Applied DNA Sciences, Inc.
Q3 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Good day, and welcome to the Applied DNA Sciences Fiscal Third Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Sanjay Hurry, Executive Director, Investor Relations. Please go ahead.

[Sanjay Hurry:]

Thank you, Jordan. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our fiscal third quarter 2020 business updates and financial results. You can access the press release that was issued after market close today and slide presentation accompanying this call by going to the Investors section of our website. Speaking on the call today are Dr. James Hayward, our CEO; and Beth Jantzen, our CFO. Before we begin, please note that some of the information you will hear today during our discussion may consist of forward-looking statements. I refer you to Slide 2 of the presentation and the company's Form 10-K filed on December 12, 2019, and Form 10-Q filed a short while ago for important risk factors that could cause the company's actual performance and results to differ materially from those expressed or implied in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or other information provided on this call as a result of new information or future results or developments. Now, it is my pleasure to introduce our first speaker on today's call, Beth Jantzen. Please go ahead, Beth.

[Beth Jantzen:]

Thank you, Sanjay. Good afternoon, everyone, and thank you for joining us. I will begin this afternoon with a review of the consolidated financial results for our fiscal 2020 third quarter. Then Dr. James Hayward, our President and CEO, will update you on our COVID-19 diagnostics and vaccine development programs as well as other business progress being made in our biotherapeutic segment. We'll then open the call to your questions. To preface my review of our quarterly financial performance, with New York observing quarantine and stay-at-home protocols during the majority of our fiscal third quarter, as an essential business as defined by the state, we kept our operations up and running as they relate to our diagnostics, vaccine and biotherapeutic, pharmaceutical and dietary supplements, mil/gov and law enforcement work and contracts. In our supply chain businesses, global demand slowed abruptly. And as a result, we have experienced a decline in revenue from nonbiologic tagging and related services. Concurrently, we shifted much of our headcount and resources towards the fight against COVID-19 to leverage our DNA expertise and ability to manufacture linear DNA at scale, as you will hear Jim detail later. Starting with the statement of operations; total revenues for the period declined to approximately $432,000 from approximately $2.1 million in the third quarter of fiscal 2019. The year-over-year decrease in total revenue is largely attributable to a $1 million licensing agreement fee received in the prior period from a former cannabis partner. Product revenues declined to approximately $57,000 for the period compared to approximately $393,000 in the prior year - in the prior period. The decrease in product revenue is attributable to a decrease in biotherapeutic revenues due to the timing of shipments as well as lower product sales to our textile and cash and valuables in transit customers due to the ongoing pandemic. Additionally, the retail sector is undergoing a drastic change in demand due to stay-at-home orders and economic uncertainty, both nationally and internationally. Therefore, we expect that revenues associated with the marketing of cotton, which historically was recognized in our fiscal fourth and first quarter, may not occur for this fiscal year. We continue to work closely with both cotton and manmade fiber partners to assess demand trends. Fiscal third quarter service revenues were approximately $375,000 as compared to $1.7 million in the prior year period. As I noted, the year ago period includes a licensing fee from a former cannabis partner. The year-over-year decrease also reflects service revenues in the prior period related to a government contract award that was completed in the second half of fiscal 2019 as well as a decrease in the number of textile and cannabis feasibility pilot projects. These decreases were offset by an increase in service revenues in our biotherapeutic contract research business, primarily from 2 validation studies. Cost of revenue as a percentage of product revenue in our fiscal third quarter of 2020 increased to 272% as compared to 69% for the year ago period. The year-over-year increase was due to poor fixed cost absorption given our low level of reported product revenue. The increase is also due to the change in product sales mix as the year ago period was comprised primarily of cotton revenue that carries a higher gross margin. Total operating expenses increased 8% or by approximately $250,000 to $3.5 million in the third fiscal quarter of 2020 compared to approximately $3.2 million for the same period in the prior fiscal year, reflecting higher SG&A costs due principally to higher stock compensation expenses and, to a lesser extent, from an increase in consulting, offset by lower investor relations and travel expenses. Third quarter R&D expenses increased by $95,000 to approximately $815,000 from $720,000 over the prior period. This increase reflects increased development costs as they relate to our biotherapeutic contract research and manufacturing, the majority of which is ascribed to the development of our COVID-19 diagnostic kit. Expenses associated with the formation of a new clinical lab subsidiary announced last month will be reflected in our fiscal fourth quarter. Net loss for the third quarter of fiscal 2020 widened to $3.3 million as compared to $1.5 million in the year ago period. As a reminder, we implemented a 1-for-40 reverse stock split on November 1, 2019. As a result, reported earnings per share for the third quarter of fiscal 2020 and 2019 have been calculated using the post-reverse stock split share count. Weighted average shares outstanding for the third quarter of fiscal 2020 and fiscal 2019 are 4,577,997 million and 952,835, respectively. Net loss per share for the third quarter of 2020 improved to $0.72 compared to a net loss per share of $1.55 for the same period in fiscal 2019. Excluding noncash expenses, consolidated adjusted EBITDA was a negative $2.8 million for the third quarter of fiscal '20 as compared to a negative $1.2 million in the prior period. Turning to our balance sheet. At quarter end, cash and cash equivalents totaled approximately $10.9 million. This figure includes approximately $4.4 million in net proceeds received during the fiscal third quarter for the exercise of warrants issued as part of the company's November 15, 2019, underwritten public offering. Each warrant entitles its owner to purchase 1 share of common stock in the company at a per share price of $5.25 until November 15, 2024. Our quarter end cash balance also includes an $874,000 PPP loan secured during the quarter. We utilized the entire loan amount on qualified expenses as defined by the Paycheck Protection Program and plan to file for forgiveness of the entire sum once the portal to apply for forgiveness is available. Total debt comprised of our secured convertible notes was $1.5 million at quarter end. Our average monthly cash burn rate that is net of warrant proceeds for the 9 months ended June 30, 2020, was $837,000 compared to $407,000 for the year ago period, an increase of 106%. The increase is due to lower cash receipts as a result of the decline in revenue period-over-period. Subsequent to June 30, we received additional warrant exercises totaling $852,000 in net proceeds. Currently, approximately 979,000 warrants issued as part of the November 15 offering, remain outstanding. Our cash position at July 31 was approximately $10.4 million. This concludes my prepared remarks. Thank you for joining us today, and I would now like to turn it over to Jim for his comments.

