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spk04: Good evening, and welcome to the Applied DNA Sciences Fiscal Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sanjay Hari. Please go ahead.
spk02: Thank you, Jordan. Good afternoon, everyone, and welcome to ApplyDNA's conference call to discuss our third quarter fiscal 2022 financial results and corporate updates. 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 Jansen, our CFO. Judy Murrah, our COO, and Clay Chirock, our Chief Legal Officer and Head of Business Development, will also be available to answer questions on the Q&A portion of the call. Before we begin, please note that some of the information you will hear today during our discussion may consist of forward-looking statements. I refer you to slide two of the presentation, NR Form 10Q 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. I also want to inform you that management will participate virtually at H.C. Wainwright's 24th Annual Global Investment Conference next month. Please get in touch with your H.C. Wainwright representative to schedule a one-on-one with us. Now, it's my pleasure to introduce our first speaker on today's call, Beth Jansen. Please go ahead, Beth.
spk01: Thank you, Sanjay. Good afternoon, everyone. Thank you for joining us on our third quarter fiscal 2022 investor call. I will begin today with a review of our consolidated financial results for the third quarter of fiscal 2022, which ended on June 30th. I will then turn the call over to Dr. James Hayward, our President and CEO, who will offer context on the equity capital raise we conducted subsequent to the close of the quarter and outline the company's expectations and development milestones over the balance of the fiscal year and into fiscal 2023 for each of the end markets we serve. As a reminder for our newer investors, we are on a September 30th fiscal year. We will then open the call to our analysts and institutional investors. Prefacing my review of our financial results, as we discussed on our prior investor call in May, we implemented a cost management program in the fiscal third quarter designed to optimize our cost structure to align resources to our linear DNA platform for biotherapeutic applications to achieve maximum value for shareholders from current and future opportunities. Beginning with the statement of operations, total revenues for Q3 were 4.3 million compared to 1.7 million in the year-ago quarter. The 153% year-over-year increase in quarterly revenue is primarily attributable to increased clinical laboratory service revenue comprised of COVID-19 testing and related services. On a sequential basis, Q3 total revenues declined from 6.1 million in Q2. This is due to lower COVID-19 testing services due in part to the summer session seasonality inherent in our academia-heavy testing client base. Product revenues were 220,000 in Q3 compared to 640,000 in the year-ago period. The year-over-year decrease of $420,000 is primarily related to a decrease of approximately $459,000 in sales of our diagnostic test kits and supplies to Stony Brook University Hospital as their testing levels declined. Service revenues were $183,000 compared to $234,000 in the year-ago period. This decrease is attributable to a decrease in research and development projects. As a reminder, our service revenues comprise research and development pilot projects as well as authentication services associated with our industrial DNA business. Clinical laboratory service revenues increased to $3.9 million compared to $826,000 in the year-ago period. As a reminder, we had not yet secured the CUNY contract in the year-ago period. On a sequential basis, clinical lab service revenues decreased 29% from $5.5 million in Q2 due in large part to the aforementioned seasonality in testing demand. Beginning in Q1, we began allocating depreciation expense versus showing it as a separate line item on our statement of operations. As a result, we are presenting a gross profit line on the statement of operations. The gross profit percentage was 24% and 34% for Q3 and the year-ago period, respectively. The decline in gross profit percentage resulted from a substantial portion of our clinical laboratory service revenues coming from testing contracts where we also provide and staff the testing centers, which in our case is predominantly CUNY. This contract has higher associated costs compared with our other COVID-19 testing contracts where we only perform the testing services. As you know, we recently reported a 12-month contract extension with CUNY. In preparation for year two, we have worked to squeeze costs out of this contract and believe that we are currently at an appropriate baseline of fixed costs given the requirements of the contract. We in CUNY have learned a lot about how to efficiently implement very large-scale COVID-19 testing operations. and we will continue to closely monitor support levels going forward with an aim to minimize our costs and maximize our margins within the confines of the contract. Further, CUNY is now in its break prior to the start of the new academic year. As such, we expect a lull in testing rates between now and the start of the new school year in late August. with CUNY then ramping up testing thereafter. Total operating expenses in Q3 were flat at $3.9 million compared to $4 million in the year-ago period. Reflective of the implementation of our cost management initiatives during this Q3, total operating