Applied DNA Sciences, Inc. (NASDAQ:APDN) Q4 2022 Earnings Call Transcript

Applied DNA Sciences, Inc. (NASDAQ:APDN) Q4 2022 Earnings Call Transcript December 16, 2022

Operator: Good afternoon, and welcome to the Applied DNA Sciences Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions . Please note this event is being recorded. I would now like to turn the conference over to Sanjay Hurry, Investor Relations for Applied DNA. Please go ahead.

Sanjay Hurry: Thank you, Gary. Good afternoon, everyone, and welcome to Applied DNA’s conference call to discuss our fourth quarter and fiscal year 2022 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. Judy Murrah, our COO; and Clay Shorrock, our Chief Legal Officer and Head of Business Development, will also be available to answer questions on the Q&A portion of the 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-K 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 any other information provided on this call as a result of new information, future results or developments. I also want to inform you that Jim and Clay will be in San Francisco next month at an offsite event to the annual JPMorgan Healthcare Conference, to meet with institutional investors and business development partners. If you’d like to meet with them, please contact me to schedule. You’ll find my contact information at the bottom of today’s earnings press release.

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, and thank you for joining us on our fiscal year-end call. I will start this afternoon with an overview of our results for the quarter ended September 30, 2022. I will then turn the call over to Dr. James Hayward, our President and CEO, who will discuss progress against our strategic initiatives. We will then open the line for questions from our analysts and institutional investors. Before my review, I would like to note that effective with the filing of our 2022 Form 10-K today, we are reporting segment data that reflects the results of operations for our three reportable segments which are comprised of: therapeutic DNA production, which is identified as LineaRx, our majority-owned biotherapeutic subsidiary; MDx or molecular diagnostic testing services and products, which is our ADCL Clinical Laboratory; and DNA tagging and security products, which is our supply chain traceability segment.

Given the recent substantial growth in our clinical laboratory business as well as the evolution of our LineaRx subsidiary, the tools and processes put in place over the course of the fiscal year will enable the executive management team to manage the company’s performance on a segment basis, assess expected future cash flows and make more informed decisions about each of our three business segments going forward. To begin, we are pleased to report continued quarterly year-over-year revenue growth for the fiscal fourth quarter as well as record revenues for the second consecutive fiscal year. Our revenue performance across both periods was driven by ADCL and its COVID-19 testing service and due primarily to the addition of a key testing client just prior to the start of this fiscal year.

Operationally, we moved to optimize our cost structure and manage our expenses. A key component of our cost management program was to reduce the cost associated with our key COVID-19 testing contract. We are continuously monitoring and rightsizing our costs relative to this contract that has been extended through July of 2023. Turning to our consolidated results for the quarter. Total revenue was $3.6 million, an increase of 17% from $3 million in the prior fiscal period, reflecting a $1.3 million increase in ADCL COVID-19 testing revenues associated with our key clients that offset a decline in product and service revenues from other businesses totaling $782,000. The decline primarily reflects a decrease in sales of DNA concentrate to protect a textile supply chain as well as a decline in sales of our MDx test kits and supplies.

Gross profit was $417,000 or 12% compared to $992,000 or 33% in the prior fiscal period. The decline in gross margin was primarily the result of a higher portion of clinical laboratory service revenue coming from managed services testing contracts that carry higher costs compared to ADCL’s surveillance contract. To a lesser extent, the decline was due to a change in product sales mix as product revenues in the prior fiscal year period included sales of diagnostic test kits and supplies and DNA concentrate for textiles that are at a higher gross margin. Total operating expenses were $4.8 million compared to $5.5 million in the prior fiscal year period, reflecting the absence of a $822,000 impairment charge related to goodwill and the remaining net book value of intangible assets incurred in the prior fiscal year period that was associated with our 2015 Vandalia asset purchase, and to a lesser extent, a decrease in research and development expenses of $313,000.

These decreases were offset by increases in insurance expense of approximately $209,000 and in bad debt expense of approximately $237,000 to reserve a customer balance that was deemed to be uncollectible. Our operating loss was $4.4 million compared to $4.5 million in the prior fiscal year period. Excluding noncash expenses, adjusted EBITDA remained relatively flat at a negative $3.4 million compared to a negative $3.3 million in the prior fiscal year period. Turning to our balance sheet. Cash and cash equivalents totaled $15.2 million on September 30th. Cash and cash equivalents include proceeds from an August public offering of common stock and two series of warrants for total net proceeds of $10.7 million as well as a subsequent warrant conversion for an additional net proceeds of $3.7 million.

