Applied DNA Sciences, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Dec 2020

[Operator:]

Good day, and welcome to the Applied DNA Sciences’ Fiscal Fourth Quarter and Full-Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would like now to turn the conference over to Sanjay Hurry. Please go ahead.

[Sanjay Hurry:]

Thank you, Matt. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our fiscal fourth quarter 2020 financial results and business updates. You can access the press release that was issued after market closed today and slide presentation accompanying this call by going to the Investor Relations calendar page of our Web site. Speaking on the call today are Dr. James Hayward, our CEO; and Beth Jantzen, our CFO.

[Beth Jantzen:]

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 fourth quarter of fiscal 2020. Then, Dr. James Hayward, our President and CEO, will summarize the company's achievements in the year and outline our key initiatives for fiscal 2021. We will then open the call to questions from our analysts. The preface my review of our financial results for the fiscal quarter ended September 30, 2020, we continue to experience a decline in revenue from our tagging and related supply chain services business. That is primarily due to the shutdown of global supply chains at the onset of the pandemic. Specifically, the effect of the shutdown continues to adversely impact the textile industry that historically has been our largest contributor to revenue. In response, and as I detailed on our fiscal third quarter investor call, we shifted a significant percentage of our headcount and resources towards addressing the fight against COVID-19. As such, our financial results also reflect investments made in the build out of our COVID-19 testing products and services and to a lesser extent, our vaccine development program. However, as you will know, when I review the statement of operations in a moment, revenue for the fourth fiscal quarter does not include significant revenues from our COVID-19 testing products and services, as the first contracts were signed late in the fourth quarter, and they've continued to increase during our first quarter of fiscal 2021. Starting with the consolidated statement of operations, total revenues for the fourth quarter of fiscal 2020 declined to $314,000 from $1.7 million in the prior period. This year-over-year decrease in quarterly revenue is mostly attributed to a decline in product revenue associated with shipments of DNA concentrate to protect the cotton supply chain during the prior fiscal year.

[James Hayward:]

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Yi Chen with H.C. Wainwright. Please go ahead.

[Yi Chen:]

Hi, thank you for taking my questions. My first question is regarding the contract with the Suffolk County Government. So could you clarify what roll does CLEARED4 play in this contract? And whether they share part of the 2 million contract?

[James Hayward:]

Yes. CLEARED4 has a remarkably flexible platform for tracking information about the client base. And it is a platform that allows facile communication between the sponsor of a surveillance program and its members. We are very impressed with their adaptability, with their ability to pull in customers and they greatly facilitate the service, which we consider to be so important to maintaining our surveillance customer relationships. And yes, we pay them a fee for that service and we're very happy with it.

[Yi Chen:]

Okay. Got it. And the second question, could you tell us how many customers do you currently have on the safeCircle platform for pooled surveillance testing, and whether the revenue you would expect to receive in the current quarter would be sufficient to make up for the lost revenue in the textile industry?

[James Hayward:]

Very good questions, Yi. Appreciate it. Thank you for asking them. So, our surveillance customer base includes multiple schools, businesses small and large, hospitals, wellness operations, a medical school, families, colleges, athletic teams and more. So there's very little risk concentration, it's very diversified customer base. And their compulsion to test is quite strong and very successful. It's certainly well over 30 customers at this stage. And in terms of -- we don't provide guidance. But certainly, the revenues we'll see from the safeCircle surveillance business would – will exceed the growth rate we were expecting for our tagging business, driven especially by textiles.

[Yi Chen:]

Got it. Thank you. And lastly, could you tell us whether the cat vaccine is still on track to -- the cat vaccine trials on track to be initiated? And what would happen for the human vaccine? When should we expect to have an update for the human vaccine?

[James Hayward:]

Sure. We can see two roles in the human vaccine. I'll answer that question first. First of all, we hope that our progress with our veterinary vaccine sheds more light on the potential we can bring to the marketplace with our LinearDNA vaccine. Also, the public's appreciation of the demand for cold chain has increased the awareness of the value of LinearDNA, because once freeze dried into a formulation, that's rehydrated at the patient's side, that freeze dried powder is extraordinarily stable. I've joked that I would ship it across the Sahara without concern, but it is remarkably stable. We do expect the cat vaccine trial to stay on course. We have great partners in the execution of those trials, and we're really looking forward to it. We think that this is not simply an anecdotal kind of application. But that it's very important in the case of pandemic, such as caused by the SARS-CoV-2 virus that humans don't accommodate to keeping a reservoir of virus at their flip side. And the cure to that is to vaccinate cats and eliminate cats as a potential carrier of the virus in the household.

[Yi Chen:]

Okay, got it. Thank you.

[James Hayward:]

Thank you.

[Operator:]

Our next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

[Anthony Vendetti:]

Thanks. So, Jim, just a little more on the Suffolk County Government contract, it's 2 million, you said that initially over six months. And the opportunity is to expand that after six months. Can you talk a little bit more about what that expansion would potentially be? Would that be for another $2 million? Or is the expansion beyond six months would have to be determined the dollar amount after the first six months would potentially be a different dollar amount, depending on the magnitude of the expansion?

