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Edited Transcript of APDN.OQ earnings conference call or presentation 11-Feb-21 9:30pm GMT

·36 min read

Q1 2021 Applied DNA Sciences Inc Earnings Call STONY BROOK Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of Applied DNA Sciences Inc earnings conference call or presentation Thursday, February 11, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Beth M. Jantzen Applied DNA Sciences, Inc. - CFO * James A. Hayward Applied DNA Sciences, Inc. - Chairman, President & CEO * Judith Murrah Applied DNA Sciences, Inc. - COO & Secretary * Sanjay M. Hurry Applied DNA Sciences, Inc. - Executive Director of IR & Corporate Communications ================================================================================ Conference Call Participants ================================================================================ * Jon Salmanson * Jonathan Matthew Aschoff ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst * Yi Chen H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Applied DNA Sciences Fiscal First Quarter 2021 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, Investor Relations Officer. Please go ahead. -------------------------------------------------------------------------------- Sanjay M. Hurry, Applied DNA Sciences, Inc. - Executive Director of IR & Corporate Communications [2] -------------------------------------------------------------------------------- Thank you, Gary. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our fiscal first quarter 2021 financial results and business updates. You can access the press release that was issued after the market closed today as well as the slide presentation accompanying this call by going to be the IR Calendar page of our website. Speaking on the call today are Dr. James Hayward, our CEO; Beth Jantzen, our CFO; and Judy Murrah who was recently promoted to COO. Before we begin, please note that some of the information you will hear today during our discussion may contain forward-looking statements. I refer you to Slide 2 of the presentation and to the company's Form 10-Q filed today and Form 10-K filed on December 17, 2020, 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. Before introducing our first speaker for the afternoon, be advised that management will be participating virtually next month at the H.C. Wainwright Global Life Sciences Conference on 9th and 10th and at the 33rd Annual ROTH Capital Conference on the 15th through the 17th. Management will be available for one-on-ones with institutional investors at both conferences. Now it's my pleasure to introduce our first speaker on today's call, Beth Jantzen. Please go ahead, Beth. -------------------------------------------------------------------------------- Beth M. Jantzen, Applied DNA Sciences, Inc. - CFO [3] -------------------------------------------------------------------------------- Thank you, Sanjay. Good afternoon, everyone, and thank you for joining us. I will begin this afternoon with a review of our consolidated financial results for the first quarter of fiscal 2021. Dr. James Hayward, our President and CEO, will then update you on development across our COVID-19 diagnostics and surveillance testing business as well as progress being made in our biotherapeutic and supply chain security segment. Judy Murrah, our newly appointed Chief Operating Officer, will join us to offer insight into initiatives being undertaken to support both our near-term and long-term growth plans. We will then open the call to questions from analysts and investors. To begin, and for the benefit of our new investors, the pandemic and resulting shutdown of global supply chains, serviced by our tagging and related supply chain business, has had an ongoing adverse impact on revenue. Specifically, the shutdown has negatively impacted the textile industry that historically has been our largest contributor to revenue. Over the past several years, this industry has averaged revenue to us of approximately $1 million per quarter. However, early in the pandemic, we shifted our focus to COVID-19 to bring our deep expertise in DNA manufacture and diagnostics to the fight. As a result, we have experienced increased revenue from our diagnostics and biotherapeutics contract research and manufacturing businesses. The increase is specific to sales of our diagnostic assay kit and for safeCircle, our COVID-19 surveillance testing platform. safeCircle testing is performed under our wholly owned subsidiary, Applied DNA Clinical Labs, that we formed during our September 2020 quarter. Therefore, the statement of operations that I will review in a moment, includes our first full quarter of safeCircle revenue contribution but also includes sizable revenue from our largest customer for our diagnostic assay from whom we continue to receive orders. In effect, our COVID-19 test products and services business has replaced most of the tagging revenue lost to the pandemic in about 1 quarter's time. Further, our largest safeCircle contract to date was signed late in the first quarter of 2021, the full benefit of which we will be seeing in our second fiscal quarter. Starting with the consolidated statement of operations. Total revenues for the first quarter of fiscal 2021 increased to $1.6 million from $634,000 in the prior period. The year-over-year increase is primarily attributed to an increase in service revenue of $1.1 million associated with safeCircle. Product revenues increased to $550,000 for the first quarter of fiscal '21 compared to $238,000 in the same period in the prior fiscal year. This increase is primarily due to sales of our diagnostic