with the Emerging Technologies Team, or ETT, which at FDA is formed to accelerate access to technologies that would normally take a little while to penetrate the industry. So we're hoping that for that 40%, with our interaction with ETT, that we may be able to accelerate the commercialization of some of our work with Colorcon.

Meanwhile, we'll stay on the stability studies and the characterization of the 60% of their portfolio and continue to move ahead. Now Colorcon has been developing some particular relationships as potential initial sales, and these are customers who could help us very much from a compliance point of view when it comes to FDA.

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Unidentified Analyst, [10]

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Got it. Could you give us an outlook, excluding the initial license fee, when you expect to begin generating revenue protecting the cannabis supply chains and how much we might expect to see from this business line 2020?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [11]

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We expect to see revenue in 2020 from our cannabis relationship with TheraCann. Remember, they have been cultivating somewhere between 2 and 3 dozen relationships, including with some of the very large recognizable names and brands in the marketplace.

Compliance for cannabis is the same whether you're a large or a small company and, of course, we'd like to initiate our rollout with those companies whose needs are the largest.

We have also been talking to states, government regulatory authorities in the U.S. and have received a great acceptance there because, in that case, we can help out not just with safety and efficacy and compliance with the established rules, but we can also relate to the ability to monitor tax-based revenue to the state using our DNA platforms. So we're -- we think that, that is one of our fastest-moving categories and we're very excited.

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Unidentified Analyst, [12]

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Got it. Last one from me, with regards to TheraCann. Were there any changes to the contract terms, any pricing or whatnot for accepting stock instead of cash?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [13]

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No. Only ones that benefited us. So their obligation to us went from $4 million to $5 million with interest. So there was no compromise and we expect that because of their nearness to their listing, as I described at the opening, that they'll be able to make that payment to us quite soon.

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Operator [14]

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The next question today comes from Jeremy Pearlman with Maxim Group.

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Jeremy Pearlman, Maxim Group LLC, Research Division - Equity Research Associate [15]

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I had a question continuing on the cannabis thread. Do you think that's going to be your main source of revenue for the future? Or -- and also are you proactively seeking other companies for potential partnerships?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [16]

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No. We have an exclusive relationship with TheraCann. It's been a worthwhile exclusivity, in our view. Frankly, I've been in business for 35 years and I have found them to be remarkably upright and straightforward and we enjoy doing business with them very much. Their reach is global, China, Africa, Latin America, the U.S., Europe, and they have many MOUs already signed and even contracts. I think the key issue for them is to get their listing complete and get the lid off. And once that happens, I expect we'll be running to keep up.

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Jeremy Pearlman, Maxim Group LLC, Research Division - Equity Research Associate [17]

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Okay. And then another question. Regarding your cash burns, it seems like looking year-on-year, your -- on your cash flows or cash burn from operating activities has gone up and it looks like that seems to be the trend. Is there anything you're doing? I know you said you reduced head count. I looked in the report. Anything else aside from that to try and reduce that burn a little bit? So...

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [18]

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No. If you noticed, in fact, our monthly cash burn has been steadily diminishing, not growing. And so we're very, very concerned about our rate of our growth of revenues. It's why we totally restructured our sales team, why we eliminated certain verticals within the company that were not generating new sales at the rate that we required, why we eliminated head counts, eliminated consulting groups. So we have made -- we stay alert steadily to our operating cost. Beth stays very close to it and we talk about it frequently.

Of course, we need a combination of cost savings and revenue growth. And as we mentioned both last quarter and at the outset here, we expect to see revenue growth in 3 categories, not just the cannabis you asked about, but also textiles where we've been working 2 years on an integrated supply chain that has brought us to some remarkable brands and we expect to be implementing tagging with some of those brands before the end of this fiscal year, just a couple, and to see more happening in the following year.

Our position in LineaRx is unique in the marketplace. No one else can do what we can do. And as I say, we're getting some very prestigious companies lining up asking us to do difficult things that we've been successful at doing.

