Q1 2020 Earnings Call

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Dead dead good day and welcome to apply DNA science fiscal first-quarter 2020 Financial results conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please single a conference specialist by pressing the star key followed by zero after today's presentation. There'll be an opportunity to ask question to ask a question. You may press * then 1 on the touch-tone phone to withdraw your question, please press * then two, please note that this event log.

Is being recorded.

I would now like to turn the conference over to clash Iraq general counsel for Applied DNA, please go ahead.

Here today during our discussion make this a forward-looking statements including without limitation that was regarding gross margins operating expenses other income and expenses stock-based compensation expense taxes earnings per share a Life Products actual results or Trends May differ materially. For more information. Please refer to the risk factors discussed and applied DNA Sciences form 10-K filed on December 12th, 2019 and form 10-q fob short while ago applied DNA science assumes no obligation to update any forward-looking statements or information now, it is my pleasure to introduce the first speaker on today's call Beth, Kansas.

Thank you. Clay. Good afternoon everyone and thank you for joining us 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 two thousand.

And open the call to your question.

Starting with the statement of operations total revenues for the. Decreased 28% to approximately 634000 from approximately 884000 in the first quarter of fiscal 2019 and decreased 62% compared to one point seven million for the fourth quarter of fiscal 2019.

Product revenues where 238,000 as compared to $322,000 in the prior. And one point three million in the fourth quarter of fiscal 9 a.m.

The sequential decrease in product revenues is attributable to a $1000000 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. And 423000 in the fourth quarter of 2019. The year-over-year decrease in service revenues is primarily attributable to revenues in the prior. Related to a government contract awards that was completed in May of 2019.

Cost of Revenue as a percentage of product Revenue in our fiscal first quarter of 2020.

Increase to 98% as compared to 48% for the year ago. And 26% on a sequential basis.

The year-over-year and quarter-over-quarter increase was due to product sales mix of sales during q1 and Q2 for a fiscal nineteen were primarily comprised of faith 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 products Revenue during the first quarter of fiscal 2020.

Total operating expenses decreased 23% or approximately 915000 to 3 million in the first fiscal quarter of 2020 compared proximately 4 million for the same period in the prior fiscal year and decline approximately 200,000 on a sequential basis.

Decrease on a year-over-year basis is primarily due to reduce payroll expenses as a result of a realignment of the sales force and reduction in overall headcount as well as Thursday action 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.

This decrease is related to decrease development costs for the contract award mentioned earlier that expired during the second half of fiscal 2019.

Net loss for the first quarter of fiscal twenty narrowed by 18% on a year-over-year basis to 2.7 million from 3.2 million months an increased from 1.2 million for the fiscal fourth quarter of 2019. Excuse me.

as in

Reminder we implemented a one for 40 reverse stock split on November 1st 2019.

As a result reported earnings per share for the first quarters of fiscal twenty and nineteen have been calculated using the post reverse stock split shared account.

Weighted average shares outstanding for first the first quarter for the first quarter of fiscal 2020 and 2019 are two million three hundred. Eighty 564000 and 761769 respectively.

Net loss per share for the first quarter of 2020 improved 21.12 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 non-cash expenses adjusted ebitda. Was it -2.4 million for the first quarter of fiscal twenty as compared to a negative 2.6 million in the prior. And the -1.6 million for the fourth quarter of fiscal 19th.

Turning to our balance sheet cash and cash equivalents totaled approximately 8.7 million at December 31st, 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 comprise the rock secured convertible note payable was 1.5 million at quarter in our average monthly cash burn rate for the first quarter of fiscal 2020 was 867000 compared to $528,000 for the year ago.

An increase of 64% our cash position at January 31st 2020 with 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 have now like to turn it over to Jim for his, well. Thank you Beth Ann. Good afternoon, everyone and Welcome to our fiscal first-quarter results conference call beginning last August then ramping up since our last Capital raised. We've revised our strategic plan to evaluate the markets in which we compete to access those opportunities that provides a faster path to growth and profitability and to allocate our resources so that we can execute on these opportunities faster.

the companies

Competencies and differentiation are the capability the intellectual property both patents and trade secret know how and The Proven commercialization a pcr-based linear DNA production. Its utility and value propositions are driven by two key Market sectors supply chain Integrity Home Care the ladder more specifically biopharmaceutical Therapeutics and Diagnostics while our platform can be used in many Industries wage too much diversity can bring distraction and under-investment in sales and 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 offer is some critical Milestones this fiscal year that we as 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 bar and Diagnostics business beginning with our recurring shipments of linear DNA for our customers early detection system for his Paddock cancer where we have a five-year Supply agreement.

