UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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On August 5, 2024, the registrant had
Applied DNA Sciences, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended June 30, 2024
Table of Contents
Part I - Financial Information
Item 1 - Financial Statements
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
ASSETS | (unaudited) | |||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for credit losses of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Other assets: |
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Restricted cash | | | ||||
Intangible assets | | | ||||
Operating right of use asset | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities | $ | | $ | | ||
Operating lease liability, current | | | ||||
Deferred revenue |
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Total current liabilities |
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Long term accrued liabilities |
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Deferred revenue, long term | | | ||||
Operating lease liability, long term | | | ||||
Deferred tax liability, net | | | ||||
Warrants classified as a liability | | | ||||
Total liabilities |
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Commitments and contingencies (Note G) |
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Applied DNA Sciences, Inc. stockholders’ equity: |
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Preferred stock, par value $ |
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Series A Preferred stock, par value $ |
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Series B Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid in capital |
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Accumulated deficit |
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Applied DNA Sciences, Inc. stockholders’ equity |
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Noncontrolling interest | ( | ( | ||||
Total equity | | | ||||
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Total liabilities and equity | $ | | $ | |
See the accompanying notes to the unaudited condensed consolidated financial statements
1
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Revenues |
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Product revenues | $ | | $ | | $ | | $ | | ||||
Service revenues | | | | | ||||||||
Clinical laboratory service revenues | | | | | ||||||||
Total revenues | | | | | ||||||||
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Cost of product revenues | | | | | ||||||||
Cost of clinical laboratory service revenues | | | | | ||||||||
Total cost of revenues | | | | | ||||||||
Gross profit | | | | | ||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | | | | | ||||||||
Research and development | | | | | ||||||||
Total operating expenses | | | | | ||||||||
LOSS FROM OPERATIONS | ( | ( | ( | ( | ||||||||
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Interest income | | | | | ||||||||
Transaction costs allocated to warrant liabilities | — | — | ( | — | ||||||||
Unrealized gain (loss) on change in fair value of warrants classified as a liability | | ( | | | ||||||||
Unrealized loss on change in fair value of warrants classified as a liability - warrant modification | — | — | ( | — | ||||||||
Loss on issuance of warrants | — | — | ( | — | ||||||||
Other (expense) income, net | ( | ( | ( | | ||||||||
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Income (loss) before provision for income taxes | | ( | ( | ( | ||||||||
Provision for income taxes | — | — | — | — | ||||||||
NET INCOME (LOSS) | $ | | $ | ( | $ | ( | $ | ( | ||||
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Less: Net loss attributable to noncontrolling interest | | | | | ||||||||
NET INCOME (LOSS) attributable to Applied DNA Sciences, Inc. | $ | | $ | ( | $ | ( | $ | ( | ||||
Deemed dividend related to warrant modifications | — | — | ( | — | ||||||||
NET INCOME (LOSS) attributable to common stockholders | $ | | $ | ( | $ | ( | $ | ( | ||||
Net income (loss) per share attributable to common stockholders-basic and diluted | $ | | $ | ( | $ | ( | $ | ( | ||||
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Weighted average shares outstanding- basic and diluted |
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See the accompanying notes to the unaudited condensed consolidated financial statements
2
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Nine-Month Period ended June 30, 2023 | |||||||||||||||||
Common | Additional |
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Common | Stock | Paid in | Accumulated | Noncontrolling | |||||||||||||
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| Amount |
| Capital |
| Deficit |
| Interest |
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Balance, October 1, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Stock based compensation expense |
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Net loss | — | — | — | ( | ( | ( | |||||||||||
Balance December 31, 2022 | | | | ( | ( | | |||||||||||
Stock based compensation expense | — | — | | — | — | | |||||||||||
Net income (loss) | — | — | — | | ( | | |||||||||||
Balance, March 31, 2023 |
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Stock based compensation expense | — | — | | — | — | | |||||||||||
Net loss | — | — | — | ( | ( | ( | |||||||||||
Balance, June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | |
Nine-Month Period ended June 30, 2024 | |||||||||||||||||
Common | Additional | ||||||||||||||||
Common | Stock | Paid in | Accumulated | Noncontrolling | |||||||||||||
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| Deficit |
| Interest |
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Balance, October 1, 2023 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Exercise of warrants, cashlessly | | | ( | — | — | — | |||||||||||
Stock based compensation expense | — | — | | — | — | | |||||||||||
Common stock issued in ATM, net of offering costs | | | | — | — | | |||||||||||
Deemed dividend - warrant repricing | — | — | | ( | — | — | |||||||||||
Net Loss | — | — | — | ( | ( | ( | |||||||||||
Balance December 31, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Common stock issued in ATM, net of offering costs | | | | — | — | | |||||||||||
Common stock issued in Registered direct offering, net of offering costs | | | — | — | — | | |||||||||||
Stock based compensation expense | — | — | | — | — | | |||||||||||
Share issued upon restricted stock vesting | | | ( | — | — | — | |||||||||||
Deemed dividend - warrant repricing | — | — | | ( | — | — | |||||||||||
Net loss | — | — | — | ( | ( | ( | |||||||||||
Balance, March 31, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | ( | ||||||
Common stock and pre-funded warrants issued in public offering, net of offering costs | | | | — | — | | |||||||||||
