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

Thank you, Jordan. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our fiscal third quarter 2020 business updates and financial results. You can access the press release that was issued after market close today and slide presentation accompanying this call by going to the Investors section of our website.

Speaking on the call today are Dr. James Hayward, our CEO; and Beth Jantzen, our CFO. Before we begin, please note that some of the information you will hear today during our discussion may consist of forward-looking statements.

I refer you to Slide 2 of the presentation and the company's Form 10-K filed on December 12, 2019, and Form 10-Q filed a short while ago for important risk factors that could cause the company's actual performance and results to differ materially from those expressed or implied in any forward-looking statements.

We undertake no obligation to update or revise any forward-looking statements or other information provided on this call as a result of new information or future results or developments. Now, it is my pleasure to introduce our first speaker on today's call, Beth Jantzen. Please go ahead, Beth..

Thank you, Sanjay. Good afternoon, everyone, and thank you for joining us. I will begin this afternoon with a review of the consolidated financial results for our fiscal 2020 third quarter. Then Dr.

James Hayward, our President and CEO, will update you on our COVID-19 diagnostics and vaccine development programs as well as other business progress being made in our biotherapeutic segment. We'll then open the call to your questions.

To preface my review of our quarterly financial performance, with New York observing quarantine and stay-at-home protocols during the majority of our fiscal third quarter, as an essential business as defined by the state, we kept our operations up and running as they relate to our diagnostics, vaccine and biotherapeutic, pharmaceutical and dietary supplements, mil/gov and law enforcement work and contracts.

In our supply chain businesses, global demand slowed abruptly. And as a result, we have experienced a decline in revenue from nonbiologic tagging and related services.

Concurrently, we shifted much of our headcount and resources towards the fight against COVID-19 to leverage our DNA expertise and ability to manufacture linear DNA at scale, as you will hear Jim detail later.

Starting with the statement of operations; total revenues for the period declined to approximately $432,000 from approximately $2.1 million in the third quarter of fiscal 2019. The year-over-year decrease in total revenue is largely attributable to a $1 million licensing agreement fee received in the prior period from a former cannabis partner.

Product revenues declined to approximately $57,000 for the period compared to approximately $393,000 in the prior year - in the prior period.

The decrease in product revenue is attributable to a decrease in biotherapeutic revenues due to the timing of shipments as well as lower product sales to our textile and cash and valuables in transit customers due to the ongoing pandemic.

Additionally, the retail sector is undergoing a drastic change in demand due to stay-at-home orders and economic uncertainty, both nationally and internationally. Therefore, we expect that revenues associated with the marketing of cotton, which historically was recognized in our fiscal fourth and first quarter, may not occur for this fiscal year.

We continue to work closely with both cotton and manmade fiber partners to assess demand trends. Fiscal third quarter service revenues were approximately $375,000 as compared to $1.7 million in the prior year period. As I noted, the year ago period includes a licensing fee from a former cannabis partner.

The year-over-year decrease also reflects service revenues in the prior period related to a government contract award that was completed in the second half of fiscal 2019 as well as a decrease in the number of textile and cannabis feasibility pilot projects.

These decreases were offset by an increase in service revenues in our biotherapeutic contract research business, primarily from 2 validation studies. Cost of revenue as a percentage of product revenue in our fiscal third quarter of 2020 increased to 272% as compared to 69% for the year ago period.

The year-over-year increase was due to poor fixed cost absorption given our low level of reported product revenue. The increase is also due to the change in product sales mix as the year ago period was comprised primarily of cotton revenue that carries a higher gross margin.

Total operating expenses increased 8% or by approximately $250,000 to $3.5 million in the third fiscal quarter of 2020 compared to approximately $3.2 million for the same period in the prior fiscal year, reflecting higher SG&A costs due principally to higher stock compensation expenses and, to a lesser extent, from an increase in consulting, offset by lower investor relations and travel expenses.

Third quarter R&D expenses increased by $95,000 to approximately $815,000 from $720,000 over the prior period. This increase reflects increased development costs as they relate to our biotherapeutic contract research and manufacturing, the majority of which is ascribed to the development of our COVID-19 diagnostic kit.

