Applied DNA Sciences, Inc. (APDN) CEO James Hayward on Q4 2021 Results - Earnings Call Transcript

Dec. 10, 2021 1:56 AM ETApplied DNA Sciences, Inc. (APDN)
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Applied DNA Sciences, Inc. (NASDAQ:APDN) Q4 2021 Earnings Conference Call December 9, 2021 4:30 PM ET

Company Participants

Sanjay Hurry - Investor Relations

Beth Jantzen - Chief Financial Officer

James Hayward - Chairman, President & Chief Executive Officer

Conference Call Participants

Jonathan Aschoff - ROTH Capital Partners

Yi Chen - H.C. Wainwright & Co.

Jason McCarthy - Maxim Group

Anthony Vendetti - Maxim Group


Good day and welcome to Applied DNA Sciences' Fourth Quarter and Full Fiscal Year 2021 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Sanjay Hurry, Director of Investor Relations. Please go ahead.

Sanjay Hurry

Thank you, Lilly. Good afternoon, everyone and welcome to Applied DNA's conference call to discuss our fourth quarter and full fiscal year 2021 financial results. You can access the press release that was issued after market closed today as well as a slide presentation accompanying this call by going to the Investor Relations page of our website. Speaking on the call today are Dr. James Hayward, our Chairman, President and 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 to the company's Form 10-K filed today 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 fiscal year-end call. I will start this afternoon with a review of our consolidated financial results for the fourth quarter of fiscal 2021 ended September 30. I will then turn the call over to Dr. James Hayward, our President and CEO, who will outline our key initiatives for the 2022 fiscal year. We will then open the call to our analysts and institutional investors for questions. As detailed in our press release and 10-K that were filed moments ago, we are pleased to report continued quarterly revenue growth as well as announced record revenues for the fiscal year, both of which are the results of our decision to enter the COVID-19 testing and assay manufacturing markets.

COVID-19-related revenues in the fiscal year were driven by the establishment of Applied DNA Clinical Labs or ADCL, our Clinical Laboratory subsidiary that provides population scale, COVID-19 testing as well as from sales of our Linea 1.0 COVID-19 Assay Kit and testing consumables. Momentum in COVID-19 testing, especially in the second half of the fiscal year, with the acquisition of new customers supported our continued investment in ADCL that is now largely complete.

In our fourth fiscal quarter, we were able to set up staff and supply COVID-19 testing sites and commence COVID-19 testing at over 23 sites, spanning the five boroughs of New York City, Westchester and Long Island as well as prepare our testing lab for higher testing volumes. This is all done with an extremely tight timeframe from CUNY contract award until the first test was performed. Although we experienced revenue growth in our fourth fiscal quarter, we are continuously monitoring and rightsizing our variable costs related to the CUNY testing program as well as the testing -- as the testing levels have been less than originally projected by the client due to the combination of increased vaccination rates and vaccine mandates. In addition, we are also utilizing the infrastructure implemented for this testing program to service several other New York City testing clients that were acquired subsequent to 9/30.

Starting with the statement of operations, I would like to note that due to the dollar value and it being a separate revenue stream, we are now presenting the COVID-19 testing revenue as well as the cost of providing the testing services performed by ADCL as separate line items in our statement of operation, beginning with the filing of our 10-K today. Cost of clinical laboratory service revenue is comprised of payroll and consumables to support our COVID-19 testing revenues. The cost for Q4 of fiscal 2021 reflects an increase in payroll, as we staffed up ADCL in preparation for our new higher education testing contracts.

Total revenues for Q4 were $3 million compared to $314,000 in the year ago quarter and $1.7 million in Q3 of fiscal '21. This year-over-year increase in quarterly revenue is primarily attributable to an increase in COVID-19 revenues of $1.8 million. For the purpose of today's presentation, I am defining COVID-19 revenues as those related to the sale of our COVID-19 testing branded at safeCircle as well as the sale of our Linea Assay Kits. I note that the year ago period contained only one month of surveillance COVID-19 testing revenues as we had established our clinical laboratory and a preceded CLIA licensure of ADCL, with which we can now conduct diagnostic testing.

We also had not yet sold any of our Linea Assay Kits. On a sequential basis, Q4 revenues increased 79%. The increase primarily due again to an increase in COVID-19 testing of approximately $813,000 as well as an increase in revenue of $824,000 in our textiles market. As a reminder, given safeCircle substantial concentration of academic clients, Q3 reflected the summer break in between terms. I would like to note, the Q4 revenue includes only about six weeks of contribution from CUNY. Product revenues increased to $1.1 million in Q4 compared to $123,000 in the year ago period. This increase is due to increased sales of $810,000 in textiles related to the shipment of DNA concentrate to protect the cotton supply chain as well as an increase of $538,000 for the sale of our Linea 1.0 Assay Kit and related consumables. Clinical Laboratory service revenues derived from our COVID-19 testing increased to $1.6 million compared to $78,000 in the year ago period. This is a testament to the dedication and hard work performed by our team to implement and grow a business over a 12-month period.