Stock based compensation expense | — | — | | — | — | | |||||||||||
Share issued upon warrant exercises | | | ( | — | — | | |||||||||||
Adjustment for reverse split | | | ( | — | — | — | |||||||||||
Net income | — | — | — | | ( | | |||||||||||
Balance, June 30, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | |
See the accompanying notes to the unaudited condensed consolidated financial statements
3
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30, | ||||||
| 2024 |
| 2023 | |||
Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Gain on sale of property and equipment | — | ( | ||||
Write-off of property and equipment | — | | ||||
Unrealized gain on change in fair value of warrants classified as a liability | ( | ( | ||||
Unrealized loss on change in fair value of warrants classified as a liability-warrant modification | | — | ||||
Transaction costs allocated to warrant liabilities | | — | ||||
Loss on issuance of warrants | | — | ||||
Stock-based compensation |
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Change in provision for bad debts |
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Change in operating assets and liabilities: | ||||||
Accounts receivable | ( | | ||||
Inventories | ( | | ||||
Prepaid expenses, other current assets and deposits | ( | | ||||
Accounts payable and accrued liabilities | ( | ( | ||||
Deferred revenue | ( | ( | ||||
Net cash used in operating activities |
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Cash flows from investing activities: |
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Capitalized transaction costs for assets purchase transaction | — | ( | ||||
Proceeds from sale of property and equipment | — | | ||||
Purchase of property and equipment | ( | ( | ||||
Net cash used in investing activities | ( | ( | ||||
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Cash flows from financing activities: | ||||||
Net proceeds from exercise of warrants | | — | ||||
Net proceeds from issuance of common stock and pre-funded warrants | | — | ||||
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Net cash provided by financing activities | | — | ||||
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Net increase (decrease) in cash, cash equivalents and restricted cash | | ( | ||||
Cash, cash equivalents and restricted cash at beginning of period | | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
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Supplemental Disclosures of Cash Flow Information: | ||||||
Cash paid during period for interest | $ | | $ | |||
Cash paid during period for income taxes | $ | | $ | |||
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Non-cash investing and financing activities: | ||||||
Offering transaction costs included in accounts payable | $ | | $ | — | ||
Deemed dividend warrant modifications | $ | | $ | — | ||
Transaction costs for asset purchase included in accounts payable | $ | — | $ | | ||
Leased assets obtained in exchange for new operating lease liabilities | $ | — | $ | | ||
Property and equipment acquired and included in accounts payable | $ | | $ | — |
See the accompanying notes to the unaudited condensed consolidated financial statements
4
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE A — NATURE OF THE BUSINESS
Applied DNA Sciences, Inc. (“Applied DNA” or the “Company”) is a biotechnology company developing and commercializing technologies to produce and detect deoxyribonucleic acid (“DNA”) and ribonucleic acid (“RNA”). Using the polymerase chain reaction (“PCR”) to enable the production and detection of DNA and RNA, the Company currently operates in
On April 24, 2024, the Company filed a Certificate of Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware that effected a
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial statements as of June 30, 2024, and for the three and nine-month periods ended June 30, 2024 and 2023 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2024. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended September 30, 2023 and footnotes thereto included in the Annual Report on Form 10-K of the Company filed with the SEC on December 7, 2023, as amended. The condensed consolidated balance sheet as of September 30, 2023 contained herein has been derived from the audited consolidated financial statements as of September 30, 2023 but does not include all disclosures required by GAAP.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, APDN (B.V.I.) Inc., Applied DNA Sciences Europe Limited, Applied DNA Sciences India Private Limited, Applied DNA Clinical Labs, LLC (“ADCL”), Spindle and its majority-owned subsidiary, LineaRx, Inc. Significant inter-company transactions and balances have been eliminated in consolidation.
Going Concern and Management’s Plan
The Company has recurring net losses. The Company incurred a net loss of $
5
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Going Concern and Management’s Plan, continued
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates include revenue recognition, recoverability of long-lived assets, including the values assigned to intangible assets and property and equipment, fair value calculations for warrants, contingencies, and management’s anticipated liquidity. Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the consolidated financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
Revenue Recognition
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications (“ASC”), Revenue Recognition (“ASC 606” or “Topic 606”).
The Company measures revenue at the amounts that reflect the consideration to which it is expected to be entitled in exchange for transferring control of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. The Company’s contracts with customers may include multiple performance obligations (e.g. taggants, maintenance, authentication services, research and development services, etc.). For such arrangements, the Company allocates revenues to each performance obligation based on their relative standalone selling price.
Due to the short-term nature of the Company’s contracts with customers, it has elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less.
Product Revenues and Authentication Services
The Company’s PCR-produced linear DNA product revenues are accounted for/recognized in accordance with contracts with customers. The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. The Company invoices customers upon shipment, and its collection terms range, on average, from 30 to 60 days.
Authentication Services
The Company recognizes revenue for authentication services upon satisfying its promises to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company services are complete, which in nearly all cases is when the authentication report is released to the customer.
