Applied DNA Sciences Q1 2024 Earnings Call Transcript

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February 8, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Applied DNA Sciences' fiscal 1st Quarter 20 24 Financial Results Conference Call. All participants will be in listen only mode. 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.

Speaker 1

Thank you, Scott. Afternoon, everyone, and welcome to Applied DNA's conference call to discuss our Q1 fiscal 20 24 financial results. You can access the press release that was issued after market close 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 Doctor. James Hayward, our Chairman, President and CEO and Beth Jansen, our Chief Financial Officer Clay Sharrock, our Chief Legal Officer and Head of Business Development and Judy Murrah, our Chief Operating Officer, to remind you that our remarks today may include forward looking statements.

Speaker 1

I refer you to Slide 2 of the presentation and our Form 10 Q filed a short while ago 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's my pleasure to introduce our first speaker on today's call, Beth Janssen. Please go ahead, Beth.

Speaker 2

Thank you, Sanjay. Good afternoon, everyone. Thank you for joining us on our Q1 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 Doctor.

Speaker 2

James Hayward, our President and CEO, who will update you on our ongoing business initiative. We will then open the line for questions from our analysts and institutional investors. Beginning with our statement of operations, total revenues for the Q1 of fiscal 2024 ended December 31, 2023, were approximately 891,000 or a decline of $4,400,000 compared to $5,300,000 for the same period in the prior fiscal year. Approximately $4,200,000 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-nineteen testing as the prior year period included testing revenues under our contract with CUNY that expired in June of 2023.

Speaker 2

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 products and services segment. Service revenues increased approximately $15,000 year over year and approximately 78,000 sequentially that were driven primarily by demand for isotopic testing within our DNA Tagging and Security Products and Services segment. Gross profit was $231,000 or 26 percent compared to $2,400,000 or 45% in the prior fiscal year period. The decline in gross margin was primarily due to a higher percentage of COVID-nineteen testing service revenue in the 3 months ended December 31, 'twenty two, which generated a higher gross profit compared to the 3 months ended December 31, 20 23. To a lesser extent, the decline in gross profit percentage was due to lower product revenues during the 3 month period ending December 31, 'twenty three, as compared to the same period in the prior fiscal year.

Speaker 2

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 revenues. Total operating expenses increased by $424,000 to $4,000,000 compared to $3,600,000 in the prior fiscal year period. This increase in total operating expenses reflects higher SG and A costs as the prior 3 month period has a credit and bad debt expense of approximately $290,000 from a customer balance that was written off and was subsequently collected during the 3 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 grant that vest 1 year from the date of grant. These increases were offset by a decrease in payroll of approximately 107,000 Operating loss for the Q1 was $3,800,000 compared to $1,200,000 in the prior fiscal period.

Speaker 2

Turning to slide 5, excluding non cash expenses, adjusted EBITDA deteriorated by $2,100,000 to a negative $3,200,000 compared to a negative $1,100,000 in the prior fiscal year 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. Cash and cash equivalents totaled $3,400,000 on December 31, compared to $7,200,000 on September 30, 2023. Fiscal year to date, Our average monthly cash burn was $1,300,000 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 2, 2024 for gross proceeds of approximately $3,400,000 Full details of the offering are provided in the subsequent events section of our Form 10 Q filing.

Speaker 2

We issued approximately 3,200,000 shares and prefunded warrants to purchase up to 2,400,000 shares common stock. In a concurrent private placement, unregistered common warrants to purchase up to 11,300,000 shares of common stock were issued with an exercise price of point 609 per warrant share. These common warrants are subject to shareholder approval at a stockholder meeting that must be held by April 15 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 an additional gross proceeds of $6,900,000 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 warrant to $0.609 per warrant.

Speaker 2

We also agreed to extend the expiration date of these warrants to August 2028. These warrant reductions are also subject to stockholder approval. Subject to approval, The exercise of the warrants issued discussed above as well as the now reduced warrants could result in total gross proceeds of up to $8,600,000 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.

Speaker 2

Inclusive of the proceeds from the registered direct, cash and cash equivalents was approximately $5,100,000 on February 2. Before turning the call over to Jim, the commercialization of our Linea IVT and Linea DNA platforms remains our primary objective. To that end, we are committed to capital allocation that support our biotherapeutic goals, while identifying and undertaking 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.

Speaker 2

Thank you for joining us today. I will now turn the call over to Jim for his comments.

