Applied DNA Sciences, Inc. (APDN) Q2 2023 Earnings Call Transcript

Applied DNA Sciences, Inc. (NASDAQ:APDN) Q2 2023 Results Earnings Conference Call May 12, 2023 4:30 PM ET

Company Participants

Sanjay Hurry - Head of Investor Relations

Beth Jantzen - Chief Financial Officer

James Hayward - Chairman, President and Chief Executive Officer

Conference Call Participants

Jason McCarthy - Maxim Group

Yi Chen - H.C. Wainwright & Co., LLC

Operator

Hello and welcome to the Applied DNA Sciences Fiscal Second Quarter 2023 Financial Results. All parties will be in listen-only mode. [Operator Instructions]. Please note today's event is being recorded.

And now I'd like to turn the conference over to Sanjay Hurry, Head of Investor Relations. Please go ahead.

Sanjay Hurry

Thank you, Keith. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our second quarter fiscal 2023 financial results. You can access the press release that was issued after market closed today, as well as the slide presentation accompanying this call on the Investor Relations section of our corporate website.

Speaking on the call today are Dr. James Hayward, our Chairman, President and CEO; and Beth Jantzen, our CFO. Clay Shorrock, our Chief Legal Officer and Head of Business Development, will also be available to answer questions on the Q&A portion of this call.

Before we begin, please note that some of the information you will hear today during our discussion may consist of forward-looking statements. I refer you to slide 2 of the presentation and to our Form 10-Q filed a short while ago for important risk factors that could cause the company's actual performance and results to differ materially from those expressed or implied in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or other information provided on this call as a result of new information or future results or developments.

Please also note that we will be in attendance at the Maxim Group virtual healthcare conference later this month. I'm sorry, next month. To schedule some time with management, please contact your Maxim representative.

Now it's my pleasure to introduce our first speaker on today's call, Beth Jantzen. Please go ahead, Beth.

Beth Jantzen

Thank you, Sanjay. Good afternoon, everyone. Thank you for joining us on our fiscal second quarter investor call. I will start this afternoon with an overview of our results for the quarter ended March 31, 2023. I will then turn the call over to Dr. James Hayward, our President and CEO, who will discuss business initiatives and anticipated milestones in the second half of the fiscal year and as we enter fiscal 2024. We will then open the line for questions from our analysts and institutional investors.

Before I begin my review, and as a reminder, we report segment data in our 10-Q filing that reflect the results of operations for our three reporting segments. The executive management team uses these data to manage the company's performance on a segment basis, assess expected future cash flows and make more informed decisions about our three business segments going forward. We provide these data to investors as a measure of transparency into our management of these segments.

Our three reporting segments are Therapeutic DNA Production, identified as LineaRx, our majority owned biotherapeutics subsidiary; MDx or Molecular Diagnostic Testing Services, which is our ADCL clinical laboratory; and DNA Tagging and Security Products, which is our supply chain traceability segment.

Our second quarter results were driven cheaply by ADCL and its COVID-19 testing service. We also recorded contributions from our Therapeutic DNA Production segment to the accelerated delivery of linearDNA under a large recurring order.

Turning to our consolidated results for the quarter, total revenue was $4.4 million compared to $6.2 million in the prior fiscal period. The approximate $1.7 million decrease in total revenues reflects the decline in our COVID-19 testing revenue, reflective of an overall weaker environment for COVID-19 testing demand.

Last Friday, we reported that CUNY, our largest COVID-19 testing customer, terminated its COVID-19 testing contract effective no later than June 30 of this year. Our use of vendors and certain staff that support on-campus collection centers will be reduced commensurate with our wind down plan.

In the near term, our COVID-19 testing service will remain in scaled down operation to support our remaining testing contracts. Direct costs will be fully absorbed by these ongoing contracts.

As Jim will discuss in his remarks, ADCL staff will transition to pharma genomics testing upon approval of our assay by the New York State Department of Health and once we secure contracts for pharma genomic testing.

Gross profit for the quarter was $1.8 million or 41% compared to $2.5 million or 40% in the prior fiscal period. Total operating expenses were consistent at approximately $4.5 million and $4.6 million across the second quarter and the prior fiscal period respectively.

Operating loss for Q2 was $2.7 million compared to an operating loss of $2.2 million in the prior fiscal period. Given the unrealized gain on the change in fair value of the warrants that are classified as a liability included in our net income line, we highlight operating income as best representing the company's operations.