6
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Revenue Recognition, continued
Clinical Laboratory Testing Services
The Company records revenue for its clinical laboratory testing service contracts, which includes its COVID-19 testing services, upon satisfying its promise to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time that Company services are complete, which in nearly all cases is when the testing results are released to the customer. For those customers with a fixed monthly fee, the revenue is recognized over-time as the services are provided.
Research and Development Services
The Company records revenue for its research and development contracts using the over-time revenue recognition model. Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation.
Revenues are recorded proportionally as costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred during a period until the remaining costs to complete a contract can be estimated. The Company has elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Disaggregation of Revenue
The following table presents revenues disaggregated by our business operations and timing of revenue recognition:
Three Month Period Ended: | ||||||
June 30, | June 30, | |||||
| 2024 |
| 2023 | |||
Research and development services (over-time) | $ | | $ | | ||
Clinical laboratory testing services (point-in-time) | | | ||||
Clinical laboratory testing services (over-time) | | | ||||
Product and authentication services (point-in-time): |
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Supply chain |
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Large Scale DNA Production | | | ||||
Asset marking |
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Total | $ | | $ | |
Nine Month Period Ended: | ||||||
June 30, | June 30, | |||||
| 2024 |
| 2023 | |||
Research and development services (over-time) | $ | | $ | | ||
Clinical laboratory testing services (point-in-time) | | | ||||
Clinical laboratory testing services (over-time) | | | ||||
Product and authentication services (point-in-time): | ||||||
Supply chain |
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Large Scale DNA Production |
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Asset marking | | | ||||
Total | $ | | $ | |
7
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Revenue Recognition, continued
Contract balances
As of June 30, 2024, the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received from a customer prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company satisfies the related performance obligations under the terms of the contract. The Company’s contract liabilities, which are reported as deferred revenue on the condensed consolidated balance sheet, consist almost entirely of research and development contracts where consideration has been received and the development services have not yet been fully performed.
The opening and closing balances of the Company’s contract balances are as follows:
October 1, | June 30, | $ | |||||||||
| Balance sheet classification |
| 2023 |
| 2024 |
| change | ||||
Contract liabilities |
| Deferred revenue | $ | |
| $ | | $ | |
For the three and nine-month periods ended June 30, 2024 the Company recognized $
Cash, Cash Equivalents, and Restricted Cash
For the purpose of the accompanying condensed consolidated financial statements, all highly liquid investments with a maturity of three months or less from when purchased are considered to be cash equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash flows.
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Total cash, cash equivalents and restricted cash | $ | | $ | |
Inventories
Inventories, which consist primarily of raw materials, work in progress and finished goods, are stated at the lower of cost or net realizable value, with cost determined by using the first-in, first-out (FIFO) method.
Net Income (Loss) Per Share
The Company presents income (loss) per share utilizing a dual presentation of basic and diluted income (loss) per share. Basic income (loss) per share includes no dilution and has been calculated based upon the weighted average number of common shares outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company’s stock options, restricted stock units and warrants.
Securities that could potentially dilute basic net income (loss) per share in the future that were not included in the computation of diluted net income (loss) per share because to do so would have been anti-dilutive for the three and nine-month periods ended June 30, 2024 and 2023 are as follows:
| 2024 |
| 2023 | |
Warrants |
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Restricted Stock Units | — | | ||
Stock options |
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Total |
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8
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Concentrations
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of June 30, 2024, the Company had cash and cash equivalents of approximately $
The Company’s revenues earned from sale of products and services for the three and nine-month periods ended June 30, 2024 included an aggregate of
The Company’s revenues earned from sale of products and services for the three and nine-month periods ended June 30, 2023 included an aggregate of
Warrant Liabilities
The Company evaluates its issued warrants in accordance with ASC 480 “Distinguishing Liabilities from Equity” and ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity” and concluded that due to the terms of certain of its warrant agreements, the instruments do not qualify for equity treatment. As such, the Common Warrants, Series A Warrants and Private Common Warrants were recorded as a liability on the condensed consolidated balance sheet and measured at fair value at inception and at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in fair value recognized in the condensed consolidated statement of operations in the period of change.
Segment Reporting
The Company has
Therapeutic DNA Production Services — Segment operations consist of the enzymatic manufacture of synthetic DNA for use in the production of nucleic acid - based therapeutics and, the development and sale of a proprietary RNAP for use in the production of mRNA therapeutics.
MDx Testing Services— Segment operations consist of performing and developing clinical molecular diagnostic and genetic tests and clinical laboratory testing services. Under the Company’s MDx Testing Services, ADCL offers pharmacogenomics testing services that were approved by the New York State Department of Health (“NYSDOH”) during June 2024.
DNA Tagging and Security Products and Services — Segment operations consist of the manufacture and detection of DNA for industrial supply chains and security services.
The Company evaluates the performance of its segments and allocates resources to them based on revenues and operating income (losses). Operating income (loss) includes intersegment revenues, as well as a charge allocating all corporate headquarters costs. Since each vertical has shared employee resources, payroll and certain other general expense such as rent, and utilities were allocated based on an estimate by management of the percentage of employee time spent in each vertical. Segment assets are not reported to, or used by, the CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.
