Applied DNA Sciences, Inc. (NASDAQ:APDN) Q3 2023 Earnings Call Transcript

Applied DNA Sciences, Inc. (NASDAQ:APDN) Q3 2023 Earnings Call Transcript August 12, 2023

Operator: Good day, and welcome to the Applied DNA Sciences Inc. Fiscal Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sanjay Hurry, Head of Investor Relations. Please go ahead.

Sanjay Hurry: Thank you, Betsy. Good afternoon, everyone, and welcome to Applied DNA’s conference call to discuss our third quarter fiscal 2023 financial results. You can access the press release that was issued after market close today as well as a 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, Beth Jantzen, our Chief Financial Officer; and Clay Shorrock, our Chief Legal Officer and Head of Business Development; Judy Murrah, our Chief Operating Officer, 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 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. 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 third quarter investor call. I will start this afternoon with an overview of our results for the quarter ended June 30, 2023. I will then turn the call over to Dr. James Hayward, our President and CEO, who will update you on our ongoing business initiatives. We will then open the line for questions from our analysts and institutional investors. To preface our performance in the fiscal third quarter, our results reflect a weaker environment for COVID-19 testing demand following the federal declaration in early May, that COVID-19 no longer constitutes a public health emergency. Following the declaration and as noted in our fiscal second quarter call, the City University of New York, our largest diagnostic testing program customer opted not to renew their contracts for our testing services.

The wind down of the CUNY program began in May at the end of the academic term and was concluded by mid-June. With this as a backdrop, total revenue for the quarter ended June 30, 2023, was $2.9 million compared to $4.3 million for the same period last year. Offsetting the decline was a year-over-year increase from our Therapeutic DNA production segment of approximately $296,000 related to a final delivery under our largest contract for LinearDNA to date. Gross profit was $1.3 million or 44% compared to $1 million or 24% in the prior fiscal year period. The improvement in gross profit margin was primarily driven by improved margins at Applied DNA Clinical Labs due to improved expense management associated with the CUNY contract and a higher percentage of the segment’s revenues attributable to higher-margin COVID-19 surveillance testing.

The operating cost of our molecular diagnostics testing services segment are currently being absorbed by surveillance testing contracts. Total operating expenses increased approximately 6% to $4.1 million from $3.9 million in the prior fiscal year period. The year-over-year increase in total operating expenses primarily reflects an increase in SG&A related to the implementation of quality system automation and an allowance for doubtful accounts to reserve for an account balance that was deemed uncollectible. With the unrealized gain on the change in fair value of the warrants classified as a liability included in our net loss line, we now highlight operating loss as best representing the company’s operations. Operating loss for fiscal Q3 was flat at $2.9 million compared to the prior fiscal period.

Excluding non-cash expenses, consolidated adjusted EBITDA for fiscal Q3 was negative $2.1 million compared to negative $2.3 million in the fiscal year ago period. This improvement resulted primarily from our improved gross profit during the third fiscal quarter. Now turning to our balance sheet. Cash and cash equivalents, excluding restricted cash, totaled $10.8 million on June 30, compared to $12.3 million at March 31. As of June 30, our accounts receivables stood at $683,000. We have since collected the majority of this AR. Year-to-date, our average monthly cash burn is $495,000 compared to $620,000 in the prior comparable period. This improvement is due primarily to increased cash receipts under our CUNY contract as well as lower cost to support the CUNY contract.

Average monthly cash burn year-to-date does not include our restricted cash of $750,000. Updating our cash burn projections post CUNY contract conclusion, we anticipate a monthly burn of about $1 million per month beginning in the current quarter and moving forward. This projection is contingent on order flow for LinearDNA, for IVT templates, the launch of our pharma genomics business and DNA tagging for textiles, the latter as we approach the start of the cotton ginning season in the U.S. It is also contingent on CapEx necessary to establish a LinearDNA production capacity suitable for clinical use and to support our ongoing platform development. Based on our recurring losses from operations and continued cash outflows from operating activities included in our just filed Form 10-Q is a disclosure of a substantial doubt of a going concern.