Excluding non-cash expenses, consolidated adjusted EBITDA for Q2 was negative $2.1 million compared to negative $1.6 million in the fiscal year ago period.

Now turning to our balance sheet, cash and cash equivalents, excluding restricted cash, totaled $12.3 million on March 31 compared to $12.9 million on December 31.

As of March 31, accounts receivable stood at $2 million, which we expect to collect the majority of this amount in the current quarter.

Year-to-date, our average monthly cash burn is $488,000 compared to $786,000 in the prior comparable period. Average monthly cash burn year-to-date does not include our restricted cash of $750,000 that was required by our new three year lease agreement for our corporate headquarters.

Based on our current cash flow forecast, we expect the impact of the CUNY termination to be reflected in our use of cash starting in our fiscal fourth quarter ending September 30.

We are projecting our quarterly cash burn for Q4 to range between $650,000 and $1 million per month. This range is contingent on several factors that Jim's remarks will discuss in greater detail, including the timing of PGx testing starts and service uptake, CertainT authentication platform sales for DNA tagging, order flow for linearDNA for IVT templates, CapEx necessary to establish a linearDNA production capacity suitable for clinical use and to support ongoing platform development, and the cash consideration needed for a biotherapeutics acquisition that is being contemplated.

We believe that with our current cash balance reserves and a continued focus on cost management, we can absorb a short term increase in cash burn as we maturate contract opportunities. However, if any of the above revenue streams do not ramp up on our current forecasted timeline, it will have a negative impact on our cash position and financial resources.

On our cash position on April 30 was approximately $11.1 million.

This concludes my prepared remarks. Thank you for joining us today. I will now turn the call over to Jim for his comments.

James Hayward

Well, thank you, Beth. And good afternoon, everyone. Thank you for joining us on our quarterly investor call.

In recent quarters, we've made steady progress on the execution of our business plan to manage the wind down of COVID-19 testing, to evolve our new revenue opportunities, and to advance the development of our linearDNA platform for biotherapeutic applications.

Now, my prepared remarks today will update you on our activities across each of our three business segments, with a focus on the breadth of opportunities at ADCL and within our supply chain segments that are expected to contribute to our revenues within our fiscal and current calendar year.

In the aggregate, we do not expect these near-term opportunities to replace COVID-19 revenues in their entirety. They are, however, revenue oriented with much of the development costs behind us. And consequently, these opportunities can facilitate ongoing strategic investment in linearDNA and support our consolidated operations, thereby helping in the management of our cash burn that Beth referred to.

Regarding our linearDNA platform, which we believe is the cornerstone to our long term growth and value creation for shareholders, we achieved several milestones this quarter. We produced and shipped the most DNA in the company's history in a fiscal quarter for a large diagnostics customer announced previously.

To achieve this production level, we introduced new efficiency methods in the linearDNA platform that we believe will also be relevant to higher value biotherapeutic DNA production. This customer now has also ordered additional linearDNA constructs for other products also on a recurring basis.

Now, we've been converting a large commercial customer to receiving production grade materials after multiple quarters of repeated research orders. We received a second order from one of our previous biotherapeutic customers now underway for fulfillment. And orders were received from marquee names in the pharma and biopharma industry for evaluation scale of linear IVT templates that could blossom into larger orders. Three orders were completely fulfilled, and another will be partially shipped in the current quarter.

Finally, to the extent I am able at this time, I will offer momentarily some insight into the rationale for a potential acquisition that we believe will give us market advantage in the use of linearDNA IVT templates for messenger RNA production.

Now as Beth detailed, we expect to wind down our largest COVID-19 testing contract no later than June 30. As she also noted, we will continue to service other customers whose testing requirements will fully absorb our COVID-19 operating costs.

Now, I want to compliment our CUNY partners and our team for their dedication of the past 22 months. I know that together we saved lives. And we made higher education safer during an extraordinarily challenging time for our country. COVID-19 testing and CUNY proved that the single payer enterprise scale service model works, laying the business strategy for ADCL's future in genomic testing.

Now lessons learned from enterprise scale COVID-19 testing services are the basis for the development of our pharmacogenomics or PGx testing service that establishes a clear economic value to the customer and offers a very attractive return on investment to large customers and to us at scale.

Compared with COVID-19, our PGx testing service, which is branded as TR8, will roll out at lower testing levels, but with a higher expected price and gross margin per test. There is an economic rationale for PGx's growing use, particularly for large, self-insured entities. Genetic screening and testing can help provide powerful information to inform healthcare decisions and improve patient outcomes. There is extensive evidence in the literature attesting to the return on investment for PGx.

