Applied DNA Sciences, Inc. (NASDAQ:APDN) Q1 2023 Earnings Call Transcript
Applied DNA Sciences, Inc. (NASDAQ:APDN) Q1 2023 Earnings Call Transcript February 9, 2023
Operator: Good afternoon, and welcome to the Applied DNA Sciences' First Quarter Fiscal 2023 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, Head of Investor Relations and Corporate Communications. Please go ahead.
Sanjay Hurry: Thank you, Gary. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our first 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. 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 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. 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 first quarter investor call. I will start this afternoon with an overview of our results for the quarter ended December 31, 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 I begin my review, and as a reminder, we now report segment data that reflects the results of operations for our three reporting segments. The executive management team uses this data to manage the company's performance on a segment basis, assess expected future cash flows and make more informed decisions about each segment going forward.
We provide this 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 biotherapeutic 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. To begin, we are pleased to report a solid start to the fiscal year with both sequential and year-over-year revenue growth. Our revenue performance in Q1 was driven primarily by ADCL and its COVID-19 testing service. Orders for linearDNA and deferred cotton tagging revenues also contributed to the quarter's topline performance. Turning to our consolidated results for the quarter.
Total revenue in Q1 was $5.3 million, an increase of 26% from $4.2 million in the prior fiscal period. On a sequential basis, Q1 revenues increased 48% from $3.6 million. The $1.1 million increase in Q1 revenues was due to an increase in COVID-19 testing revenues associated with a key client. Notable in Q1's revenues were orders for research and development quantities of linearDNA by first-time biopharma customers for their mRNA development efforts, as well as a recurring commercial order from an existing biotherapeutic customer. The increase in revenues was offset by a decline in product revenues of $310,000 that was primarily attributable to a decrease in sales of our MDx test kits and supplies. Our key COVID-19 testing client is an academic institution.
And as such, testing demand is subject to lull due to semester breaks and school holidays. The current quarter, fiscal Q2, testing levels includes approximately three weeks of winter break, during which testing levels were muted. With the start of the spring semester, testing levels are ramping up. Gross profit was $2.4 million or 45% compared to $1.1 million or 27% in the prior fiscal year period. The improvement in gross margin was the result of an improved gross margin at ADCL. Higher testing levels, coupled with cost management efforts for our testing contracts where we also provide and staff test collection centers were the main contributors to the improved gross profit. To a lesser extent, the improvement in gross margin for the current period was due to the prior fiscal year period having high COVID-19 positivity rate, which resulted in a reduction in pooling size that had a negative impact on gross margin due to higher consumable costs per sample.
Our total operating expenses declined by $2.2 million or 38% in Q1 to $3.6 million from $5.8 million in the prior fiscal period. The decline was primarily attributable to lower stock-based compensation expense of $1.6 million. The balance of the decrease is related to a decrease in bad debt expense of $300,000 for the collection of an outstanding receivable balance that was previously fully reserved for. Our operating loss for Q1 was $1.2 million compared to an operating loss of $4.7 million in the prior fiscal period. Given the unrealized change in fair value of the warrant liabilities included in our net loss, we highlight loss from operations to be the best representation of the company's operations. Net loss for Q1 decreased to $3.8 million or $0.30 per share versus a net loss of $4.7 million or $0.53 per share in the prior period.
Excluding non-cash expenses, consolidated adjusted EBITDA for Q1 was negative $1.1 million compared to negative $2.7 million in the year-ago period. Turning to our balance sheet. Cash and cash equivalents totaled $12.9 million on December 31. As of December 31, accounts receivable stood at $4.1 million. We expect to collect the bulk of this amount in the current quarter. For Q1, our average monthly burn stood at $779,000 and was essentially flat with average monthly burn for the prior fiscal period. Our current warrants outstanding balance on December 31, 2022, remain unchanged at $7.3 million as our share price did not reach warrant exercise prices during the quarter. Approximately 2.2 million of the 7.3 million warrants have exercise prices ranging from $2.80 to $2.84 per warrant share, which if exercised could result in exercise proceeds to the company of approximately $6.3 million.