assay kit. Cost of revenue as a percentage of product revenue in the first quarter fell to 44% compared to 98% for the prior period. This year-over-year improvement is due in part to a shift in product revenue mix as our diagnostic assay kit sales are at a higher gross margin. The decrease is also the result of certain fixed costs that were not fully absorbed with the low level of product revenues in the prior period as compared to the period we are reporting today. Total operating expenses increased 44% or by $1.3 million to $4.3 million in the first quarter compared with $3 million in the prior period. This increase was driven principally by greater SG&A and R&D expenditures. SG&A expenses for the first quarter increased by $1.1 million to $3.5 million from $2.4 million in the prior period. This increase reflects higher payroll expenses of approximately $748,000, of which $341,000 related to bonus compensation, and the remaining increase was due to increased headcount. The increase in SG&A was also the result of an increase in stock-based compensation expense of $366,000. R&D expenses increased by $184,000 to $748,000 from $554,000 over the prior period. This result is -- this resulted primarily from an increase in laboratory supply purchases to support our continued research and development efforts. Net loss for the first quarter widened to $4.8 million compared to $2.7 million in the year ago period. Net loss for the first quarter includes a noncash charge of $1.8 million for the loss on extinguishment of debt associated with the repayment of the entirety of our secured convertible notes. Net loss per share for the first quarter improved to $0.88 compared to a net loss per share of $1.12 for the same period in fiscal 2020. Excluding noncash expenses, consolidated adjusted EBITDA was flat at negative $2.4 million in both periods. Turning to our balance sheet. Cash and cash equivalents totaled $4.2 million on December 31, 2020. Our average monthly cash burn rate, net of financing and warrant exercise proceeds for the 3 months ended December 31, 2020, was $1.5 million compared to $867,000 in the year ago period, an increase of 77%. The increase is primarily due to capital expenditures for our Clinical Labs subsidiary as well as the purchase of equipment that underpins our safeCircle service and the production of our diagnostic assay. In May 2020, we received a Paycheck Protection Program loan in the amount of $847,000 under the CARES Act. We submitted our loan forgiveness application in October 2020, and it is currently under review by the SBA. Except for our CARES Act loan, we are currently debt-free. Subsequent to December 31, we raised gross proceeds of approximately $15 million via a registered direct offering. As a result, our cash position on January 31, 2021, was approximately $16.5 million. We believe we have adequate cash to fund operations for at least the next 12 months from today. Approximately 460,000 November 2019 warrants remain outstanding as of February 8, 2021, that carry an exercise price of $5.25, which could result in potential proceeds, if exercised, of $2.4 million. We have an additional 259,000 warrants, 50,000 of which carry an exercise price of $6.57, 50,000 of which carry an exercise price of $6.46, with the balance at an exercise price of $7.54. The possible potential proceeds upon exercise of these 259,000 warrants would be approximately $1.9 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 A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [4] -------------------------------------------------------------------------------- Thank you, Beth, and good afternoon, everyone. Thank you for joining us on our quarterly investor call. I hope you and your families are keeping well and safe. I will begin my remarks today with a brief progress report against certain inflection points outlined in our fiscal 2020 year-end call that can drive our top line in 2021. I will also provide an update on our strategy to advance the establishment of our LinearDNA manufacturing platform as a disruptive alternative to the use of plasmid DNA. But first, let me welcome Judy Murrah to the call. Judy has been an integral part of the management team for the better part of the decade now, and her contributions to Applied DNA span both our supply chain security and diagnostics and biotherapeutics businesses. She is the driving force behind the implementation of the digital track and trace infrastructure that underpins our CertainT platform and that ensures authentication in the supply chains we serve. More recently, she has spearheaded the build-out of our Applied DNA Clinical Labs subsidiary and, specifically, its safeCircle testing capacity. She has also recently undertaken our effort to build out a cGMP capacity at our LineaRx subsidiary. She commands tremendous respect across all levels of the company, and I am pleased to welcome her as a participant on her first investor call. Now when SARS-CoV-2 burst onto the world stage in January 2020, scientists knew it would be bad. With almost all the supply chains we service running through China, we saw an almost immediate impact on our tagging business. As Beth noted, with the onset of the pandemic, we made the decision to pivot much of our resources to the fight against the virus. We saw COVID-19 as an opportunity to bring to bear over 15 years of PCR expertise to build a new revenue stream to help us weather the pandemic, while also advancing our long-term strategy to position our LinearDNA manufacturing platform as an alternative to plasmid DNA-based therapeutics manufacture. With the receipt of the EUA authorization last May and the establishment