Speaker 3

Well, thank you, Beth. Good afternoon, everyone. Thank you for joining us on today's call. It was an important quarter for our biotherapeutic goals. This afternoon, My remarks will update you on the progress we've made during the quarter to advance the commercialization of our Linea IVT platform and establish a GMP capacity to and establish a GMP capacity to manufacture critical starting materials for clinical grade Messenger RNA Therapeutics.

Speaker 3

Now 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 template DNA such as our linear DNA templates is turned into the sequence of messenger RNA via RNA polymerase. Our Linea IVT platform is comprised of both our Linea DNA IVT templates and our proprietary RNA polymerase ready for use in in vitro transcription of an mRNA drug. I will also share some representative customer profiles and their intended use cases for our Linea DNA and Linea IVT platforms. These customers and their future needs for mRNA starting materials form the basis for Applied DNA's strategic growth.

Speaker 3

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 Linea IVT. Establishing a 1st 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 Linea IVT. And as you can see in this slide, in fiscal 2023, which was year 1 of our Linea IVT commercialization plan, we firstly Launched Linea IVT as a platform for the manufacturer of mRNA. Secondly, we expanded our presence across the global marketplace.

Speaker 3

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 roadmap To transition our manufacturing capacity from research use only milligram scale DNA template orders to multi gram scale GMP orders capable of supporting our customers early stage toxicology, pharmacokinetics and clinical trials. In year 2, our current fiscal year, We are focused on migrating our customers to scale up agreements for Linea IVT Templates Coupled with our linear RNA polymerase manufactured under applicable GMPs to support their clinical RNA objectives. With approximately 420 5 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.

Speaker 3

Consequently, after the Q1's end, we closed on the equity offering that will fund us through implementing our initial GMP footprint. As indicated on this slide, we reiterate the timing of this facility to come online is during the first half of calendar twenty twenty four. Now establishing a GMP footprint takes a phased approach to simultaneously support existing and new 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 $15,000,000 from a footprint of less than 1,000 Square Feet. Incremental capacity will be straightforward to add.

Speaker 3

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 Linea DNA IVT templates, lineaRNA polymerase and a royalty for a technology license. With 67% of that mRNA development pipeline in preclinical development, The industry is quickly progressing to clinical and eventually commercial stages. In year 3 or 2025, we believe that the economics of our unique business model will be fully realized as we initiate large scale GMP supply to customers as they advance in the clinic and prepare for commercial launch. Now turning to our customers.

Speaker 3

Our sales pipeline is populated both by cutting edge biotech companies who manufacture their own products and by CDMOs, which are contract development and manufacturing organizations that are operating suppliers to biotech and pharma companies. Each of these segments represents an outcome that could materially and positively alter Applied DNA's biotherapeutic once successfully engaged. On this slide, you will find a select sampling of customers and applications relevant to Linea IVT 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 our GMP capacity about to come online, much of our sales and business development efforts have been focused on converting interest in Linea DNA as the IVT template material into evaluations of our Linea IVT platform with the ultimate goal of securing long term supply agreements.

Speaker 3

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 Linea initiating evaluations of Linea IVT has quickened and the size of the potential opportunities is increasing. We are already in several Linea IVT position of linear RNA polymerase was only 6 months ago. Particularly noteworthy, We recently completed an evaluation with a 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 IVT template 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.

Speaker 3

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 U. S.-based mRNA CDMOs. Now CDMOs have substantial Underutilized manufacturing capacity available after the decrease in demand for COVID-nineteen vaccines. We believe that Linea IVT provides these CDMOs with significant differentiators in the marketplace at a time when the mRNA modality is 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.

Speaker 3

CDMOs are showing particular interest in self amplifying mRNA. During the Q1, we shipped our 1st self amplifying mRNA IVT template to a preclinical therapeutic manufacturer, thereby demonstrating that the Linea DNA's 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 Template manufacturing for this promising and growing messenger RNA modality that is self amplifying RNA. We have validated Linea IVT for The small scale manufacturer of mRNA critical starting materials. To support customers much larger commercial aspirations with Linear IVT, we need to substantiate Linea IVT's performance at scale within a commercial manufacturing setting.

Speaker 3

In partnering with the CDMO Kudobio, which was announced this quarter, We have entered the arena of commercial scale manufacturing. Our first CDMO partner, KUDO will help validate the commercial scale up of the Linea IVT platform. In Kudo Bio's workflow, our Linea IVT platform would serve as the front end of an integrated GMP mRNA drug product manufacturing workflow. We believe that KUDO's integration of our Linea IVT 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 into a scale up manufacturing agreement with an enzyme manufacturer for our linear RNA polymerase enzyme to scale its production for commercial scale use.