Our ability to alleviate the going concern is dependent on our ability to implement our business plan further and generate revenues or raise capital. Our cash position on July 31, was approximately $9.6 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. Good afternoon, everyone. Thank you for joining us on our call today. In recent quarters, we have made steady progress on our strategic pivot towards the biotherapeutics market and the unlocking of the full value of our PCR expertise applied to the manufacture of next-generation nucleic acid therapies. Remember, DNA encodes for the transcribed messenger RNA which itself encodes for the translated amino acid sequence of an express protein. The translation may take place in the patient as is the case with the messenger RNA vaccines against SARS-CoV-2 or in vitro when the therapeutic modality is the delivery of a preformed protein such as a monoclonal antibody or replacement enzyme or a protein-based vaccine.

After the close of the quarter, we took a significant step toward our — forward rather, with our acquisition of Spindle Biotech. When combined with our LinearDNA IVT templates, Spindle’s proprietary RNA polymerase offers the following advantages. It gives us a differentiated offering with market advantages over conventional IVT mRNA production. It increases the commercial relevance of our platform to the growing pipeline of mRNA therapeutics in development globally. And it substantially increases our mRNA total addressable market with improved economics. The acquisition translates to roughly a fourfold increase in our mRNA total addressable market made relevant through our now integrated offering. As we announced a few weeks ago, we have branded this new integrated platform, Linea IVT with the tagline, “Better mRNA…Faster” as shown in this slide.

In a moment, I’ll ask Clay to take you through our business development plan for this new exciting offering. Our goal is to enhance further the platform’s value proposition to mRNA manufacturers and developers and acquire additional evaluation customers while we bring online our cGMP quality production capacity to support the demand for DNA at volumes relevant to both clinical and commercial stages. My presentation today will also detail the nontherapeutic LinearDNA revenue opportunities being advanced alongside our mRNA initiatives. In the aggregate, these opportunities represent compelling paths for growth. Recall that at the start of the fiscal year, we announced the receipt of our largest single purchase order of LinearDNA, which is for a diagnostic assay.

Now we can produce LinearDNA today at a quality sufficient for commercial diagnostic applications. These applications do not require the compliance of therapeutic DNA. Consequently, the cost to us of diagnostic DNA is less than that of therapeutic DNA. And as we are approaching the start of the cotton ginning season in the U.S., some of our opportunities are also tied to our supply chain traceability business catalyzed by the Uyghur Forced Labor Protection Act, or UFLPA, which is now enjoying its second year of enforcement. I will now turn the call over to Clay to offer his insights into our acquisition of Spindle and our path forward in messenger RNA. Clay?

Clay Shorrock : Thank you, Jim, and good afternoon, everyone. We are very excited about our acquisition of Spindle Biotech, and we feel that integration with our LinearDNA IVT template to create our new Linea IVT platform overly compelling and differentiated offering to mRNA stakeholders and addresses two key pain points in mRNA manufacturing. One, we use the plasmid DNA as starting material and two, double stranded or DS RNA contamination. When utilizing the customer’s mRNA production workflow, we believe our Linea IVT platform will produce a higher purity mRNA product with a simplified workflow compared to conventional mRNA production. The mRNA market continues to grow at breakneck pace with approximately 350 therapies in preclinical or clinical development.

These therapies target a wide range of indications, ranging from infectious disease to oncology and genetic disorders with an increasing number of therapies reaching late clinical trials. mRNA vaccine for common infectious diseases such as RSV, are on the horizon and represent very large mRNA manufacturing opportunities. It’s with these opportunities in mind that we have launched the Linea IVT platform. Our Linea IVT platform is built upon the integration of our LinearDNA IVT template and the proprietary fusion RNA polymerase or RNAP that we acquired from Spindle. The novel RNAP developed by Spindle is a fusion protein consisting of wild-type T7 RNAP and DNA-binding domain. The DNA-binding domain has a high affinity for certain chemical compounds that can be efficiently added to our LinearDNA IVT template via PCR.