we've started to

Recognize revenue for the time sm88 pancreatic cancer study that uses our patented and proprietary liquid biopsy for invest circulating tumor cells more on our invasive CTC platform and it's increasing potential in just a moment. It needs 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 JP Morgan Healthcare conference in San Francisco last month, there is no doubt.

growing evidence of a wave of epiphany across the scientists at the major healthcare companies

Now in November of q1 we announced these three sentences.

applied

DNA Sciences reports fourteen development customers were it's linear DNA manufacturing platform. These customers are evaluating Arlene are DNA across applications. We've seen positive results from many of these customers, but this evaluation takes time and quote.

Well in the last 30 days we have received 3 new orders from leading companies.

With a combined market cap of more than four hundred billion dollars.

Applications range from karti to RNA vaccines. We expect to ship these orders within this or next quarter while these are development orders off each with the possibility to scale a successful. We do seem to be gaining the attention of the right players and our goal is to build more reps 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, 24 cast over last year's actuals, but it is relatively flat as a percentage of overall applied DNA forecast versus 2019 actuals do happily to the simultaneous growth in our other markets.

Our strategy for developing an integrated supply chain to accelerate right accelerate brand and Retail adoption is played out.

In the current forecast snapshot our business is heavily concentrated in Cotton sold into three retail outlets with one more likely going into a test Mark our next three categories recycled leather and thread face major commercial milestones in the next 3 months leather production already in progress and is headed toward one or two brands that should be commercialized by the summer.

recycle

P e t expanded Market distribution to Sainsbury's last month in the UK and is targeted toward two additional retailers and brands with new technologies.

Now, unfortunately, these two markets leather and recycled are being manufactured in China and we have seen disruptions in their own respective Supply chains over the last two weeks due to coronavirus closing factories and sales conferences, but this is a two-sided coin month, which I'll address in. My phone are remarks later in this discussion.

Next is our Cascade of regulated markets of pharmaceuticals nutraceuticals and cannabis from most to least stringent month after significant development and quality due diligence our Pharma partner colorcon announced the market launch of there on those authentication off naming our product as the empowering ingredient as a result colorcon has an international reputation as a pharmaceutical supplier Choice based on Superior product quality and Technical Support, extensive regulatory assistance and reliable Supply from 11:00 manufacturing facilities worldwide.

in parallel

We continue our activities with FDA to be ready for Market.

No, I am happy to announce today that this week we signed business contracts for our first entry into neutral vehicles.

As we projected last quarter with nutrition 21 self-described as a leading developer of clinically substantiated high-value patented ingredients.

The nutraceuticals market is projected to reach $194 billion dollars by $20.25 according to a new report by Grandview research off a detailed announcement on the business agreements is 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 there are market leader in Innovation and their approach to a 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 TWP offering visibility and awareness for us from the entire nutraceutical industry.

The last of the trailer of regulated markets is cannabis.

With the cancellation of the contract in early December. We are now reasserting our brand in the market as previously announced. We signed a project in a contract with old oil a processor located in Maine and within four weeks of signing. We completed our first tagging pilot. We will make our first choice DNA lead 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 New Jersey vehicle markets.

Now aside from the supply chain markets, we continue to execute against our Baseline customer set of the defense Logistics agency European it in cash protection and labels and packaging. These markets are well-established and they contribute to our Revenue with off-the-shelf product little no product development and marketing and sales through Channel partners.

Now we have collaborated for a year.

With the Italian sister companies every vax.

Which makes vaccines for companion animals dogs and cats and takas which makes vaccines for humans.

Together we are developing a pan cancer vaccine that has shown rapid tumor clearance and test on 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.

No, I am very excited today to announce that we have expanded our joint development with taxes to include a linear life 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.

No, I want to be sure that no-one misinterprets our announcement, which is slated for tomorrow morning as us chasing headlines off because we believe that we bring real advantage to the race for a vaccine and this is to save lives.

The advantage is 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 DNA the Simplicity of design. They're 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. I'm 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 US Department of Health and Human Services off. This is a positive strand RNA virus and as is typical of RNA viruses Corona viruses mutate a track rates that require constant surveillance by Health authorities. We believe that one of the many benefits of PCR produced linear DNA is the rapidity with which putative vaccine can be revised in order to accommodate mutational drift.

No.