Expenses associated with the formation of a new clinical lab subsidiary announced last month will be reflected in our fiscal fourth quarter. Net loss for the third quarter of fiscal 2020 widened to $3.3 million as compared to $1.5 million in the year ago period. As a reminder, we implemented a 1-for-40 reverse stock split on November 1, 2019.

As a result, reported earnings per share for the third quarter of fiscal 2020 and 2019 have been calculated using the post-reverse stock split share count. Weighted average shares outstanding for the third quarter of fiscal 2020 and fiscal 2019 are 4,577,997 million and 952,835, respectively.

Net loss per share for the third quarter of 2020 improved to $0.72 compared to a net loss per share of $1.55 for the same period in fiscal 2019. Excluding noncash expenses, consolidated adjusted EBITDA was a negative $2.8 million for the third quarter of fiscal '20 as compared to a negative $1.2 million in the prior period.

Turning to our balance sheet. At quarter end, cash and cash equivalents totaled approximately $10.9 million. This figure includes approximately $4.4 million in net proceeds received during the fiscal third quarter for the exercise of warrants issued as part of the company's November 15, 2019, underwritten public offering.

Each warrant entitles its owner to purchase 1 share of common stock in the company at a per share price of $5.25 until November 15, 2024. Our quarter end cash balance also includes an $874,000 PPP loan secured during the quarter.

We utilized the entire loan amount on qualified expenses as defined by the Paycheck Protection Program and plan to file for forgiveness of the entire sum once the portal to apply for forgiveness is available. Total debt comprised of our secured convertible notes was $1.5 million at quarter end.

Our average monthly cash burn rate that is net of warrant proceeds for the 9 months ended June 30, 2020, was $837,000 compared to $407,000 for the year ago period, an increase of 106%. The increase is due to lower cash receipts as a result of the decline in revenue period-over-period.

Subsequent to June 30, we received additional warrant exercises totaling $852,000 in net proceeds. Currently, approximately 979,000 warrants issued as part of the November 15 offering, remain outstanding. Our cash position at July 31 was approximately $10.4 million. This concludes my prepared remarks.

Thank you for joining us today, and I would now like to turn it over to Jim for his comments..

one, gross sales of our diagnostic kit to authorized clinical laboratories and the large-scale screening of asymptomatic individuals necessitated by reopening businesses and schools; and two, to grow testing volumes of our own kits at our own clinical laboratory. And I'll address each of these in turn.

Our kit is designed for high sensitivity with a low likelihood of false negatives, and is designed for high throughput and same-day results. It can be applied in 96-well high-throughput systems; EUA approved for use with our kit, and is suitable for laboratories screening large amounts of patient samples.

And to that end, through a steady campaign of EUA amendments, we have grown the footprint of systems on which our diagnostic kit can run. With the recent second amendment to our EUA, we have added Applied Biosystems' QuantStudio 5 Real-Time PCR System to our fold that represents a tenfold expansion in the addressable market for our kit.

We are working on a new amendment targeting the use of our diagnostic kit on what we believe is the most prolific real-time PCR system installed in clinical labs, which we believe will further increase our addressable market. We anticipate this next amendment to our EUA in the coming weeks.

Increasing the relevant installed base of instruments that can use our linear COVID diagnostics will help us to gain market share against instruments that are not as widely approved. Now on July 24, FDA issued new guidance that prevents the use of any EUA kit for the screening of asymptomatic individuals without the specific approval of FDA.

Now we applaud this step and that was not broadly anticipated by the COVID diagnostics industry as necessary to ensure the safe screening of presymptomatic or asymptomatic individuals.

Now high analytical sensitivity increases the likelihood that a test will be positive for any samples that contain the virus, even if the patient has no apparent symptoms. High specificity increases the probability that the test will remain negative for individuals with respiratory illnesses that are other than COVID-19.

But given the speed of the U.S. response to COVID-19, there were no indexed methods to evaluate the sensitivity and specificity across the spectrum of approved EUAs, that is until recently. Roughly coincident with the guidance for asymptomatic screening, FDA developed a reference panel for the blinded assessment of both sensitivity and specificity.