5.1 million of these warrants have an exercise price of $4 per warrant share, which if exercised, could result in total exercise proceeds of approximately $20.3 million. Of the 5.1 million warrants, 2.1 million expired September 2023, which if exercised would total proceeds of $8.4 million. Our cash position on January 31 was approximately $10.8 million. Before I turn the call over to Jim, earlier this afternoon, the State of New York and the Empire State Development Corporation announced our receipt of an Excelsior Jobs Program award valued at up to $1.5 million. The reward, which was announced on the State of New York website, could result in refundable tax credit for qualifying net new job creation over a benefit period of 10 years. We intend to use the award to support linearDNA's platform development path for use in the manufacture of nucleic acid-based therapies.
Jim's remarks will go into greater detail on progress by this business segment and why we are excited about its future prospects. 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: Okay. Thank you, Beth, and good afternoon, everyone. Thank you for joining us on our quarterly investor call. Our performance in the first quarter was one of improving execution. At the same time, we achieved progress on strategic initiatives focused on laying the foundation for a compelling biotherapeutic story supported by two PCR enabled businesses with the potential for growth and future cash flows. On prior quarterly calls, I've identified the biotherapeutic application of our PCR expertise as the company's chief creator of shareholder value. I've discussed that DNA underpins most nucleic acid pipelines, either in the manufacturer of the therapy as in the case with messenger RNA or with DNA as the direct therapeutic itself.
The demand for DNA is expected to grow going forward. And the plasmid DNA, which is the industry's incumbent DNA production technology, suffers from long lead times, high complexity and high capital and labor costs as it moves to scale to support the growing number of nucleic acid-based therapies under development. Plasmid DNA's scalability and related cost and process issues are negatively impacting developers in real time. It's common today for a developer to encounter delays for a manufacturing slot up to 12 to 18 months out. A delay of this magnitude for an industry that's reliant on development milestones and clinical data, can alter cash runways, prospects for strategic partnerships and paths to commercialization. The industry requires an alternative to plasmid DNA, and it is actively seeking it out.
The industry acknowledges non-plasmid DNA's potential for enabling companies across the nucleic acid-based therapy sector to simplify and accelerate DNA manufacturing. The ability to iterate R&D faster via enzymatically produced DNA to bring product to the clinic and to market faster confers a valuable advantage to a sector where therapy development has historically taken a decade or more and at considerable cost. But so much has changed. Interest from major pharmaceutical players in non-plasmid DNA manufacturing is rapidly increasing. With two enzymatic DNA manufacturing companies being acquired in the last 18 months, one by Merck, and the second last month by Moderna. In addition, Pfizer last summer inked a licensing agreement with a third enzymatic DNA manufacturing company.
Unlike those companies, we are a relative newcomer with a differentiated PCR-based technology platform that excels at manufacturing the specific DNA needed to empower next-generation mRNA workflows. In light of the favorable macro environments for both enzymatic DNA manufacturing and mRNA therapies, we believe the timing is right to find long-term strategic partners to assist Applied DNA in its broad-scale commercialization of the platform. Now my prepared remarks today will focus on why we believe we are in the right place at the right time with the right expertise to be integral to the future of nucleic acid-based therapies as a direct alternative to plasmid DNA. I'll also touch on ADCL, our Molecular Diagnostics Clinical Lab and our DNA tagging business, also beneficiaries of our PCR expertise.
I'll update you on recent developments as we position them for long-term profitable growth and positive cash flows. Our ability to make enzymatic DNA for nucleic acid-based therapies is based on very, very large-scale PCR which is grounded in our 15 years plus of development experience. Our LineaRx subsidy produces DNA enzymatically, which we have branded linearDNA. We view linearDNA as a direct alternative to plasmid DNA with improved safety and efficacy and performance, all with reduced manufacturing times. Since forming LineaRx four years ago, we've made tremendous strides in developing our linearDNA platform. DNA is therapy agnostic. Therefore, linearDNA's relevance to nucleic acid-based therapies is at least equally broad. And to name just a few of those applications; mRNA uses DNA as an in vitro transcription template or an IVT template.