Our PCR-based platform’s unique ability to add these chemical modifications efficiently and cost effectively is the enabling technology for Spindle Biotech something allowing us to extract the full benefit of this Spindle RNAP. At the time of the acquisition, Spindle was pre-commercial but has attracted an amicable list of partners drawn from the upper tier biotech. So it held back the inability to manufacture chemically modified IVT template at scale. Our PCR-based LinearDNA platform solve this issue and unlocks the full value of the Spindle RNAP. As you noted, acquiring Spindle and launching the Linea IVT platform expands our mRNA related total addressable market. On a stand-alone basis, our Linear IVT — or excuse me, our LinearDNA IVT templates are relative to approximately 5% of the mRNA manufacturing balance sheet.

And only a limited amount of DNA template is required to produce very large amounts of mRNA with the ability to now sell a paired IVT template with the Spindle RNAP under the Linea IVT platform, we expect to have relevance to over 20% of the mRNA manufacturing value chain, representing an approximate 4x increase in the company’s mRNA related total addressable market. As I noted, our newly launched Linea IVT platform address two key pain points interventional mRNA manufacturing. Avoiding the use of plasmid DNA IVT template and minimizing DS RNA contamination all while also providing simplified workflow. On the top of Slide 9, which is the current slide, represents a conventional mRNA production workflow that utilizes plasmid DNA and conventional wild-type T7 RNAP.

The bottom of that slide represents a potential Linea IVT mRNA production workflow using both chemically modified Linea’s DNA IVT template and the Spindle RNAP. I will highlight two important differences between processes. The first difference is the simplification of the front end of the mRNA manufacturing prop. The use of DDNA or plasmid DNA as a template causes long lead times to require numerous steps and costs specific to its use, including expensive enzymes and increased regulatory scrutiny and additional filtration steps. By replacing plasmid DNA with LinearDNA in the bottom workflow, these upstream plasmid-related pain points are reduced, resulting in a simpler mRNA workflow. We estimate that using LinearDNA to move to about 40% of the extreme steps involved in conventional plasmid-based IVT, which is the top workflow.

Second difference is in the streamlining of the back end of the mRNA manufacturing process by reducing DS RNA contamination through unique combination of chemically-modified linear template and the Spindle RNAP. DS RNA contamination is a byproduct of wild-type T7 RNAP used in all mRNA manufacturing. T7 is used throughout the mRNA industry due to its ability to create large amounts of RNA from a small amount of DNA template. But there are trade-offs, including the production of problematic DS RNA. DS RNA is a stimulatory and inflammatory byproduct that needs to be removed from mRNA, which is a single trend construct before it can be used as the therapeutic. Currently, DS RNA is removed via expensive and complex downstream purification method.

Now due to the ability of our Linea IVT platform to significantly reduce DS RNA contamination without sacrificing mRNA yields, we believe the need for downstream purification will be reduced and further streamlining the mRNA workflow for our customers. So in summary, by simplifying both the upstream and downstream aspect of mRNA production, we believe our Linea IVT platform can enable our customer to produce better RNA with reduced workflow — with reduced peripheral steps and time lines. Now shortly after we acquired Spindle, we attended a key industry conference call. The reception to our new platform is very encouraged. The plasmid DNA and DS RNA contamination pain points addressed by our IVT platform are called across the industry. And it’s clear that manufacturers and developers are seeking new and differentiated approaches to mRNA production.

Equally encouraging the mRNA initiatives are gaining strong traction within the industry. We are today is due to the highest number of valuation customers since the launch of our IVT template one year ago. These customers range from preclinical mRNA therapy developers to CDMOs to large therapy developers pursuing mRNA vaccines for common respiratory illnesses. Our future planned cGMP quality production capabilities are critical to converting these customers from the evaluation stage to large sale supply agreements, and we remain committed to launching this capability in early calendar year ’24. Looking ahead, our business development efforts are focused on further elevating our profile in the marketplace and building a broader base of interest in our Linea IVT platform.

