Q1 2024 Applied DNA Sciences Inc Earnings Call
Participants
Sanjay Hurry; Head of IR; Applied DNA Sciences Inc
Beth Jantzen; Chief Financial Officer; Applied DNA Sciences Inc
James Hayward; President, CEO, Chairman; Applied DNA Sciences Inc
Clay Shorrock; Chief Legal Officer, Executive Director - Business Development; Applied DNA Sciences Inc
Presentation
Operator
Good day, and welcome to the Applied DNA Sciences fiscal first-quarter 2024 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, Scott. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our first-quarter fiscal 2024 financial results. You may 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; and Beth Jantzen, our Chief Financial Officer. Clary Shorrock, 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 this call.
Before we get started, I would like to take this opportunity to remind you that our remarks today may include 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 for other information provided on this call. As a result of new information, our future results are developed.
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, and good afternoon, everyone. Thank you for joining us on our first-quarter fiscal 2024 investor call. I will start this afternoon with an overview of our results for the quarter ended December 31, 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.
Beginning with our statement of operations, total revenue for the first quarter of fiscal 2024 ended December 31, 2023, for approximately $891,000 or a decline of $4.4 million compared to $5.3 million for the same period in the prior-fiscal year. Approximately $4.2 million of this decrease in total revenue is attributable to lower clinical laboratory service revenues. This revenue line item reflects an ongoing and unfavorable year-over-year comparison in our COVID-19 testing. As the prior-year period included testing revenues under our contracts with CUNY that expires in June of 2023.
Approximately $210,000 of the decrease in total revenue was attributable to lower product revenues and specifically lower cotton DNA tagging revenue within our DNA tagging and security product and services segment service revenues increased approximately $15,000 year over year and approximately $78,000 sequentially. That were driven primarily by demand for ACO topic testing within our DNA tagging and security products and services segments. Gross profit was $231,000 or 26% compared to $2.4 million or 45% in the prior fiscal-year period. The decline in gross margin was primarily due to a higher percentage of COVID-19 testing service revenue in the three months ended December 31, 2022, which generated a higher gross profit compared to the three months ended December 31, 2023.
To a lesser extent, the decline in gross profit percentage was due to lower product revenues during the three-month period ended December 31, 2023, as compared to the same period in the prior-fiscal year. The lower volume of product revenues in the current period was not able to fully absorb the fixed costs that are included in cost of product revenue. Total operating expenses increased by 424,000 to $4 million compared to $3.6 million in the prior fiscal-year period. This increase in total operating expenses reflects higher SG&A costs as the prior three month period has a credit in bad debt expense of approximately 290,000 from a customer balance that was written off and was subsequently collected during the three-month period ended December 31, 2022. The remainder of the increase is related to an increase in stock-based compensation expense of $247,000. That relates to the timing of the annual non-employee Board of Director grants that vest one year from the date of grant. These increases were offset by a decrease in payroll of approximately 107,000. Operating loss for the first quarter was $3.8 million compared to $1.2 million in the prior fiscal period.
Turning to slide 5. Excluding noncash expenses, adjusted EBITDA deteriorated by $2.1 million to a negative $3.2 million compared to a negative $1.1 million in the prior-fiscal-year period.
Now turning to our balance sheet on slide 6. Accounts receivable stood at $451,000 at December 31 with payment terms ranging from 30 to 60 days. And cash and cash equivalents totaled $3.4 million on December 31 compared to $7.2 million on September 30, 2023, fiscal year to date, our average monthly cash burn was $1.3 million compared to $780,000 in the prior-fiscal year.
Staying with the balance sheet a moment longer, we closed on a registered direct public offering on February second, 2024 for gross proceeds of approximately $3.4 million. Further details of the offering are provided in the subsequent events section of our Form 10-Q filing, we issued approximately $3.2 million shares and pre-funded warrants to purchase up to $2.4 million shares of common stock in a concurrent private placement unregistered common warrants to purchase up to $11.3 million shares of common stock were issued with an exercise price of $0.609 per warrant share. These common warrants are subject to shareholder approval at a stockholder meeting that must be held by April 15th of this year in accordance with the terms of the private placement subject to approval by stockholders at a stockholder meeting, the exercise price of these warrants could result in additional gross proceeds of $6.9 million to the company. We also agreed to reduce the exercise price of warrants previously issued to the purchasers with exercise prices ranging from $1.29 to $4 per wire 2.609 per warrant. We also agreed to extend the expiration date of these warrants to August 2028 these wide reductions are also subject to stockholder approval. Subject to approval. The exercise of the warrants issue discussed above as well as the now reduced warrants could result in total gross proceeds of up to $8.6 million to the company.