Cost of revenue as a percentage of product revenue in the fourth quarter decreased to 30% from 49% in the year ago period. The year-over-year improvement reflects a better product mix as the fourth quarter of this fiscal year was primarily comprised of sales of industrial DNA to the textile industry which are at a higher margin compared to the products sold during the same period in the prior fiscal year.

Total operating expenses in Q4 increased 34% or $1.4 million to $5.6 million compared to $4.2 million in the year ago period. The year-over-year increase is primarily attributable to an impairment charge of $822,000 for the write-off of goodwill and the remaining net book value of intangible assets associated with our 2015 acquisition of Vandalia and to a lesser extent, an accrued bonus included in SG&A that was subsequently paid by the issuance of stock options as well as an increase in depreciation and amortization, totaling $218,000.

Recall that we acquired Vandalia's core technology and IP portfolio that allows for the large-scale production of specific sequences of DNA using continuous flow PCR. We remain in this business. However, we have since migrated to a different PCR-based manufacturing process. Q4 net loss increased incrementally to $4.5 million from $4.1 million in the year ago period. Net loss per share improved to $0.60 from $0.82 in the year ago period on a higher number of weighted average shares outstanding. Excluding noncash expenses, consolidated adjusted EBITDA improved to negative $3.3 million in Q4 compared to a negative $3.8 million in the year ago period.

Turning to our balance sheet. Cash and cash equivalents totaled $6.6 million on September 30, 2021. We used $5.6 million of cash during the fourth quarter. The increase in cash disbursements is primarily related to capital expenditures, the purchase of inventory and other supplies and consumables to support and service the CUNY awards that I discussed earlier. These investments were essential since these supply chains were and remained under considerable pressure and we needed to ensure that future revenues would not be restricted by constrained supply chain. These investments are also being utilized to service other additional safeCircle customers. Our cash position on November 30 was approximately $3.6 million. Accounts receivable stood at $2.8 million on September 30 compared to $737,000 on June 30. Inventories stood at $1.4 million compared to $429,000 on June 30. As I noted, the increase in inventory is related to our CUNY award, principally the purchasing of materials necessary for the production of our Linea Assay as well as the sample collection kits. Our current warrants outstanding is 744,000, of which 459,000 warrants carry an exercise price of $5.25. We carry no debt on our balance sheet.

We filed our fiscal 2021 10-K a short while ago, in which we disclosed that based on historical financial results, there is substantial doubt about our ability to continue as a going concern for one year from the issuance date of the financial statement. Our ability to continue as a going concern is dependent on our ability to continue to increase our revenue or to raise additional working capital.

This concludes my prepared remarks. Thank you for joining us today. I will now turn the call over to Jim for his comments.

James Hayward

Great. Thank you, Beth and good afternoon, everyone. Thank you for joining us on our fiscal year-end call. I hope that you and yours are keeping safe and well during this holiday season. Fiscal '21 was a year of substantial execution for Applied DNA. In the midst of the pandemic, we stood up a high throughput CLEP-CLIA certified lab in our Stony Brook headquarters that serves as our diagnostic testing services subsidiary to support population scale COVID-19 testing.

New York CLEP-CLIA certification is especially challenging to achieve but we obtained certification in just a matter of months. We put in place all the constituent components of the full-service COVID-19 population testing, grounded in our house developed EUA-authorized assay and proprietary-automated pooled workflows. We expanded our operating area to include all of Long Island and then within weeks of contract signing, with the City University of New York, we added the five boroughs of New York City and then to the borders of New York state itself. The use of our diagnostic, what we now refer to as our Linea 1 version 1 Assay. At our high-throughput clinical labs generates very attractive margin when scaled, as such, fiscal '21 also reflects investments made to ADCL's footprint to encompass testing programs capable of serving the entirety of New York State. To support our now state-wide safeCircle customer base. The result is the achievement of record annual revenues that more than cushioned the pandemics' impact on our industrial DNA and LineaRx business.

Execution on our testing strategy did not end with the fiscal year. And in a moment, I'll speak to the launch of safeCircle nationally, with the surveillance testing of samples beginning to flow to our clinical lab from 14 different states. We believe that ADCL can be an engine for growth for us throughout fiscal '22. Our long-term view of ADCL, given the foundation that we have put in place, is that of an engine that can drive our financial performance and generate cash flow to support investments in our LinearDNA and industrial DNA businesses. But more than cash flow, we will marry the diagnostic capability of ADCL to the therapeutic applications of LinearDNA, that will ultimately enhance the commercial value of both platforms.

