Good day and welcome to the Applied DNA Sciences Fiscal Third Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Sanjay Hurry.

Please, go ahead..

Thank you, Betsy. Good afternoon, everyone, and welcome to Applied DNA's Conference Call to discuss our Fiscal 2021 Third Quarter Financial Results. You can access the press release that was issued after market closed today, as well as the accompanying PowerPoint presentation to this call by going to the IR Calendar page of our website.

Speaking on the call today are Dr. James Hayward, our CEO; and Beth Jantzen, our CFO. Judy Murrah, our COO and Clay Shorrock, our Chief Legal Officer will also be available to take your questions on the Q&A portion of the call.

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-Q filed today and form 10-K filed on December 17, 2020 for important risk factors that could cause a 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. And before we begin, please note that management will attend and present virtually at H.C.

Wainwright and Company's 23rd Annual Global Investment Conference next month. Please contact your H.C. Wainwright representative to schedule a one-on-one with management. Now it's my pleasure to introduce our first speaker for today, CFO, 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 our consolidated Financial Results for the Fiscal 2021 Third Quarter.

On the heels of our COVID-19 testing services award from CUNY, Jim Hayward, our President and CEO will then take you through our assumptions and modeling for testing based on certain aspects represented in the university systems' RFP [ph].

He will also provide operational updates across our industrial DNA and LinearRx businesses before opening the call to questions from analysts and investors. Starting with the consolidated statement of operations, total revenues for the third fiscal quarter of 2021 was increased to $1.7 million from $432,000 in the third fiscal quarter of Fiscal 2020.

This represents a 294% increase year-over-year that is primarily attributable to an increase in service revenue of $686,000 associated with safeCircle, our COVID-19 testing services program. On a sequential basis, third fiscal quarter revenues decreased 37% compared to second fiscal quarter revenues of $2.7 million.

This is due primarily to lower safeCircle revenues resulting from the non-renewal of our Suffolk County testing contract because of progressively higher vaccination rates within the county's employee base, as well as low positivity rates in our operating area, and the start of the summer recess for our academic clients during which no testing occurs.

Product revenues increased to $640,000 for the third quarter of Fiscal 2021, compared to $57,000 in the same period in the prior fiscal year. This increase is due to sales of our Linea COVID-19 Diagnostic Assay Kit. Cost of revenue as a percentage of product revenue in the third quarter decreased to 86% from 272% in the prior period.

The year-over-year improvement is due in part to a shift in product revenue mix as our assay kit sales are at a higher gross margin. The decrease is also the result of certain fixed costs that were not fully absorbed with the level of product revenues in the prior period as compared to the period we're reporting on today.

Total operating expenses increased 30% or by $1.1 million to $4.5 million in the third quarter, compared with $3.5 million in the prior period. This increase was driven principally by greater SG&A and R&D expenditures. SG&A expenses increased by $651,000 to $3.2 million from $2.6 million in the prior period.

The increase is primarily attributable to an increase in payroll consulting and other administrative expenses related to staffing and the establishment of our ADCL subsidiary. R&D expenses increased by $215,000 to $1 million from $815,000 in the prior period.

The increase relates primarily to increased purchases related to the clinical lab, as well as for projects related to our genetic sequencing and a project associated with forensic traceability for our textile business. Net loss for the third quarter was relatively flat at $3.4 million compared to $3.3 million in the year ago period.

Net loss for the third quarter improved to $0.46 per share compared to a net loss per share of $0.72 for the same period as Fiscal 2020, on a higher number of weighted average shares outstanding. Excluding non-cash expenses, consolidated adjusted EBITDA was unchanged as compared to the same prior period year at a negative $2.8 million.

Turning to our balance sheet. Cash and cash equivalents total $12.2 million on June 30, 2021, a strong cash collection, caught up with the large increase in accounts receivable that occurred in our fiscal first quarter. Accounts receivable stood at $737,000 at June 30, compared to $2.2 million at March 31.

Our average monthly cash burn rate net of financing and warrant exercise proceeds for the three months ended June 30, 2021 was $569,000 compared to $749,000 for the year-ago period, a decrease of 24%.

The improvement in our burn rate was the result of increased cash receipts from the higher revenue levels during the first half of Fiscal 2021, as well as decreased cash disbursements as the majority of our capital expenditures were paid for in prior quarters.

Our total capital expenditures as of June 30, related to the establishment and scaling of our Clinical Lab subsidiary was approximately $1.6 million, including equipment to support our whole genomic sequencing capacity. Our cash position at July 31 was approximately $10.4 million.