9
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
As of June 30, 2024, there
Recent Accounting Standards
In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, that enhances the transparency of income tax disclosures by expanding annual disclosure requirements related to the rate reconciliation and income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied prospectively with the option of retrospective application. The Company is currently evaluating the impact of adopting this ASU on its disclosures.
10
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued
Recent Accounting Standards, continued
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. These disclosures are required quarterly. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted. It is required to be adopted retrospectively for all prior periods presented in the financial statements The Company is currently evaluating the impact of adopting this ASU on its disclosures.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The objective of this update is to simplify the accounting for convertible preferred stock by removing the existing guidance in ASC 470-20, “Debt: Debt with Conversion and Other Options,” that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. This amendment also further revises the guidance in ASU 260, “Earnings per Share,” to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company does not expect the adoption of ASU 2020-06 to have a significant impact on its condensed consolidated financial statements.
NOTE C — INVENTORIES
Inventories consist of the following:
June 30, | September 30, | |||||
| 2024 |
| 2023 | |||
(unaudited) | ||||||
Raw materials | $ | | $ | | ||
Work-in-progress | | | ||||
Finished goods |
| |
| | ||
Total | $ | | $ | |
NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows:
June 30, | September 30, | |||||
| 2024 |
| 2023 | |||
(unaudited) | ||||||
Accounts payable | $ | | $ | | ||
Accrued salaries payable |
| |
| | ||
Other accrued expenses |
| |
| | ||
Total | $ | | $ | |
11
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE E — CAPITAL STOCK
April 2024 Reverse Stock Split
On April 15, 2024, the Company held the special meeting of stockholders (the “April 2024 Special Meeting”) where its stockholders approved the April 2024 Reverse Split (the “Reverse Split Proposal”). The Company’s Board of Directors determined on April 21, 2024 that the split ratio of the April 2024 Reverse Stock Split should be
The April 2024 Reverse Stock Split was effected as of 12:01 a.m. Eastern Time on Thursday, April 25, 2024 and combined each twenty shares of the Company’s outstanding Common Stock into
Public Offering
On May 28, 2024, the Company entered into a placement agency agreement (the “Placement Agreement”) with Craig-Hallum Capital Group LLC and Laidlaw & Company (UK) Ltd. (collectively, the “Placement Agents”) pursuant to which the Placement Agents agreed to serve as the co-placement agents, on a “reasonable best efforts” basis, in connection with the issuance and sale (the “Offering”) of
The Company received net proceeds from the Offering, after deducting placement agent fees and other offering expenses payable by the Company, of approximately $
The exercisability of the May 2024 Series Warrants will be available only upon receipt of such stockholder approval as may be required by the applicable rules and regulations of the Nasdaq Capital Market (the “Warrant Stockholder Approval”). Each May 2024 Series A Warrant offered hereby will become exercisable beginning on the date of the Warrant Stockholder Approval at an exercise price of $
As further detailed in Note J, the Company held a special meeting of stockholders on August 2, 2024 to obtain Warrant Stockholder Approval for the May 2024 Series Warrants (the “August 2024 Special Meeting”). The August 2024 Special meeting was adjourned without any action taken due to a lack of quorum as determined by the Company’s By-Laws. Pursuant to the terms of the May 2024 Series Warrants, since the Company did not obtain Warrant Stockholder Approval at the special meeting, it is obligated to call a subsequent stockholder meeting to seek to obtain Warrant Stockholder Approval. In the event that the Company is unable to obtain the Warrant Stockholder Approval, the May 2024 Series Warrants will not be exercisable and therefore will have no value.
12
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE E — CAPITAL STOCK, continued
Public Offering, continued
Under the alternate cashless exercise option of the May 2024 Series B Warrants, the holder of the May 2024 Series B Warrant has the right to receive an aggregate number of shares equal to the product of (x) the aggregate number of shares of Common Stock that would be issuable upon a cash exercise of the May 2024 Series B Warrant and (y) 3.0. In addition, the May 2024 Series A Warrants and May 2024 Series B Warrants include a provision that resets their respective exercise price in the event of a reverse split of the Company’s Common Stock, to a price equal to the lesser of (i) the then exercise price and (ii) lowest volume weighted average price (VWAP) during the period commencing five trading days immediately preceding and the five trading days commencing on the date the Company effects a reverse stock split in the future with a proportionate adjustment to the number of shares underlying the May 2024 Series A Warrants and May 2024 Series B Warrants.
Subject to certain exceptions, the May 2024 Series A Warrants provide for an adjustment to the exercise price and number of shares underlying the May 2024 Series A Warrants upon the Company’s issuance of Common Stock or Common Stock equivalents at a price per share that is less than the exercise price of the May 2024 Series A Warrants.
The Common Stock and May 2024 Pre-Funded Warrants were only sold with the accompanying May 2024 Series A Warrants and May 2024 Series B Warrants that are part of a Unit, but the components of the Units were immediately separable and were issued separately in this Offering. During the three-month period ended June 30, 2024, all of the May 2024 Pre-Funded Warrants were exercised.