Our efforts will also center on continued optimization of the platform for both conventional mRNA products as well as a growing number of self-amplifying or SA mRNA therapies. At the same time, we are hard at work at updating our sales and marketing material to highlight the Linea IT platform to new and existing customers. Finally, we remain committed to building our patent state around our Linea’s Rx products and services. The acquisition of Spindle brought with it a large portfolio of pending international patent applications covering the enzyme as well as various other modalities of next-generation RNA production. In addition, the company continues to pursue patents protection around both the LinearDNA and Linea IVT platforms. Now let me turn the call back to Jim for further remarks.

James Hayward: Well, thank you, Clay. I’ll now address the opportunities to drive revenue growth in addition to Linear IVT. Beyond messenger RNA and central to our long-term vision for our LinearDNA platform is the ability to support the manufacture of a host of genetic medicines currently subject to the drawbacks of plasmid DNA. Recent work conducted in collaboration with our partners demonstrated safety and immunogenicity of an LNP that is a lipid nanoparticle encapsulated LinearDNA vaccine candidate in mouse models. Our approach combines the rapid design and manufacturing capabilities akin to mRNA therapies, with the thermal stability and relative manufacturing simplicity of LinearDNA for a potential new class of veterinary and human health therapeutics.

With this in mind, we expect to announce soon the establishment of a sponsored research agreement with a prestigious institution of veterinary medicine to accelerate the development of LinearDNA-based vaccine platform targeting diseases that impact high-value animals. Our long-term road map for LinearDNA — for our LinearDNA platform includes developing an out-licensing veterinary therapeutics. Our approach to veterinary therapeutics leverages many developments necessary for mRNA production and supports our human health aspirations. In addition to the opportunities discussed already, our business segments have had other exciting developments. During the fiscal third quarter, we delivered the last shipment under our largest LinearDNA contract to date.

For context, this slide represents multiple shipments over the prior three quarters for a single amplicon utilized as a control in 1 diagnostic assay. The dollar values of these shipments have tripled over the time as the customer has progressed their assay through validation to commercial readiness. The assay is today in the early stages of the customer’s commercial rollout. And as the assay is adopted, we would expect recurring orders. This customer is also developing 2 additional LinearDNA-dependent assays. We expect this customer’s demand for LinearDNA will grow as they validate and commercialize these other assays. LinearDNA is also being evaluated for other diagnostic use cases, including in an assay to test for the presence of heavy metals in water and another by a leading biotech company in a quality control assay for cutting-edge therapeutic.

These latter two opportunities are in the early stages but they are identical to that first application I described from a production perspective. Now we are awaiting the New York State Department of Health’s approval of our pharmacogenomics assay. Meanwhile, we’ve been actively building our go-to-market plan and awareness for our company and our PGx platform within the segment of potential institutional users and partners. Now turning to our supply chain traceability business as the industry continues to adjust to the UFLP Act compliance requirements, we are seeing ongoing demand for our source verification tools and steady growth in the associated revenues. Since the launch of our textile verification service, we have added over 50 new customers.

As discussed on prior calls, the value of source verification customers is as an initial customer base within which we can expand our offering to include complementary DNA tagging and genotyping at potentially higher margins, represented on this slide. Discussions are ongoing with current source verification, customers potentially migrating to DNA tagging and to new and existing DNA tagging prospects that in the aggregate, represent potential revenue opportunities of millions of dollars. This extends not only to U.S. brands and retail retailers, but also to overseas manufacturers with supply chains that extend into India and Pakistan. Before opening the call to questions, let me briefly recap some key points that we’ve made today. The combination of Spindle Biotech’s proprietary RNA polymerase with our LinearDNA IVT templates significantly increases the commercial relevance of our integrated offering to mRNA manufacturers and developers.

The acquisition also positions us to monetize a much larger segment of the mRNA value chain, significantly increasing our total addressable market. The industry’s reception to the acquisition has been positive and is helping us to advance discussions with existing evaluation customers while also attracting new prospective evaluation customers, we remain committed to delivering CG&T quality LinearDNA at volume suitable for IVT use in clinical stages and commercial launch in early calendar 2024. We continue to advance the work necessary to position our linear DNA platform for the manufacturer of next-generation genetic medicines. Our ability to deliver LinearDNA for diagnostic applications gives us a path to incremental revenue opportunities.