Accounts receivables stood at $3.1 million, the majority of which has just been collected. For fiscal 2022, our average monthly cash burn stood at $786,000, representing a 41% reduction from fiscal 2021, average monthly burn of $1.3 million, and is reflective of increased cash receipts as well as our cost management efforts. Our warrant balance increased as a result of the recent public offering. Our outstanding warrant balance on September 30 stood at $7.3 million. Approximately 2.2 million warrants have exercised prices ranging from $2.80 to $2.84 per warrant share. That would represent total proceeds of $6.2 million to the company, if exercised. The balance were $5.1 million warrants at an exercise price of $4 per warrant share, of which $2.1 million warrants expire in September 2023.

I would like to note that also effective with the filing of the 10-K, we have alleviated the substantial doubt of a going concern on the company through the cash received from the August public offering and the warrant exercise as well as collection of our accounts receivable. We estimate that we will have sufficient cash and cash equivalents to fund operations for the next 12 months from the filing of our 10-K today. Cash and cash equivalents were $14.7 million on November 30. Additionally, we identified a material weakness in our internal controls over financial reporting as part of our €“ the annual audit. The material weakness is nonoperational, and it did not require restatement of any previously issued financial statements. The identified material weakness is related to controls around accounting for complex financial instruments, as it relates to the accounting for our outstanding warrants and the related tax impact.

We are committed to maintaining a strong internal control environment, and are implementing procedures to help ensure this material weakness is remediated as soon as possible. Capital expenditures are projected to be less than $3 million, the bulk of which will be focused on development activities to support our two near-term go-to-market application for LineaRx’s linear DNA platform, that Jim will address in his remarks. In parallel, we are pursuing nondilutive funding sources, including grants that may offset or supplement our projected spend. This concludes my prepared remarks. Thank you for joining us today. I hope you all have a happy and healthy holiday and New Year. I will now turn the call over to Jim for his comments.

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James Hayward: Okay. Thank you, Beth, and good afternoon, everyone. Thank you for joining us on our fourth quarter and year-end fiscal 2022 investor call. It was a strong year for Applied DNA, both from the perspective of revenue growth and operational execution. In fiscal 2022, our strategic priorities were: first, to maintain momentum and revenue after a record fiscal 2021; second, to advance our pivot to biotherapeutics, which we recognize as having the greatest opportunity to build long-term value for our shareholders; and third, to evolve our DNA tagging and clinical lab segments toward positive cash flows to support the value-creating potential of LineaRx, our biotherapeutics segment. To that end, the fourth quarter capped off a consecutive second year of record revenues in which we also recorded four consecutive quarters of year-over-year revenue growth.

While our revenue performance was once again generated from COVID-19 testing, what is most impressive is that these record revenues were achieved while concurrently putting into place the potential drivers of continued growth beyond COVID-19. And I’ll initially focus on our clinical lab, ADCL. As Beth noted, consolidated revenues were driven by ADCL and the acquisition of the key COVID-19 testing customer, just prior to the start of the fiscal year. Since the contract began, we have continuously aligned our operational model and costs with the fluctuating testing demand over the academic year. We continue to proactively manage costs to demand following the receipt of a one-year extension to our contract through July of 2023. Beyond its contribution to revenue, the expertise that we gained from high throughput COVID-19 testing, enabled our clinical labs to become tailored to serving large populations and enterprise customers as a population health platform, which is a key differentiator versus other clinical labs that focus on individual patient testing and payment from third-party payers.

We ported this domain expertise to MPOX, which was previously known as Monkeypox, with the rapid design and approval of our own PCR MPOX test, which, at the time of development had a strong demand but which became almost irrelevant shortly afterward due to effective vaccines and changing social behavior. Nevertheless, we did gain additional valuable diagnostic development experience. The speed with which we develop the assay and obtained regulatory approval from the New York State Department of Health serves as a model for Applied DNA Clinical Labs going forward. We moved to expand ADCL’s menu of diagnostic tests for a second time with the initiation of development for pharmacogenomics testing service, which once again we’ll be marketing to large populations and enterprise customers.