Registered Direct Offering
On February 2, 2024, the Company closed on a registered direct public offering (the “RDO”) of
The RDO Pre-Funded Warrants have an exercise price of $
The Private Common Warrants and the shares of Common Stock issuable upon the exercise of the Private Common Warrants are not registered under the Securities Act. The Private Common Warrants and the shares of Common Stock issuable upon exercise thereof were issued or will be issued, respectively, in reliance on the exemptions from registration provided by Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder, for transactions not involving a public offering. Pursuant to the Purchase Agreements, within
13
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE E — CAPITAL STOCK, continued
Registered Direct Offering, continued
The Private Common Warrants are recorded as a liability in the condensed consolidated balance sheet and were recorded at fair value and will be marked to market at each period end (see Note I). Additionally, the Company incurred $
In connection with the RDO and the Purchase Agreements, the Company agreed to reduce the exercise price of warrants previously issued to the Purchasers with exercise prices ranging from $
Nasdaq Stockholders’ Equity Requirement Deficiency Notice
On May 16, 2024, the Company received a deficiency letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it is not in compliance with the minimum stockholders’ equity requirement of at least $2,500,000 for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). In the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, the Company reported stockholders’ equity of ($
As described above, on May 29, 2024, the Company closed the Offering and received net proceeds, after deducting placement agent fees and other offering expenses payable by the Company, of approximately $
On June 27, 2024, the Company received formal notification from Nasdaq confirming that, based on the information contained in the Company’s Form 8-K, dated June 18, 2024, the Company complies with the Stockholders’ Equity Requirement.
14
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE E — CAPITAL STOCK, continued
ATM
On November 7, 2023, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC, as sales agent (the “Agent”), pursuant to which the Company may, from time to time, issue and sell shares of its Common Stock in an aggregate offering price of up to $
The offer and sales of the shares of Common Stock made pursuant to the Equity Distribution Agreement, will be made under the Company’s effective “shelf” registration statement on Form S-3. Under the terms of the Equity Distribution Agreement, the Agent may sell the shares of Common Stock at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended. As of June 30, 2024, the Company has issued
As a result of the issuance of Common Stock under this Equity Distribution Agreement, the exercise price of the
15
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE F —WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding. These warrants were granted as part of financing transactions, as well as in lieu of cash compensation for services performed or as financing expenses in connection with the sales of the Company’s common stock.
Weighted | |||||
Average | |||||
Exercise | |||||
Number of | Price Per | ||||
| Shares |
| Share | ||
Balance at October 1, 2023 |
| | $ | | |
Granted |
| |
| | |
Exercised |
| ( |
| | |
Cancelled or expired |
| ( |
| | |
Balance at June 30, 2024 |
| | $ | |
The
NOTE G — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under an operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a
Employment Agreement
The employment agreement with Dr. James Hayward, the Company’s President and CEO, entered into in July 2016 provides that he will be the Company’s CEO and will continue to serve on the Company’s Board of Directors. The initial term was from July 1, 2016 through June 30, 2017, with automatic
16
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE G — COMMITMENTS AND CONTINGENCIES, continued
Employment Agreement, continued
Upon termination due to death or disability, the CEO will generally be entitled to receive the same payments and benefits he would have received if his employment had been terminated by the Company without cause (as described in the preceding paragraph), other than salary continuation payments.
On October 29, 2021, the Board of Directors amended the existing compensatory arrangement with the CEO to increase his salary to $
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. There is no pending litigation involving the Company at this time.
17
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE H – SEGMENT INFORMATION
As detailed in Note B above, the Company has
Information regarding operations by segment for the three-month period ended June 30, 2024 is as follows:
Therapeutic DNA | MDx Testing | DNA Tagging and |
| |||||||||
| Production |
| Services and Kits |
| Security Products |
| Consolidated | |||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Product revenues | $ | | $ | — | $ | | $ | | ||||
Service revenues |
| |
| — |
| |
| | ||||
Clinical laboratory service revenues |
| — |
| |
| — |
| | ||||
Less intersegment revenues |
| — |
| ( |
| — |
| ( | ||||
Total revenues | | | | | ||||||||
Gross profit | | ( | | | ||||||||
Loss from segment operations (a) | ( | ( | ( | ( |
Information regarding operations by segment for the three-month period ended June 30, 2023 is as follows:
Therapeutic DNA | MDx Testing | DNA Tagging and |
| |||||||||
| Production |
| Services |
| Security Products |
| Consolidated | |||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Product revenues | $ | | $ | — | $ | | $ | | ||||
Service revenues |
| |
| — |
| |
| | ||||
Clinical laboratory service revenues |
| — |
| |
| — |
| | ||||
Less intersegment revenues |
| — |
| ( |
| — |
| ( | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Gross profit | $ | | $ | | $ | | $ | | ||||