Turning to our at-the-market facility, the ATM was terminated in accordance with the terms of and to facilitate this registered direct offering, inclusive of the proceeds from the registered direct cash and cash equivalents was approximately $5.1 million on February 2.
Before turning the call over to Jim, the commercialization of our linear IVT. and linear DNA platforms remains our primary objective. To that end, we are committed to capital allocation that support our biotherapeutic goals while identifying and undertaking operation and operating efficiencies throughout the Company. Initial steps are being taken to manage a leaner organization aligned behind our highest ROI opportunities.
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
Good afternoon, everyone. Thank you for joining us on today's call. It was an important quarter for our therapeutic goals. This afternoon's, my remarks will update you on the progress we've made during the quarter to advance the commercialization of our linear IVT. platform and establish a GMP capacity to manufacture critical starting materials for clinical-grade messenger RNA therapeutics. And just to set the ground rules, IVT. stands for in vitro transcription in vitro means that it is performed outside of the body and transcription is the process by which the sequence in 10 play DNA such as our linear DNA templates is turned into the sequence of messenger RNA via RNA polymerase. Our linear IVT. platform is comprised of both our linear DNA IVT. 10 blades and our proprietary RNA preliminaries ready for use in in vitro transcription of an M RNA drug. I will also share some representative customer profiles and their intended use cases for our linear DNA and Lineage IVT. platforms, these customers and their future needs for our mRNA starting materials form the basis for Applied DNA strategic growth. We are not yet at a point where we can divulge their names. However, the applications being contemplated underscore the potential and long term need for linear I-VT, establishing a first phase GMP capacity to deliver messenger RNA, critical starting materials under applicable GMP and at large scale is crucial to our ability to mature our current research and development scale customers into long-term supply agreements for linear I-VT. And as you can see in this slide in fiscal 2023, which was year one of our Lineage IVT. commercialization plan. We firstly launched Lineage IVT. as a platform for the manufacture of them on a.
Secondly, we expanded our presence across the global marketplace. And thirdly, we grew a robust sales pipeline of marquee customers and initiated proof of concept studies. These efforts were supported by the establishment of the GMP. road map to transition our manufacturing capacity from research use only milligram scale, DNA template orders to multi grounds scale, GMP orders capable of supporting our customers' early-stage toxicology, pharmacokinetics and clinical trials.
In year two, our current fiscal year, we are focused on migrating our customers to scale up agreements for Lineage IVT. 10 plates, coupled with our linear RNA preliminaries manufactured under applicable GMPs to support their clinical RNA objectives with approximately 425 messenger RNA therapies currently in development and judging from our slate of meetings at the JPMorgan Healthcare Conference last month, it is evident that the biotherapeutics industry is beginning a surge in mRNA demand. Consequently, after the first quarter's end, we closed on the equity offering that will fund us through implementing our initials GMP footprint. As indicated on the slide, we reiterate the timing of this facility to come online is during the first half of calendar 2024. Now establishing a GMP footprint takes a phased approach to simultaneously support existing and new customers through their clinical trial process. Our unique business model in which I remind you, linear IV tiers comprise the linear IVT. Tenplay, paired with our high value RNA polymerase allows us to drive substantial revenue from a very small space. We project that this first phase capacity will enable an annual revenue capacity of up to $15 million from a footprint of less than 1,000 square feet incremental capacity, we'll be straightforward to add. It is important to note that this annual figure does not serve as financial guidance. Instead, this figure is informed by internal modeling, utilizing current pricing projections and industry figures. And based on the combined sales of linear DNA, IVT templates, linear RNA polymerase and a royalty for a technology license with 67% of that mRNA development pipeline in preclinical development on the industry three is quickly progressing to clinical and eventually commercial stages in year three or 2025. We believe that the economics of our unique business model will be fully realized as we initiate large scale of GMP supply to customers as they advance in the clinic and prepare for commercial launch.