When you map the individual PGx benefits on to large populations, an enterprise can realize substantial dollars and cents in savings on health care cost, while also increasing the wellbeing and performance of its population.

We will employ a differentiated sales model that targets direct to large enterprise accounts. The elimination of third-party reimbursement ensures faster cash collection. And this is the same model that we use quite successfully within our large COVID-19 customers.

Now, we submitted a validation package for our PGx assay in March to the New York State Department of Health and we're awaiting its review as a laboratory developed test.

Since genetic testing is a new permit category for our clinical lab, our PGx assay falls under the high complexity category, for which one to two quarters is the standard review cycle.

The New York State Department of Health is one of the most rigorous regulatory bodies in the entire country. And as such, their review is highly comprehensive. Yet at the same time, that high regulatory burden acts as a barrier to entry for many labs. We believe that this will give us a significant competitive advantage upon test approval, and make New York a greenfield opportunity for us.

Upon approval of our PGx testing service, we have the capacity to perform over 150 tests per day. We're discussing partnerships and platform enhancements to support higher volumes.

We are already engaging with enterprises likely to adopt our PGx testing service and feedback to date has been very positive, although the lack of an approved assay gates our customer acquisition.

It is clear from our sales and marketing efforts that there is little in the way of competition in the state, which puts us in a thought leadership and market educator role. One of the key prospective customers is sponsoring our conference this fall on precision medicine, and has asked us to speak about our testing service and to help develop their event.

Our supply chain traceability segment also offers us the opportunity for COVID-19 replacement revenues. We continue to see momentum in new customer acquisitions for our CertainT authenticity platform. The CertainT platform encompasses multiple forensic testing tools, including isotopic testing, genotyping, DNA tagging and other methods that are valuable to importers of cotton goods in order to comply with the Uyghur Forced Labor Prevention Act, or UFLPA, and with other due diligence regulations globally.

Now as a reminder, the Customs and Border Protection Agency recognizes two technology platforms for compliance under the UFLPA, isotopic testing and DNA technologies. We are the only company to offer an approach that integrates both technology platforms for compliance. Since the UFLPA went into effect last June, we've added many new source verification customers.

Source verification expands our base of textile customers to whom we can upsell recurring high dollar value and higher margin DNA tagging services. But even a low conversion rate of these customers to DNA tagging would result in a material increase in segment revenue. To that end, we are advancing discussions with source verification customers who view the deployment of DNA tagging as the next natural step in their compliance under the UFLPA. We are experiencing increased interest in DNA tagging, especially from apparel manufacturers.

Now we've completed a commercial pilot with an established North American apparel brand that utilized DNA tagging and isotopic testing its global supply chain. This first apparel initiative primed the supply chain, and we're actively working on follow on tagging programs to keep the cotton flowing. Other opportunities to deliver tagged cotton to the market are also underway. We anticipate initiation of an additional supply chain in the fiscal fourth quarter.

Now transitioning to the biotherapeutics application of our PCR expertise, we are firmly committed to our LineaRx subsidiary and our linearDNA platform as fundamental building blocks to Applied DNA's sustainable growth and value creation story.

Within the biotherapeutic industry's remarkable focus on genetic medicines, our initial priority is in vitro transcription, or IVT. And that is DNA templates for RNA production. The platform has marked advantages over plasmid DNA and other non PCR based and enzymatic DNA manufacturing platforms.

And last summer, we launched our IVT templating service to raise awareness of linearDNA's unique advantages to establish an ecosystem of partners, to enhance the value proposition of our services and advance the transition to linearDNA for therapy developers with active pipelines.

Now momentum for linearDNA for IVT is building. We are receiving evaluation orders from marque customers, and the feedback we have received is that linearDNA is very well suited to empower the manufacture of mRNA therapies. This then creates new pathways for additional potential order flow and demand for larger quantities of linearDNA.

With these early successes under our belt, we focused on optimizing our manufacturing workflows, and we've invested in larger commercial capabilities in recent quarters. We have already achieved certain key milestones, including increases in scale.

The gating factor to our deeper penetration of the IVT template opportunity is the need to deliver DNA that is suitable for mRNA for clinical use at a GMP facility or at GMP quality.

As we expand our base of evaluation customers, we're also building the capacity to deliver GMP quality linearDNA suitable for clinical IVT. This capacity will allow us to support existing customers from their research and development phase to the clinic, while generating higher value and larger orders for linearDNA. We are on track for this capacity to come online by the end of calendar 2023, with an initial forecasted manufacturing capacity of about 50 grams of linearDNA per year. And to put this in perspective for you, this is enough IVT template to produce over 250 million vaccine doses.