(Loss) income from segment operations (a) | $ | ( | $ | | $ | ( | $ | ( |
Information regarding operations by segment for the nine-month period ended June 30, 2024 is as follows:
Therapeutic DNA | MDx Testing | DNA Tagging and |
| |||||||||
| Production |
| Services and Kits |
| Security Products |
| Consolidated | |||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Product revenues | $ | | $ | — | $ | | $ | | ||||
Service revenues |
| |
| — |
| |
| | ||||
Clinical laboratory service revenues |
| — |
| |
| — |
| | ||||
Less intersegment revenues |
| — |
| ( |
| — |
| ( | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Gross profit | $ | | $ | ( | $ | | $ | | ||||
Loss from segment operations (a) | $ | ( | $ | ( | $ | ( | $ | ( |
18
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE H – SEGMENT INFORMATION, continued
Information regarding operations by segment for the nine-month period ended June 30, 2023 is as follows:
Therapeutic DNA | MDx Testing | DNA Tagging and |
| |||||||||
| Production |
| Services |
| Security Products |
| Consolidated | |||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Product revenues | $ | | $ | — | $ | | $ | | ||||
Service revenues |
| |
| — |
| |
| | ||||
Clinical laboratory service revenues |
| — |
| |
| — |
| | ||||
Less intersegment revenues |
| — |
| ( |
| — |
| ( | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Gross profit | $ | | $ | | $ | | $ | | ||||
(Loss) income from segment operations (a) | $ | ( | $ | | $ | ( | $ | ( |
The following shows reconciliation of loss from segment operations to Corporate (loss) income for the three-month periods ended:
June 30, | ||||||
| 2024 |
| 2023 | |||
Loss from operations of reportable segments | $ | ( | $ | ( | ||
General corporate expenses (b) |
| ( |
| ( | ||
Interest income |
| |
| | ||
Unrealized gain (loss) on change in fair value of warrants classified as a liability | | ( | ||||
Other (expense) income, net | ( | ( | ||||
Consolidated income (loss) before provision for income taxes | $ | | $ | ( |
The following shows reconciliation of loss from segment operations to Corporate loss for the nine-month periods ended:
June 30, | ||||||
| 2024 |
| 2023 | |||
Loss from operations of reportable segments | $ | ( | $ | ( | ||
General corporate expenses (b) |
| ( |
| ( | ||
Interest income |
| |
| | ||
Unrealized gain on change in fair value of warrants classified as a liability |
| |
| | ||
Unrealized loss on change in fair value of warrants classified as a liability - warrant modification | ( | — | ||||
Transaction costs allocated to registered direct offering | ( | — | ||||
Loss on issuance of warrants | ( | — | ||||
Other (expense) income, net |
| ( |
| | ||
Consolidated loss before provision for income taxes | $ | ( | $ | ( |
(a) | Segment operating (loss) income consists of net sales, less cost of sales, specifically identifiable research and development, and selling, general and administrative expenses. |
(b) | General corporate expenses consist of selling, general and administrative expenses that are not specifically identifiable to a segment. |
19
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments at fair value are measured on a recurring basis. Related unrealized gains or losses are recognized in unrealized gain (loss) on change in fair value of the warrants classified as a liability in the condensed consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note B.
The following table presents the fair value of the Company’s financial instruments as of June 30, 2024 and summarizes the significant unobservable inputs in fair value measurement of Level 3 financial assets and liabilities as of June 30, 2024. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of June 30, 2024.
Fair value at | Valuation | Unobservable | Volatility |
| ||||||
| June 30, 2024 |
| Technique |
| Input |
| Input |
| ||
Liabilities: |
|
|
|
|
|
|
| |||
Common Warrants | $ | | Monte Carlo simulation |
| Annualized volatility | | % | |||
Series A Warrants | $ | | Monte Carlo simulation | Annualized volatility | | % | ||||
Series A Warrants - modified | $ | | Monte Carlo simulation | Annualized volatility | | % | ||||
Private Common Warrants | $ | | Monte Carlo simulation | Annualized volatility | | % |
The change in fair value of the Common Warrants, the Series A Warrants and the Private Common Warrants for the three-month period ended June 30, 2024 is summarized as follows:
| Series A | Private | |||||||||||||
Common | Series A | Warrants- | Common | ||||||||||||
Warrants |
| Warrants |
| modified |
| Warrants |
| Totals | |||||||
Fair value at April 1, 2024 | $ | | $ | | $ | | $ | | $ | | |||||
( | ( |
| ( |
| ( | ( | |||||||||
Fair Value at June 30, 2024 | $ | | $ | | $ | | $ | | $ | |
The change in fair value of the Common Warrants, the Series A Warrants and the Private Common Warrants for the nine-month period ended June 30, 2024 is summarized as follows:
|
| Series A |
| Private |
| ||||||||||
Common | Series A | Warrants- | Common | ||||||||||||
Warrants | Warrants | modified | Warrants | Totals | |||||||||||
Fair value at October 1, 2023 | $ | | $ | |
| $ | |
| $ | — | $ | | |||
Fair value at February 2, 2024 |
| — |
| — |
| — |
| |
| | |||||
Change in fair value-warrant modification |
| |
| — |
| |
| — |
| | |||||
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Fair Value at June 30, 2024 | $ | | $ | | $ | | $ | | $ | |
20
APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2024
(Unaudited)
NOTE J – SUBSEQUENT EVENTS
Nasdaq Minimum Bid Requirement Deficiency Notification
On July 12, 2024, the Company received written notice (the “Notification Letter”) from the Listing Qualifications Department of Nasdaq notifying the Company that it is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of thirty (30) consecutive business days. Based on the closing bid price of the Company’s Common Stock for the thirty (30) consecutive business days from May 28, 2024 to July 11, 2024, the Company no longer meets the minimum bid price requirement.