Now turning to our customers. Our sales pipeline is populated both by cutting-edge biotech U.S. companies who manufacture their own products and by CDMOs, which are contract development and manufacturing organizations that are at operating as suppliers to biotech and pharma companies. Each of these segments represents an outcome that could materially and positively alter our Applied DNA's biotherapeutic profile once successfully engaged on this slide, you will find a select sampling of customers and applications relevant to Lineage IZT that span mRNA vaccines against common respiratory illness to autoimmune and oncology therapies from the application column, it should be clear that we are being evaluated for our ability to deliver on broadly relevant clinical indications with RGMP. capacity about to come online much of our sales and business development efforts have been focused on converting interest in linear DNA as the IVT 10 plate material into evaluations of our linear T platform with the ultimate goal of securing long-term supply agreements. Momentum in our sales pipeline has continued to build and our conversion efforts are paying off. We completed multiple successful evaluations by customers for our linear DNA and Lineage IVT platforms during the quarter, the pace of linear DNA customers initiating evaluations of Lineage IVT has quickened and the size of the potential opportunities is increasing. We are already in several Lineage IVT platform evaluation cycles on notable milestone, given our acquisition of Linear RNA polymerase was only six months ago, particularly noteworthy, we recently completed and our valuation with the clinical-stage mRNA customer in which our IVT. templates met or exceeded all customer quality metrics. And with the manufacturing speed that exceeded all other IBT tinplate suppliers that the customer had evaluated. Based on this successful evaluation, we are now being asked to provide quotes for scale-up materials under GMP. In addition, we are starting to see the seeds of our business development efforts with respect of large CDMOs begin to bear fruit with recent interest from several US-based mRNA CDMOs now CDMOs have substantial underutilized manufacturing capacity available after the decrease in demand for COVID-19 vaccines, we believe that linear IVT. provides the CDMOs with significant differentiators in the marketplace at a time when the mRNA modalities gaining preclinical momentum, we are in real time discussions with CDMOs actively seeking a differentiated workflow to bring new mRNA customers into their underutilized manufacturing capacity CDMOs are showing particular interest in self amplifying mRNA. During the first quarter, we shipped our first self-amplifying mRNA IVT. 10 play to a preclinical therapeutic manufacturer, thereby demonstrating that the linear DNA is platform's ability to enzymatically produce the challenging and large DNA sequences needed to manufacture self-amplifying mRNA at scale. We believe this puts us at the forefront of Tenplay manufacturing for this promising and growing messenger RNA modality. That is self-amplifying RNA. We have validated Lineage ISET. for the small-scale manufacturer of mRNA critical starting materials to support customers much larger commercial aspirations with linear IVT., we need to substantiate linear diabetes performance at scale within a commercial manufacturing setting in partnering with the CDMO crude oil bio which was announced this quarter, we have entered the arena of commercial scale manufacturing. Our first CDMO partner Couto will help validate the commercial scale-up of the Lineage IVT. platform in crude oil vials workflow, our linear IV T platform would serve as the front end of an integrated GMP MRNA drug product manufacturing workflow. We believe that kudos integration of our linear VT. platform to simplify mRNA production and to drive double-stranded RNA mitigation gives them a substantial leg up over other CDMOs.
Now during the quarter, we also entered into a scale-up manufacturing agreement with an enzyme manufacturer for linear RNA polymerase enzyme to scale its production for commercial scale use. This is part of our efforts to increase efficiencies and reduce linear IVT.s cost of goods sold as we move to deploy our improved workflow into C. GMP capacity. In brief, we believe this project once completed will ensure we can manufacture our linear on a preliminary set of scale and reduce cost of goods to enable profitable growth of linear IBT. And we expect to announce this agreement in a press release soon this quarter also saw us generate new compelling data. It further substantiate the capacity of our linear IVT. platform to create equal or greater RNA yields with mitigated double-stranded RNA contamination at levels that are 10 to 50 times lower than those found using conventional mRNA production technologies. Now this is a very strong selling point to mRNA therapy developers and CDMOs today that are seeking ways to mitigate double-stranded RNA without sacrificing their mRNA production yields. We see our ability to drastically mitigate double-stranded RNA, which enables the IVT platform to produce better on a faster as a key differential differentiator against our competitors in a further application of linear DNA, our partnership with the Institute of hematology and blood transfusion in Prague on their CD. one 23 CAR therapy has moved past the experimental stage pending the finalization of the supply agreement with us, we expect the Institute of hematology and blood transfusion and drug will receive EU regulatory approval to proceed with the Phase one CD. one 23 clinical trial to dose 10, compassionate use patients with their CAR T therapy Phase one trial is expected to begin before the end of this calendar year. Now this is a significant milestone for linear DNA and its application to the rapid and efficient manufacture of CAR T cells without the need for complicated virus production or plasmid DNA. We congratulate the institute and look forward to the results with great anticipation.