[James Hayward:]

Okay. Well, thank you, Beth, and good afternoon, everyone. Thank you for joining our call this afternoon. COVID-19 has been Applied DNA's primary focus since the start of this pandemic that has challenged the spirit, science and creativity of the global society and economy. The first phase in our company's response was focused on the health and safety of our employees. And in this regard, I'm pleased to report that we have and continue to execute well. I also want to use the opportunity to praise the performance of our team throughout the lockdown and in their continued isolation and social distancing. Those of us working from home have actually shown an increase in productivity, while many in the labs and in production worked throughout the lockdown and took on extraordinary goals that required working around the clock. This is how our linear COVID-19 diagnostic came to be. We all, shareholders and management alike, have many reasons to be proud of our team. Today, fully 60% of our technical headcount is dedicated to our COVID-19 diagnostics business and vaccine development programs. Applied DNA has developed a highly sensitive and specific diagnostic assay for COVID-19. And since March, our focus has been to develop a leading diagnostic kit and obtain the appropriate regulatory approvals to ramp up our production capabilities, now measured in tens of thousands of patient reactions per day, and to engage leading institutions, hospital networks, companies and schools as customers for our diagnostic kits and testing services. My remarks this afternoon will focus on that portion of our response, in which we moved to perform against our COVID-19 commercialization strategy. Having secured the FDA Emergency Use Authorization for our linear COVID-19 diagnostic assay kit and then several subsequent amendments, I will offer insight into our go-to-market strategy as we anticipate receipt of our first commercial diagnostic kit orders. I will also shed light on the establishment of our clinical lab subsidiary that I believe has the potential to be a significant revenue and profit center for the company. In our vaccine development program, we are very encouraged by our recent results in animal models that echo the effectiveness announced by some of the COVID-19 vaccines that are already in human trials. We will look to build on this momentum in the near term with toxicology screens in large animal trials and with the support of industry and big pharma partners, with whom we are already in negotiations. Beginning first with the science behind our COVID-19 programs, our science is grounded in the central feature of the virus that is the Spike protein, or the S gene encoded protein, to both detect and protect against the virus. For our diagnostic kit, this means that we can detect all currently sequenced stable variance of the virus and, we believe, any new stable and infective variants that may develop in the future. Should, as some have suggested, the virus eventually become seasonal, our assay would be able to detect those new genetic variants. Our focus on Spike in the diagnostic ensures that we can detect all variants still capable of binding to the host cell ACE2 receptor. Without this event, the virus would lose its mechanism to bind to and enter host cells. Other diagnostics that are not focused on Spike, and there are many, lack this advantage. Given this ability to detect current and future genetic variants, should there be a sudden mutation in the sequence of the virus that impacted the effectiveness of current and planned vaccines, we believe that in conjunction with our partner, Takis, we can more quickly develop a corresponding linear DNA vaccine that we believe could be manufactured at scale for global consumption faster than anyone in the industry. And this is the power of our linear DNA platform. Having received the EUA for our diagnostic kit in mid-May, we began to put into place the foundation necessary to commercialize it. In the ensuing months, our activities have yielded an expandable, addressable market, further improvements to our kit and the installation of an expanded sales and marketing infrastructure with which to drive demand. Now our kit comes in three capacities

[Operator:]

[Operator Instructions] Our first question comes from Yi Chen with H.C. Wainwright.

[Yi Chen:]

My first question is do you expect to ship the COVID-19 test kits before additional EUA amendment?