The Company intends to implement a reverse stock split of its outstanding securities, subject to shareholder approval, to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules and to comply with the provisions of the Series Warrants unless the Company otherwise regains compliance with the minimum bid price requirements by January 8, 2025, or if granted a 180-calendar day extension to the compliance period, by July 7, 2025.
August 2024 Special Shareholder Meeting
On August 2, 2024, the Company held the August 2024 Special Meeting to obtain Warrant Stockholder Approval for the May 2024 Series Warrants. At the August 2024 Special Meeting, an aggregate of
Pursuant to the terms of the May 2024 Series Warrants, since the Company did not obtain Warrant Stockholder Approval at the Special Meeting, it is obligated to call a subsequent stockholder meeting to seek to obtain Warrant Stockholder Approval.
21
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (including but not limited to this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to qualify for the “safe harbor” created by those sections. In addition, we may make forward-looking statements in other documents filed with or furnished to the Securities and Exchange Commission (“SEC”), and our management and other representatives may make forward-looking statements orally or in writing to analysts, investors, representatives of the media and others. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts and include, but are not limited to, statements using terminology such as “can”, “may”, “could”, “should”, “assume”, “forecasts”, “believe”, “designed to”, “will”, “expect”, “plan”, “anticipate”, “estimate”, “potential”, “position”, “predicts”, “strategy”, “guidance”, “intend”, “budget”, “seek”, “project” or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:
● | discuss our future expectations; |
● | contain projections of our future results of operations or of our financial condition; and |
● | state other “forward-looking” information. |
We believe it is important to communicate our expectations. However, forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry and are subject to known and unknown risks, uncertainties and other factors. Accordingly, our actual results and the timing of certain events may differ materially from those expressed or implied in such forward-looking statements due to a variety of factors and risks, including, but not limited to, those set forth in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report, those set forth from time to time in our other filings with the SEC, including our Annual Report on Form 10-K, for the fiscal year ended September 30, 2023, as amended, and the following factors and risks:
● | our expectations of future revenues, expenditures, capital or other funding requirements; |
● | the adequacy of our cash and working capital to fund present and planned operations and growth; |
● | the substantial doubt relating to our ability to continue as a going concern; |
● | our need for additional financing which may in turn require the issuance of additional shares of common stock, preferred stock or other debt or equity securities (including convertible securities) which would dilute the ownership held by stockholders; |
● | our business strategy and the timing of our expansion plans, including the development of new production facilities for our Therapeutic DNA Production Services; |
● | demand for Therapeutic DNA Production Services; |
● | demand for DNA Tagging Services; |
● | demand for MDx Testing Services; |
22
● | our expectations concerning existing or potential development and license agreements for third-party collaborations or joint ventures; |
● | regulatory approval and compliance for our Therapeutic DNA Production Services, upon which our business strategy is substantially dependent; |
● | whether we are able to achieve the benefits expected from the acquisition of Spindle Biotech, Inc. (“Spindle”); |
● | the effect of governmental regulations generally; |
● | our expectations of when regulatory submissions may be filed or when regulatory approvals may be received; |
● | our expectations concerning product candidates for our technologies; |
● | our expectations of when or if we will become profitable; |
● | our current non-compliance with Nasdaq’s minimum bid price requirements may lead to delisting, potentially negatively impacting our business, our ability to raise capital and the market price and liquidity of our common stock, par value $0.001 per share (the “Common Stock”); and |
● | The risk that our laboratory developed tests (“LDTs”) may become subject to additional regulatory requirements due to FDA rulemaking activity, and that compliance with such requirements may be expensive and time-consuming, resulting in significant or unanticipated delays. |
Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in our forward-looking statements. Among the factors that could affect future results are:
● | the inherent uncertainties of product development based on our new and as yet not fully proven technologies; |
● | the risks and uncertainties regarding the actual effect on humans of seemingly safe and efficacious formulations and treatments when tested clinically; |
● | formulations and treatments that utilize our Therapeutic DNA Production Services; |
● | the inherent uncertainties associated with clinical trials of product candidates, including product candidates that utilize our Therapeutic DNA Production Services; |
● | the inherent uncertainties associated with the process of obtaining regulatory clearance or approval to market product candidates, including product candidates that utilize our Therapeutic DNA Production Services; |
● | the inherent uncertainties associated with commercialization of products that have received regulatory clearance or approval, including products that utilize our Therapeutic DNA Production Services; |
● | the inherent uncertainties associated with commercialization of our PGx Testing Services; |
● | economic and industry conditions generally and in our specific markets; |
● | the volatility of, and decline in, our stock price; and |
● | our ability to obtain the necessary financing to fund our operations and effect our strategic development plan. |
23
All forward-looking statements and risk factors included in this Quarterly Report are made as of the date hereof, based on information available to us as of such date, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time.