Our original Linear COVID Assay which we are now referring to as version 1 targets 2 amplicons in the Spike gene. This has been of enormous utility. As the variance evolved, we were able to identify alpha through delta, simply by changes in the positive PCR patterns for patients infected by that variant. Those altered PCR patterns were confirmed by our sequencing studies using next-generation sequencing. But with the arrival and propagation of the Omicron variant, the changes in the Spike gene are so large in number and in impact that we expect version 1 of our assay to lose sensitivity. But however, there is a significant silver lining to the story. We expected the appearance of massively mutated Spike gene and months ago, developed and validated our version 2 assay. The 2.0 Assay is the three target multiplexed real-time reverse transcription polymerase chain reaction assay, targeting conserved regions, conserved meaning they don't mutate at the same frequency, of the viral E envelope gene and the viral nucleocapsid N gene and the human RNA gene in respiratory systems. Linea 2 is variant agnostic. This means that it is designed to determine the infectivity and not whether a COVID-19 sample contains a variant of any specific COVID lineage.

We have filed our 2.0 assay in supporting validation data with the New York State Department of Health. Our strategy is to utilize the assay that detects the viral N and E genes to identify positive samples. Then we are reflex testing those positives with our version 1 assay. Samples that exhibit drop of the S signals are likely Omicron variants. They will be positively identified by sequencing with NGS.

We have already identified Omicron this way and we have strong interest from our existing customers to utilize these methods to more quickly identify Omicron as opposed to sequencing. Version 2 has been validated for both single samples and pooled testing via anterior nasal swab collection. So for our safeCircle customers, Linea 2's design includes a plug-and-play function that allows it to be plugged into the Linea 1's testing workflow seamlessly. This means that we can process Linea 2 with the same speed and efficiency and with the identical economics to our Linea 1 assay, to mitigate any disruptions in the processing of those samples. So we are prepared to transition to Linea 2 from our current Linea 1-based testing workflow subject to review by the New York State Department of Health. If this transition needs to occur prior to the completion of their review, we have validated a third-party EUA-authorized assay for use at ADCL until the review is complete.

Now as Beth noted, our current quarter ending December 31 will reflect the first full quarter of CUNY's contributions to our consolidated revenues. CUNY modeling at the time of the award back in August was for 20,000 to 65,000 tests per week. Weekly testing levels have not reached these levels. The result of a combination of increasing vaccination rates and after the award date, CUNY's adoption of a vaccine mandate as well as low on-campus attendance driven by concerns about infection.

As prime contractor at CUNY and working with our partner CLEARED4, we've been able to deliver value-adding services to enable CUNY to consolidate testing, vaccination, verification and site access control into a single platform which is a real benefit for administrators, students and employees. The evolving nature of the pandemic, however, makes a strong case with the testing of vaccinated populations in addition to the unvaccinated. So effective two weeks ago, we've started to test a random sampling of CUNY's vaccinated population every week. The percentage of the randomly tested will be determined by infectivity rates as well as the number of students on campus. We've seen an increase in weekly testing figures following the start of random vaccinated sampling, though it's too soon to determine whether testing will stabilize at any specific level.

Third-party medical staffing and our operational footprint beginning in August, were predicated on our outlook for customers utilizing this managed-service model, including CUNY, Suffolk Community College, Sarah Lawrence College and Molloy. Our model is to continuously rightsize staffing and ancillary costs to an affordable operating footprint at the level of service that our customers should expect from us. The path forward with CUNY and others is a promising one. CUNY's vaccine mandate should bring students back on campus starting with the spring semester. We expect this to translate into increased weekly testing rates starting in the middle of January. Now for fiscal '22, we expect that ADCL will continue to drive the company's topline growth. We believe this growth will come from both continued and expanded COVID testing services as well as additional non-COVID molecular testing. As I'll discuss in a bit, we plan on using this topline growth to help fund the expansion of the LinearDNA platform to capture the rapidly growing market for non-plasmid-derived DNA for biotherapeutic applications.

Recall that in the first months of 2020 as the world grappled with COVID-19 and vaccine development, we too were investigating the virus as a test bed for our LinearDNA vaccine as a pure fast and flexible alternative to plasmid DNA that has the benefit of speed of production without the additional burden and costs of cold chain storage required for global distribution. And having become experts Spike, we developed our Linea 1 COVID Assay that has underpinned our diagnostics and testing business and has driven our topline performance in '21. Since the introduction of Linea 1 in May of 2020, we've continued to expand our COVID-related diagnostic offering reflective of this residents.