Now looking ahead to fiscal 2023, we are focused on new sales opportunities and incremental gross margin improvements in our ADCL segment. To this end, we’ll continue to optimize costs associated with our largest COVID testing contract to maximize gross margins, coupled with the launch of a higher-margin pharmacogenomic testing, which should return higher margins relative to our COVID-19 testing. Now we’re also cognizant of the shifting climate for COVID testing. ADCL has been, and is today prepared for a post-COVID world. The two largest cost centers for our COVID-19 testing services are the third-party providers who staff our testing locations for our key client throughout New York City, followed by our clinical laboratory staff. Our clinical staff is already cross-training on our pharmacogenomics assay.

Costs associated with our third-party staffing can be terminated with 30 days’ notice, without impacting the balance of ADCL’s testing customers. Now our pharmacogenomics testing service is borne out of a lesson learned from our COVID-19 strategy, that is to open up new sales opportunities that specifically serviced large population and enterprise customers. Now, pharmacogenomics is a field of precision pharmacy that combines the science of pharmacology and genomics to understand how an individual’s genetics may influence their response to drugs. It looks at specific genes to help determine the types of medicines and dosages that may be best for a patient, ensuring fewer adverse reactions, better drug response, and ultimately, more efficient treatments.

All these benefits culminate in better patient outcomes and lower health care costs, especially for large populations. For these reasons, we are focusing on large cohort health care opportunities for pharmacogenomics, particularly regional health systems and large self-insured entities where the economic benefits of pharmacogenomic testing can really be substantial. Numerous published studies show that pharmacogenomics do help guide drug selection and dosage, and can significantly reduce both direct and indirect health care costs for an individual. While these potential individual savings are substantial, we believe the real benefit of pharmacogenomics comes to light when it’s used in a large population, thus amplifying the potential individual health care cost savings across an entire organization or community.

Several studies have shown that large-scale pharmacogenomics testing can drastically reduce an organization’s overall health care costs, while at the same time, providing better care for each individual. Thus, by leveraging our unique large-scale population testing expertise honed from COVID-19, we believe we can offer a differentiated population health care, pharmacogenomics testing services that return significant value to larger organizations. Whereas our COVID-19 and MPOX assays are single target tests. Our pharmacogenomics panel interrogates 120 targets across 38 genes, making it a more complex development process. Initially, it was estimated to be submitted to the New York State Department of Health in October, but we now expect to do so by the end of January 2023.

This slight delay is due to complications with our clinical validation partner, which we have since remedied. Subject to New York State Department of Health approval, we are targeting a late Q2 fiscal year 2023 commercial launch date. Now to our DNA Tagging segment. That has not yet experienced a rebound in demand post COVID. The recent confluence of cotton margins being squeezed and low cotton inventories resulting from the worst drought in a decade, blunted demand for DNA tag cotton. Nonetheless, we believe demand in this segment may return in fiscal year 2023. The Uyghur Forced Labor Prevention Act went into effect over the summer. The act identifies cotton and apparel as two of four high priority sectors for federal scrutiny. DNA Tagging and isotopic testing, two constituent components of our CertainT platform, were identified by guidelines issued by Customs and Border Protection as the key means of compliance with the Act.

We entered into an exclusive partnership with our long-time isotopic testing partner to give us a best-in-class multilayered approach to supply chain traceability and assurance across the entirety of natural fiber-based value chains. Since implementation of the act, we have secured new certainty customers focused on isotopic testing initially as a means of demonstrating rapid compliance with the act, and we are now working to potentially move these customers to DNA Tagging. And to remind you, 20% of global cotton production originates in the Xinjiang province of China, the primary focus of the act. The remaining 80% of global cotton now also need to prove that it is not tainted with Xinjiang cotton and we are moving to access that 80%. Historically, demand for DNA Tagging and testing has been triggered by the authentication demands of American-grown Pima and Upland cottons.

We’ve worked in collaboration with a world-leading cotton merchant and a manufacturer to brands. While the revenue stream has been irregular, the platform is proven and has been successful with both Egyptian and Australian cottons as well. The drought in the U.S. in 2022 highlighted our dependence on American cotton. I noted earlier that all cotton products entering the U.S. must comply with the UFLP Act. Consequently, for fiscal 2023, we have adapted our go-to-market strategy by moving along the cotton textile value chain and engaging with spinners, weavers and other supply chain participants who transact in substantial amounts of cotton annually, and each with a vested economic interest in delivering products compliant with the UFPL Act. We are in active discussions with participants in the textile value chain, and will report on new developments or new orders as they occur.

