STONY BROOK Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Applied DNA Sciences Inc earnings conference call or presentation Thursday, February 6, 2020 at 9:30:00pm GMT

Good day, and welcome to Applied DNA Science Fiscal First Quarter 2020 Financials Results Conference Call and Webcast.

I would now like to turn the conference over to Clay Shorrock, General Counsel for Applied DNA. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our fiscal first quarter 2020 financial results conference call.

A copy of the company's earnings press release and accompanying PowerPoint presentation to this call are available for download under the Events and Presentations section to the investor page of the Applied DNA website.

With me on the call today are Dr. James Hayward, Chairman and CEO; and Beth Jantzen, Chief Financial Officer.

As a reminder, please note that some of the information you will hear today during our discussion may consist of forward-looking statements, including, without limitation, those regarding gross margins, operating expenses, other income and expenses, stock-based compensation expense, taxes, earnings per share and future products. Actual results or trends may differ materially. For more information, please refer to the risk factors discussed in Applied DNA Sciences' Form 10-K filed on December 12, 2019, and Form 10-Q filed a short while ago. Applied DNA Sciences assumes no obligation to update any forward-looking statements or information.

Today, I will review our consolidated financial results for our 2020 fiscal first quarter. Then Dr. James Hayward, our President and CEO, will summarize the company's achievements in the quarter and update you on certain key initiatives for the company in fiscal 2020. Jim will then open the call to your questions.

Starting with the statement of operations. Total revenues for the period decreased 28% to approximately $634,000 from approximately $884,000 in the first quarter of fiscal 2019 and decreased 62% compared to $1.7 million for the fourth quarter of fiscal 2019.

Product revenues were $238,000 as compared to $322,000 in the prior period and $1.3 million in the fourth quarter of fiscal '19. The sequential decrease in product revenues is attributable to a $1 million shipment of DNA concentrate to protect the cotton supply chain that was recorded in the fourth quarter of fiscal 2019.

First quarter service revenues were $396,000 as compared to $562,000 in the prior period and $423,000 in the fourth quarter of 2019. The year-over-year decrease in service revenues is primarily attributable to revenues in the prior period related to a government contract award that was completed in May of 2019.

Cost of revenue as a percentage of product revenue in our fiscal first quarter of 2020 increased to 98% as compared to 48% for the year ago period and 26% on a sequential basis. The year-over-year and quarter-over-quarter increase was due to product sales mix as sales during Q1 and Q4 of fiscal '19 were primarily comprised of sales in our textiles market which are at a higher margin as compared to sales during the current quarter. This increase was also the result of certain costs of revenue being fixed costs, such as payroll and rent, which were not fully absorbed with the level of product revenue during the first quarter of fiscal 2020.

Total operating expenses decreased 23% or approximately $915,000 to $3 million in the first fiscal quarter of 2020 compared with approximately $4 million for the same period in the prior fiscal year and declined approximately $200,000 on a sequential basis. The decrease on a year-over-year basis is primarily due to reduced payroll expenses as a result of a realignment of the sales force and reduction in overall head count as well as a reduction in stock compensation expenses and lower consulting fees. First quarter R&D expenses declined by $146,000 to $564,000 from $710,000 over the prior period. This decrease is related to decreased development costs for the DoD contract award mentioned earlier that expired during the second half of fiscal 2019.

Net loss for the first quarter of fiscal '20 narrowed by 18% on a year-over-year basis to $2.7 million from $3.2 million and increased from $1.2 million for the fiscal fourth quarter of 2019. 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 first quarters of fiscal '20 and '19 have been calculated using the post-reverse stock split share count. Weighted average shares outstanding for the first quarter of fiscal 2020 and 2019 are 2,380,564 and 761,769, respectively.

Net loss per share for the first quarter of 2020 improved to $1.12 compared to a net loss per share of $4.25 for the same period in fiscal 2019 and a net loss per share of $1.44 for the fourth quarter of fiscal '19.