The establishment of a mutation and variant tracking program with Northwell Health and the launch of safeCircle, both powered by our Linea 1 Assay and feasible only through our genomics expertise and acquired next-generation sequencing capacity gave us a front row seat to mutational drift and to the evolution of variance. From this knowledge, we developed our Linea SARS-CoV-2 mutation panel, for which we are seeking EUA approval from FDA for the testing of genetic mutations prior to the administration of monoclonal antibody treatments, known to be impacted by some of the mutations that are detected by the mutation panel.

As you are likely aware, certainly EUAs have been rescinded by the FDA after the negative impact caused by mutations. If authorized under EUA, the administration of the right treatment matched to it's variant, we believe, can enable better standards of care and outcomes for the patients. The economic rationale for our mutation panel includes the potential recommercialization of monocolonal antibody treatments whose EUAs have been rescinded to enable their continued commercial utility. And the emergence of new mutations or the reemergence of known mutations, makes clear the importance of our efforts to develop and provide tools that can rapidly identify mutations of concern to assist health care providers in determining the appropriate treatments for COVID-19 patients. Our COVID-19 diagnostic development plan and go-to-market strategy are in line with our capacity to conduct population-scale testing to meet the evolving demands of current and prospective customers.

The identification of the Omicron variant and the introduction of our Linea 2 Assay only days later, speaks to our agility and to our ability to execute our diagnostics development strategy. The operational framework we established for CUNY is being leveraged to access segments of the market, we believe can be more durable in the face of higher education rates. While OSHA has suspended vaccine enforcement pending resolution of legal challenges, we are seeing employers continue to implement vaccine mandates, both in preparation for the federal mandate rule and to protect their workers and workplace. Concurrently, we are focused on making our COVID-19 offering easier to distribute, use and collect. We plan to seek authorization for an at-home sample collection system that when paired with the HIPAA-compliant vaccine records management and test result reporting capabilities brought to us by CLEARED4, makes safeCircle and exceedingly efficient service for employers to keep their employees safe as they return to work.

In addition, we are in discussions with several national telehealth providers for asynchronous medical oversight of testing programs located outside of New York State. If successful, we believe that these constitutive parts on supervised home collection, the CLEARED4 digital health platform and out-of-state asynchronous medical oversight will empower the nationwide reach for our safeCircle program.

Early fruits of these endeavors are shown by our recently launched customer pilot project for surveillance testing in 14 states that will continue to drive incremental revenue, starting next month in January. In addition, Omicron's impact on the Linea 1 Assay has a silver lining, even when we replaced by Linea 2. Linea 1 will still offer utility as a reflex test for Omicron. Our tests have shown that Linea 1 likely exhibits a unique double S gene target drop that appears to be specific just to Omicron. This unique double target drop appears to be specific to Linea 1.0 given that it targets S1 and S2 on Spike where there are over 30 of Omicron's mutations. The value of reflex testing using Linea 1 is the time and potentially life-saving speed with which it can be run versus standard multi-day genomic sequence to potentially impact not only a patient's standard of care but also to inform public health officials to track the variance progress in our communities, as a kind of early warning system. We have already been informed by a user of our Linea 1 Assay that they intend to use it in a genomic surveillance modality to identify potential cases of Omicron in their population.

Finally, we are in the process of validating a dual COVID-19 influenza A and influenza B test, as they share many symptoms in common. We believe this assay will be validated and ready for clinical use by the end of the calendar year. I think it's safe to say that we have left no COVID-19 testing-related stone unturned. We believe our existing and yet to be launched COVID-19 assets will serve us well in fiscal '22. And while we believe that COVID-19 testing demand will remain robust through fiscal '22, we are planning to introduce non-COVID-19 testing services through ADCL. Currently, we are in discussions with a major assay manufacturer of pharmacogenomics testing. Pharmacogenomics is a form of genetic testing that assesses the patient's risk of an adverse response or likelihood to respond to a given drug.

Pharmacogenomics can be used to help a doctor or a patient informed drug selection and dosing, especially in the areas of psychotropic and cardiovascular medications. We believe that there is a strong unmet need for pharmacogenomics testing in the Long Island area and the development and commercialization of pharmacogenomics testing will be a focus for ADCL in this coming fiscal year. ADCL is also in the process of evaluating the iCTC platform as a potential source of valuable cancer biomarkers. If successful, this project could result in a differential cancer biomarker identification platform. We're currently in discussion with academic institutions to investigate with the iCTC platform, can be used to identify a newly discovered cancer biomarker.