Now before I open our call to questions. I want to impress on our investors that we have made substantial headway in bringing a more rapid, cost-efficient and qualitative process to creating DNA at a scale for commercial availability we feel that the imminent establishment of our G&P footprint keeps us firmly on a growth company trajectory with positive ramifications for long term shareholder value.
Now this concludes my prepared remarks. Operator, please open the call to questions.
Question and Answer Session
Operator
(Operator Instructions) Jason McCarthy with Maxim Group. Please go ahead.
Hi, Jim. Thanks for taking the questions on. First, just on your on your last point there from the Prague hematology institute doing the CD. one 23 power. Can you talk a little bit more about what they're targeting or maybe even some of their preclinical work that they had done. And since they are, they're expecting to move from preclinical to clinical, at least in the EU on that, is that going to require GMP-grade it materials from Applied.
James Hayward
Great question Jason. First of all, I have to tell you these folks are great scientist and a delight to work with having done my PhD in hematology. I can I appreciate the quality of their work. So they have an entire CAR T program laid out and the fine value in our approach to the term CAR T, the European authorities have indicated that they will approve and up labeling of our research use our D. and A. construct to CGMT. at their facility. And so after an inspection here and some additional correspondence with the EMA. We expect that to happen for us with their animal study results were superb, and it's based on that the European authorities are taking their position the compassionate use would be apropos.
So what degree or what level of or actually rather amount of product do they need for starting material? Or I mean a clinical Phase one trial CAR T, we can probably do just a handful of patients. So I'm assuming that maybe it's not that much material that you'll need.
James Hayward
It's probably enough material to treat, I'd say about 10 patients. I don't want to speak for them because you still are under their control, but that's work fine. I'm expecting a little. So that should be no problem for us.
Do you have publicly disclosed who the principal investigators at the product hematology and to do it?
James Hayward
I'm sorry. Could you triangulate again, Jason?
Is it publicly available who the principal investigator is at the Prague Institute. I'm just thinking we pulled some papers this week from now.
James Hayward
Oh, sure. I'd be happy to verify that is and then out of not only get their names for you, but I'd be happy to put you in touch with them and you can pull all the papers as well.
Great. Then also just moving over to the crude oil Vyyo relationship that was updated back in December as a CDMO in the mRNA space panel. Can you give us a little bit of color on kind of maybe who they're producing for or what they're producing mRNA products for.
And I guess at what scale, they are significantly large player compared to others in the space they are a large player with international facilities, including in Boston and Clay, you're on the line, correct me if I'm wrong, but I believe they also have facilities in Singapore and their their scale is quite large. So on they have the opportunity to really be and to and mine a manufacture at very significant scale.
Yes. And I think you have energy Thanks, Jim. Yes, they have facilities, Jason, in the U.S., they also have their main manufacturing facilities in China, and they're currently manufacturing clinical materials for clinical trials in China and also Australia. They're a great partner to be frank, and they are new to the mRNA manufacturing space, but they do have the ability to scale, you know, very large commercial scale as Jim noted, but there's also potential additional synergies there that we are investigating, are they taking on the the RNF enzyme as well as part of all this work that you're doing with them?
Beth Jantzen
Yes.
So under the close contact, yes. So the joint development agreement that was disclosed, the goal of that agreement is to scale many of IVC to commercial cap rate right now, we've proven that when the IGT works extremely well at the small-scale, we need that validation that the platform scale too multi leader, IBC scale, right? And that's what we are doing with them, and then we'll bring the results in mRNA through LNP encapsulation into dress up and the drug product.