And I'm pleased to say we've just completed our analysis of that reference panel and submitted the results back to FDA. In addition, we are now preparing another amendment to enable large-scale pooling and testing of asymptomatic individuals as additional claims to our EUA, whether utilized by our customers or in our own clinical lab.

We expect to submit our amendment to FDA shortly. It should be noted that FDA recently granted a similar amendment to a large testing laboratory whose sensitivity of their assay is 10x less than ours. In other words, our lower limit of detection is to 10x less viral RNA, is to 10x less viral RNA than the competitor's assay. I'll say that again.

In other words, our lower limit of detection is to 10x less viral RNA than our competitor's assay. I think you might agree that we're in a competitive position in this regard.

As parts of the country undergo their first wave of the virus and other parts that have endured the first wave are today seeing infection rates spike yet again, we believe that pooled asymptomatic screening could help the nation alleviate the difficulties in keeping up with the testing demand, and we intend to be ready to meet that demand.

Now patient accessibility is also a crucial aspect of a diagnostic kit's commercial success.

In addition to offering nasopharyngeal swab sample collection, our EUA provides us the ability to collect patient samples through the use of an anterior nasal swab collection system, known as ANS, that's less invasive and far more comfortable method, should prove very beneficial in terms of accelerating screening for COVID-19, especially in student populations that are unlikely to comply with repetitive nasopharyngeal swabs.

By contrast, our anterior nasal swabs are painless and easy to administer to testing subjects of all ages, including children. To facilitate the use of an anterior nasal swab collection with our diagnostic kit, we plan on launching our own proprietary nasal sampling kit in the coming weeks.

As our diagnostic kit becomes relevant to more laboratories, we have expanded our sales infrastructure through internal hires and external recruitment that is designed to get our kit in front of laboratories nationally.

We have invested aggressively in our supply chains and have established sufficient inventory to support our expectations for kit demand. We are closing in on our first commercial diagnostic kit contract that we hope to announce very soon.

We expect the customer, a major regional medical center and teaching hospital, will serve as validation of our kit in the marketplace and could ultimately encompass testing across patients, students and staff populations. This will be an important customer site, and it will serve a second benefit.

We've also been working concurrently to implement a high-throughput COVID testing workflow for our kit at their laboratory, consisting of robotic RNA extraction, robotic sample preparation and software interfacing with the customer's laboratory information system.

We believe this smooth workflow serves as a model for other diagnostic kit customers to adopt to their laboratories. It also serves as the basis for the end-to-end high throughput workflow solutions currently being deployed at Applied DNA Clinical Labs, our new testing subsidiary, to offer testing as a service.

Now with regard to our clinical lab subsidiary, we established it to enable clinical testing of patient samples using our own diagnostic test to help satisfy the growing testing demand in the U.S.

The economics of testing, however, make our intention to offer testing as a service, or TaaS, a hidden gem within Applied DNA given its potential for revenue contribution at a level per test of possibly up to 4x that of stand-alone kit cells. Now to illustrate the current CMS reimbursement for COVID-19 testing is $100 per test.

In a hypothetical scenario, a standing - a stand-alone kit cell would yield $25 to us per test at the lower end of the pricing range I provided a moment ago. This then leaves $75 on the table that is captured by a laboratory conducting the testing.

By running our own kits through our own clinical lab, we can capture much of the increment up to the approved reimbursable $100 per test.

We can also serve as an overflow service laboratory for our own customers who purchase our linear COVID-19 diagnostic kits, thereby providing additional value to our customers in times of stress caused by increased demand.

With cases seemingly on the rise that suggests greater and long-term demand for testing, we expect fully to be an overflow facility. In order to launch testing as a service, our clinical lab must be certified by the state of New York.

This certification process has been significantly delayed by COVID-19 and the shutdown of government systems as a consequence of stay-at-home orders. Certification requires an inspection of our clinical lab and the submission of validation data, both of which we hope to complete in the coming weeks.

Now as we await certification, Applied DNA Clinical Labs is already generating a revenue stream in the form of sponsored research contracts under which we are performing anterior nasal swab sampling research in pooling models that will help the U.S. increase testing throughput.