[James Hayward:]

Sure. First of all, I have to say that I'm astonished and wonderfully impressed by the agility of the Suffolk County Government. Their capacity for decision-making or response to events and to strategy is, I just have not seen before. And we as a company, find ourselves sprinting to keep up with their agility. It's really wonderful to see and restores your faith in government. The expansion could occur in real-time, it does not have to wait for the end of the six months, and is in part influenced by the reception of those we would be protecting by this surveillance campaign. And I can tell you from our first meetings with agencies and people, like the members of the police department and the Chief of Police, their reception is very strong, they're very anxious to participate. They ask whether or not their families can participate. And I think the opportunity for it to broaden is genuine. And, frankly, I think the wider and deeper it gets, the better job we can do it helping to protect Suffolk County. So I'm very optimistic and anxious to get going.

[Anthony Vendetti:]

Great, sounds like that. Is that a significant opportunity that could continue to expand? You also mentioned on the call, Jim, that other municipalities have reached out or you've been in contact with other municipalities. Where would you say that those other municipalities are in terms of the pipeline? Are they close to making a decision? Or they're just not as nimble as Suffolk County, and it could take a while.

[James Hayward:]

It's kind of hard for me to say with assurance, Anthony. We're seeing even in the schools that have to make decisions about, they look back in retrospect about the impact of the Thanksgiving holiday on infection rates, and can clearly see what inter-household visits did to the infection rates thereafter. And that was with a two-day holiday and a four-day weekend. With the coming holiday, we see the schools and many of the communities tacking as you would in a sailboat to ensure they're heading in the right direction. And we respond in real-time right with them. So, I think we could see a very significant increase in our activity in this area after the first of the year and I'm just hoping that people are wise about the way they visit one another and limit the opportunity for infection.

[Anthony Vendetti:]

Yes. It makes sense. And then just done the veterinary opportunity. You said, everything's moving forward with the feline trial. What is that overall opportunity if everything goes well, in terms of a dollar amount, what do you think the market opportunity there is?

[James Hayward:]

Well, I think it's broad enough on the basis of cats. We've seen estimates from the 58 million I quoted to well over 100 million, that's even in household camps. If you combine that with feral cats, there's a huge opportunity. But early on in the -- who workshops, the World Health Organization workshops, the ferret was identified as one of the best clinical, pre-clinical laboratory animals to work with. And the reason for that is because unlike cats, ferrets develop symptoms and many eventually die from the disease and ferrets are in the same family as minx. And as you know a very significant commercial business has been perhaps permanently impacted by the impact of this virus on minx. But we believe that if our vaccine is functional in cats, it would also be functional in some animals of very important commercial value like minx. And then, secondly, the data that we would get from these trials and use after approval, could very well be helpful in our potential COVID vaccine based on LinearDNA, as well as a host of other nucleic acid-based therapeutics that we're working on.

[Anthony Vendetti:]

Okay. And then, just to switch gears a little bit, I think Beth mentioned during her opening remarks that there was a write-off for some development expenses, not expected to be utilized by the cannabis industry. Can you elaborate on that?

[James Hayward:]

We have continued our close connection to the cannabis industry. And it's very clear that as it becomes approved more globally, that there is still a requirement to be able to track cannabis to its original source. And as the methods of harvesting and subsequently isolating distillates and other components becomes clearer, we realize that our initial methods may not be as relevant to tagging in the field as to tagging during the chemical processes early after harvest, where the material is still close to its starting point but very eligible for tagging.

[Anthony Vendetti:]

Okay, okay. So bottom-line is, as you still see an opportunity there. It's the type of opportunity has shifted, is that correct?

[James Hayward:]

Yes, exactly. So we've moved to tagging at another point in the supply chain, instead of while it's out in an open field.

[Anthony Vendetti:]

Okay. And then, just the last question on the CLIA certification those deficiencies. What were they and I know, you said you were addressing them? Did you say you expect them to be addressed early in '21?

[James Hayward:]

Yes. We believe we actually addressed most of those concerns already. And now documenting how we have addressed them and supplying those documents back to New York State Department of Health is the key issue. Most of the concern dealt with the flow of data in electronic systems typically and those systems have been implemented and are being improved as we speak.

[Operator:]

Our next question comes from Matt Bullock with Maxim Group.

[Matt Bullock:]

Hi, thanks for taking my question. Just a quick follow-up on from a modeling perspective. Any additional color on how you guys think about gross margin and SG&A expenses going into fiscal '21, and how that cadence might play out? Thanks.

[James Hayward:]

Beth, you want to take that one?

[Beth Jantzen:]

Sure. Yes, I think we had, as we mentioned increased development costs in the fiscal fourth quarter, but then I would expect SG&A levels to be slightly down from where they were on this fiscal quarter. And almost remained fairly consistent as we kind of focus some efforts and move some of our resources from tagging and things like that over to the COVID-19 and the biotech sector.

[Matt Bullock:]

Then on gross margin?

[Beth Jantzen:]

The gross margin really -- the gross margin is so poor in Q4 because we didn't absorb some of the fixed costs that are flowing through COGS with the low product revenue, but the gross margin on the surveillance testing is very good in some other, it's not better than like our textile industry. Same with the diagnostic kit itself.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Jim Hayward for any closing remarks.

[James Hayward:]

Okay. Well, thank you very much, and thanks to everybody for listening in. It's been a year clouded by anxiety, illness and fear. But we have found encouragement in the -- on unfaltering commitments of our employees and our colleagues, our investors, our development partners and our customers. As I said before, we are amazed at the agility of a tripartite and translational collaboration between government, academia and industry. And as we close this call and year, we have found strong reasons to be optimistic about our future as a company, as an industry and the country. And we wish you all peace and health. Thanks very much.

[Operator:]

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