As our go-to-market strategy for linearDNA matures to support more clinical demand, we are actively recruiting partners who share our vision for a fully enzymatic high speed IVT template production workflow.

Our partnering interests lie at the front end of the workflow and with the next generation DNA synthesis companies that can make higher quality brand new DNA sequences quickly and cost effectively. A fully synthetic IVT workflow, we believe, can outperform plasmid DNA for IVT across all the relevant metrics, while delivering market leading turnaround times.

Now, this may be especially important in view of the exciting workflows for individualized patient-specific immunotherapies against aggressive cancers, as has been demonstrated by Merck and Moderna for melanoma, or just announced today by BioNTech for resected pancreatic cancer.

Business development activities are ramping up concurrent with our investments in our commercial capabilities, highlighted by our presence at several mRNA conferences throughout the coming summer where we will be showcasing linearDNA's advantages.

Finally, I'd like to discuss a unique and potentially transformative opportunity for LineaRx that we have identified in the messenger RNA market. We've looked at the mRNA manufacturing value chain, of which IVT templates represent less than 5% of the total cost. And frankly, we desire more.

We have identified and we're moving toward an acquisition target that gives us access to a more significant portion of the mRNA manufacturing value chain. That's significantly increasing our potential total addressable market.

Our analysis over the past several months makes a compelling case that the combination of linearDNA and the target's assets can impact up to 25% or more the mRNA value chain.

To be clear, we currently have no desire to manufacture messenger RNA at scale. But instead, we're looking to enhance the unique advantages of linearDNA IVT templates to improve other aspects of messenger RNA manufacturing by our customers.

We feel this is a one plus one equals three business opportunity that supercharges our offering by unlocking several unique and important benefits relating to the manufacture of messenger RNA that can only be empowered by the combination of our linearDNA and our target's assets.

The transaction value being contemplated will be commensurate with the target's early stage of development. We hope to close on the acquisition in the current quarter, and we'll have more details to offer at that time.

Before opening the call to questions, let me briefly recap some key points I've made today. We are preparing for winddown for COVID-19 testing revenues. We have developed new revenue opportunities at ADCL and our DNA tagging segment that should come online in the next several quarters.

These revenue opportunities are unlikely to offset the loss of COVID testing revenues fully. However, they will be at higher margin, and will help them manage our cash burn. Our cash balance allows us to absorb the short term increase in cash burn while continuing to execute on key priorities.

The biotherapeutic industry is responding very well to linearDNA and our offering for DNA IVT templates. This gives us the confidence to continue to commit further resources.

We have identified and are moving toward an acquisition that we believe can deliver significant returns to us, to prospective mRNA customers and to our shareholders.

And then finally, I simply could not be more proud of our team in delivering across all facets of our growth strategy. As the pandemic era comes to a close, we are proud of the positive impact we've had on our communities. And we will truly miss the synergistic relationships we have developed with our customers and our partners. And we are appreciative of the lessons learned that has armed us with new capabilities as we move forward to this next chapter.

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

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question comes from Jason McCarthy with the Maxim Group.

Jason McCarthy

Sounds like a lot of progress. I want to stay with the biotherapeutic side or portion of your business. Can you talk a little bit about some of the manufacturing bottlenecks that the COVID vaccine mRNA companies face? It was in the news quite a bit a couple of months ago. It was 10%, 20%, 30% cost savings by flipping to a linear approach might be more ideal and maybe more something like your IVT platform can have success.

James Hayward

We definitely believe that our linearDNA offers cost savings and simplicity to mRNA manufacturers. But what's becoming clear, Jason – you, I'm sure, will appreciate the BioNTech announcement today – is that with the dawn of science like pharmacogenomics and the ability to sequence the neoantigens in cancers, the opportunities for personalized medicine are growing at a very rapid rate. AI is only going to help that as well.

And when it comes to personalized medicine, speed is going to be of the essence. So incorporating a fully synthetic path that doesn't have us relying on plasmids at all for the initial template before PCR and allows us a very rapid turnaround time, that will be the secret we believe both to bulk manufacture – look at how rapidly the COVID vaccines were rolled out – and to personalized manufacture, which is really exciting opportunity for the patient.