Speaker 3

This is part of our efforts to increase efficiencies and reduce Linea IVT's cost of goods sold In brief, we believe this project once completed will ensure we can manufacture our Linea RNA polymerase at a scale and a reduced cost of goods to enable profitable growth of Linea IVT. And we expect to announce this agreement in a press release soon. This quarter also saw us generate new compelling data that further substantiate the capacity of our Linea 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 RNA, faster as a key differentiator against our competitors.

Speaker 3

In a further application of Linea DNA, our partnership with the Institute of Hematology and Blood Transfusion in Prague on their CD123 CAR therapy has moved past the experimental stage. Pending the finalization of a supply agreement with us, we expect the Institute of Hematology and Blood Transfusion in Prague will receive EU regulatory approval to proceed with a Phase 1 CD123 clinical trial to dose 10 compassionate use patients with their CAR T therapy. The Phase 1 trial is expected to begin before the end of this calendar year. Now this is a significant milestone for Linea DNA and its application to the rapid and efficient manufacture 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.

Speaker 3

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 GMP footprint keeps us of our GMP 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.

Operator

We will now begin the question and answer session. And our first question today comes from Jason McCarthy with Maxim Group. Please go ahead.

Speaker 4

Hi, Jim. Thanks for taking the questions. First, just on your last point there from the Prague Hematology Institute doing the CD123 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 expecting to move from preclinical to clinical at least in the EU, Is that going to require GMP grade materials from Applied?

Speaker 3

Great question, Jason. Well, first of all, I have to tell you these folks are great scientists and a delight to work with. Having done my PhD in hematology, I can appreciate the quality of their work. So they have an entire CAR T program laid out and They find value in our approach to the evolution of CAR T. The European authorities have indicated that they will approve An up labeling of our research use DNA construct to CGMP at their facility.

Speaker 3

And so after an inspection here and Some additional correspondence with the EMA, we expect that to happen forthwith. Their animal study results were superb and it's based on That the European authorities are taking their position that compassionate use would be apropos.

Speaker 4

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 1 trial for 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?

Speaker 3

Yes. It's probably enough material to treat, I'd say, about Ten patients, I don't want to speak for them because the details are under their control, but that's what I'm expecting. And so that should be no problem for us.

Speaker 4

Do you have is it publicly disclosed who the principal investigator is at the Prague Hematology Institute?

Speaker 3

I'm sorry, could you try that again, Jason?

Speaker 4

Is it publicly available who the Principal Investigator is at the Prague Institute? Just thinking if you could pull some papers and just read some of that.

Speaker 3

Sure. I'd be happy to verify that it is and then I'll 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.

Speaker 4

Great. And also just moving over to the Kudobio relationship that was updated back in December. As a CDMO in the mRNA space,

Speaker 1

Can you give us

Speaker 4

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? Are they a significantly large player compared to others in the space?

Speaker 3

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 scale is quite large. So they have the opportunity to really be an end to end mRNA manufacturer at very significant scale.

Speaker 5

Yes. And I can jump in there too. Thanks, Jim. Yes. So they have facilities, Jason, in the U.

Speaker 5

S. They also have their main Manufacturing facilities in China. 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 Very large commercial scale, as Jim noted, but there's also potential additional synergies there that we are investigating.

Speaker 4

Are they taking on the RNAV enzyme as well as part of all this work that you're doing with them?

Speaker 5

Yes. So under the disclosed contract, yes. So the joint development agreement that was disclosed, the goal of that agreement is to scale Linea IVC to commercial scale, right? Right now, we've proven that Linea IVC works extremely well at the small scale. We need that validation That the platform scale to multi leader IVC scale, right?

Speaker 5

And that's what we are doing with them and then bring the results in mRNA through LNP encapsulation into Drosoph and then drug product.

Speaker 4

Got it. Last question, Just briefly on Slide 9, you give a sample of select customers in the biotherapeutic 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 any in vitro or preclinical work to clinical this year? Thank you.

Speaker 3

Clay, you want to take that too?

Speaker 5

Sure. Absolutely. So, yes, so obviously we can't disclose NAM, Jason, but Since the launch of Linea IVT in August 2023, we've really seen more rapid adoption of the platform. That's been driven, I would say, in equal parts of the enzymatic IVC template story, but also the ability to reduce the dsRNA, right? So Our early customers are IVC template customers.