Excluding noncash expenses, adjusted EBITDA was a negative $2.4 million for the first quarter of fiscal '20 as compared to a negative $2.6 million in the prior period and a negative $1.6 million for the fourth quarter of fiscal '19.

Turning to our balance sheet. Cash and cash equivalents totaled approximately $8.7 million at December 31, 2019. This figure includes net proceeds of $10.5 million we received through an underwritten public offering of stock and warrants during the quarter. Total debt comprised of our secured convertible note payable was $1.5 million at quarter end. Our average monthly cash burn rate for the first quarter of fiscal 2020 was $867,000 compared to $528,000 for the year ago period, an increase of 64%.

Our cash position at January 31, 2020, was $7.7 million. Cash burn was higher in the first quarter of fiscal 2020 as we paid down payables as a result of the proceeds from the public offering. Going forward, we would expect this level to normalize more in line with the prior fiscal year.

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.

Well, thank you, Beth, and good afternoon, everyone, and welcome to our fiscal first quarter results conference call.

Beginning last August and ramping up since our last capital raise, we've revised our strategic plan to evaluate the markets in which we compete, to access those opportunities that provide a faster path to growth and profitability and to allocate our resources so that we can execute on these opportunities faster. The company's core competencies and differentiation are the capability; the intellectual property, both patents and trade secret know-how; and the proven commercialization of PCR-based linear DNA production. Its utility and value propositions are driven by 2 key market sectors: supply chain integrity and health care, the latter more specifically biopharmaceutical therapeutics and diagnostics. While our platform can be used in many industries, too much diversity can bring distraction; and underinvestment in sales, in marketing and product development in any one important area. Therefore, beginning in Q4 of fiscal '19, we began executing our analysis of our strategic plan related to market focus, people, capital on hand and other elements, subsequently shifting resources and spending associated with our lower-growth markets to those exhibiting an upward trajectory. We are pleased with our progress and know that we face some critical milestones this fiscal year that we have outlined in our business plan and reviewed with our Board of Directors in what is a continuing quarterly process.

First, we see significant momentum in our biopharm and diagnostics business, beginning with our recurring shipments of linear DNA for our customers' early detection system for hepatic cancer, where we have a 5-year supply agreement. We've started to recognize revenue for the Tyme SM-88 pancreatic cancer study that uses our patented and proprietary liquid biopsy assay for invasive circulating tumor cells. More on our invasive CTC platform and its increasing potential in just a moment. In these health care markets, we began a quiet revolution as a new technology platform for linear DNA. And as we spread the word, just as we did during the recent JPMorgan Healthcare Conference in San Francisco last month, there is, no doubt, growing evidence of a wave of epiphany across the scientists of the major health care companies. Now in November of Q1, we announced these 3 sentences: "Applied DNA Sciences reports 14 development customers for its linear DNA manufacturing platform. These customers are evaluating our linear DNA across a range of applications. We've seen positive results from many of these customers, but this evaluation takes time." Well, in the last 30 days, we have received 3 new orders from leading companies with a combined market cap of more than $400 billion. Applications range from CAR T to RNA vaccines. We expect to ship these orders within this or next quarter. While these are development orders, each with the possibility to scale if successful, we do seem to be gaining the attention of the right players, and our goal is to build more relationships like these and to build future recurring revenues and to execute flawlessly.

Now in our tagging business, we continue to build our textile business, which we expect to realize growth in absolute dollar revenue of fiscal year '20 forecast over last year's actuals, but it is relatively flat as a percentage of overall Applied DNA forecast versus 2019 actuals due happily to the simultaneous growth in our other markets. Our strategy for developing an integrated supply chain to accelerate brand and retail adoption is playing out. In the current forecast snapshot, our business is heavily concentrated in cotton sold into 3 retail outlets, with 1 more likely going into a test market. Our next 3 categories, recycled PET, leather and thread, face major commercial milestones in the next 3 months. Leather production is already in progress and is headed toward 1 or 2 brands that should be commercialized by the summer. Recycled PET expanded market distribution to Sainsbury's last month in the U.K. and is targeted toward 2 additional retailers and brands with new technology. Now unfortunately, these 2 markets, leather and recycled PET, are being manufactured in China, and we have seen disruptions in their respective supply chains over the last 2 weeks due to coronavirus closing factories and sales conferences. But this is a two-sided coin, which I'll address in my biopharma remarks later in this discussion.