As for our fiscal fourth quarter, we expect to see an increase in spending in both capital expenditures and supplies and staffing to support our COVID-19 testing services contract with CUNY.

Given the potential size of this contract, we believe these temporary increases in spending our warranted to support revenue growth in the fiscal fourth quarter and into fiscal year 2022. This concludes my prepared remarks. Thank you for joining us today. I will now turn the call over to Jim for his comments..

Okay. Thank you, Beth. Good afternoon, everyone, and thank you for joining us on this call. We're pleased to have delivered a third consecutive quarter of year-over-year revenue growth, driven in large part by demand for safeCircle, our pooled COVID-19 testing program.

Demand for safeCircle dropped in the third quarter due to the seasonality inherent to our academic clients and progressively higher vaccination rates and lower positivity rates in our operating area.

However, our recently-secured award for COVID-19 testing services for the City University of New York affirms the need for ongoing and consistent COVID testing. With this contract in hand, we expect to continue to drive strong year-over-year revenue growth over the contract period of performance, contingent on ongoing demand for testing.

I'll begin this afternoon with a brief overview of the award. We already started an initial low volume of testing just this week, but we do not expect weekly testing levels to really equilibrate until after the start of the academic year that begins the week of August 25.

What we can detail at this time are the operating assumptions that guide our execution under this award. But before I begin, I want to take a moment to thank our absolutely remarkable employees. This award is testament to their efforts and their dedication to your company's goals.

I'm really extraordinarily proud of this accomplishment for each and every one of them.

Despite the clinical success of COVID-19 vaccines, infections across the country are spiking due to the steady evolution of viral variants aided and amplified by vaccine hesitance, with the confluence of fully vaccinated, partially vaccinated and unvaccinated populations returning to campuses this fall.

K-12 schools and institutions of higher education are faced with a much more complicated reopening than just a year ago.

We have deployed our safeCircle Testing Service, which is a high throughput pooled COVID-19 testing program to provide weekly asymptomatic COVID-19 screening of on-campus unvaccinated students, staff and faculty, and a random sampling of vaccinated individuals across the CUNY system.

While New York City enjoys a high vaccination rate relative to the national average, the 16 to 34 years of age group comprising the bulk of the CUNY population is only about 61% vaccinated according to current New York state data.

We are building a high testing rate program, which is especially needed due to the delta variant even in the face of increasing vaccination. The testing of vaccinated individuals is a key component of CUNY's plan.

The CDC recently published an interim public health recommendation that among other measures, recommends that fully vaccinated people who have a known exposure to someone with suspected or confirmed COVID-19 should be tested three to five days after their exposure.

We applaud CUNY's decision to include testing of vaccinated individuals given the high transmission environment likely in most classrooms. This is especially pression [ph], juxtaposed against recent data from the CDC that vaccinated people may be able to spread the delta variant just as easily as unvaccinated people.

I would like to also add that in New York City, delta and its higher transmission rate currently account for 83% of all positive samples. In fact, all five boroughs of the city, each with at least one CUNY institution now meet the CDC guidelines to be considered high transmission areas. Now, recap the terms of our contract.

We're providing a turnkey asymptomatic pooled COVID-19 screening testing to the CUNY population comprising students, staff and faculty. Unvaccinated individuals will be tested weekly, supplemented by a random sampling of vaccinated individuals across the entirety of the CUNY school system.

The contract is a 12-month period of performance with no minimum testing commitment by CUNY. The contract has a maximum value of $35 million.

And while we would like to provide a forecast of weekly testing numbers under the contract, accurate modeling before full implementation is difficult, given the multiple dynamic variables in play, which include ever-changing vaccination rates, in-person student enrollment figures and impacts caused by the delta variant.

Based on these facts, we will be able to give guidance on weekly testing numbers once students start classes on August 25 and full testing under the contract begins. Based on current information provided by CUNY, we believe actual weekly testing numbers will fall in the previously-stated weekly range of 20,000 to 65,000.

This is potentially the largest contract in the company's history and it's fair to say that we've been preparing for scenarios like this for more than a year. Our ability to execute on this contract is grounded in our safeCircle Testing Service. In just over one calendar year, we develop, secured EUA approval for and commercialized our Assay Kit.

We pioneered and refined the COVID-19 pooled surveillance testing method with which to test large populations efficiently; we established partnerships to enable the scaling of high volume clients; we developed unique expertise in the testing of clients in the educational sector; and we established our Applied DNA Clinical Labs subsidiary as a CLEP-CLIA certified laboratory, purpose-built for rapidly scalable high throughput testing.