expenses on a sequential basis declined 15%. driven primarily by reduction in headcount from 95 to 75, or 27%. Q3 loss from operations decreased to $2.8 million from $3.4 million in the year-ago period. Given the transaction costs related to the warrant liabilities and the unrealized change in fair value of the warrant liabilities included in our net loss, Going forward, we will have loss from operations as being the best representative of the company's operations. Our Q3 net loss decreased to $1.1 million, or $0.13 per share, versus a net loss of $3.4 million, or $0.48 per share, in the year-ago period, on a higher number of weighted average shares outstanding. Excluding non-cash expenses, consolidated adjusted EBITDA for Q3 was negative 2.3 compared to negative 2.8 million in the year-ago period and negative 1.6 million in Q2. Turning to our balance sheet, at June 30th, cash and cash equivalents totaled 4.7 million and accounts receivables stood at 2.9 million. For fiscal 2022 to date, our average monthly cash burn stood at $620,000 on June 30th, representing a 46% reduction from fiscal 2021 average monthly burn of $1.2 million, and is reflective of increased cash receipts and the cost controls I highlighted earlier. Subsequent to the close of the quarter, we conducted a public offering of common stock and two series of warrants for gross proceeds of $12 million. We also received an exercise of warrants in connection with this offering for an additional net proceeds of $3.6 million. Inclusive of the public offering and exercise of warrants, cash and cash equivalents on August 9th stood at approximately $16.8 million. Based on our current average monthly cash burn, our cash runway is currently 25 to 27 months. Our warrant balance increased as a result of the recent public offering. We now have a total of 7.3 million warrants outstanding, with approximately 2.2 million of these warrants having exercise prices ranging from $2.80 to $2.84 per warrant share. and 5.1 million of these warrants having an exercise price of $4 per warrant share. We carry no debt on our balance sheet. As a result of recent funds raised, our just-filed 10-Q for the third quarter eliminates our substantial doubt of a going concern. This concludes my prepared remarks. Thank you for joining us today. I will now turn the call over to Jim for his comments.
spk05: Thank you, Beth. Good afternoon, everyone. Thank you for joining us on our fiscal 22 third quarter investor call. My remarks this afternoon will focus on the company's biotherapeutics market opportunity and development plans for our linear DNA platform. I'll also provide updates on the expansion of our diagnostic testing services at our clinical lab subsidiary. and on our textile tagging business, especially given the Uyghur Forced Labor Prevention Act that went into effect on June 21st. Let me begin first by putting our recent equity raise into perspective for our newest shareholders. The equity raise was the latest step on a strategy executed across the past two years to further evolve our components of sustainable growth. Those who have followed us during these two years will note that we weathered the pandemic's impact on our textile supply chain integrity business. We opportunistically stood up a molecular diagnostic testing practice, Applied DNA Clinical Labs, or ADCL, that is presently centered on COVID-19 and with new ongoing test developments is evolving into a launch pad for continued growth when the pandemic eases. And we accelerated our pivot to a biotherapeutics opportunity grounded in our almost two decades of PCR expertise. We have expanded on an already voluminous library of preclinical data, that showcase linear DNA's advantages over plasmids, even as the demand for therapeutic DNA grows nearly exponentially and the supply chain is bottlenecked. From Beth's prepared remarks, you've heard that we cut our average monthly cash burn by 46% since the beginning of the fiscal year. Operational expenses were reduced 15%, primarily from a reduction in headcount of 27%. Now, these organizational adjustments have enabled us to optimize our cost structure and to reallocate resources to the value-creating potential of our linear DNA platform. We believe that the equity raise will fund the development of the linear DNA platform as well as our current expansion of the clinical labs commercial diagnostic testing offering and put us on a path to sustainable and profitable growth. Beginning first with our linear art rec spinal therapeutic subsidiary and the linear DNA platform, Our recent fundraising will serve to accelerate the platform's development across three key service applications, RNA templating from linear DNA, veterinary DNA vaccines, and longer-term gene and cell therapies. The biotherapeutics industry is coalescing around the realization that plasmid DNA is a suboptimal DNA construct. Now, these numbers are amazing. There are currently over 3,633 gene, cell, and RNA therapies in development from preclinical through preregistration stages. almost all of which use DNA in their manufacturing process. Now, this number increased by over half just since May of 21. Demand for nucleic acids is increasing at a rate never seen before. We believe that the use of linear DNA as a replacement for plasmid DNA can help solve many of the challenges currently experienced by DNA-based therapy developers and manufacturers. And that belief was enhanced by our experience at the summit on