We continue to see momentum in acquiring certainty source verification customers, and we’re starting to engage in discussions for DNA tagging opportunities. Operator, this concludes my prepared remarks, will you please open the call to questions.

Q&A Session

Operator: [Operator Instructions] The first question today comes from Jason McCarthy with Maxim Group. Please go ahead.

Jason McCarthy: Hey, team. Thanks for taking the questions. Just a couple related to Linea IVT. Can you guys talk a little bit about how pretty much T7 RNAP is baked into the process? Everybody uses it. So it’s not so exotic. It’s very common, which is good for what you’re doing and how having the fusion protein with the DNA-binding domain can separate out from regular T7 use. I don’t know if I’m phrasing that correctly, but how is — I guess I’m asking, how is it easy is it to make that switch for an end user of your product?

James Hayward: Sure. That’s a great question, Jason. Thank you. The workflow process for both our fusion protein and for the wild-type T7 are virtually the same. So in terms of the burden on an existing mRNA manufacturer, we feel there really is none. However, we shorten the workflow process at the beginning of the process and also at the end and build as a consequence in significant efficiency in the associated savings. Perhaps more important is the fact that the wild-type T7 as part of its processivity forms double-stranded RNA, which can have a very detrimental effect when delivered. That is, it’s both highly immunogenic, meaning that by the second time you use it, you could be allergic to it. And secondly, it’s very inflammatory. So with little effort, we believe that the use of our platform can provide significant gain in value. Clay, would you like to add anything to that?

Clay Shorrock: I think that was a great answer, Jim. I mean the platform is build, Jason to essentially be plug-and-play into existing plasmid-based workflows, right? So as Jim noted, it takes out upstream and downstream process steps. But because of the way that the Spindle RNAP interacts with our chemically-modified LinearDNA template, it allows us to alter the offer conditions of the IVT reaction in a way that wild-type T7 would have to be inhibitory to wild-type T7. And that’s what allows us to greatly mitigate or to a certain extent, eliminate DS RNA.

Jason McCarthy: Got it. And now I’m just going to ask 1 more. It’s kind of a two-part question, and then I’ll jump back into the queue. So Clay, you had mentioned there’s about 350 mRNA-based therapies in preclinical or clinical development. At any point along that process from a regulatory perspective, can a drug developer, an mRNA developer makes the switch to Linea IVT from whatever else that they’re using conventionally? That’s one part. And the other part is from a simple way to just plug and play, to your point. Does it make it much more attractive for contract manufacturers who are probably all lining up and competing with each other and they’re not that different from each other for a contract for like Moderna’s vaccine or COVID or something else. Does this product Linea IVT really separate these contract manufacturers from one another and is that a market that you’re targeting?

James Hayward: So, Clay, I’ll jump into…

Clay Shorrock: Sure, go ahead, Jim.

James Hayward: I’ll jump into the second question and leave the first question for you, how is that?

Clay Shorrock: Sounds good.

James Hayward: So Jason, we believe that this is a great way for a CDMO to compete in a crowded unit color marketplace. So that offering our platform in a license agreement to CDMO gives us the opportunity to spread the effect to — or the benefit to their customers as well. And Clay, would you like to speak to the first one?

Clay Shorrock: Sure. Sure. Yes. So to your question of it being plug and play, how much of this positive act that is when we built the Linea IVT platform, we had a couple of options, and we could have really turned IVT on its head with some of the capabilities that the Spindle concept can do in some of the IP that has — is in progress we could have really built an IVT version 2.0, but we chose not to do that because there’s a huge existing CDMO market out there, as you noted, and we wanted it to be plug and play. So using the concept of this locking key mechanism of action of Spindle plus LinearDNA, we kind of built a version 1.5, where it plugs into the existing fast-paced IVT manufacturing workloads. And I think that’s the advantage to existing manufacturers.