Next is our cascade of regulated markets of pharmaceuticals, nutraceuticals and cannabis, from most to least stringent. After significant development and quality due diligence, our pharma partner, Colorcon, announced the market launch of their on-dose authentication platform, naming our product as the empowering ingredient. As result, Colorcon has an international reputation as a pharmaceutical supplier of choice based on superior product quality and technical support, extensive regulatory assistance and reliable supply from 11 manufacturing facilities worldwide. In parallel, we continue our activities with FDA to be ready for market. Now I am happy to announce today that this week, we signed business contracts for our first entry into nutraceuticals, as we projected last quarter, with Nutrition 21, self-described as the leading developer of clinically substantiated high-value patented ingredients. The nutraceuticals market is projected to reach $194 billion by 2025, according to a new report by Grand View Research. A detailed announcement on the business agreement is forthcoming shortly, but I would like to share with you that this customer differentiates or demonstrates all the attributes necessary to truly realize value from our platform. They are serious about product quality, product brand assurance, IP protection. And they're a market leader in innovation and their approach to product development, to marketing and to sales. We have completed commercialization of the first product within their pipeline in less than a year and look forward to working on other products already being teed up, offering visibility and awareness for us from the entire nutraceutical industry.

The last in the trio of regulated markets is cannabis. With the cancellation of the TheraCann contract in early December, we are now reasserting our brand in the market. As previously announced, we signed a project-based contract with Old Port Oil, a processor located in Maine. And within 4 weeks of signing, we completed our first tagging pilot. We will make our first Applied DNA-led market showing next week at the CBD expo in Las Vegas with Old Port Oil and have an execution plan for marketing and sales thereafter with a focus on processors who are the most near-term segment to leverage the value proposition and product development from our pharma and nutraceutical markets.

Now aside from these supply chain markets, we continue to execute against our baseline customer set of the Defense Logistics Agency, European asset and cash protection and labels and packaging. These markets are well established. And they contribute to our revenue with off-the-shelf product, little to no product development and marketing and sales through channel partners. Now we have collaborated for a year with the Italian sister companies Evvivax, which makes vaccines for companion animals, dogs and cats; and Takis, which makes vaccines for humans. Together, we are developing a pan-cancer vaccine that has shown rapid tumor clearance in test animals, as we reported to you last September. Clinical trials using the linear DNA form of the cancer vaccine in companion animals are being planned here in the United States. Success in this trial could lead to a marketable cancer vaccine for companion animals and, given the translational nature of this specific vaccine, better position the vaccine for human clinical trials.

Now I am very excited today to announce that we have expanded our joint development with Takis to include a linear DNA vaccine candidate for preclinical evaluation against the Wuhan coronavirus. This new coronavirus originated in Wuhan, China and has infected more than 28,000 and killed hundreds in just weeks. Now I want to be sure that no one misinterprets our announcement, which is slated for tomorrow morning, as us chasing headlines because we believe that we bring real advantage to the race for a vaccine, and this is to save lives. The advantages posed by PCR-produced linear DNA for this challenge include the speed of production, the absence of antibiotics and their resistance genes, the purity of the DNA, the simplicity of design, the powerful immunogenicity proved in a prior linear DNA vaccine, the absence of any bacterial contaminants and the fact that the vaccine gene is effective without insertion into the patient's genome. That's powerful. In addition, we have unique technology that can improve expression of the antigens and immunomodulators that can strengthen immune response, putting us in a very competitive position. The virus expanded its host to humans and has been declared a public health emergency by the World Health Organization and by the U.S. Department of Health and Human Services. This is a positive-strand RNA virus. And as is typical for RNA viruses, coronaviruses mutate at rapid rates that require constant surveillance by health authorities. We believe that one of the many benefits of PCR-produced linear DNA is the rapidity at which a putative vaccine can be revised in order to accommodate mutational drift.