of a unique testing service in safeCircle in August, we've moved with agility and speed to form a COVID-19 diagnostics and testing business that, with the publication of our first quarter 2021 results today, is already compensating the suspended revenue from our tagging business. Our aim, however, is for this business to be a significant contributor to our long-term revenue. Let me review the fruits of our labor to date and what is to come next. As both the manufacturer and user of Linea COVID-19 assays, we enabled 2 COVID-19 revenue streams. The first is the sale of our assay kits to certified laboratories. And as Beth mentioned, first quarter revenues included assay sales to our largest customer, a medical center and teaching hospital local to us. We expect recurring orders from this customer. We are also planning additional amendments to our EUA that we believe can attract further interest in our assay, especially given the assays relevance today to variant detection and more on this in a moment. The second is the use of our assay by our safeCircle surveillance testing service, the economics of which are much more favorable to us than kit sales. Having established reference customers, such as the Suffolk County, New York government, several private education institutions, collegiate-level sports teams and numerous businesses and private clients, we are centrally focused on further expanding the sales pipeline. Our recent partnership with CLEARED4 is aligned with this sales strategy. Earlier this week, we closed our fourth customer with CLEARED4, a private college based in Manhattan. Due in part to the FDA's alert last month that listed our Linea assay as one of the very few EUA-authorized multi-target assays able to discriminate COVID-19-positive samples for certain variants and confirmation of that ability, both in silico and in the field, we have opened a third application for our assay: genomic surveillance. Now to our knowledge, we are the only EUA-authorized test that looks for 2 targets within the SARS-CoV-2 S gene that codes for spike. We believe this gives us a substantial advantage in the ability to detect variants even if the wild-type virus continues to mutate as we would expect it to do. Whereas safeCircle tests within population for SARS-CoV-2 positivity, genomic surveillance seeks to monitor positivity for variant spread to inform public health decisions. The current means of variant presence confirmation uses expensive and time-consuming gene sequencing available only at specially equipped laboratories nationally. Given this limited gene sequencing capacity with which to confirm the presence of a variant, variant spread can, and likely is, going undetected, especially here in the U.S. The U.K. and countries in Continental Europe have successfully used genomic surveillance to surveil variant spread. They did so by using a similar multi-target assay to the Linea assay that experiences S gene dropout in the presence of certain mutations as the enabling test. Now we aim for our assay to be the enabling test for genomic surveillance in the U.S. The U.S. currently lacks a national testing program with which to track variant spread. Based on our very recent conversations with departments of health from multiple states, we believe there is a growing appreciation for genomic surveillance at the state level to monitor variant spread at a time when variants are not yet prevalent in the national population and action can still be taken against them. Our Linea assay would be used to confirm the presence of certain variants on virus-positive samples. And if confirmed, those samples would then undergo gene sequencing at state labs, thereby making more rational use of their gene sequencing capacity. This has been proved out and was detailed in our announcement this morning in which a lab in Kansas using our Linea assay kit in genomic surveillance mode was the first to detect what ultimately proved to be the U.K. variant in the state. And I'm pleased to report that we have already received initial orders from certain states that I hope to speak about in the future. Now we are also developing new multiplex PCR assays that will target the silent mutations that characterize the variants of concern. While these assays will not eliminate the need for sequencing the variant viral genomes, they can help ensure that sequencing is applied judiciously only to those samples likely to contain variants of concern. But genomic surveillance is also relevant to safeCircle. We believe we can grow the surveillance market given our capacity to discriminate certain variants. safeCircle can help protect population against the propagation of variants while we race toward herd immunity. Should variants become more prevalent before we achieve herd immunity, this would likely require higher levels of vaccinations at a time when populations are already under-vaccinated. Pooled genomic surveillance can help to isolate variants before they can spread, which we believe makes this modality more relevant to states beyond our own. As is the case with our largest customer, safeCircle could serve as the blueprint for pooled surveillance testing of variants in other geographies. Interest in genomics surveillance of variants is found at the regional level as well. We have begun very early discussions with a major regional health care provider to run a certain number of their virus-positive samples through safe circle to test for the presence of variants. Here, as well, the economics of safeCircle are much more favorable to us than standalone kit sales. Now while our COVID-19 test products and services offer near-term revenue, we