Now from a capacity perspective, our clinical lab currently has two automated testing lines that can process 10,000 tests daily in two shifts, and we could add a third shift contingent on demand that would expand testing capacity by another third.

Our testing lines are analogous to manufacturing lines where demand is met by simply increasing the number of lines. Our newly completed clinical laboratory space easily accommodates multiple automated testing lines. A third automated testing line is just being added as we speak and we have three additional lines being assembled in reserve.

We are employing an integrated solution that will offer individual scheduling, sampling, testing, and reporting of results performed in concert with our subcontracting partners.

The use of subcontracting partners allows us to service CUNY while remaining focused on our core competency, namely, testing and the ability to return results rapidly within 24 to 48 hours. Now, we serve as the prime contractor for 20 testing sites that will cover the entirety of CUNY's 25 campuses and five administrative centers.

We've partnered with CLEARED4 and its health verification platform to provide value-added services of campus access management, contact tracing and results reporting.

A management layer has been put in place with oversight and staff management led by a new consultant hire, a senior executive and logistician with an international emergency services organization.

Leveraging his unique expertise, we have established operations structured as four zones across the five boroughs that contain the 20 sample collection sites. Samples are collected across all zones multiple times per day with testing centralized at Applied DNA Clinical Labs in Stony Brook.

In addition to CLEARED4, we've also grown on a staffing agency to help staff all field operations. With the help of this subcontractor we've deployed, approximately 100 new field staffers. Subcontracted staffers will allow our clinical labs to scale CUNY without additional direct hiring.

In addition, a medical courier backed up by our own drivers will ensure timely delivery of samples to our lab. Testing will be conducted using our Linea COVID-19 Assay Kit, both in a pooled screen modality and with reflex individual diagnostic testing of those samples contained in a positive pool. Now, one note about our assay.

The high-sensitivity and high-specificity of our assay means that we can detect as little as two copies of the virus in a pooled sample. This means that the assay potentially allows for very early detection of an infection and the sooner we can identify an infected individual, the sooner we can alert CUNY and the individual to mitigate virus spread.

So, in this way, we are enabling CUNY to achieve the enhanced population safety they seek. To-date, we have completed all site selections and site installations, we have established field operations and training at the first 16 of those 20 locations with the remaining four sites coming online shortly.

Testing began this week for CUNY faculty and staff. Testing for the students will begin Monday, August 16. We expect the volume of testing to approach equilibrium by mid-September with subsequent modulations in response to population positivity, the potential need to test vaccinated participants, regional epidemiology and variant evolution.

We intend to update analysts and investors when we begin to have predictable weekly testing levels. Our collaboration with CUNY and the administrative team has been a remarkable and really invigorating experience. We applaud their foresight and commitment to the health and safety of their community.

We look forward to continuing our close collaboration and we have the capacity to manage CUNY testing throughput in all circumstances while serving other testing clients. While the CUNY contract is top of mind, I want to highlight two points of operational progress made in this quarter.

The first relates to our Linea SARS-CoV-2 mutation panel, formerly our SGS mutation panel, through which we are broadening our COVID testing offerings. Subject to the FDA's evolving EUA review priorities, we expect to enter the formal EUA process shortly.

The Linea mutation panel has been revised to target three mutations designated by the Centers for Disease Control and Prevention, as substitutions or mutations of therapeutic concern due to the potential impacts on the efficacy of certain EUA-authorized antibody treatments.

We believe that if granted the EUA, the revised mutation panel offers a compelling proposition for its use in determining the applicability of monoclonal antibody treatments for COVID-19 by mutation, thereby potentially making clinically relevant again those treatments whose EUAs have been revoked or have been demonstrated a reduction in efficacy due to the mutational impacts.

The second point of operational progress made in the quarter relates to our veterinary COVID-19 vaccine candidate. On the heels of compelling data from our clinical trial in cats, in the coming weeks, we will launch a clinical trial to determine safety and immunogenicity of the vaccine candidate in ferrets.

As you are probably aware, the commercial application of our vaccine candidate targets the farmed mink population that really has been decimated by the virus.

It's with our sense of ironies then that the mink used in clinical studies come from the very farms that have contracted COVID-19, thereby forcing us to proceed with another member of their mustelid family, the ferret, and ferrets that are bred specifically for biomedical research.

We'll offer more details on our clinical trial when we formally begin it. Now turning to our supply chain business as we approach the annual start of the cotton ginning season in the U.S. Our recent planning discussions with textile partners and brands suggest a path to revenues from cotton tagging before the end of the calendar year.

Of particular relevance is our cotton business that is rebounding with our current partners. Beyond the U.S. market, our pipeline of potential orders today includes opportunities in Egypt and India.