So I suspect that we'll see licensing agreements with milestones, long-term revenue, long-term supply both before the clinic and after. And so we're excited about the long-term prospects. We just have to really manage this short term very carefully. We've got to get through our NASDAQ issue and we're determined to do that.

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Jeremy Pearlman, Maxim Group LLC, Research Division - Equity Research Associate [19]

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Okay. So we can expect to see revenue increase outside of cannabis, like you said, in textiles and biopharmaceuticals for the end of this year or more likely into 2020?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [20]

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No. That's not what I said. What I said was the primary drivers for revenue were in the categories I gave you. We are expecting to see revenue in other categories.

We have -- just yesterday or last week, we announced our relationship with Schreiner MediPharm, who is a company that specializes in the tagging of medical products. They already have customers beginning to use our materials.

We're making progress finally with our Videojet business and looking at the capacity of labeling drinks materials at the request of law enforcement and an international business.

We are still working very steadily with the defense logistics agencies and with an unnamed federal agency to deliver new product. So no, I -- you are mistaken to say, we won't see revenue from other categories.

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Jeremy Pearlman, Maxim Group LLC, Research Division - Equity Research Associate [21]

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No I said, will, will, "will see."

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [22]

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Oh, yes, we will see revenue from other categories.

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Jeremy Pearlman, Maxim Group LLC, Research Division - Equity Research Associate [23]

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Yes. Yes, not won't. Yes, I just wanted -- like towards the end of 2019, into 2020, will see revenue increase from other sources, that's what I asked?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [24]

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Oh, yes. We will. Absolutely.

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Operator [25]

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(Operator Instructions) Our next question comes from Craig Pierce with Morgan Stanley.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [26]

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First off, what I think I understood you to say is that TSXV has completed the review. TheraCann is expecting to be -- I mean I'm sorry, the reviewing authorities have completed a review. TheraCann expects to be listed the second half of September on TSXV. And at that point in time, $4 million plus $1 million would be paid to Applied. Did I understand that correctly?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [27]

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No, you were quite close. The $4 million would be paid to Applied in exchange for our convertible preferred stock. However, the convertible debt is callable at our option. And so whether or not we collect that extra $1 million, I think, Beth, you know more of those details than I.

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [28]

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Right. So we can have it convert into their publicly traded common stock or, at their option, they can pay it back once they do their IPO. Otherwise, it will get paid back at the end of the term in cash.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [29]

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And what is the end of the term?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [30]

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Two years.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [31]

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All right. What's not real clear in my mind and I probably just needed to research, but easier to ask right now. Fiscal year 2020, is TheraCann going to paying Applied anything during fiscal 2020?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [32]

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Oh yes. We're expecting it. And as we roll out, we will be paid for our materials as we always are and our services as well. We have a revenue-sharing relationship with TheraCann that will kick in at a later date once we reach certain revenue milestones.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [33]

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Because I think I remember there's, what, a 15-year different numbers escalating each year?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [34]

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That's right. It escalates to a maximum of $20 million per year as it gets closer to the end, yes. So that escalation starts either in year 3 or as soon the gross revenues minus our payment is enough for TheraCann to have earned back the $4 million that they have paid us.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [35]

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So revenue anticipated in fiscal year 2020, but the stepladder or the stairstep numbers going through year '15, the next stairstep year is fiscal 2021? Is that correct?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [36]

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We expect to see incremental revenues from TheraCann with every year. So there's not too much left to our fiscal year '19. So I'm not expecting that to have a big impact on fiscal '19, but it could well start in fiscal '19 before this quarter closes given their proximity to listing and given the fact that they have pre-existing relationships already.

However, in 2020, starting for us in October, we expect that we'll see revenue growth from the number of customers I've already indicated that have relationships with TheraCann and us across the globe.