messenger RNA-based therapeutics in Boston at the end of July just weeks ago. We presented a plenary paper on the use of linear DNA as the template for messenger RNA drug manufacturing, which was extremely well received. You'll find our recent presentation posted on our LinearRx website. Apparently, many scientists in messenger RNA drug development now share our opinion that linear DNA is a far better drug development platform than plasmids. We have already been approached by several companies to quickly complete proof of concept experiments, after which we would expect larger projects and commitments. On our last call in May, I advise that our initial focus would be on linear DNA as a template for messenger RNA production. We did exactly that, and I will share a small selection of results in the next couple of slides. Our studies have shown that linear DNA has two major advantages over plasma DNA. as template for messenger RNA. The first advantage is the fact that at equal mass, linear DNA contains a greater copy number of a DNA target sequence as compared to plasmid DNA. This fact allows less mass of linear DNA to be used as compared to plasmid DNA to achieve the same RNA yield. While the magnitude of the linear DNA copy number advantage varies a bit based on specific target and plasmid DNA sequence, it's always present. Our studies have shown that on average, linear DNA can be used at 25 to 50% of the mass of plasmid DNA to achieve the same RNA results. The second advantage is derived from the high purity of linear DNA and the fact that plasmid DNA struggles with amplifying the challenging DNA sequences that are necessary for messenger RNA production. In this slide, We used a model therapeutic gene, a marker called green fluorescent protein, or GFP, to measure the efficiency of messenger RNA production from two different DNA templates, and then measure the ability of that messenger RNA to yield the intended protein in the cell. The fluorescent green protein mimics the expression of a vaccine or a therapeutic protein. The upper image with the strongest fluorescence was obtained from a linear DNA template that had a polyT tail that was transcribed homogeneously into a highly functional polyA tail on the messenger RNA. The lower image is the messenger RNA product from a plasmid in which the messenger RNA was polyadenylated after IVT production. And it's made perhaps most easily understood in the bar graphs on the right that quantify the protein expression for the linear DNA template on the left, which expresses 40% more protein than the plasmid template on the right. The key issue is 40% more of the target protein produced from the same amount of DNA if it's linear DNA. These experiments highlight the importance and advantage of linear DNA's ability to incorporate a precise number of poly T's into a messenger RNA template and the improved expression of the target gene. Now imagine that instead of looking at green fluorescent protein, you were looking at the expression of a vaccine or a therapeutic protein. The advantage of linear DNA is clear. More RNA per mass of linear DNA and more consistent expression efficiency, which together we believe strongly translate to a better drug. In addition to messenger RNA templates, we are also commercializing the linear DNA platform for veterinary DNA vaccines. Intramuscular administered nucleic acids delivered via lipid nanoparticles altered the course of the COVID-19 pandemic and quite literally saved millions of lives. But without encapsulation by lipid nanoparticles, the so-called naked nucleic acids are not taken up efficiently by the cells in the body. Our announcement just yesterday of the successful delivery of linear DNA constructs by encapsulation in lipid nanoparticles, or LNPs, followed by a simple intramuscular injection was a genuine milestone for the company and our investors. LNPs evolved out of the nearly 50-year history of liposomes, which were much more difficult to work with, but which we have a very deep experience. Our scientists produced LNPs that facilitate the delivery of RNA and linear DNA to target cells in culture or to cells in the body following simple injection. Now we know we can deliver linear DNA efficiently to patients, whether they are animals or humans. Linear DNA LNP constructs hold the potential to be used across a wide variety of therapeutic applications. Near term, we are working to formulate our canine lymphoma vaccine candidate for IM administration via LNP. LNPs may even one day enable freeze-dried linear DNA to be delivered as a simple nasal spray. Turning now to our clinical lab, earlier this week we announced a 12-month contract extension with the City University of New York through July of 2023. Since the initial award in August of 21, the contract has fueled the company's record fiscal 21 revenues, a level that we surpassed in just the first half of this year. COVID-19 testing has been a significant driver of ApplyDNA's revenue growth over the last in the 18 months. It has required exceptionally large-scale operational execution. Now, in our second year of the CUNY contract, we are confident that we can execute our testing strategies at better margins than in our first year. Now COVID-19 was not the end game for our clinical labs, but rather just the start. The clinical labs are commercializing two diagnostic platforms. The first is high throughput infectious disease testing, and the second is genetic testing, specifically