remain dedicated to the advancement of our LinearDNA manufacturing platform as an alternative to nucleic acid therapeutics. The pandemic has shown that regulatory bodies worldwide, which were once quite guarded, are now willing to accept nucleic acid-based vaccines. We achieved an important milestone in the development of our LinearDNA veterinary COVID-19 vaccine just last week that I believe bears highlighting. In preparation for Phase I of our veterinary trial, we proved that a freeze-dried linear DNA vaccine could be shipped internationally unrefrigerated and, subsequently, rehydrated with no loss in potency. We have manufactured a complete supply of the freeze-dried form of our vaccine candidate for our partner, EVVIVAX, to oversee a second and final round of preclinical testing. It concluded successfully. We expect to initiate Phase I of the veterinary clinical trial in very short order. The linear DNA can be shipped without the need of a cold chain and demonstrates no loss of potency upon rehydration, and it adds to the compelling value proposition of our proprietary LinearDNA manufacturing platform. Production of linear DNA via our platform is straightforward. We utilize only primers, the template and polymerase that makes the resultant product purer than the purest form of plasmid-based DNA. Our platform is easily and quickly modified. If we learn tomorrow that a variant required a modification of our vaccine, technically, we could be manufacturing that change within 24 hours but compliance issues, of course, would be the actual determinant in implementing any change. Currently, we believe the gating factor for the therapeutic use of linear DNA is that no linear DNA therapy has ever been brought through the clinical trials process. Our customers at our LineaRx subsidiary, however, are the kinds of sponsors we seek, the kind that have regulatory and compliance wherewithal to be able to help us get a first-ever linear DNA-based therapeutic to be approved by FDA. This, of course, will take substantial funding and partner engagement, both of which we are currently working toward. Now our recent capital raise serves to advance our long-term strategy. Our LineaRx subsidiary counts the who's who of biotech companies as customers. We function as a CRO, contract research organization, to them whereby they present us with an initial construct they want to evaluate in vitro. They will ask us to produce it in linear format quantity sufficient for evaluation. We have intellectual property and capabilities that can help them increase the circulating lifetimes of their constructs and increase the expression levels to make their constructs more effective. And this value-add runs the basis of a royalty to us should their therapeutic obtain regulatory approval. In effect, we get 2 bites of the therapeutic apple. Initially, the pandemic slowed down customer evaluations that were typically performed on cell models in a lab. But in recent months, we have seen an uptick in CRO activity that we take as reflective of the growing value being placed on linear DNA by drug developers seeking nucleic acid-based vaccines that come to market. In a CRO mode, we might evaluate several of a client's constructs around their central theme until they identify the construct that they would like to take to preclinical animal models. Now several clients have made it clear their expectation for us to support them as a contract manufacturing organization and under cGMP conditions. And to that end, we are enhancing our production capacity and capabilities. In a CMO mode, we would be the manufacturer of record should the therapeutic enter the market. And now Judy will provide an overview of our cGMP initiative in her remarks, but let me offer insight into what is driving interest in linear DNA as well as some of the applications we are currently working on. But to protect client relationships, I cannot divulge customer names at this time. Now Moderna and Pfizer's mRNA vaccines have put the spotlight on messenger RNA as a therapeutic platform. Messenger RNA vaccines are made by copying or transcribing DNA templates that are well suited for production via the LinearDNA platform. To this end, we are seeing a growing interest from biotech customers that believe linear DNA may be a better alternative template for use in mRNA production, which currently uses plasmid DNA. We are also seeing growing interest in virus-based delivery of genes, such as vaccines using, for example, adeno-associated viruses, or AAVs. We believe that linear DNA has a real chance of improving the outcome of AAV-based therapies by improving their manufacture. Our current applications for the LinearDNA platform include 1 of the top 5 pharmaceutical manufacturers globally that is seeking a nonviral, non-plasmid CAR-T application using an in-market electroporation solution. They found that our LinearDNA outperformed plasmid DNA in terms of having better expression in cells when electroporated. A top 10 global pharmaceutical manufacturer we've previously referenced is seeking a nonviral, non-plasmid CAR-T application but with their own lipid nanoparticle-based transfection system and not electroporation. Another leading pharmaceutical company is contemplating using our LinearDNA rather than plasmid DNA as the template for RNA vaccines. And finally, an existing diagnostics customer has approached us to generate new amplicons for use in a new in vitro diagnostic under development. So my comments today are intended to convey that we are positioned to benefit from the need for test and testing for however long this pandemic is with us. And we are positioning to benefit from