Now coronaviruses have a simple genetic composition. One of the genes, called the S gene, encodes from the spike protein that binds to the receptor of a host cell surface and then allows the virus particle to gain access to the interior of the cell and to begin manufacturing more virus and eventually causing the demise of the cell, spreading more virus. The spike protein forms the ring around the surface of the virus that you see in these photos, giving rise to the corona name, like the surface of the sun. This is the gene that mutated to allow this coronavirus to jump to humans, and it is the target of our therapeutic approach. Our collaborators and we have already begun the design and optimization of a synthetic gene that, when delivered to muscles, should enable the temporary production of a designed antigen that could provoke an immune response against spike. Once the optimized gene is assembled, we will produce quantities of the linear DNA prototype vaccine at large scale here in Stony Brook for test in mice. Prior evidence indicates that genes made of linear DNA reside only temporarily within the muscle cell nucleus, long enough to provoke an immune response, and are eventually cleared without genomic integration. Now we expect to have linear DNA ready for testing within the next 60 to 90 days. This global emergency requires a swift response, and our team will work diligently.

On a separate but related topic, we've also participated in collaborative submissions with other partners for competitive contracts to develop related genetic countermeasures, actually to protect American war fighters. And to avoid any misinterpretations: We have not identified any commercial partner to take the potential coronavirus vaccine to market, nor is there any indication that our applications to develop countermeasures or vaccines would be approved by regulators.

Now switching topics. Our diagnostic platform for the capture of invasive circulating tumor cells or iCTCs is a form of liquid biopsy that is unique in the industry. These cells are very rare in a cancer patient's blood and must be concentrated 1 million fold in order to be studied. Other liquid biopsies bind circulating tumor cells by virtue of biomarkers that are presumed to be associated with specific cancers. But sometimes, the biomarkers are also present on normal cells, so the capture of CTCs by these binding methods are often less precise. And those CTCs are fixed in formalin and are no longer alive from the moment of capture. In contrast, and as shown on this slide, our invasive -- and I emphasize the word invasive because that's really what characterizes it functionally. Our invasive CTCs are functionally captured by recapitulating the process that takes place in metastasis in a cancer patient's body. We coat tubes and plates with a cellular adhesion matrix or CAM that mimics the interstitium with proteins that help form the extracellular matrix that all cells live in to form your organs. When we place whole anticoagulated blood in an environment coated with cellular adhesion matrix, the cancer cells replicate metastasis and literally digest their way into the matrix, separating themselves from the millionfold excess of nonmetastatic cells. Then the nonpenetrating cells and liquid are simply poured off. The cellular matrix -- adhesion matrix is dissolved and the invasive CTCs are recovered and can be characterized at great depth. They may also be expanded in culture for additional longer-term study.

Now our iCTC platform has been used to characterize over 6,000 samples and has been the beneficiary of funding by over $7 million from the National Cancer Institute, with whom we have a current application pending. It is clear that the accumulation of epigenetic mutations in invasive CTC cells renders them potently metastatic. In fact, when transplanted into xenographic mice that allow human tissues to grow, a small number of ITCs lead to disseminated metastasis. To get the same number of metastasis from the primary tumor requires 1,000x as many cells. This makes the invasive CTCs extremely valuable to companies who are trying to develop drugs to stop metastasis or to fight cancer in general. Based on our relationship with Tyme pharmaceuticals, we are already talking to companies who want to use our invasive CTC platform in drug development and subsequent clinical trials.

