Applied DNA Sciences, Inc. (NASDAQ:APDN) Q1 2024 Earnings Call Transcript February 9, 2024
Applied DNA Sciences, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Applied DNA Sciences Fiscal First Quarter 2024 Financial Results Conference Call. [Operator Instructions] 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.
Sanjay Hurry: Thank you, Scott. Good afternoon, everyone, and welcome to Applied DNA’s conference call to discuss our first quarter fiscal 2024 financial results. You can access the press release that was issued after market closed today as well as the slide presentation accompanying this call on the Investor Relations section of our corporate website. Speaking on the call today are Dr. James Hayward, our Chairman, President, and CEO; and Beth Jantzen, our Chief Financial Officer. Clay Shorrock, our Chief Legal Officer and Head of Business Development, and Judy Murrah, our Chief Operating Officer, will also be available to answer questions on the Q&A portion of this call. Before we get started, I would like to take this opportunity to remind you that our remarks today may include forward-looking statements.
I refer you to Slide 2 of the presentation and our 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’s 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. Thank you for joining us on our first quarter 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 Dr. 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 first quarter of fiscal 2024 ended December 31, 2023, were approximately $891,000 or a decline of $4.4 million compared to $5.3 million for the same period in the prior fiscal year. Approximately $4.2 million 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-19 testing as the prior year period included testing revenues under our contract with CUNY that expired in June of 2023. 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% compared to $2.4 million or 45% in the prior fiscal year period.
The decline in gross margin was primarily due to a higher percentage of COVID-19 testing service revenue in the 3 months ended December 31, ’22, which generated a higher gross profit compared to the 3 months ended December 31, 2023. To a lesser extent, the decline in gross profit percentage was due to lower product revenues during the 3-month period ending December 31, ’23, as compared to the same period in the prior fiscal year. 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 million compared to $3.6 million in the prior fiscal year period. This increase in total operating expenses reflects higher SG&A costs as the prior 3 month period has a credit in 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 vests one year from the date of grant. These increases were offset by a decrease in payroll of approximately $107,000. Operating loss for the first quarter was $3.8 million compared to $1.2 million in the prior fiscal period. Turning to Slide 5, excluding non-cash expenses, adjusted EBITDA deteriorated by $2.1 million to a negative $3.2 million compared to a negative $1.1 million in the prior fiscal year period. 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. And cash and cash equivalents totaled $3.4 million on December 31 compared to $7.2 million on September 30, 2023.
Fiscal year-to-date, our average monthly cash burn was $1.3 million 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 $3.4 million. Full details of the offering are provided in the subsequent event section of our Form 10-Q filing. We issued approximately 3.2 million shares and pre-funded warrants to purchase up to 2.4 million shares of common stock. In a concurrent private placement, unregistered common warrants to purchase up to 11.3 million shares of common stock were issued with an exercise price of $0.609 per warrant share. These common warrants are subject to shareholder approval at a stockholder meeting that must be held by April 15 of 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 $6.9 million 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. 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 $8.6 million 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.
Inclusive of the proceeds from the registered direct, cash and cash equivalents was approximately $5.1 million 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. Thank you for joining us today. I will now turn the call over to Jim for his comments.
A business-person in a lab coat standing in front a microscope that displays a DNA strand.
Dr. James Hayward: 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 manufacture critical starting materials for clinical-grade messenger RNA therapeutics. 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 Linea 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. 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 first-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 manufacture of mRNA.
Secondly, we expanded our presence across the global marketplace. 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 multigram 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 Linea RNA polymerase, manufactured under applicable GMPs, to support their clinical RNA objectives. With approximately 425 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.
Consequently, after the first quarter’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 2024. Now establishing a GMP footprint takes a phased approach to simultaneously support existing and new customers through their clinical trial process. Our unique business model, in which I remind you Linea IVT is comprised of Linea IVT template paired with 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 million from a footprint of less than 1,000 square feet.
Incremental capacity will be straightforward to add. 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, Linea RNA 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 of GMP supply to customers as they advance in the clinic and prepare for commercial launch. Now turning to our customers, 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 as suppliers to biotech and pharma companies.
Each of these segments represents an outcome that could materially and positively alter Applied DNA’s biotherapeutic profile 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.
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 DNA and Linea IVT platforms during the quarter. The pace of Linea DNA customers initiating evaluations of Linea IVT has quickened and the size of the potential opportunities is increasing. We are already in several Linea IVT platform evaluation cycles, a notable milestone given our acquisition of Linea 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 a 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. 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-19 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.
CDMOs are showing particular interest in self-amplifying mRNA. During the first quarter, we shipped our first 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 Linea IVT, we need to substantiate Linea IVT’s performance at scale within a commercial manufacturing setting.
In partnering with the CDMO Kudo Bio, 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 entered into a scale-up manufacturing agreement with an enzyme manufacturer for our Linea RNA polymerase enzyme to scale its production for commercial-scale use. This is part of our efforts to increase efficiencies and reduce Linea IVT’s cost of goods sold as we move to deploy our improved workflow into cGMP capacity.
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. 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 the supply agreement with us, we expect the Institute of Hematology and Blood Transfusion in Prague will receive EU regulatory approval to proceed with the Phase I CD123 clinical trial to dose 10 compassionate use patients with their CAR T therapy. The Phase I 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 of 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. 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 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.
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