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [37]

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But just one small clarification on that. I think, Craig, to answer your part of that question, the minimums in the contract start in year 3.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [38]

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Okay. That's exactly what I was asking. Okay. So ideally, and you're anticipating revenue in 2020, but the contract minimums, the next year that we see that is year 3 and then stepping up each year from there more or less?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [39]

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Yes. The contract minimums and the revenue sharing. But the revenue sharing would start the moment they've earned a certain amount of money.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [40]

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Okay. You had mentioned or used the phrase, I believe, in regards to Colorcon, the 40% that you'd used at one point the phrase, I believe, accelerate revenue from that relationship. Do you have a sense of the time frame of the acceleration when -- I mean not -- when that point in time where revenue would begin to really ramp up?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [41]

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Yes. Well, Colorcon already has Blue Blood Biotech and pharma companies interested in our platforms, just been waiting to get through the stability issues, and so we know we have companies who are interested in using our platform but have to get through the FDA issues, and with the stability data and our DMF filed, we're well poised to help.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [42]

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Any feel for how many more months, years are needed of -- to get the required stability time period out of the way?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [43]

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Well, stability testing will be...

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [44]

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That's a familiar voice.

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [45]

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I would say another 6 to 9 months of -- it's sort of a tiered approach, right? Some of them are going to end and others are going to continue because they were brought on to the program later.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [46]

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Later, yes. So 6 to 9 months to complete -- to start seeing the completion of some of the stability testing?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [47]

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Yes. I would say so.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [48]

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And at that point in time, that they could actually then start bringing to market and actually retail sales-generating revenue flowing back to Applied?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [49]

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Discussions in marketing can happen before the exact end of that, but that's a good milestone for you to keep in mind.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [50]

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Okay. So basically, have the picture of the bar with patrons all ready to go, the kegs of beer up on the wall and just waiting for midnight of the day that prohibition was ended that everybody can start drinking?

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Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [51]

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I like your analogies.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [52]

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Okay. So get the bar ready and we'll...

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [53]

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As long as you're buying.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [54]

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Hey, just get the bar ready, I'll buy. The -- wanted to ask, I mean with all of this delisting, I mean you've got bad news that's pretty intense; you've got good news that's pretty intense; up and down various supply chains. Are you getting any pushback in terms of questioning your company's liability?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [55]

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Well, it's a natural consequence that people are curious about what our circumstances are. We're confident and we're honest and so we provide those answers and what our expectations are. And on that basis, we're selling quite well. We've placed orders, 2 of them just yesterday and today.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [56]

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And finally, you had used the expression majority-owned LineaRx? Who else, if anybody, owns a minority stake, in LineaRx?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [57]

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Yes. Well, we acquired Vitatex just this last week and that acquisition was largely stock-driven. And so if Vitatex achieves all of their milestones for their earnout, they would be paid a total of $1 million in cash and shares. Those shares would constitute about $800,000 out of the $1 million in total. So out of a $20 million pre-money value given to LineaRx, $800,000 post-money was used to pay the current -- the prior shareholders of Vitatex.

Now quite honestly, that acquisition increased the value of LineaRx quite substantially, especially given the fact that it was valued only 2 years before at over $20 million.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [58]

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So what that translates into is you've -- that Applied owns -- assuming all of that pays out, that Applied would still own 95-ish percent of LineaRx?

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [59]

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Yes. That's a fair assessment, that our shareholders own 95%. Yes.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [60]

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Yes, okay. It sounds to me like 2020 is going to be a very different year with a very different tune than what you've been forced to sing for the last couple of years.

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [61]

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I'll be honest with you Craig. I think the fourth quarter of 2019 could be described the same way.

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Craig Pierce, Morgan Stanley - VP of Wealth Advisor [62]

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That's just terrible. Terrible. But we'll all try to live with that.

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [63]

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Okay.

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Operator [64]

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This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Hayward for any closing remarks.

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James A. Hayward, Applied DNA Sciences, Inc. - President, CEO & Chairman [65]

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Well, thank you, operator. I want to thank you all on the call for your time and attention today and for your unfailing support of Applied DNA Sciences. I hear from many of you. We look forward to speaking with you next quarter and we'll keep you closely apprised until next we speak. Have a good evening.

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Operator [66]

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