DNA is used to make the viral vectors that empower gene therapies. DNA is also used to reprogram cells into CAR T cells used in the treatment of certain cancers. And of course, DNA itself can be used as a direct therapeutic agent in the form of DNA vaccines targeting a wide range of indications from infectious disease to cancer. To date, we have cultivated an enviable roster of biopharma companies that have used linearDNA for R&D purposes to inform the therapy pipelines. And as Beth noted in her remarks, we acquired a pair of first-time linearDNA customers during the first quarter that are engaged in mRNA therapy development. Given that linearDNA's relevance to nucleic acid-based therapies is so broad, we have carefully examined the market and have deliberately chosen to focus on two near-term opportunities that we believe offer the nearest term revenues and can serve as a jumping off point for applying our platform to the broader genetic medicines opportunities.
I'll spend a few minutes speaking to each in turn. And they are, firstly, in vitro transcription templates, known as IVT templates, for mRNA production, and DNA therapeutics. We have spent the last 12 months optimizing the linearDNA platform for the enzymatic production of linearDNA IVT mRNA templates. This was not an easy task as conventional PCR is not really an option due to the unique homopolymer sequences that are found in IVT templates. Specifically, the poly(T) in the DNA template that is transcribed into poly(A) in the mRNA. Nevertheless, by using the many tools in our particular PCR toolbox, we overcame these challenges and developed a workflow that utilizes specialized PCR primers in the PCR process to achieve highly homogeneous IVT templates, thus creating a differentiated production platform with many advantages over plasmid DNA manufacturing.
Now we launched our IVT template service this past summer, and the response from industry has been overwhelmingly positive. Our IVT templating workflow, as shown in this slide, is a simple five-step process. We take a DNA template, which can be a plasmid, a linear amplicon or any type of synthetic DNA. In step two, we optimize it for yield and fidelity. It then goes through our production platform, which is step 3. This step conducts the amplification of the optimized template by means of our PCR production platform, which in the case of our current R&D stage customer produces small-scale orders that can be easily scaled up for production for recurring larger orders. Through this reaction, we can deliver a high-quality enzymatically produced template, complete with long and homogeneous poly(T) tails.
Photo by ANIRUDH on Unsplash
It then goes through purification and quality control, as indicated in step four. And batch released to the customer is step five. For customers with existing DNA templates, this entire process can currently be completed in under two weeks for a milligram scale. With faster turnaround times and scale are part of our platform roadmap. Our end product is pure. It only produces the gene of interest. And in doing that, we eliminate endotoxin risks and the risk of including genes responsible for ampicillin resistance. It is efficient. You can use less quantity of linearDNA to drive similar or higher yields than the equivalent of plasmid DNA. It offers unparalleled flexibility. We provide a suite of IVT template modification options for specific performance requirements, such as chemical modifications and the addition of precise poly(T) sequences.
These poly(T) sequences are highly homogeneous in the DNA sequence, including the length of these repeat homopolymer sequences, all necessary for optimal function. It is scalable in a facility that is a fraction of the cost and a footprint and a fraction of the footprint of a plasmid DNA facility. In addition, by providing an IVT template that is already linear inform, we estimate that our linearDNA IVT templates can eliminate about 35% of the process steps required by conventional plasmid DNA-based mRNA production workflows. Moreover, unlike plasmid DNA templates that require expensive restriction enzymes to linearize the DNA, our linear template has no such requirement, thus eliminating expensive input materials from an RNA manufacturing workflow.
The combination of all of these advantages forms a compelling use case for our customers. Now our second term focus is on DNA therapeutics and veterinary biologics within this field. The veterinary market is now beginning to grow based on advances in human therapies. The veterinary biologics market goes through USDA and has a lower regulatory threshold via conditional approval and offers a path to commercialization has substantially lower cost compared to FDA. The veterinary market is also a greenfield for nucleic acid-based therapies and can serve as a proving ground for linearDNA's eventual application to human health. Now in the past year, we've demonstrated that linearDNA can be used as a direct therapeutic. With this capacity established, our first entree is with a direct therapeutic targeting the veterinary immuno-oncology market.
There are currently no veterinary lymphoma immunotherapy treatments being marketed. Now we've taken a de-risked approach by in-licensing a canine lymphoma immunotherapy from a close partner whose data from a plasmid DNA version of this therapy showed a threefold increase in treated dogs' survival times. Now these data are compelling. However, USDA declined their request for conditional approval based in part on the therapies use of plasmid DNA. Given the host of drawbacks associated with plasmids, antibiotic resistance, the origin of replication chief among them, USDA did not want the therapy used on companion animals. Our partner also faced manufacturing challenges due to their therapies, plasmid DNA and an adenovirus composition. Our linearDNA version of the same therapy has demonstrated a similar immune response to the plasmid version of the therapy, but incurs none of the plasmid drawbacks.