Now the confluence of substantially heightened interest in nucleic acid therapies because of the COVID-19 vaccine development globally and supply chain issues impacting plasmid DNA availability is driving the biotech and pharmaceutical industries to seek an alternative to plasmid DNA-based manufacturer. In short, the concept of non-plasmid derived bulk DNA is really catching on. This is creating a very attractive window of opportunity for the LinearDNA platform. The plasmid DNA manufacturing process is incredibly complex and expensive. Batch yields vary considerably and batch failure is common. And if there's one thing that the FDA does not care for, it's inconsistency of production. When you use a manufacturing process grounded in the use of bacterial cells for amplification of the target DNA, inconsistency comes with that territory, as do additional costs associated with complex and expensive purification steps downstream.

It's no wonder that the biotherapeutics industry which needs never be seen for -- well that the biotherapeutics industry is looking for alternative DNA sources, excuse me. In contrast, we produced LinearDNA enzymatically and without any cells present and with rapid turnaround times and exceptional batch-to-batch consistency. There is no bacterial contamination and the need for purification is minimal compared to the plasmids. It's a simple process to produce high DNA yields. Based on internal costing analysis, we believe that the cost of cGMP LinearDNA is comparable to or even slightly less than cGMP plasmid DNA.

In fiscal '21, we focused on both the validation and optimization of the LinearDNA platform. In terms of platform validation, we accomplished much this year, specifically, we obtained the first data that LinearDNA and plasmid DNA for COVID-19 vaccine have equivalent performance in rodents. We obtained the first data from higher order animals, fee lines that LinearDNA vaccines produce high levels of neutralizing antibodies against SARS-CoV-2 and it's variants. And the initiation of a detailed ferret study with Cornell University to study the efficacy of our LinearDNA vaccine candidate against actual SARS-CoV-2 infection. This trial is still ongoing but the data from the trial, assuming it meets it's endpoints, we'll provide invaluable insight into the efficacy of LinearDNA as a vaccine.

Now in terms of platform optimization, we've also been highly successful. Over the past half year, we put into place a cell biology suite, designed to validate and optimize numerous aspects of the LinearDNA platform. This new asset allows the company for the first time to undertake substantial R&D activities on LinearDNA in-house. This investment has rapidly borne fruit with several breakthroughs in cellular transfection and in expression, including the deployment of an in-house lipid nanoparticle or LNP capability for the encapsulation and transfection of nucleic acids to cells. To date, we have successfully encapsulated DNA with LNPs that showed very significant expression in vitro. This is an important proof-of-concept that supports our goal to develop LNP-based delivery of LinearDNA for various applications, including vaccines. We've seen substantial success with LinearDNA constructs by our team to substitute for plasmid constructs that were already in use by our customers. These constructs which are often components of advanced therapy medicinal products like CAR T or mRNA vaccines and gene therapy are direct replacement for plasmid DNA used in these therapies.

As the plasmid DNA supply chain continues to struggle, we expect to see more requests of this type of for LinearDNA and we believe that the near-term demand for GMP-grade LinearDNA as a CDMO will be very strong. And the economics of CDMOs far exceeded that of CROs which is really our current business. We have CRO relationships with major pharmaceutic players that need cGMP DNA. In fact, our cGMP approach was catalyzed by one such CRO customer, who came to us to inquire as to our plans to offer CDMO-scale LinearDNA production. In addition, our COVID-19 veterinary vaccine development program has elevated LinearDNA's profile in the marketplace. Inbound inquiries to date are magnitudes above what we've experienced historically, both in terms of volume and in value.

To meet this interest and with our investment in ADCL largely complete, we continue our pathway to implement a phased-based approach to cGMP manufacturing capacity for LinearDNA in fiscal 2022. The volumes and quality necessary for a Phase I clinical trial can be achieved in our current footprint in our Stony Brook facility. In fact, we believe we can achieve Phase II efficacy trial volumes and quality also within our current footprint. However, Phase III will be scale up manufacturing which will require a larger footprint. In concert with planning undertaking with our regulatory consultants, we believe we can achieve Phase I in fiscal '22 at a cost of roughly $3 million in capital expenditure. Once we are the manufacturer of record for the clinical trial, we believe we can grow as the CDMO for the customer throughout the clinical trial process. In addition to planning and facility reviews, we're also working to put the necessary partnerships together to support successful cGMP. We're currently working with polymerase manufacturers for the production of a cGMP grade enzyme. The most important aspect of our manufacturing process. In addition, we're working with several device manufacturers to upgrade the devices in our large-scale PCR workflows to meet cGMP compliance.

