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

Applied DNA Sciences, Inc. (NASDAQ:APDN) Q2 2023 Earnings Call Transcript May 11, 2023

Applied DNA Sciences, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.2.

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.

Pixabay/Public Domain

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?

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Q&A Session

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

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

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.