LinearDNA is well suited for the economics of veterinary biologics because we can manufacture DNA cost effectively. We are also investigating the use of off-patent inexpensive lipid nanoparticles, or LNPs, as the delivery mechanism for lymphoma therapy. This would give us an integrated offering across the veterinary cancerous therapy value chain. We have concluded our initial screening studies on numerous LNP formulations that have resulted in promising results in vitro. In addition, early studies have shown that the LNP linearDNA compositions are highly stable at four degrees Celsius, which gives us a large commercial advantage over the LNP mRNA formulations that require an extremely cold chain. We plan to share our important findings in the coming months.
Our plan is to now take our most promising LNP formulation into animal studies to arrive at a final formulation. Once complete, we will use the optimized LNP linearDNA formulation to empower our canine lymphoma immunotherapy and seek U.S. conditional approval via a small canine clinical trial. Upon conditional approval, there is a well-established commercial path of out-licensing the therapeutic to an animal health company that would secure a final regulatory approval and take the product to commerce. So looking ahead, where are we today? LinearDNA really stands at an inflection point. We have proven the platform to be an attractive and viable alternative to plasmid DNA. We've cultivated a marquee biopharma customer base, and we are constantly optimizing and improving our workflows, supporting genetic medicines.
The gating factor for us has never been the ability to produce DNA at scale. Instead, it's been the ability to make linearDNA at a cGMP grade required to take a customer's therapy into the clinic. And in fact, it's really been a question of funding. Our capital raise this past August served as the funding basis for establishing a small-scale cGMP production capacity by the end of this calendar year. This capacity was tasked to the manufacturer of DNA products to support customers from early-stage drug discovery through late phase clinical trials, subject to necessary regulatory approvals. Now our time line to cGMP is unaltered. In recent weeks, we've been offered space adjacent to our corporate footprint that was already fit for purpose. We have opportunistically secured this space that, too, though smaller than the standalone space initially planned, is more cost efficient and adequately sized to manufacture cGMP-grade mRNA-based starting materials at quantities necessary to support early and mid-stage clinical obligations.
We expect to have the space that we've allocated and ready for cGMP production of IVT templates by calendar year-end. We expect to complete this space without the need for additional CapEx relative to our allocation for fiscal 2023. We expect this new space postpones our need for a stand-alone capacity by 12 to 24 months, while allowing us to pilot our manufacturing processes that will be integral to expanding our production roadmap. In addition to meeting current demand, we believe bringing to market cGMP product as soon as possible will facilitate the opportunity to secure strategic partners who are seeking enzymatic DNA production to inform their therapy pipelines. In addition, we are not standing still on the development of our platform and we're focusing on two platform improvements.
First, we're currently working to increase our platform manufacturing speed by leveraging one of PCR's biggest advantages, the ability to use de novo synthesized DNA as a starting material. This would enable us to go from digital DNA sequence received in an e-mail to milligrams or grams of DNA in a very short period of time. This is made possible by the fact that our PCR-based platform does not require a plasmid DNA template. Leveraging the unique power of PCR, our goal is a completely plasmid-free high-speed IVT template production workflow capable of going from digital DNA sequences to large quantities of IVT template in only 14 days. We are currently working with our input materials partners and believe that this goal is achievable. Second, and again, leveraging the unique attributes of PCR, we are also investigating the use of chemically modified IVT templates via PCR to enable a next generation of RNA polymerase to increase IVT yields and reduce double-stranded RNA production.
Data from our early studies with a partner company have been very promising, with large increases in RNA yield and decreased double-stranded RNA production as compared to conventional IVT. And we look forward to providing more information on these exciting improvements in the near future. Now let me update you on our activities in ADCL and our DNA tagging business before opening the call to questions. We have successfully completed our clinical validation and data analysis for our pharmacogenomics, or PGx, testing panel and have secured partners to enable an end-to-end order to result workflow. We plan to file our validation package with the New York State Department of Health in the near future for approval as a laboratory developed test. Approval will allow us to initiate a PGx testing service here in New York and allow us to receive samples collected nationally from states that conform to New York's Clinical Laboratory Evaluation Program or CLEP.