Now iCTCs can also be used to monitor therapies and to predict therapeutic outcomes for patients. This is really a remarkable study reproduced in the upper box in this slide. It's a patient with ovarian cancer, and she has the tumor mass measured by a CT scan, which is plotted by the blue line. As she begins therapy and has surgery, the tumor mass and the invasive CTC counts dropped to 0. Makes sense, but unfortunately, this cancer is about to recur. Remarkably, a full 6 months before the image of the tumor can be detected by imagery, the rebound, in the red line, in iCTCs made it clear the tumor was recurring, again 6 months before the image could reveal it. Hence, the use of our platform can provide the oncologist with the evidence to make the decision to change therapy much earlier, which is extremely valuable. Hence, we believe our invasive CTC platform poses great potential as a companion diagnostic to follow the course of specific cancer therapies. In fact, we plan to pursue applications as a companion diagnostic in the future.

In 2019, our assay was leveraged successfully by Tyme pharmaceuticals in a prostate cancer trial. Tyme states that our [iCT] assay is a better indicator of disease than the PSA biomarker, which is the classic biomarker used to detect prostate cancer. In 2020, Tyme is leveraging our iCTC assay in a Phase III clinical trial for the treatment of pancreatic cancer. It is our goal to position our assay across more clinical trials, and we are investing accordingly. Finally, in this study of drug development to treat prostate cancer, iCTCs were able to predict that a drug was not working 3 months before detection by the accepted biomarker, PSA, and 3 months before imagery. We believe this platform will have great value in future. As we seek regulatory approvals, we believe we have great potential in genomic analysis, drug development, cancer diagnosis and in monitoring therapy.

So my remarks today are designed to give you the sense that the biopharma market presents us with a great opportunity to monetize our linear DNA platform and expertise in DNA. Over the next several quarters, we will be working to further establish our platform in this market. We will also continue to target key industrial applications that can drive customers and orders. We are rightsized. We're flexible. We're aware of the gating moments we face when we have to adjust our asset allocations. We are on very solid footing and we are committed to achieving our goals in fiscal 2020 and beyond.

Thank you for your time and attention this afternoon. We'll be happy to take your questions. Operator, please open the call to questions.

If you can talk a little bit about -- a little bit more about LineaRx. And I know that you had mentioned previously that you had 14 or so existing customers; and you're just on the back of JPMorgan, which we thought was a really productive conference this year for the first time in a while; that you came out with 3 new orders from what seems to be large cap -- larger-cap groups. What does it take to go from the development stage where you supply them with whatever product they're requesting of you for them to then evaluate that product and even take it into a preclinical development stage? Because that's really the benchmark we're looking at in terms of turning things into a potential contract manufacturing or some sort of partnership that becomes public with Applied. Can you talk a little bit about what those time lines look at and if you expect anything like that could occur in 2020?

Sure. First of all, in terms of the head count, I decided after I used that number, 14, that I really didn't want to put myself in the position of providing a serial head count quarter-to-quarter. Suffice it to say it actually has increased. And typically, when those biotech, biopharma customers come to us at first, it's in a CRO relationship, where they're looking for a quantity of DNA larger than their average production in-house but not beyond the CRO level so that they can do their experiments in vitro and begin to contemplate experiments in mice, for example. And we have -- we are in the process now of just signing our first longer-term agreement with a large pharmaceutical company. And that agreement should allow us to get to animal studies, which means more stringent DNA production conditions and greater quantities and typically more hoops to leap through. So that -- it for us means a higher level of revenue. I would say, for most CRO customers, the time required to make that transition is anywhere between 6 and 12 months. We earn money during that time period but at a lesser rate. As we go to the CMO level, there should be periodic requirements for what is now a selected DNA as opposed to a panel of DNAs. But those are produced under more stringent conditions, leading to an increase in revenue to us in over a longer period of time. So we're already there, quite honestly, beginning to see those transitions happen. And we're seeing 1 or 2 companies, on the heels of the success we've had with others, skipping the CRO stage and moving further up the progressive ladder more quickly.

Right. And like from our -- from my perspective, revenue generation is one thing and -- but on the linear side, I don't really view the company really ready to be benchmarked on a revenue level. For me, what's important is, one, those development what -- those development time lines for your potential or your existing customers and when it could potentially become public because as a biotech, which is Applied, half the business is a biotech business now. What drives valuations tends to be news flow and being hedged in a way to larger-cap biotech and pharmas, to us is a big deal and to investors, I think, is a big deal. So I guess my question is, when do you think some of those names that you're working with could potentially become publicized? Is this an Applied issue, or is it completely in the hands of your customers to decide that?