Coronaviruses have a simple genetic composition. One of the genes called the S Gene encodes for the spike protein that binds to the reception 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 with our collaborators. And we have already begun that its design and optimization of a synthetic Gene that when delivered to muscles should enable the temporary protection of a designed antigen that could provoke an immune response against Spike.

once the

Jean is assembled. We will produce quantities of the linear DNA prototype vaccine at Large Scale here in Stoneybrook protest in mice dead.

Our 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 dead.

We expect to have linear DNA ready for testing within the next 60 to 90 days off.

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 avoid any misinterpretation we have not identified any commercial partner to take the potential coronavirus vaccine a market nor is there any indication?

That are applications to develop countermeasures of vaccines would be approved by Regulators now switching topics.

Diagnostic platform for the capture of invasive circulating tumor cells or ICT sees is a form of liquid biopsy that is unique in the industry.

These cells are very rare in a cancer patients blood and must be concentrated 1 million fold in order to be studied.

Other liquid biopsies find circulating tumor cells by virtue of biomarkers that are presumed to be associated with specific answers. But sometimes the biomarkers are also present on normal cells. So the capture of ctcs by these binding methods are often less precise.

and

These are fixed in formalin and are no longer alive from the moment of capture.

In contrast and not shown in this slide are invasive and I emphasize the word invasive because that's really what characterizes it functionally wage are invasive ctcs are functionally captured.

By recapitulating the process that takes place in metastases and a cancer patient's body recoat tubes and plates with a cellular replication Matrix or Cam that mimics the interstitium with proteins that helped form the extracellular Matrix that all cells live in to form your own 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 million-fold excess of non-metastatic cells.

Then the non-penetrating cells and liquid are simply poured off the cellular matrix adhesion Matrix is dissolved and the invasive species 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 it has been the beneficiary of funding bio or seven million dollars 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 wage. In fact when transplanted into Xena graphic mice that allow you meant issues to grow a small number of itc's lead to dispatch emanated metastasis to get the same number of metastases from the primary tumor requires a thousand times as many cells

This makes the invasive ctcss extremely valuable to companies who are trying to develop drugs to stop metastasis or to fight cancer in general based on our relationship with time Pharmaceuticals. We are already talking to companies who want to use our invasive CTC platform and Drug development in a subsequent clinical trials.

No, I cdc's 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 zero makes sense.

But unfortunately, this cancer is about to recur remarkably a full six months before the image of the tumor can be detected by imagery off the rebound in the red line.

In icy TCS made it clear the tumor was recurring.

Again, six months before the image could reveal it hence the use of our platform. We provide the oncologist with the evidence to make the decision to change therapy month earlier, which is extremely valuable. Hence We Believe are 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. RSA was leveraged successfully by time Pharmaceuticals in a prostate cancer. Trial time states that r i c t s a is a better indicator of disease than the PSA biomarker, which is the Catholic biomarker used to detect prostate cancer.

in 20

Same time is leveraging r i c t c s a in a phase 3 clinical trials for the treatment of pancreatic cancer. It is our goal to position our I say across clinical trials and we are investing accordingly finally in this study of drug development to treat prostate cancer wage. I see TCS able to predict that a drug was not working three months.

Before detection by the accepted biomarker PSA and three 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 then 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 Lounge 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're right-sized. We're flexible. We're aware of the gate imbalance we face when we have to adjust our asset allocations.

we were on very

Solid footing and we are committed to achieving our goals and fiscal 2020 and Beyond.

Thank you for your time and attention this afternoon will be happy to take your questions operator. Please open the call to questions. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key. If at any time, your question has been addressed and you would like to withdraw your question, please press star then to our first question is from Jason McCarthy from Maxim group home. Go ahead. Oh hi James. Thanks for taking the questions. You talk a little bit about a little bit more about linear RX and and I know that you had mentioned previously that you had 14 or so existing customers and you just on the back of JPMorgan which we thought was a really productive conference this year for the first time.

file that you know you you came out with

Timelines look at and if you expect anything like that could occur in 2020.

Sure. Yeah, the first of all, you know, in terms of the headcount I decided after I used that number 14 that I really didn't want to put myself in the position of providing a Serial headcount quarter-to-quarter suffice it to say it actually has increased and practically when those biotech biopharma customers come to us at first. It's in a relationship where they're looking for a quad DNA larger than they are average production in house.

But not beyond the level so that they can do their experiments in vitro and begin to contemplate experiments with mice for example, and we have we are in the process now of just signing our first longer-term agreement with the large pharmaceutical company and that agreement should allow us to get to animal studies which means more stringent do you in a production conditions and greater quantities and typically more Hoops delete through so long that it's for us means a higher level of Revenue.