Given this, we believe there is a significant operating leverage to be realized from potential new demand supported by the infrastructure we already have in place today. Now to LineaRx. In fiscal 2022, we focused on research and development activities to support our two near-term go-to-market applications for the linear DNA platform. The first, to produce linear DNA templates for in vitro transcription to enable the manufacturer of the mRNA therapies; and the second, to generate veterinary biologics, particularly linear DNA vaccines. Let me briefly summarize our achievements during this past fiscal year. We generated data showing that linear DNA makes for a compelling case as a template for a messenger RNA drug manufacturing over plasmids. Specifically, linear DNA holds a greater copy number advantage.

It contains homogeneous poly T tail sequences that are necessary for the required poly A sequences in the RNA, and it removes the use of expensive restriction enzymes that comprise up to 5% of the total cost of goods for mRNA therapies. The data were sufficiently compelling to attract interest in proof-of-concept projects with several mRNA developers, with whom €“ we hope will evolve with us as we bring our cGMP capacity online. In addition, we published seminal data that showed for the first time that a linear DNA-based vaccine can mitigate tumor growth and can protect against live infectious virus and animal models. Moreover, we also work to optimize the in vivo delivery of linear DNA to increase its ease of administration via lipid nanoparticles or LNPs, moving away from the specialized administration via electro gene transfer.

And during the year, we reported our first successful administration of a linear DNA construct in vivo using LNPs by a simple intramuscular injection in animals, which is a very important first step towards increasing the commercial viability of linear DNA. With these important milestones behind us, we now need a cGMP production capacity to grow our in vitro transcription templating business, and to get linear DNA veterinary vaccines into the clinic. Shortly after the close of the fiscal year, we committed to standing up a small-scale cGMP facility for the enzymatic production of DNA by the end of calendar 2023. We also received a full year commitment for quarterly delivery of linear DNA from a diagnostic customer. Moreover, we are leveraging valuable data generated and published during fiscal 2022 to progress linear DNA as both a prophylactic and therapeutic cancer vaccine platform for the growing veterinary health market.

The veterinary immuno-oncology market is a particularly attractive target market for linear DNA. Market data suggests this market is projected for a three-fold growth by 2030, and we believe, linear DNA is well suited to address common veterinary cancers such as lymphoma, which represent up to 24% of all cancer in canines. Currently, we are conducting two additional LNP related studies. In one, we are working with Cornell University to test whether linear DNA encapsulated with an off-the-shelf LNP formulation, can elicit a successful immune response when delivered via intramuscular injection to an animal model. This is an important study. And if successful, would be the first time LNP encapsulated linear DNA, would be shown to be immunogenic, opening the door for both prophylactic and therapeutic LNP linear DNA veterinary vaccines.

We expect initial data from this study late in the first half of the fiscal year. The study’s second goal is to optimize an LNP formulation for use with linear DNA. We are currently working with a very well-regarded CDMO to screen numerous LNP formulations. The goal of the study is to identify or develop a cost-effective LNP formulation that maximizes linear DNA immunogenicity in vivo. Since linear DNA is much more stable than mRNA, we believe that we may be able to utilize non-IP-protected LNP formulations that may lower LNP costs. This study was kicked off just last month, with completion slated for the second half of fiscal 2023. In addition, we are also serving the marketplace for potential oncology and infectious disease targets that could be adapted for the linear DNA platform.

As we’ve previously noted, our goal for veterinary vaccines is to gain USDA conditional approval, after which we would seek out to license the vaccine to a large veterinary health company. This is a common development pathway in veterinary medicine, which potentially minimizes therapy development costs and time lines. Finally, as we execute the platform’s development plans and are today more fully armed with data to support the linear DNA platform. Strategic partnerships become increasingly relevant to this segment’s future. We have established dialogues with other companies to the production of genetic medicines as well as with therapy developers. Of particular interest to us are companies that can amplify linear DNA’s value proposition as a template for mRNA drug manufacturing and as a veterinary vaccine platform.