The advantage of recruiting for research use-only sponsored studies at this time is the incremental revenue they generate as well as being able to leverage their data for use in our certification process with the state of New York.

Furthermore, the data also serves as the basis for application for new approvals from FDA for asymptomatic screening testing and sample pooling. Now the nucleic acid-based responses to the pandemic are being validated by other companies who are in pursuit of a COVID-19 vaccine.

And nowhere is that more evident than at the unprecedented pace of development that has a DNA- or RNA-based vaccine candidate, comprising about 40% of all the current clinical trials, a record breaker for the first time.

In our recent tests conducted on mouse models, all 5 of our linear DNA COVID-19 vaccine candidates, designed in concert with Takis Biotech, provoked 0 conversion in all mice to produce IgG against Spike protein by day 14 and significantly enhanced those responses by day 38.

Our results suggest that a low-dose vaccine could be potentially effective in providing protection with neutralizing antibodies, while the T cell responses in both CD4 and CD8 lineages suggest potential long-term immunopersistence.

And as I noted earlier, these results in animal models echo the effectiveness announced by some of the COVID-19 vaccines already in trial. We believe this bodes well for the human responses to our vaccines.

Together, both Takis and Applied DNA have entered into dialogue with biotech partners and potential big pharma partners for the evaluation of efficacy in more complex animal models and to fund the completion of toxicology studies.

Our potential big pharma partner is already a customer of our CRO/CMO division, LineaRx, and has engaged in the valuation of many constructs of linear DNA for their planned therapeutics. A second benefit of this potential collaboration on the linear DNA COVID vaccines may include enhancements to our DNA delivery systems. Very exciting.

We believe that our linear DNA vaccines, however, have inherent advantages over even the speed of development that conventional DNA and RNA vaccines offer. We can revise our vaccines rapidly in days to weeks without the need for cloning techniques.

Our linear DNA vaccines have the inherent advantages of vaccine expression without integration into the human genome and the avoidance of antibiotics and the transference of antibiotic-resistance genes, the avoidance of bacterial vectors and the high purity in a very, very simple means of production.

Linear DNA vaccines are much more stable during storage and shipment than RNA-based vaccines, which is a practical advantage during worldwide deployment. Now we believe that we are the world's largest manufacturer of linear DNA.

Should the virus mutate, we can improve our linear DNA vaccine within weeks of obtaining the sequence of a genetic variant of that virus. And with our manufacturing capacity, we could produce quantities for mass consumption globally.

Or should another company develop an efficacious vaccine, we would be in a position to develop a linear DNA form of their vaccine and supply it at quantities relevant to worldwide inoculation.

Now our CRO/CMO service business has, since its beginning, developed a strong client base, many of those clients with state-of-the-art challenges in the manufacture of contemporary gene therapies.

And recently, we have succeeded in the production of single stranded DNA by PCR, a real feat, and in the production of the linear genes necessary for the manufacture of some viruses that play central roles in gene therapy and in redirected cell therapy. These are not inconsequential developments.

We've received requests to scale these processes under cGMP in quantities adequate to serve initial clinical trials. Now though our business focus year-to-date has been on our COVID-19 programs, we have not lost sight of our supply chain security business.

And as Beth noted, the impact of COVID-19 on business activity has had a negative and pronounced impact on the supply chains we service that generate the bulk of this segment's revenues.

Segment revenues principally generated from the textile industry that uses our molecular tags for the marking of cotton and certain manmade fibers that are sold at Bed Bath & Beyond and other retail channels.

As we await the return of increased demand patterns, we're focused on business building across key industrial and regulated markets, including textiles, as well as cannabis, personal care, nutraceuticals and pharmaceuticals.

By setting the stage today, we are positioning the company for further adoption of our supply chain security and authenticity solutions tomorrow.

Now even though we've been working at break-net speed to address the COVID-19 pandemic, we've not forgotten about the importance of our intellectual property which has always been one of the central underpinnings of the company.

Over the last few months, we've received 4 notices of allowances for important patent applications related to cotton tagging; Beacon, which is our locked optical marker system; and a system to DNA tag and inventory through the use of a fogging system that has broad applicability to several markets, including cannabis.