Further, our new cell bio suite is developing the technical skills to support the quality standards necessary for cGMP manufacturer of LinearDNA. Once in place, our cGMP manufacturing will be designed around parallel workflows that are well suited to rapid scaling. We believe that once implemented, the production of cGMP LinearDNA as a CDMO will be a substantial catalyst for our growth. In addition to our numerous LinearDNA customers, validation of our decision to pursue cGMP for LinearDNA and can also be found in a recent publication by the Prague Institute of Hematology and Blood Transfusion on their use of our LinearDNA as a suitable and cost-effective replacement to plasmid DNA in the production of CAR T cells with similar efficacy to the CAR cells manufactured with plasmids. This paper highlights the use of LinearDNA with a nonviral transfection system. In their case, a transposon-transposase system. We believe this combination overcomes many of the existing manufacturing complexities associated with plasmids and with viral vectors, thereby offering therapy developers, a rapid and cost-effective tool for manufacturing preclinical CAR T cells. This is very valuable validation for us as the majority of our CRO stomers [ph] are ordering from us LinearDNA for CAR T cell applications.

We are currently in discussions with the institute on a potential clinical trial with a new CAR construct targeting acute myeloid leukemia. This would have the potential to leapfrog our development work in the U.S. to be a first in-human trial for LinearDNA. A near-term Phase I is made possible through the auspices of new European Medical Agency Guidance that allows for the use of GMP-like product to be upscaled to cGMP for certain Phase I trials. I don't have additional details to share at this time but the trial is currently projected to commence in fiscal '22. Now turning now to our industrial DNA business and specifically, our textiles practice. We're pleased to see the resumption of more normal demand patterns in the fourth quarter with the receipt of a $1.6 million purchase order. Fiscal '21 was a challenging year with the continuation of COVID-19's impact on the textile supply chains.

As vacation rates increase, so too began a sign of the global textile supply chain. Given the impact of the ongoing pandemic, fiscal '21 was about progressing COVID-paused commercial scale trials and scale up commercial production in fiscal '22. In fiscal '21, we completed a key proof-of-concept trial for the tagging of recycled PET with Ganesha, the largest producer in India of recycled PET fiber, spun yarn and died filament. In fiscal '22, we'll continue to pursue pre-commercial trial developments in recycled PET production as well as from other textile customers in cotton, downs and feathers, leather and thread. These activities are necessary step to eventually tag commercial-scale material volumes.

In cotton, fiscal '21 was about progressing pre-commercial trials in new textile categories like apparel, footwear and accessories. In fiscal '22, cotton will be focused on scale-up of these trials and commercialization. It is particularly noteworthy that for the first time, both home goods and apparel brands and their suppliers are reaching out to us. We have gained the attention of multiple apparel and footwear brands and their suppliers and we have traction. Demands in '22 should approximate '21 level an increment as we execute on the scale up. Our outreach activities during the fiscal year resulted in the evaluation of certainty, strategic value with prospective customer supply chains. Certainties, value proposition speaks to the need for compliance and to support a brand's brand promise. These are issues central to the brands and suppliers coming out of the pandemic and driven in part by their own ESG commitments as well as the standards against which their products are being measured by end consumers.

Now as previously spoken about how the pandemic brought into stark relief, the inefficiencies embedded in the modern supply chain that has textile brands sourcing finished product from factories globally, the providence of these textiles is often opaque to the brands themselves to regulatory bodies and to consumers alike. Social issues, such as the use of cotton produced through the use of forced labor. I've also become a call to action for the industry and has been taken up by regulatory bodies in the U.S. and Europe some of whom are talking to us. You know our CertainT platform to be an end-to-end supply chain traceability platform that uses the immutability of DNA tag, track and trace cotton through supply chain. Go to your local Bed Bath & Beyond and pick up a set of 100% Pima cotton brand, Pima cotton sheets and note that the packaging says Pure By Nature, Proven By Science.

The science being referred to is Applied DNA Sciences. Our CertainT workflow allows us to say with certainty. Yes, this is American Pima cotton, Yes, this entire bed spread is made as Pima cotton. Our call to action in 2021 was to bring the full measure of cotton genomics to bear to answer the question, where does my cotton come from, utilizing our genomic sequencing capacity, we identified a biomarker, specific to the most widely used Egyptian cotton Giza 94 varietal used in the production of textiles. We believe that it has proven for the first time that the geographic origin of cotton can be definitively ascertained via genotyping, a process of determining minute differences in the DNA living manner. In short, we believe that we can bring forensic proof of origin to regional cotton varietals to give brands and relevant regulatory authorities access to fiber origin data regardless of the locations of finished goods manufacturer.

We filed a provisional patent application with the U.S. PTO for this Giza 94 cotton biomarker. We also have brought to bear an additional test for cotton, through a new relationship, we will be announcing soon that brings the forensic fidelity of stable isotopic analysis to all certainty customers for cotton textiles.

Well, this proceeds my -- concludes my prepared remarks. And operator, please open the call to questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Jonathan Aschoff with ROTH Capital Partners.