We believe we are well positioned in two growth markets and we’ll be seeking potential partnerships as part of our attendance at the JPMorgan Healthcare Conference held in January in San Francisco. Finally, in fiscal 2022, we strengthened our balance sheet to support our strategic priorities. As Beth noted, our balance sheet is at its healthiest and includes warrants that should our share price align with our business execution could serve as a capital efficient source of additional funding. Now just before we open the call to questions, let me offer a brief recap. We are seeking to sustain momentum in our topline in fiscal 2023, while we also moved to put in place the constituent components for long-term and profitable growth across each of our business segments.

At LineaRx, we are putting in place the necessary foundation to address our target commercial markets with our linear DNA platform. We also expect to have in place a small-scale cGMP facility by the end of this calendar year €“ calendar 2023. At ADCL, we plan to launch our pharmacogenomic testing services late in Q2 of 2023, subject to New York State Department of Health approval, and we are currently laying the necessary groundwork to ensure a rapid launch and help drive market interest. For DNA Tagging, we are broadening our addressable market to take advantage of the UFLP Act and similar legislation being proposed worldwide. Finally, we have the capital necessary to execute on our near-term goals. Be assured that we are very focused on the value creation opportunity and the growth trajectory ahead of us.

Operator, please open the call to questions.

Q&A Session

Operator: We will now begin the question-and-answer session. Our first question is from Yi Chen with H.C. Wainwright. Please go ahead.

Yi Chen: Thank you for taking my questions. My first question is, could you give us some €“ your expectation with regard to potential annual revenue generated from pharmacogenetic testing service?

James Hayward: Yes. It has not been our habit, Yi, to provide guidance, but we can tell you that our survey indicates there’s a real vacancy in the pharmacogenomics, particularly in New York State. And we’ve spoken to very large health care networks who have shown in intense interest. So suffice it to say, we’re excited and have great expectations.

Yi Chen: Okay. Thanks. My second question is, could you tell us how many biopharmaceutical companies are currently evaluating or have adopted the enzymatically produced linear DNA for their manufacture of genetic medicines?

James Hayward: I don’t have a precise number in front of me, but I would guess that number is in the neighborhood of 20, actively collaborating, and that covers the range and size from start-ups to well-established decades, old biotech firms.

Yi Chen: And lastly, could you comment on the current trend of the COVID testing market demand?

James Hayward: On the trend of COVID testing

Beth Jantzen: Market demand.

Yi Chen: Volume or the trend in the current quarter and going forward?

James Hayward: Well, we’re encouraged by the amount of testing that we’re doing when, of course, many of our competitors have stepped away from COVID testing, thinking that the pandemic was over. I can tell you it’s not, and we are seeing high rates of positivity in the cohorts we’re testing, and we are testing at a steady state, consistent with the revenues of last year. And we’re hopeful that we’ll stay at that steady state for at least in the next six to eight months.

Yi Chen: Okay. Thank you.

Operator: The next question is from Jason McCarthy with Maxim Group. Please go ahead.

Jason McCarthy: Hi, Jim. Thanks for taking the question. Can you talk a little bit about €“ I know you can’t reveal specific partners for the linear DNA program, but the types of therapies €“ you had mentioned oncology, but is that more towards cancer vaccine? Or are there other approaches in there, including things like DNA-based antibodies, particularly checkpoints? Not that many groups have done that, and I wondered if linear DNA can be applied to molecules that large?

James Hayward: Right. Well, we have been able to incorporate quite large open reading frames than our linear DNA system. And so, we think that the range of applications is extraordinarily diverse. We have customers with interest in cancer and redirected cell therapies and novel approaches to rare diseases and vaccines. And so, I think, of the applications that have so excited the marketplace for RNA, many of them or most of them are addressable with linear DNA. And of course, with greater stability €“ and in some cases, far fewer problems like double-stranded RNA or in homogeneous poly A or challenges in capping, so we’re being very conservative, Jason, by starting out focused on IVT templates. But we also think that gradually, as we prove that linear DNA does not integrate into genomes and is expressed episomally, we think the range of applications will grow quite quickly.

Jason McCarthy: Can you €“ from a linear DNA-based RNA type approach, can you talk about what the interest level is in that area? Because, as you know, the, mRNA €“ obviously, RNA has captured everybody’s attention because of COVID, but there are very specific reasons why it was successful as an infectious disease vaccine. They’ve never really been able to deliver it with great success anywhere else for a variety of reasons. Maybe DNA €“ linear DNA makes sense and solves that delivery problem and maybe there could be strong interest there? Or can you describe the level of interest around that type of approach?