growing awareness and adoption of our LinearDNA platform more centrally as a key enabling technology to make nucleic acid therapeutics safer and more accessible to manufacture them faster, to give drug developers a platform with which to respond to future pandemics faster to the benefit of us all. Before I pass the microphone to Judy, let me conclude with a few words on our tagging business. As part of our pivot to COVID-19, we undertook a rationalization of our business pursuits to focus on those end markets we believe offer a surer path to revenue, namely: textiles, pharmaceuticals, dietary supplements and cannabis. COVID-19 has made companies more focused on the need to secure their supply chains and made consumers and brand builders more aware of their exposure to counterfeiting and diversion. As we await the return of increased demand patterns, we note the emergence of potential catalysts, such as the federal government's ban on the import of cotton from the Xinjiang region of China that is currently used in 1/5 of the cotton goods manufactured globally every year. Another potentially close catalyst is a more favorable environment for cannabis under the new administration here in the U.S. As the economy gradually reopens, we expect a positive benefit to our tagging business. Now this concludes my remarks. I'll turn over the call to Judy to offer some insight into the initiatives being undertaken to support both our near- and long-term growth plans. Judy? -------------------------------------------------------------------------------- Judith Murrah, Applied DNA Sciences, Inc. - COO & Secretary [5] -------------------------------------------------------------------------------- Thank you, Jim, and good afternoon, everyone. I'm pleased to be speaking with you today. By way of introduction, and as Jim noted previously, I joined Applied DNA in 2013 with a range of cross-functional experiences, which certainly have come in handy in operationalizing our practices, products and services here. Prior to Applied DNA, I held senior leadership positions at Motorola and at Symbol Technologies prior to its acquisition by Motorola. They spanned functions of sales and marketing, information technology and operations. Today, my responsibilities lie in working with all of our teams here to drive readiness and responsiveness for our customers' requirements; priorities, balancing supply, demand and inventory, anticipating where the business is coming from to scale appropriately and to ensure we have the skilled resources ready. Today, while there is much that I could address, I will focus on 2 of the top trajectories for the company, as discussed by Jim and Beth: number one, COVID diagnostics, both for building capacity of our assay kit product sales and in use in ADCL's internal operations and in optimizing our services sales with efficiency and certification for ADCL; second is scaling the biotherapeutics manufacturing based on our LinearDNA platform. Today, we are operating in cGMP environment suitable for pharmaceutical excipient, dietary supplements and cannabis industrial tagging. We have institutionalized a GLP environment for our LineaRx biotherapeutic CRO business, and now we are working to add a third regulatory compliance level suitable for CMO contract manufacturing for biotherapeutic customers. Let me offer some operational color and explanations of the industry acronyms for each. Diagnostics first. The core of our product portfolio is the Linea assay kit in sizes of 100, 500 and 1,000 reactions or tests. We use those interchangeably with volume-based pricing model beginning at $40 per reaction list price. Planning and producing these kits and managing the supply chain must meet demand for both our end-user certified laboratory customers and, internally, by our own Applied DNA Clinical Labs subsidiary to support surveillance testing. For our largest customer of our kits, we did earn our business by offering superb customer care as a differentiator from other of our competitors. We provided vendor-managed inventory services for reagent kits, sample collection kits, consumables and more in their facilities. We offered process workflow design consultation for their lab, followed by software and automation implementation with a continuing eye on supply chain health to support their surveillance testing program. Now anticipating an uptick in kit sales due to demand-generation programs we've recently launched and competitive differentiation and variant detection, as Jim mentioned, and the continued ramp-up in our surveillance business, we're now implementing our own robotics and automation to, again, increase our capacity to be production-ready to service potential demand. Next, turning to our services business and COVID surveillance testing. safeCircle is the engine that's opening doors for our customers to get back to work and back to school. For our regional customers, we operationally manage supplies and sample collection logistics. We assist customers in setting up their surveillance program in a growing number of instances with our partner, CLEARED4. Monetarily, for us, at a pooling ratio of 5 individual samples per test reaction and a price of between $60 and $100 per individual samples submitted, depending on volume and portfolio of services requested, therefore, that makes it $300 to $400 per test reaction, this program does generate more per reaction than the Linea assay kit. However, the assay kit also does have a lower complexity and overhead in delivery. So the combination of these balance our portfolio. For customers outside our region, we easily support sales and implementation remotely. After 1 or 