Speaker 5

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 up under GMP look like? And that's why we have a certainty for this GMP facility. But importantly, we also now are seeing adoption both from large CDMOs and also some therapeutic customers of the joint Linea IVT platform.

Speaker 5

And that's important because the economics of selling that enzyme along with the template are so much more advantageous for us. So We've had some first successful evaluations of that platform. The first one was actually with KUDO. 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 as Jim noted in his prepared remarks, we actually met or exceeded all specs and our time to manufacture beat everyone else that they were looking at.

Speaker 5

So It's quite promising.

Speaker 4

Great. Thank you, fellas.

Speaker 5

Thank you.

Operator

Our next question comes from the line of Deepesh Patel with H. C. Wainwright. Please go ahead.

Speaker 6

Hi, James, and thank you for the additional details there. Regarding Slide 9, just a follow-up Are you able to share more color on the percentage of customers that you have in the U. S. And the ex U. S?

Speaker 6

And how might you expect this to trend over the coming quarters?

Speaker 3

Yes. The bulk of our customers are U. S. At the moment, but with The good smattering of international customers coming both from Asia and from The European Union, I expect that we'll see more from the European Union over the course of the next year or so. And while we profiled in Slide 9, only 6.

Speaker 3

We have many more customers than that. And what's really compelling is that many of those customers are Returning for additional orders and for orders of greater volume.

Speaker 6

Great. And then last question, with regards to your the projection that you noted of up to $15,000,000 annual for the linear IVT revenue. What assumptions can we kind of take away from that in terms of are you putting in like 100% utilization of the 1,000 square foot facility that you mentioned?

Speaker 3

Yes. The capacity is slightly greater than that at 100% utilization. Of course, you never want to get to 100% utilization, But the facilities are quite cloneable, if you owe pardon the pun. And It would be easy to prepare additional space. I can see a future where Customers are beginning to lay out their plans for pharmacokinetics and toxicology and clinical trials and their approach to FDA.

Speaker 3

And not only will they be placing orders, but I suspect they will 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 we're set and ready to go.

Speaker 6

Great. Thank you so much for the update, gentlemen.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Jeffrey Bernstein with Silverberg Bernstein Capital. Please go ahead.

Speaker 7

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 and ANZA, those kinds of folks?

Speaker 3

Well, I

Speaker 4

think that, Tim, if you want.

Speaker 3

Sure.

Speaker 5

Okay. Hey, Jeff. So yes, we're talking Some of our competitors in the enzymatic scale up, not the enzymatic synthesis. So we don't know what customers they are All we know is that we are being benchmarked against other enzymatic manufacturers and we are exceeding the turnaround time.

Speaker 7

Okay. So those would potentially be like CDMOs that are offering these capabilities?

Speaker 5

Exactly, right. So again, there are 2 enzymatic uses. There's 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. Yes. Okay.

Speaker 5

That's great.

Speaker 7

Thanks. Thank you.

Operator

This concludes our question and answer session. Would like to turn the conference back over to James Hayward for any closing remarks.

Speaker 3

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.

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Key Takeaways

  • Total Q1 fiscal 2024 revenues fell to $0.9 million, down from $5.3 million a year ago, driven primarily by the expiration of the CUNY COVID-19 testing contract and reduced DNA tagging product sales.
  • Operating loss widened to $3.8 million (adjusted EBITDA of –$3.2 million), compared to a $1.2 million loss in Q1 2023, reflecting lower gross margins and higher SG&A expenses including stock-based compensation.
  • Cash and equivalents stood at $3.4 million as of December 31, with average monthly burn of $1.3 million, and the company closed a registered direct offering in February raising $3.4 million, plus potential warrant proceeds of up to $8.6 million pending shareholder approval.
  • Applied DNA is ramping commercialization of its Linea IVT platform and establishing GMP capacity in H1 2024 in under 1,000 sq ft, targeting an annual revenue capacity of up to $15 million from combined template, enzyme and license royalties.
  • Sales pipeline momentum includes successful customer evaluations—one clinical-stage mRNA customer reported superior quality and speed versus competitors—partnerships with CDMOs like Kudobio, shipment of the first self-amplifying mRNA template, and a planned EU Phase 1 CD123 CAR T trial in Prague.
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Earnings Conference Call
Applied DNA Sciences Q1 2024
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