pharmacogenomics or PGX testing. I'll address each of these platforms in turn. Now, the Clinical Labs business model is to develop a specialized mix of PCR diagnostics that leverage our deep science bench and through which we generate revenues and cash flow. With access to applied DNA's expertise in DNA and through COVID-19, the Clinical Labs established a track record of developing, securing regulatory approval for, and deploying PCR-based molecular diagnostics that can positively impact public health. Now, our path to market for our newest diagnostic is via the laboratory-developed tests, or LDTs. the regulatory path that specifies review and approval by the New York State Department of Health prior to commercialization. Armed with an approved LDT, our sales strategy will focus on the clinical labs serving as a reference lab to hospital systems and larger clinical labs in New York State. as well as clinical labs located in other states that allow sample processing by clinical labs permitted under the New York State Department of Health Clinical Laboratory Evaluation Program. Currently, that's approximately 46 states nationwide. Now, we have experience in this model and we have served as a reference lab for COVID testing. Offering reference lab services is a cost-efficient way to go to the market, and it leverages our clinical lab's existing testing and reporting infrastructure. This path to market reduces sample acquisition costs, marketing costs, and removes the burdensome process of seeking third-party payments. We can stick to what we do very, very well. Test rapidly, test accurately, and report those results quickly, as we have in our partnership with Cleared4 and the Cleared4's digital health management and results reporting platform. Now, high-throughput infectious disease testing is principally geared toward high-volume testing that recurs. within a population such as COVID-19. Our monkeypox virus test fits under this rubric and utilizes the exact same workflow, the exact same laboratory equipment as our COVID-19 testing practice. As such, we've had no equipment investments for monkeypox. We expect to offer a superior turnaround times that can help to mitigate monkeypox virus spread. Superior turnaround time should give us a sales advantage compared to other monkeypox testing providers in the marketplace, most of whom offer testing based on the CDC's orthopoxvirus test that is less specific for monkeypox. Additionally, commercial labs appear to be aggregating their testing in other states, thereby increasing their turnaround time, and that heightens the potential for further transmission. Now, if we've learned anything from COVID-19 as a nation, as an industry, it's that short turnaround times improve containment even more than test sensitivity. Our proximity to the national epicenter in New York City we believe gives us another advantage in a marketplace that we already serve. Analytical validation of our monkeypox virus test is ongoing. Once completed, if the results are in line with our expectations, we'll submit the validation package to the New York State Department of Health, who will review our submission. We intend to update our investors via press release when we move forward with that submission. Now moving on, our pharmacogenomics addition to our portfolio, whose capital investment was completed in Q3 last quarter, offers high margin testing in a growing diagnostic field that is related to therapeutics. We believe the economics of complex molecular diagnostic testing services, such as our pharmacogenomics panel, are especially favorable to our business. Our PGx panel, or pharmacogenomics panel, is designed to interrogate multiple DNA targets and provide genotyping information initially relevant to certain cardiac, mental health, and pain management therapies. Unlike COVID-19, for which our test has a single target, of course, in the virus. Our pharmacogenomics test will utilize a remarkable 120 target panel test to evaluate the unique genotype of a specific patient to help guide precision individual drug therapy decisions. As a far more complex test relative to COVID-19, it should be significantly accretive to our clinical lab margins, contingent, of course, on testing rates. We are pursuing the LDT route for our PGx panel and have already begun analytical validation. We anticipate the validation package submission to the New York State Department of Health this fall, and if approved, we are targeting an early calendar 2023 service launch. Now, to provide a real-world example of pharmacogenomic testing and its value to individuals, consider the psychotropic drugs and how they often are prescribed. It's not uncommon for a patient's medication to be changed several times before the right combination of drug and dose are determined, a process that can literally take years. Using pharmacogenomics, a physician will have the data necessary to prescribe the right drug the first time at the right dose based on the patient's genetics, saving healthcare costs and improving patient outcomes. This is the future of precision medicine. Now let's turn to our textile supply chain business. The implementation of the Uyghur Forced Labor Prevention Act, or UFLPA, on the 21st of June has brought home the potential for a very real-world negative impact, both financial and reputational, to textile brands and supply chains contracting with geographic centers that use forced labor. Excuse me. For the first time, the