So we're now in a position to be a little more demanding about our need to let our investors know with whom we are working. And I think we are going to find ourselves in that position for the first time this quarter, and then I think it will occur more frequently as time goes on. And I also feel we'll be signing those relationships that involve retainer fees, followed by significant milestones, as they ask us to achieve more and more difficult armchair molecular engineering and to make it real.

And just real quick last question. On the coronavirus side and given all the activity we're seeing, other groups kind of dip their toe into potential vaccines, et cetera, or therapies. Is there a mechanism for what you're going to work on to possibly get to emergency use or something like that? Because we saw it with Ebola in 2014. There were some accelerated time lines from regulators to get some of these things out there, at least trying them in human populations.

Well, the very fact that both the U.S. and WHO have declared public health emergencies actually begins to provide a vehicle for a condensed time frame going from concept to preclinical animal trials, to potential first-in-human trials. So I think it's unlikely at this stage that we would be taking this to the marketplace ourselves. And part of the reason for announcing this tomorrow is that we're beginning to talk with folks who could help us take this to the marketplace. We'd like those conversations to accelerate.

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [9]

Jim, can you just talk a little bit more about the CBD opportunity? I know you said there's a conference you're attending and the agreement with Old Port Oil.

Sure, yes. The CBD opportunity is kind of one of the fastest paths to commerce because you're not dealing with the plant in the field. You're dealing with the material essentially in a manufacturing situation, ready to go. And those facilities are typically licensed, already have their SOPs. There's no development work. And we have done this before, so we know exactly how to get the tagging done. I think it's a great place for us to start. And eventually, we'll be working with the growers more and monitoring the entire supply chain to ensure that no black market cannabis finds its way in. In the case of CBD, though, there's an unusual aspect to the market that we can really help, and that is that CBD can be derived from both forms of cannabis, from hemp as well as marijuana. Derived from hemp, it is legal, I believe, in every state and can cross state borders. But derived from marijuana, it cannot cross state borders. And if bills of lading don't indicate the plant of origin -- there actually have been reports of arrest of truckers made, legitimate retail supply truckers who are carrying CBD made from hemp but can't prove it. Our methods would allow us to absolutely categorically and forensically approve -- prove that the CBD in whatever form it's in, whether it's in a finished product or in a pure state, that it absolutely derived from hemp. So that's a great opportunity for us as well. Now we're looking forward to -- this is our first show without TheraCann. And we've prepared for it well. We should show very, very well. We're very excited to go to this one, and I think it's in Las Vegas.

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [11]

Okay. And particularly, I guess, with the current agreement that you have, and it certainly sounds like there's an opportunity to strike other partnerships, what do you think the opportunity is in 2020 either with the current agreement or just in general overall in 2020 in terms of revenues for this full fiscal year that you're in?

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [13]

So we expect that Old Port will grow their business aggressively this year. They're certainly sending every signal that that's the case, but we think that we will be diversifying into a wide variety of processors across the country, and we think the opportunity there is very strong.

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [15]

Okay. And then this quarter, gross margins were lower than normal. Usually, you're in the 80% range or at least were in fiscal '19. Is this a 1-quarter anomaly, or should we expect lower margins going forward at this point?

It basically was due to 2 things: the product sales mix. The 2 quarters we were comparing it to had textile, more heavily weighted in textile revenue, which is typically at a higher gross margin. And also, unfortunately, our Q1 2020 products revenue was low, so it didn't fully absorb some of the fixed costs that are included in cost of goods sold such as payroll, rent, utilities and things like that.

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [17]

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

Well, thank you all for your steady support and the many kindnesses from those of you who have contacted me. Our team is determined to succeed, to deliver impactful products and to recover and build shareholder value. And we hope to see you at our next investor call. Thanks much.

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