I would say.

For most customers the time required to make that transition is anywhere between six and twelve months. We are in money during that time. Wage 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 DNA's but those are produced under more stringent conditions leading to an increase in Revenue to us over a longer period of time. So we're ready. They're quite honestly beginning to see those transitions happen and we're seeing one or two companies off the heels of the success we've had with others skipping the stage and moving further up the progressive Club.

Are quickly right? It's like from our from from from my perspective, you know, you know, Revenue generation is one thing and and but on the linear life, I don't really view the company, you know, really ready to be benchmarked on a revenue level for me what's important is you know on those developments what those developments wage I'm lines for your potential or your existing customers and when it could potentially become public because as a as a biotech, which is applying a you know, half the business is a biotech business. Now, you know, what drives valuations tends to be news flow and and you know being hitched in a way too large cap biotech and Pharma as 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 you know some of those names that you're working with could page

actually become publicized is there's a

And applied issue or is it completely in the hands of your customers to decide that 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 month and then I think it will occur more frequently as time goes on.

Okay, and I also feel will be signing those relationships that involve retainer fees followed by significant Milestones as Thursday asked 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, you know, give it all the the activity we're seeing other groups kind of dip their toe into potential vaccines et cetera or therapies month. Is there a mechanism for what you're going to work on to possibly get to emergency use or something like that? Cuz you know, we saw it with a bullet 2014. There was some accepted timelines from Regulators to get some of these things out there at least trying them in human populations. Well the very fact that both the US and Ed.

Who have declared?

Public Health emergencies actually begins to provide a vehicle for condensed time frame going from you know, concept to Thursday 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 excel.

Thank you, Jim for taking all the questions. Oh, you're welcome, Jason. Thank you.

Our next question is from Anthony venditti from Maxim groups. Go ahead.

Q can you just talk a little bit more about the CBD opportunity? I know you said there's a conference you're attending. Um and the agreement with all Porsche oil.

Sure. Yeah, the opportunity is kind of one of the fastest paths to Commerce because you're you're not dealing with the plant in the field. You're dealing with the material essentially in a manufacturing situation Thursday 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 you know, eventually we'll be working with the Growers more and monitoring the entire supply chain to ensure that no black market can log

this finds its way in and

The case of CBD though. There's an unusual aspect of the market that we can really help and that is that CBD can be derived from both ends of cannabis from hemp smell as well as marijuana derived from pent. It is legal. I believe in every state and I can cross state borders, but direct from marijuana, it cannot cross state borders.

And if bills of lading don't indicate the plant of origin there actually has been reports of arrests 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 forensic Leah prudent prove that the CBD in whatever form it's in whether it's in a finished product home or in a pure state that it absolutely derived from hemp. So it's a great opportunity for us as well. Now we're looking forward to this is our first month without Sarah can and we prepared for it. Well, we should show very very well. We're very excited to go to this one and birth.

I think it's in Las Vegas.

Okay, and and particularly, I guess with the the current agreement that you have and it certainly sounds like there's an opportunity to to strike other Partnerships.

What what do you think the opportunity is in in in 2020 either with the current agreement or just in general overall in 2020 in terms of revenues for this for this full fiscal year that you're when you say the current agreement you were referring to Old Port so we expect that Old Port will not grow their business aggressively this year. They certainly sending every signal that that's the case but we think that we will be diversifying into a wide variety pack of processors across the country and we think they opportunity there is is very strong.

Okay, and then this quarter gross margins were were lower than than normal. Usually you're in the you know, eighty percent range or or at least were in in fiscal 19. Is this is this a a 1/4 anomaly or should we should we expect a lower lower margins going forward at the at this point it basically was due to two things the product sales mix the two quarters. We were comparing it to had 10,000 more more heavily weighted in textile Revenue, which is typically at a higher gross margin. And also unfortunately our queue 12020 product Revenue was low. So it didn't fully absorbed fixed costs that are included in cost of goods sold such as payroll rent utilities and things like that.

So Beth more of an anomaly than for this quarter, correct? Okay, great. Well, thank you more optimistic.

Going for okay, great. Thank you. You're welcome. Thank you, Tony.

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 studies support and the many kindnesses from those of you who have contacted me. Our team is determined to succeed off.

To deliver impactful products and to recover and build shareholder value, and we hope to see you at our next investor call. Thanks much.

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