Jonathan Aschoff

Thank you. Good evening and congrats on the progress. My first question is about the COGS, maybe you explained it and I missed it but what drove that roughly 97% COGS for the fourth quarter?

Beth Jantzen

Well, we broke out COGS into two separate lines. So we have the cost of the Clinical Laboratory service revenues and that mainly was driven by a ramp-up in staffing and certain other -- mainly in staffing, that's where the consumables flow through for the COVID-19 surveillance CUNY testing in all of our COVID-19 testing. So a lot of that we had to ramp up. But then remember, the higher education contracts didn't start until the latter part of August and early in September.

Jonathan Aschoff

Okay, all right. My next question is a broader one. There are a lot of things going on at APDN and can you please rank your programs, more important than anything else but what you are spending on them. So I can have a better sense your priorities? I mean, it clearly seems like COVID testing, cotton, LinearDNA are the Top 3, maybe in that order, maybe LinearDNA before cotton. But what other specific programs follow in that sort of decreasing order of investment? And what maybe some of the things in the past are no longer really anything that you're focusing on?

James Hayward

Sure. We have a very crystal go-to-market strategy and that is reflected in where we're spending our available bandwidth and any investment money. The investment in Applied DNA Clinical Labs is largely behind us. And we already have a pipeline of new developments to roll out. We believe that, that will generate new revenues, increasing revenues and contribute to our cash. We will, at the same time, be focusing much more on bringing in LineaRx customers for our LinearDNA platform. And that will be aided by the cGMP advancements will make to produce LinearDNA. So that would be our number one priority, funded by our number two priority the Clinical Lab and by our number three priority and that is the industrial applications of DNA. Does that answer your question, Jonathan?

Jonathan Aschoff

Yes. So basically, the other items, I mean, the iCTC, cannabis, veterinary vaccine, is there a zero investment here? Or what's going on with the...

James Hayward

Well, we group them under those three groups. So cannabis is an industrial DNA application where we're doing tagging. The iCTC platform is part of our ADCL diagnostics effort. And I've forgotten what your third one was.

Jonathan Aschoff

Veterinary vaccine.

James Hayward

Yes, that's under LineaRx.

Jonathan Aschoff

Okay. That sounds complete [ph]. Thank you very much, James.

James Hayward

Well, thank you.


Our next question comes from Yi Chen with H.C. Wainwright.

Yi Chen

Thank you for taking my question. My first question is, can you give some additional color on the additional tests that you're going to offer at ADCL and how soon these non-COVID test will be -- will start to generate revenue for the company?

James Hayward

Sure. Well, we are already validating the combination COVID flu assay. So I guess that is an extension of COVID but the issue is going to be for many people who -- and especially long-term care institutions when a patient exhibit symptoms which are similar for all three indications, you need to know in a hurry what that is and to treat those opportunities appropriately. And we actually have sales expertise focused very much on the long-term care facilities. So we believe we have a market we can develop there. Assuming that we're successful there. The other kind of assay that, that market needs to optimize the care of their patient is pharmacogenomics. And so we expect to be rolling that out in this current fiscal year.

Yi Chen

Got it. My second question is, do you still plan to proceed with the clinical trial after veterinary vesting?

James Hayward

The clinical trial of what?

Yi Chen

The vesting in MiG?

James Hayward

Yes. That study is underway. USDA has indicated that it is the only commercial vaccine. They're really interested in promulgating right now. And our early data are quite promising. And so we want to bring that to a close and begin to look for a partner to help us commercialize that vaccine.

Yi Chen

When do we -- when do you plan to report the topline results from this MiG trial?

James Hayward

Probably in the next six to eight weeks.

Yi Chen

Okay, got it. Thank you.


Our next question comes from Jason McCarthy with Maxim Group.

Jason McCarthy

Hey Jim, thanks for taking the questions. I have to take it just a little bit in a different direction. You had mentioned in your remarks about Linea 1 and seeing that drop-off in signal and it seems to be very identifiable. How long -- because the U.S., as you know, has lacked tremendously in sequencing of samples. How long have you seen that signal? And did you start to get a sense that there was some kind of variant even before we were really hearing about it?

James Hayward

Well, we had projected variance with a mutation density in Spike because it's not as highly conserved. And it's the region of the genome most likely to be subject to mutation. So we planned several assays as surrogates for our Linea 1 Assay. But our Linea 1 Assay which does target 2 Spike amplicons had been of enormous value in testing large populations because we were able to detect just from the PCR pattern which variant we were dealing with. When we filed our EUA with FDA, we gained a positive diagnosis for signal coming from either of our 2 Spike amplicons. So in the case of alpha, we had an impact only on S1. And I remember late at night, seeing the very first alpha, we believe we found the first one in New York State. And the appearance on the PCR machine with those were breathtaking.