federal government has recognized DNA traceability and or isotopic testing as evidence of compliance with the USLPA. Since the 21st of June, the conversations around regulatory compliance have turned toward our certainty platform. due to its layered technology-first and forensic approach. Now, this makes, we believe, certainty well-suited to helping clients understanding the rigor of a customs and border protection inquiry of goods about to enter the U.S. marketplace. And that can also help to secure supply chains for brands and backstop their product claims. The CertainT platform is large scale, and it's been field proven for many years, focused primarily on US cotton with footholds in other major cotton producing countries, including India, Egypt, and Australia. Our focus is on driving DNA tagging volumes for profitable growth and cash flow. The CertainT platform is large scale and is field proven, And we've begun onboarding certain platform customers initially for isotopic abundance of textile goods prior to reaching American ports. It's our expectation that as UFLPA enforcement becomes ubiquitous at American ports, these customers and others will migrate in time to DNA tag across the entirety of their supply chains. We are also pursuing cotton opportunities in the US and worldwide, who now have a vested interest in differentiating their cotton and textile production from those under the UFLPA scrutiny. Currently, we are broadening the application of DNA tagging that historically focused on home goods to include apparel. Before we open the call to questions, let me offer a brief recap. We are centrally focused on the biotherapeutics opportunity and the further development of our linear DNA platform, which we believe can be the common denominator for the next generation of genetic medicines. Our recent equity offering serves to fund the development of the linear DNA platform and the expansion of our diagnostic offerings. Our clinical lab and textile businesses are positioned as sources of continued revenue and potential cash flow with which to mitigate cash burn associated with the development of the linear DNA platform all the way through to commercialization. We are well funded for the foreseeable future, and we are centrally focused on the value creation opportunity and growth trajectory ahead of us. Thank you all for your time and attention this afternoon. Operator, please open the call for questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dipesh Patel with HC Wainwright. Please go ahead.
spk03: Hi, ladies and gentlemen. This is Dipesh Patel on behalf of Yi Cheng at HC Wainwright. A couple of questions and then a follow-up. When do you expect to complete the analytical validation of the monkeypox PCR test, and how long will it take New York State Department of Health to review the validation package?
spk05: Sure. I can't put an hour on the monkeypox validation, but I can tell you it's very soon, certainly within the next two weeks, if not sooner. And New York State does not tell you in advance how long it will take to examine your filing, but we've had conversations with them that give us hope.
spk03: Okay, and then in follow-up, how do you expect your monkeypox test to compete with other monkeypox PCR tests that are currently available at, for instance, LabPOR and Quest?
spk05: Sure. You know, we learned some wonderful lessons in COVID, and we did design a test that was for COVID that was extremely sensitive and extraordinarily selective. But the lesson we learned is that if your goal is to curb the spread of a cohort you're servicing in surveillance testing, those terrific aspects of science hardly matter. What matters is your turnaround time. And essentially, what is the service mentality of your team? And our head of operations, Judy Murrow, has cultivated a remarkable sentiment amongst everyone involved in the field and in the laboratory. And our turnaround times are really second to none. So we've done a great job of protecting our COVID clients from further spread. We intend to do exactly the same in the case of monkeypox. Now, we have designed an assay, which is we did not just take the CDC assay off the shelf, which is what the great majority of current testers have done. We designed our own target. It's selective for the signature DNA of monkeypox. So it's highly selective. We've contrasted it very carefully against the genomes of anything else that we could encounter in a test sample. And it is highly specific. But as I say, great science is not the only means of providing in a pandemic or in an issue of epidemiological concern of providing the best service. The best service comes from the fastest turnaround time, and we have finely honed those skills.
spk03: Got it. And then last question. Currently, what is the number of shares outstanding?
spk01: 12 million, around 12.9 million.
spk03: Great. Thank you so much. You're welcome.
spk05: Next question.
spk04: I'm showing no more questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Dr. Hayward for closing remarks.
spk05: Okay. Well, thank you, operator, and thank you to all of our investors who joined us on our call today. On behalf of the management team and all of our employees, we thank you for your continued support. And we look forward to speaking with you again on our fiscal fourth quarter call. Stay healthy and goodbye.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now.
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