2 phone calls of a consultative nature in helping them set up their surveillance programs and the online platform, they can manage as self-service. And we ship our kits 2-way via courier. Consequently, we have focused much of our capacity expansion on safeCircle services. Since its launch, we've outfitted a complete laboratory under our Applied DNA Clinical Labs subsidiary with the equipment for [splicing], RNA extraction and PCR. We've completed facilities upgrades for cleanliness and safety, and we've hired a team with the certifications and experience needed to grow over 10x since we began. We're building capacity in anticipation of CLIA certification for which our application to the New York State Department of Health is currently pending, and that will allow multiple avenues of growth in there. On these metrics, our staffing is complete. Some equipment and facilities expansion is ongoing to open some bottlenecks we have. And our lab information systems, all new, are being rolled out as we grow. Near term, CLEP-CLIA certification would complete our service offering with patient-specific diagnostic testing on a sample presumed to be positive as tested under safeCircle pooled surveillance. In our low -- relatively low positivity region, while this action represents a small cost savings to bring in-house from an outsourced third-party certified lab, it does represent a big-time savings to our customers. We are on track to request our reinspection as announced and are pursuing every avenue available under the New York State CLEP Program to ensure ADCL's ability to offer an integrated testing service. Longer term, a CLEP-CLIA certified laboratory would have benefit beyond the pandemic through commercialization of other services as in, for example, our invasive circulating tumor cell-based platform beyond that of our up to $1 million, 2-year award with Time Technologies. A cancer assay transition to an approved laboratory developed test that is applicable to a host of cancer types would serve as a diagnostic for oncologists to both diagnose and follow the course of therapy for their cancer patients. In parallel with diagnostics, our second initiative, I had mentioned, is to drive adoption of our PCR-based LinearDNA platform. Our toggling from CRO to CMO services, as we now complete small quantity proofs of concept, means investment in capability and capacity, something we must derive from sponsors. Now just a few acronyms. The industry follows FDA guidance for good laboratory practices, or called GLP; and current good manufacturing practices, called cGMP. It's a living process, so to speak. Different levels of product require different levels of stringency. While the stringency required at the level of therapeutics and vaccines is quite high, for example, we have been living the cGMP process in our cannabis, dietary supplement and pharmaceutical excipient tagging business for over 2 years. We adopted cGMP appropriate for the Gram-level manufacturing we have performed to produce components of a third-party diagnostic. We have lived GLP within the LineaRx CRO business. Now we have a step function upgrade required as we cross the threshold toward the manufacture of clinical-stage therapeutics beginning with veterinary trials and moving on from there. The wheels are already in motion. Last May, we contracted a highly respected regulatory consulting firm to help us set our road map, and we have been executing on it since. We have divided our manufacturing groups in 3: diagnostics, therapeutics and industrial, to align appropriate overhead burden and regulatory compliance schemes for each. We've completed some facilities upgrades and have purchased new cGMP-compliant equipment in production and in quality, and we use the opportunity of the diagnostics facilities build-out to begin to prepare for clinical-stage therapeutic manufacture as well. As noted in communications related to our recent capital raise, this area is one of the primary use of funds as we, in parallel, seek sponsorship for our work. We have a lot happening here. And today, I'd like to conclude my remarks on those points and turn it back over to Jim. Actually, I will notify the operator that we're ready for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Yi Chen with H.C. Wainwright. -------------------------------------------------------------------------------- Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [2] -------------------------------------------------------------------------------- Congratulations on a solid quarter. My first question is, based on the current trend you've observed on the shipping of the COVID-19 diagnostic kit, do you think the company is able to deliver solid or robust sequential growth in the current quarter over the calendar fourth quarter of last year? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- We certainly have the capability, the manufacturing wherewithal and the equipment and people necessary to do it. We also have a remarkable array, for someone at our stage of development, of blue-chip customers. So Yi, I think we do have the capability and the opportunity to ship significant linear DNA constructs that represent long-term opportunities with these blue-chip players. And I expect that they will be successful, since most have, in their early cellular and animal trials, and I expect that they will continue to evolve toward requiring larger CMO-like quantities under cGMP. -------------------------------------------------------------------------------- Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [4] -------------------------------------------------------------------------------- Yes. So before starting the clinical trial for the veterinary COVID-19 vaccine in cats, what additional work needs to be done to prepare the company for the initiation of a clinical trial? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Sure. Well, we have already manufactured all of the material necessary for our Phase I trial. So we are in a strong enough position from a regulatory position and from a manufacturing position, and we have already manufactured all the material necessary. Of course, we're planning 2 cat trials. The cat trial -- the second cat trial will require an additional quantity, and we may have mild changes in formulation by the time we reach that second trial. But we're actually in pretty good shape already to be able to manufacture those products. -------------------------------------------------------------------------------- Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [6] -------------------------------------------------------------------------------- Got it. My last question is, is Takis Biotech still committed to advancing the human COVID-19 vaccine? And do you believe when this -- when your linear DNA-based human vaccine -- COVID-19 vaccine reach the market, there could still be a meaningful market left, considering that multiple new vaccines could enter the market this year besides the Pfizer-BioNTech and the Moderna vaccines? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [7] -------------------------------------------------------------------------------- Yes. At this stage, it's difficult to see into the future, out 6 months, a year from now. Certainly, it's a hope that much of the world in 12 months will have achieved herd immunity. But it's unclear what kinds of boosters may be required for the variants that become well established across the world in that time. And so I could see a global need for a third booster in many of those therapies, and I can see an opportunity growing by that time because we will have the cat trial behind us and, hopefully, its commercialization. And we'll begin to gather data in those animal models that will help us eventually with the FDA. So I think we are far from missing the opportunity in COVID-19. But more than that, I think we are paving the path for a variety of vaccine-like approaches and for the use of linear DNA in the other therapeutic platforms we're investigating right now that include, for example, CAR-T, cancer vaccine and the production of AAV using linear DNA and a far simpler way to manufacture AAVs to achieve an effective gene therapy. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Next question is from Jonathan Aschoff with ROTH Capital Partners. -------------------------------------------------------------------------------- Jonathan Matthew Aschoff, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9] -------------------------------------------------------------------------------- Congrats on that revenue line in this past quarter. When could more substantial cannabis tagging revenue come online, perhaps with the help of TruTrace? And how do you evaluate the specific market potential of tagging itself for cannabis? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [10] -------------------------------------------------------------------------------- Right. Well, our association with our partner has brought us already global opportunities that we're in the midst of a dialogue with. So I think those opportunities will begin to require materials in the course of our current fiscal year. I think the market is large. I think that the new administration in the U.S. may open those opportunities wider and faster, deeper. And it's an industry that will move so quickly it will need help tracking the origins, and our CertainT platform is poised and really ready for our work in cannabis. -------------------------------------------------------------------------------- Jonathan Matthew Aschoff, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11] -------------------------------------------------------------------------------- Okay. I'm assuming that the market will tolerate electroporation for feline vaccines and for CAR-T, for sure. But will you definitely only proceed with a human COVID vaccine if it can be given without electroporation? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [12] -------------------------------------------------------------------------------- Well, our colleagues at Takis actually are using an electroporation device that is already well distributed in hospitals -- human hospitals throughout Europe, and they are advancing ahead with a plasmid-based version of our vaccine using electroporation. So I don't rule out electroporation as a potential delivery path. However, that said, I think there have been great advances made in the science of lipid nanoparticles relevant to all forms of nucleic acid, relevant to multiple delivery vehicles whether it's intramuscular, whether it's inhalation, intranasal for -- nebulized into the lung. So we are studying both paths, both electroporation and the use of lipid nanoparticles. -------------------------------------------------------------------------------- Jonathan Matthew Aschoff, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13] -------------------------------------------------------------------------------- Okay. So I'm assuming the decision comes down to how far does getting the lipid nanoparticle chemistry up to speed? How far does that set you back time-wise? And that would be sort of the decision, the gating factor, right, between deciding which way to give it? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Yes. But remember, the regulatory agencies have already encountered head-on the LNP issue and approved those drugs. So I think the lid is off for RNA-based therapies and for lipid nanoparticle-based formulations and delivery systems. You're right, it requires certain refinement as payloads change but we have, at this company, a deep history in lipid nanoparticles like liposomes, and the transition to the more solid-based LNPs is not all that difficult. -------------------------------------------------------------------------------- Jonathan Matthew Aschoff, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15] -------------------------------------------------------------------------------- Okay. I was wondering on a comment you guys made during this call. What makes an mRNA more easy to generate off of a linear template? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [16] -------------------------------------------------------------------------------- It's not just that it is easier. You know what, typically, with plasmids, they have to be linearized before they're used for IVT, in vitro transcription. Of course, our PCR-produced DNA is already linear. But PCR-produced DNA has no history of exposure to bacteria, no risk of other sources of DNA, the bacterial chromosomal DNA or worse, the plasmid-based genes for antimicrobial resistance or more opportunities for homologous-based insertion because you got more than you bargained for from the plasmid. So I think it will make it enormously safer, and we can provide those DNAs in extraordinarily pure linear format and eliminate what I think is a partial risk that comes from plasmid-based templates of the allergic and anaphylactic response that can come from the endotoxin associated with bacteria, small amounts of lipid membranes from bacteria that people can be allergic to. I think it just makes imminent sense. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- (Operator Instructions) The next question is from Jon Salmanson with Hubble Wealth Management. -------------------------------------------------------------------------------- Jon Salmanson, [18] -------------------------------------------------------------------------------- Congratulations on the quarter, and congratulations to Judy. I might ask this question using the wrong term analogy, and I apologize ahead of time. But -- and I guess this is directed at Jim. We are approved on our EUA. We got the authorized test. What's it going to take for our assay to become the standard basically in the U.S. for genomic surveillance? That's part one. And then part two, is there a timeline for when can we expect a linear DNA contract at the contract manufacturing or the CMO level? -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [19] -------------------------------------------------------------------------------- Okay. Sure. So the first question is the promulgation of our Linea COVID-19 diagnostic kit as a dominant means for genomic surveillance. Jon, I think we stand a very good chance at that, and we are already seeing the distribution of our kits in genomic surveillance efforts in California, in Texas, in Arkansas and in Kansas and, of course, here in New York as we achieved success as we did in our announcement today, and I must say that happened in the very first use of our diagnostic kit by a certified laboratory after they develop their own lab-developed test, the very first use revealed 3 variants of concern in their positives that they have identified from a large throughput diagnostic operation. As that kind of new spreads across the U.S., I think we'll have a great opportunity to recruit more and more diagnostic labs that have genuine concerns about the epidemiology of the variants. Now as our clients, who typically enter into our workflow through a CRO-based relationship, meet success in their in vitro testing, they move, of course, to very simple animal models, typically xenographic mice. Now that's really at the cusp of requiring GLP product or cGMP product. And so that transition to CMO really begins even when a customer moves at the CRO stage from cells in a dish to an animal model -- an early animal model. As that animal model matures, the need for cGMP does as well. And of course, once you reach early clinical trials in humans, those requirements are for strict cGMP at the highest level. I can see that happening. Even now the signs of it beginning are crystal clear. It's why the raise we just did is so important to us. And it's why we are investing in our cGMP wherewithal and retaining the best compliance and regulatory advice we can find. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- This concludes our call. I would like to turn the conference back over to Dr. Hayward for any closing remarks. -------------------------------------------------------------------------------- James A. Hayward, Applied DNA Sciences, Inc. - Chairman, President & CEO [21] -------------------------------------------------------------------------------- Okay. Thank you, Gary. Thank you. In conclusion, fiscal 2021 is about business execution. And to that end, we have started the year really in tremendous form. Fiscal 2021 is also about laying the foundation for opportunity and growth beyond our COVID-19 diagnostics and testing business. The value of linear DNA has never been more evident in this COVID and post-COVID world, and I believe we are uniquely positioned to benefit from its adoption across both biologic and nonbiologic worlds. Well, thank you all for your participation this afternoon, and we'll speak to you again in 3 months' time. Stay well. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.