But down the line, we do see some pretty exotic things that you can do with chemically-modifying DNA and having binding domains on the enzyme that can be used in maybe a new form of IVT, but that is down the line.

Jason McCarthy: Great. Thank you.

Operator: [Operator Instructions] The next question comes from Yi Chen with H.C. Wainwright. Please go ahead.

Unidentified Analyst : This is Chetan [ph] behalf of Yi Chen. And my apologies, my signal was bad. So if you’ve already answered these questions, please excuse me. But could you comment on the types of customers you’re attracting with respect to certainty, authenticity platform? I know you indicated that you have over 50 customers added. So are these textile and manufacturing customers across the world. Any color on that would be very helpful. And also your take on its potential in the future from a revenue standpoint? Thank you so much.

James Hayward: Sure. Happy to. So our technology is relevant to every node in the supply chain and every node is impacted by the Uyghur Forced Labor Protection Act. So even if you consider starting at the level of the farm, the baled cotton needs to be able to prove its origin all the way through the supply chain or when it’s debated at the Spindle. So we see — we’re seeing requests for every — from every element of the supply chain from the farm to the spinner to the weaver to the cotton sell operation to the brand owner to the retailer. Each one has to be concerned with whether or not they can prove that their product is made without the benefit of forced labor. So not only are we seeing it integrated across every node of the supply chain, but we’re seeing it effectively relevant across the entire world for the most part.

So we have exciting new opportunities in India and Pakistan. We’ve got a long-standing business dealing with American cotton. And so this platform is of certainty is helping us become relevant to a global enterprise. Does that answer your question?

Unidentified Analyst : It did. It did. Thank you so much. And one quick one on Linea IVT. And again, my apologies if I missed it earlier on, but where are you with — in terms of discussions with prospective evaluation customers? Any color on the nature of discussions at this stage would be very helpful. Thank you so much.

James Hayward: Clay, would you like to handle that one?

Clay Shorrock: Sure. Yes. So we’ve launched the LinearDNA IVT templates about one year ago, right? And that is our enzymatically produced templating service. About one month ago, we launched the Linea IVT platform, which is the integration of the LinearDNA templates right with Spindle RNAP. We have a good number of evaluation customers, really running the gamut from preclinical startup biotech to CDMOs to large pharma looking at our LinearDNA templates. We have a fair amount of interest within our existing evaluation customers for the Linea IVT platform, which we just launched last month. So our commercialization strategy is to leverage our existing relationships with these strong contacts in biotech and pharma for our template to get them to evaluate the Linea IVT platform.

In addition, we have since its launch last month through a conference two weeks ago, we do have a fair amount of new contacts that wish to evaluate the Linea IVT platform exclusively. And we’re seeing that mainly in the CDMO space as a way to really mitigate against DS RNA. And we’re seeing a lot of interest in this platform for the potential manufacturer of self-amplifying mRNA. That seems to be where the industry is going, and there are substantial manufacturing challenges with SA mRNA and we do believe this platform can address many of those.

Unidentified Analyst : Excellent. Thank you so much.

Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to James Hayward for any closing remarks.

James Hayward: Thank you so much. Well, thank you all for joining us today. Before I conclude the call, I’d like to take an opportunity to say on behalf of all of Applied DNA that we were privileged to assist the City University of New York in keeping their community safe, which was really a success as judged both by the notes of gratitude we received from the administration, including Hector Batista, the Executive Chancellor — Vice Chancellor and COO, who stated, “Your tools and practical solutions empowered the university with real-time data to make informed decisions that, in turn, kept our community safe. From the beginning of the pandemic, we recognize the importance of following the science and Applied DNA was instrumental to helping us uphold that principle.” But it’s also noteworthy to recognize that throughout the course of our contract, CUNY positivity rates remained at a fraction of the surrounding borrows.

Well, thank you again, and we look forward to updating you on our progress on our fiscal fourth quarter and year-end. Thank you very much, and have a good evening.

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