[James Hayward:]

Yes, we do. And we expect that the additional EUA amendment will facilitate incremental rates of those shipments.

[Yi Chen:]

Got it. And could you give us some color as to the potential time frame? Is it in the immediate term, in the coming weeks or the coming months?

[James Hayward:]

Certainly in the coming weeks to the immediate term. Very close.

[Yi Chen:]

Got it. And when do you expect to receive the New York State certification for the clinical labs?

[James Hayward:]

That's a little more difficult to nail down. New York State is working very hard to keep up with the testing demand. But we've made great progress on the assembly of our compliance documents on our proficiency testing and on our validations. So that could happen in a time frame as short as two weeks, but we're not in the position to control that.

[Yi Chen:]

Got it. Given the current COVID-19 status in New York State, is there actually a testing shortage or backlog in New York State? Or once you get the certification, you plan to primarily service states that are currently COVID-19 hotspots, such as California, Texas and Florida?

[James Hayward:]

No, there are existing testing shortages in New York State. And when that will become particularly apparent is as students return from across the country to colleges and universities in New York State. And as the administrations of high schools, even middle schools and colleges come to grips with evolving testing strategies for both symptomatic, asymptomatic and presymptomatic students, and that demand could change wildly in very, very short periods of time as the positivity rates are affected by the arrival of unwittingly infected students from hotspots across the U.S.

[Yi Chen:]

Okay, got it. And when you talk about the vaccine candidate, when you talk about the potential collaboration with big pharma and also presently negotiating rights for a novel delivery system, so could you give us additional color on what novel delivery system that is.

[James Hayward:]

I'd love to, but it's a little premature to tackle. We have an existing functional delivery system that gives us very high transfection efficiency and very high transduction survival rates. So we are contented with the methods we currently have in our tool belt, but we're always interested in increasing efficiency, such that it lowers perhaps the dosage required for a vaccine and increases the relevance of single batches to larger numbers of potential patients.

[Yi Chen:]

Okay. And my final question is, has the U.S. government approached you to potentially include your vaccine candidate in Operation Warp Speed? And if not, do you - what kind of data do you think you need to generate to potentially attract U.S. government agencies to include the vaccine and potentially give Applied DNA Sciences additional grant for further development of the vaccine?

[James Hayward:]

Yes. That's a great question, Yi, because we really are the only company commercializing a scaled linear DNA manufacturing platform. It's really distinct from everything else that has been considered in the march of COVID vaccines toward commerce. We believe that there is a gradual epiphany occurring across the biotech industry. And we believe it will reach the governments, both at the state and federal level, so that programs like Warp Speed will see that we are an alternative manufacturing route to a variety of different vaccine candidates, including those produced from DNA or from RNA. And I think that, that epiphany will awaken all manner of municipal funding; God willing.

[Operator:]

Our next question comes from Anthony Vendetti with Maxim Group.

[Anthony Vendetti:]

Yes - no, most of my questions have been answered. But just a little bit more on the big pharma negotiations and joint ventures or agreements you have with them. I know the focus has been on COVID-19. But in terms of how you're working with big pharma, outside of COVID-19 in terms of linear DNA, is there anything else that you can talk about, Jim, in terms of your negotiations with big pharma outside of COVID-19 that could be significant or instrumental as we move forward?

[James Hayward:]

Sure. One very positive aspect of the linear DNA work we're doing with big pharma is that it preceded COVID-19 by 6 to 12 months. And in some cases, those programs that have been delineated with us are long lasting and far reaching. So we had their attention and our customers had analyzed our methods well enough to realize that they were worth testing, in some cases, as many as 20 of their therapeutic constructs for evaluation in both in-vitro systems and in animals. So, as big pharma also turned its attention to COVID and the notion of nucleic acid-based vaccines, it was just a natural extension of the knowledge base they'd acquired over the prior 6 months to contemplate that this would be a great way to make a COVID vaccine.

[Anthony Vendetti:]

Right. So that was sort of my point, was that you were already in negotiation with a number of these large pharmaceutical companies prior to COVID ever appearing on the scene. So I guess what I'm trying to get at is if there's potential beyond COVID-19 for you to work with big pharma. And I know like the focus has been on COVID-19, but this platform has many potential uses outside COVID-19, correct?

[James Hayward:]

Yes, absolutely. It's relevant to really all manner of gene therapy, of redirected cell therapies like CAR-Ts, of vaccines and the like. So that - those companies that enjoyed having already climbed the learning curve of the value of linear DNA in a clinical scenario were quick to move to the COVID concept.

[Operator:]

[Operator Instructions]

[James Hayward:]

Okay. If there are no more questions, operator, I'd like to thank you and everyone for your time and attention this afternoon. And as you've heard, there's a lot of activity taking place within the walls of Applied DNA. And while this has not yet translated into financial performance, we believe there are multiple avenues ahead of us to significantly drive shareholder value. So, thank you, again, for your time. Please stay safe. We'll speak again with you next quarter. Thanks.

[Operator:]

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