Jason McCarthy

As far as your new or newer biopharma customers that are exploring IVT templates, I don't believe you could tell us who they are, but can you tell us what categories they are looking at? Are they looking at vaccines? Are they looking at immune therapy for cancer? Because the thought was oncology is going to be very challenging to use an mRNA. Obviously, Moderna and BioNTech are proving that to not be the case. And that could open up a tremendously much larger opportunity.

James Hayward

Yeah, absolutely. I think it could be. Can you help me with your question again, Jason?

Jason McCarthy

Can you tell us what categories the biopharma customers are having for IVT? What are they looking at, a vaccine or collagen or whatever?

James Hayward

So some are vaccines, some are immunotherapies, like the BioNTech approach. Some are customized targets. And I think, honestly, in future, the range of products going to be very diverse from very large PCR products to reasonably small ones. That diversity requires a tremendous knowhow for PCR, and we believe we lead the industry in that regard.

Jason McCarthy

Last question, can you give us a little bit more clarity on the acquisition in terms of what types of assets that they could have and how they pair with IVT? Or is that something we're going to have to wait for until it's a little bit further along?

James Hayward

Well, you have to wait just a little bit, I think. But I focused some of my commentary on the importance of speed. I think the importance of cost of goods will also be essential. There are over 4,000 nucleic acid drugs in development and cost is going to be important. I don't think that the industry of nucleic acid therapeutics will be in a position to repeat the history of monoclonal antibodies with extraordinary prices for their early to market products. We're now on the heels of vaccines, which typically can't be very high priced. And I think that by competing both in speed and efficiency and being able to compete on price, we have the chances of taking a good share of the market.

Operator

The next question comes from Yi Chen with H.C. Wainwright.

Yi Chen

My first question is, could you clarify whether ADCL is currently performing any non-COVID tests?

James Hayward

We have developed a number of non-COVID tests, but commercially, we have limited ourselves to this institutional business model, which we think is very novel. But as a consequence, it limits us in our variety. We will not have the variety of assays that a diagnostic company that bills third parties will have, but nor will we have the headaches and delays of billing third parties. We've seen lots of diagnostic companies on their knees because of their inability to negotiate prices with these third party customers.

We think our business has been much simpler – I'm sure Beth would attest to that as well – having large institutions paying us monthly bills. And it's very simple. But that also means our offering has to be suitable for that marketplace, which is not unlimited in terms of its offering.

But things like wellness assays is and the ability to predict potential morbidities will be doable on a large scale with a single payer.

Yi Chen

Regarding the PGx assay, could you give us some additional color? What level of revenue can we look forward to once it receives approval from that New York State Department of Health?

James Hayward

Yeah, that's kind of hard to predict. We could be having cash top line run rates similar to what we enjoyed at the peak of our COVID testing by doing only 150 PGx assays a day.

Now, we're talking to multiple cohorts right now for commercial relationships, all of whom – not one of whom has less than 50,000 members in their cohort. So being able to recruit from a cohort of that size means, with a little imagination, you could imagine those numbers well exceeding 150 per day and generating much more significant revenue that we're currently suggesting.

However, that will require two kinds of selling. Firstly, we have to sell to the institution and agree to a contract, agree to their sponsorship. But assays like PGx are not mandatory the way COVID testing was. So we have to also educate the members of the cohort. And to an extent we have to educate the members of the medical community.

So, we'll have to see just how deep the slope is of our acquisition of customers, but we think they'll be highly localized within the cohorts we sign. And our hope is that the barrier to recruiting them won't be very high. And certainly, the high interest we've solicited in our kind of pre-selling while we await approval from New York State. We think we'll be successful in that regard.

Yi Chen

My last question is, are the biotech customers waiting for the cGMP certification of the linearDNA production to make big amount purchase of the IVT templates?

James Hayward

Yes. Their initial evaluations are at the bench. And so, they're really research quality. But it's not long before therapies, nucleic acid therapies go from cell models to simple animal models. And then from animal models, the stretch to the clinic is not that far, especially since there are so many of these nucleic acid therapeutics, and the concerns over safety and toxicity will diminish as the whole category makes progress. So I think the march to market will be faster than most people expect. So, we have to be there with cGMP. And we have to do it quickly, which is why it has so much of our attention.

Operator

And this concludes our question-and-answer session. I would like to return the call to Dr. James Hayward for any closing comments.

James Hayward

Well, thank you, operator. And thank you all for joining our call today. I hope, like us, you feel that this is an exciting time for us and we look forward to a rapidly evolving future. And we'll speak to you again next quarter. Thanks very much.

Operator

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