And in the case of Delta, the impact is more on S2. And it's a minor impact but it increases the CT value by 2 to 3. And it's enough for you to see right off the bat before the sample comes off the PCR machine that this is Delta. So the strategy of targeting Spike has paid off royalty for us really rather well. And it led us to our mutation panel. Now we hope to use it again in the reflex testing of Omicron. And being able to shorten the time to diagnosing an infection as Omicron. In particular, if it turns out that there are monoclonal antibody therapies that are more effective against Omicron. And in the period between now and if Omicron ever dominates the planet, you will need that assay because otherwise, you'll be waiting three to four days to make a decision on a monoclonal antibody.

Jason McCarthy

Have you seen -- have you done any serial sampling. Have you seen signals in the PCR readout, if they're very specific and identifiable that there's more than one variance in one person overtime?

James Hayward

No. We have not seen that circumstance too often. But obviously, it is quite plausible especially now with Omicron having a tendency for reinfection. So you may well see Omicron and Delta simultaneous in the same patient. But our biggest concern right now is detecting positive samples and monitoring the appearance and potential spread of Omicron.

Jason McCarthy

Got it. And just the last question on the CAR T side. You had mentioned as opposed to using plasmas -- the advantages of using LinearDNA but using a transposon-transposase approach. Is that the most ideal approach in terms of specific targeting for getting your genes in versus using something like a mega talent or something that seems to be more much more precise as that's what the gene editing groups are doing? Or does it not really matter that much?

James Hayward

No, I think it's an enormous benefit to tell you the truth because it avoids the need for viral vectors and subsequently increases the safety of the therapy. And it seems to be more specific in terms of it's integration target; so at the moment, that's what I favor.

Jason McCarthy

Got it. Great, thank you.

James Hayward

Thank you.


[Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group.

Anthony Vendetti

Okay, thanks.

James Hayward

Go ahead, Anthony.

Anthony Vendetti

How are you doing, Jim? Hey, Beth. I just wanted to follow-up with maybe some financial questions and then just circle back to the pickup that you're seeing post-Thanksgiving in testing. But first on the financials. On the gross margin side, I guess, obviously, with the filing of 10-Q, it looks like maybe the accountants said that cost that you were previously including in SG&A are now being accounted for as part of cost of goods sold, is the new sort of 38% to 40% gross margin that you have this quarter, is that the new sort of standard gross margin we should be looking at? Or the ramp-up in staffing is sort of somewhat of a onetime expense and then gross margins should be able to move north of the 40% from there? I'm just trying to get a handle on the new gross margin perspective.

Beth Jantzen

Right. Really, the new gross margin came when we purchased a significant amount of consumables and then hired relating to the new higher education awards. So some of the consumables are sitting up in inventory. But right, to your point, it should go higher than the 40% because we had to staff up and things like that before the revenue started to -- and then the revenue followed. Remember, we only had six weeks of one of the higher education contracts in the fourth quarter. And then this quarter, we have a full quarter of that contract but some of the other new ones that came on. So we have more utilization of that than we did in Q4.

Anthony Vendetti

That's helpful, Beth. And then just in terms of the textile contract, the $1.6 million purchase order was all $1.6 million of that recognized here in the fiscal fourth quarter?

Beth Jantzen

It was not. We recognized a little over $800,000.

Anthony Vendetti

$800,000 this quarter. Okay. Great. And then just on the testing in the press release, you said that now that you're in your fiscal first quarter '22, you've seen some of that testing pick up. Omicron is probably related to that. Is it Omicron mostly -- or is it more to do with colleges and schools in as opposed to the actual Omicron variant?

James Hayward

Yes. I would say, certainly, Omicron has sensitized everyone, if you weren't before. And secondly, many schools have reached decisions, they've had difficulty making up until now and that is they're returning to the classroom. And businesses are doing the same. And the trick is how to do that in both cases, safely. So now especially with Omicron threatening reinfection, regardless of your vaccination status, the simplest way to monitor prevalence is by testing at high-frequency populations.

Anthony Vendetti

Okay, great. Thank you very much. I'll hop back in the queue. Appreciate it.

James Hayward

Okay, thank you.


This will conclude our question-and-answer session. I'd like to turn the call back over to Dr. James Hayward for any closing comments.

James Hayward

Okay. Well, thank you very much everyone and thanks to everyone who joined us today. We've put fiscal '21 in place using our capacity for genomic insights that we believe we can drive both toward precision health care and expanding our molecular DNA and industrial applications. The road ahead of us in fiscal '22 is really full of promise and supported by a remarkable group of employees, who are steadfastly focused on the company's success. I'm grateful to their contributions every day as I am for your continuing interest in Applied DNA. So thank you all. We wish you a good and -- good health and safety until we speak again.


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

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