Got it.
Last question just briefly on slide 9, you give a sample of select customers in the biotherapeutics space and kind of what they're working on. Can you tell us how many customers you do have in total? And if you're expecting any of them to potentially transition from and some in vitro or preclinical work to clinical this year?
Thank you.
James Hayward
Clay, you want to take that to say?
Clay Shorrock
Absolutely. So I'm yes. So obviously, we can't disclose names, Jason, but up since the launch of Lineage IVT. in August 2023, we've really seen more rapid adoption of the platform that's been driven, you know, I would say an equal part of the enzymatic pathway story, but also the ability to reduce the DSRNA., right? So on our early customers, our IBC temporary customers. They are not enzyme customers since we didn't have the enzyme at the time. And we're seeing those customers come through successful evaluations and we're getting asked for the first time to quote upon what would scale up look like, what does scale under GMP look like? And that's one. That's why we have this urgency for this note that after some therapeutic customers of the joint linear ABC platform. And that's important because the economics of selling that enzyme along with the template are so much more advantageous for us. So we had some first successful evaluations of that platform. The first one was actually with kudos, and we're seeing some follow-on evaluations now and the readouts have been fantastic. And we had a readout last week from one of our customers on the template. And then as Jim noted in his prepared remarks, we actually met or exceeded all specs and our time to manufacture it, beat everyone else that they were looking at the data. It's quite promising.
Great. Thank you both Mike, and thank you.
Yes.
Operator
Our next question comes from the line of Dipesh, the tower with H.C. Wainwright. Please go ahead.
Hi, James, and thank you for the additional details there on regarding Slide 9, just a follow-up question. Are you able to share more color on the percentage of customers that you have in the US and the ex U.S.? And how might you expect this expect this to trend over the coming quarters?
James Hayward
Yes, the bulk of our customers are US at the moment, but with a good smattering of international customers coming both from Asia and from the European Union. And I expect that we'll see more from the European Union over the course of the next year or so. And you know, while we profiled in slide 9 only six, we have many more customers than that. And what's really compelling is that many of those customers are we're returning for additional orders and four are orders of greater volume.
Great. And then last question with regards to your the projection that you noted of up to $15 million annual for the linear IVT revenue. On what assumptions can we kind of take away from that in terms of are you putting in like 100% utilization of the fountain airflow facility that you mentioned?
James Hayward
Yes, we would the capacity is actually slightly greater than the 100% utilization. Of course, you never want to get to 100% utilization, but the facilities are quite comparable, if you'll pardon the pun and it would be easy to prepare additional space. I can see a future where our customers are beginning to lay out their plans for pharmacokinetics and toxicology and clinical trials and their approach to FDA and not only will they be placing orders, but I suspect they'll be booking time. And so as that begins to happen, we have to ensure that we have the capacity to accommodate more time as it were, and that will be a straightforward process. We've already mapped out how to do it, so where so ready to go.
Great. Thank you so much for the update gentlemen.
Operator
Thank you. Again, if you have a question, please press dollars and one.
Our next question comes from the line of Jeffrey Bernstein with Silverberg Bernstein capital. Please go ahead at
Hey, guys. I just wanted to understand when you talked about being benchmarked against competitors and having a higher speed of production, are we talking about the enzymatic guys like twist in the hands of those kinds of folks?
James Hayward
Well, I am not sure I can hedge FMCS. and now we're talking about some of our Kim competitor than the enzymatic scale-up, not the enzymatic synthesis. So we don't know what customers they are. Particularly all we know is that we are being benchmarked against other enzymatic manufacturers and we are exceeding their turnaround plan.
Okay.
So those would potentially be like CDMOs that are offering these capabilities?
Exactly.
Right. So again, there there's there's two enzymatic uses the synthesis of that initial template, which is not what we do. And then there's use of enzymatic manufacturing to scale up, which is what we do.
Beth Jantzen
Okay.
Well, thanks.
Thank you.
Operator
Again, if you have question, please press and then one, 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
Well, thank you all for joining us, and we look forward to keeping you closely apprised as we move ahead through these exciting times. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