India, which is the world's leading cotton producer wants to elevate the profile of its cotton on the world stage, while also differentiating it from the cultivated cotton in the Xinjiang region of China, against which claims of forced labor have been levied.

Particularly exciting for me is that the brands are awakening to the utility of our platform and securing their supply chains and then protecting themselves against the unintended use of cotton that may have benefited from forced labor. The U.S.

Customs and Border Protection Agency has taken a hard line against the importation of textiles without clear country of origin representation. We are cognizant that a hardening regulatory environment against forced labor could serve to catalyze interest in our certainty program. Now, this concludes my prepared remarks.

Operator, please open the call to questions..

We will now begin the question and answer session. [Operator Instructions] And the first question comes from Jonathan Aschoff with ROTH Capital Partners. Please, go ahead..

Thank you.

James, can you elaborate on just how likely it is for you to achieve the $35 million max rev with CUNY, assuming that that target requires about 40,000 to 45,000 tests per week?.

I'd say it's well within the range of possibilities and as I implied, Jonathan in my prior comments, we're dealing with such a moving target, that it's pretty difficult for us to do any prediction of testing rates, and consequently, how long that maximum would last until we really reach equilibrium.

And you know, there may be more than one equilibrium in the course of the year. So, I could see an early equilibrium happening in September or October, but we've seen the first colleges today. Stanford announced that they will be testing 100% of their vaccinated students. In fact....

Yes, I saw that..

And as more of those changes start to impact education across the U.S., that early equilibrium will be perturbed and we'll reach a new one, perhaps at higher testing levels. It's hard to say..

Okay.

And if you're heading towards exceeding $35 million, does that just require a simple contract amendment? Nothing major? Or will they really rethink it after $35 million?.

Well, it's their money and I'm sure that they will want to try to conserve it as much as they can. We're working with them to ensure we operate economically. At the same time, we want to provide them the best scientific and epidemiological advice that we can do.

And in the face of the kind of morphing scenario, we just have to be prepared for multiple types of change..

Okay.

James, lastly, what progress have you had over the past quarter for the car key manufacturing, the cell matrix, for drug discovery and cannabis tagging?.

Sure. So, we have continued to manage our invasive CTC program and with the addition of our NGS capability in our R&D group and also as a service to other customers, our hope is to be able to expand that utility of the invasive CTC business to other forms of oncology beyond the pancreatic cancer work we're currently involved in.

The world as a consequence of COVID has become more and more aware of counterfeits and of schemes to rob the honest public of their money, including, ironically, counterfeit COVID vaccines.

So, industries like the cannabis industry, like textiles, like nutritional supplements, have seen a really strong resurgence of interest and really rewarding for me is seeing the interest of brands.

And most of our conversations in the tagging business up until this last year, that really involved manufacturers, but the brands awakening to the opportunity, I think will greatly help us penetrate those markets. And I think I may have forgotten your first question..

No. I think you got that all, James. Thank you very much..

Okay, great..

And I'm glad to see that there's a cotton revenue coming before the end of the year. Thank you..

From your mouth to God's ears..

[Operator Instructions] The next question comes from Jon Salmanson with [indiscernible]. Please, go ahead..

Hi, Jim. Congratulations on the CUNY contract to you and your team. You touched your last statement before you took questions, was about textiles and the concern of slave labor and products coming into the United States, which is starting to get press both in the UN and in the U.S. papers.

Besides cotton, in short of a government mandate that would mandate where products are made, are we looking at that as an area to get ahead of that?.

It's certainly an opportunity for us to provide value to individual markets, but also to accomplish the humanity goal. That is to do what we can to prevent forced labor.

We do have a strong interest in it, always have had and I think we have some unique technologies to be able to help the marketplace avoid the tragic error of using products made from forced labor, which of course as you know, go way beyond textiles to other food products as well.

And I think that some of the technologies that we do have, such as next-generation sequencing can be a particular value in identifying the genetic components of Xinjiang cotton and ensuring it's excluded from brands who are trying to protect their reputations..

Okay, thank you..

Welcome, Jon..

[Operator Instructions] This concludes our question and answer session. I would like to turn the call back over to James Hayward for any closing remarks..

Okay. Thank you, Operator. I'd like to thank you all for dedicating your time to us this afternoon. We are very prepared for continued and accelerated execution. Our teams are really motivated, our employees, invigorated by the challenge of contributing to the health and welfare of our communities.

And we are all singularly-focused on building a base for sustainable growth. Thank you and look forward to speaking with you again next time..

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