In addition, we continue to bolster our IP estate in the domestic and biotherapeutic markets with the recent filings of several patent applications for our COVID-19 diagnostic and novel biotherapeutic applications of linear DNA.

We also continue to prosecute previously filed patent applications related to the use of linear DNA in CAR T therapies and vaccines. And so now to conclude my remarks, we really have accomplished much over the quarter to position Applied DNA to serve unmet and evolving needs for both COVID-19 testing and vaccines.

We are today primed for increased market penetration and commercial sales. With our strategy set and supported by solid cash reserves and with a continued laser focus on execution, we believe we are very well positioned to succeed. And this concludes my prepared remarks. Operator, please open the call up to questions..

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

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

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

Got it.

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

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

Got it.

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

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

Got it.

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

No, there are existing testing shortages in New York State. And when that will become particularly apparent is as students return from across the country to colleges and universities in New York State.

And as the administrations of high schools, even middle schools and colleges come to grips with evolving testing strategies for both symptomatic, asymptomatic and presymptomatic students, and that demand could change wildly in very, very short periods of time as the positivity rates are affected by the arrival of unwittingly infected students from hotspots across the U.S..

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

I'd love to, but it's a little premature to tackle. We have an existing functional delivery system that gives us very high transfection efficiency and very high transduction survival rates.

So we are contented with the methods we currently have in our tool belt, but we're always interested in increasing efficiency, such that it lowers perhaps the dosage required for a vaccine and increases the relevance of single batches to larger numbers of potential patients..

Okay. And my final question is, has the U.S. government approached you to potentially include your vaccine candidate in Operation Warp Speed? And if not, do you - what kind of data do you think you need to generate to potentially attract U.S.

government agencies to include the vaccine and potentially give Applied DNA Sciences additional grant for further development of the vaccine?.

Yes. That's a great question, Yi, because we really are the only company commercializing a scaled linear DNA manufacturing platform. It's really distinct from everything else that has been considered in the march of COVID vaccines toward commerce. We believe that there is a gradual epiphany occurring across the biotech industry.

And we believe it will reach the governments, both at the state and federal level, so that programs like Warp Speed will see that we are an alternative manufacturing route to a variety of different vaccine candidates, including those produced from DNA or from RNA.

And I think that, that epiphany will awaken all manner of municipal funding; God willing..

Our next question comes from Anthony Vendetti with Maxim Group..

Yes - no, most of my questions have been answered. But just a little bit more on the big pharma negotiations and joint ventures or agreements you have with them. I know the focus has been on COVID-19.

But in terms of how you're working with big pharma, outside of COVID-19 in terms of linear DNA, is there anything else that you can talk about, Jim, in terms of your negotiations with big pharma outside of COVID-19 that could be significant or instrumental as we move forward?.

Sure. One very positive aspect of the linear DNA work we're doing with big pharma is that it preceded COVID-19 by 6 to 12 months. And in some cases, those programs that have been delineated with us are long lasting and far reaching.

So we had their attention and our customers had analyzed our methods well enough to realize that they were worth testing, in some cases, as many as 20 of their therapeutic constructs for evaluation in both in-vitro systems and in animals.

So, as big pharma also turned its attention to COVID and the notion of nucleic acid-based vaccines, it was just a natural extension of the knowledge base they'd acquired over the prior 6 months to contemplate that this would be a great way to make a COVID vaccine..

Right. So that was sort of my point, was that you were already in negotiation with a number of these large pharmaceutical companies prior to COVID ever appearing on the scene. So I guess what I'm trying to get at is if there's potential beyond COVID-19 for you to work with big pharma.

And I know like the focus has been on COVID-19, but this platform has many potential uses outside COVID-19, correct?.

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

[Operator Instructions].

Okay. If there are no more questions, operator, I'd like to thank you and everyone for your time and attention this afternoon. And as you've heard, there's a lot of activity taking place within the walls of Applied DNA.

And while this has not yet translated into financial performance, we believe there are multiple avenues ahead of us to significantly drive shareholder value. So, thank you, again, for your time. Please stay safe. We'll speak again with you next quarter. Thanks..

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