We believe we have set up our PGx service for success for two primary reasons. First, we've taken a differentiated approach to this testing service. Our business model is predicated on servicing enterprise scale customers, similar to what we did in our COVID testing model, which worked very well. Under this model, we contract with large organizations to analyze their populations, conferring a benefit to both the enterprise and the constitutive individuals. This model allows us to charge a single entity for testing, thus eliminating the need to seek out reimbursement on an individual patient basis, simplifying our services and removing the need to employ a large billing reimbursement department, such as you would find at a typical clinical lab.
Second, we've been speaking with prospective customers in the marketplace for many months to cultivate interest in our service. Their feedback has helped us shape our commercial strategy. We're targeting regional health systems and large self-insured entities in the New York operating area, enterprises where the return on investment of PGx testing is not only measured in its clinical utilities and improved patient outcomes and improved standards of care, but also its economic value in terms of cost savings to the enterprise customer by reducing direct and indirect health care costs for the overall population. I also note that unlike COVID-19 testing, where turnaround times are measured in hours. PGx testing has no such imperative. With this without this constraint, we can move to commercialize the panel nationally from our laboratory here at Stony Brook.
We anticipate the state's review of our validation package will take several months and are targeting a service launch shortly thereafter. Based on feedback from our prospective customers, it is likely that a commercial scale testing contract will be preceded by a soft launch to ensure optimized workflow for any customer-specific processes. The prospective customers we are currently speaking to represent individual cohorts of over 50,000 potential patient samples each. Our submission to the state for approval comes on the heels of an unexpected cessation of the COVID or rather of an expected cessation of the COVID-19 public health emergency by the Biden Administration this coming May. PGx testing compared with COVID-19 will roll out at much lower testing levels, but with a higher anticipated gross margin per test.
At this time, COVID-19 testing customers have not indicated how they will respond to the end of the public health emergency. Finally, as for our supply chain traceability segment, we are heartened to see that the recently enacted federal Omnibus spending bill includes funds that support a sizable increase in Customs and Border Protection personnel. And for the development of technology, the agency uses to support forced labor enforcement efforts. As you will recall, CBP recognizes isotopic abundance testing and DNA tagging as two technologies that are able to deliver compliance with the Uyghur Forced Labor Act. In total, the bill provides $101 million to support efforts to prevent imports of goods produced with forced labor in fiscal 2023.
That's on top of the $51 million that CBP received for forced labor enforcement in fiscal 2022. The increase in funding dovetails with the volume of goods and anticipated scale of petitions of compliance that CBC expects in fiscal 2023 as it enforces the Uyghur Forced Labor Protection Act. During the first quarter, we added several new customers for CertainT isotopic analysis testing, which serves as a complementary diagnostic to tagging for customers in our cotton pipeline. So I've provided a lot of commentary today, and let me offer a brief recap. Our linearDNA sits at the intersection of the expansion of nucleic acid-based therapies and the industry's movement toward enzymatic DNA manufacturing platforms that are faster, less complex to operate and less investment intensive.
We are maintaining our timeline to cGMP. But now with the deployment of a more cost-efficient space so as to capitalize on interest from customers, platform development partners and even strategic partners. At ADCL our PGx platform is incredibly well positioned to leverage the population health platform we built during the pandemic to propel the subsidiary into the genetic testing marketplace of the future. PGx is anticipated to be realized at a higher margin and lower testing volumes than COVID. And finally, the Omnibus spending bill put some real teeth behind implementation and compliance with the Uyghur Forced Labor Protection Act. More customers and border protection staff means more capacity to interrogate shipments, which increases the value proposition of our CertainT platform.
Now before I open the call to questions, on behalf of Applied DNA, its Board of Directors, the executive management and staff I'd like to thank Governor Hochul and the Empire State Development team for their award under the Excelsior Jobs Program and the support from our county and town governments. In the context of my prepared remarks this afternoon and the opportunities we are pursuing in the life sciences sector, this award is timely and will help us achieve our goals here on Long Island, in New York, and to the benefit of all. This concludes my prepared remarks. Operator, please open the call to questions.
See also 12 Most Undervalued Retail Stocks to Buy and 15 Countries that Produce the Best Beef in the World.
To continue reading the Q&A session, please click here.