Forward-looking statements may include our plans and objectives for future operations, including plans and objectives relating to our products and our future economic performance, projections, business strategy and timing and likelihood of success. Assumptions relating to the forward-looking statements included in this Quarterly Report involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, demand for our products and services, and the time and money required to successfully complete development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many of which are beyond our control.
Any of the assumptions underlying the forward-looking statements contained in this Quarterly Report could prove inaccurate and, therefore, we cannot assure you that any of the results or events contemplated in any of such forward-looking statements will be realized. Based on the significant uncertainties inherent in these forward-looking statements, the inclusion of any such statement should not be regarded as a representation or as a guarantee by us that our objectives or plans will be achieved, and we caution you against relying on any of the forward looking statements contained herein.
Our trademarks currently used in the United States include Applied DNA Sciences®, SigNature® molecular tags, SigNature® T molecular tags, fiberTyping®, SigNify®, Beacon®, CertainT®, Linea™ DNA, Linea™ RNAP, Linea™ and TR8TM pharmacogenetic testing. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. All trademarks, service marks and trade names included in this Quarterly Report on Form 10-Q are the property of the respective owners.
Introduction
We are a biotechnology company developing and commercializing technologies to produce and detect DNA and RNA. Using PCR to enable the production and detection of DNA and RNA, we currently operate in three primary business markets: (i) the enzymatic manufacture of synthetic DNA for use in the production of nucleic acid-based therapeutics (including biologics and drugs) and, through our recent acquisition of Spindle, the development and sale of a proprietary RNAP for use in the production of mRNA therapeutics (“Therapeutic DNA Production Services”); (ii) the detection of DNA and RNA in molecular diagnostics and genetic testing services (“MDx Testing Services”); and (iii) the manufacture and detection of DNA for industrial supply chains and security services (“DNA Tagging and Security Products and Services”).
Our current growth strategy is to primarily focus our resources on the further development, commercialization, and customer adoption of our Therapeutic DNA Production Services, including the expansion of our contract development and manufacturing operation (“CDMO”) for the manufacture of synthetic DNA for use in the production of nucleic acid-based therapies, and to further expand and commercialize our MDx Testing Services through genetic testing.
We will continue to update our business strategy and monitor the use of our resources regarding our various business markets. In addition, we expect that based on available opportunities and our beliefs regarding future opportunities, we will continue to modify and refine our business strategy.
Therapeutic DNA Production Services
We are developing and commercializing our Linea DNA and Linea IVT platforms for the manufacture of synthetic DNA for use in the production of nucleic acid-based therapeutics.
Linea DNA Platform
Our Linea DNA platform is our core enabling technology, and enables the rapid, efficient, and large-scale cell-free manufacture of high-fidelity DNA sequences for use in the manufacturing of a broad range of nucleic acid-based therapeutics. The Linea DNA platform enzymatically produces a linear form of DNA we call “LineaDNA” that is an alternative to plasmid-based DNA manufacturing technologies that have supplied the DNA used in biotherapeutics for the past 40 years.
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As of the first quarter of calendar year 2024, there were 4,047 gene, cell and RNA therapies in development from preclinical through pre-registration stages, almost all of which use DNA in their manufacturing process. (Source: ASGCT Gene, Cell & RNA Therapy Landscape: Q2 2024 Quarterly Report). Due to what we believe are the Linea DNA platform’s numerous advantages over legacy nucleic acid-based therapeutic manufacturing platforms, we believe this large number of therapies under development represents a substantial market opportunity for the Linea DNA platform to supplant legacy manufacturing methods in the manufacture of nucleic acid-based therapies.
We believe our Linea DNA platform holds several important advantages over existing cell-based plasmid DNA manufacturing platforms. Plasmid-based DNA manufacturing is based on the complex, costly and time-consuming biological process of amplifying DNA in living bacterial cells. Once amplified, the DNA must be separated from the living cells and other process contaminants via multiple rounds of purification, adding further complexity and costs. Unlike plasmid-based DNA manufacturing, the Linea DNA platform does not require living cells and instead amplifies DNA via the enzymatic process of PCR. The Linea DNA platform is simple and can rapidly produce very large quantities of DNA without the need for complex purification steps.
We believe the key advantages of the Linea DNA platform include:
● | Speed – Production of Linea DNA can be measured in terms of hours, not days and weeks as is the case with plasmid-based DNA manufacturing platforms. |
● | Scalability – Linea DNA production takes place on efficient bench-top instruments, allowing for rapid scalability in a minimal footprint. |
● | Purity – DNA produced via PCR is pure, resulting in only large quantities of only the target DNA sequence. Unwanted DNA sequences such as the plasmid backbone and antibiotic resistance genes, inherent to plasmid DNA, are not present in Linea DNA. |
● | Simplicity – The production of Linea DNA is streamlined relative to plasmid-based DNA production. Linea DNA requires only four primary ingredients, does not require living cells or complex fermentation systems and does not require multiple rounds of purification. |
● | Flexibility – DNA produced via the Linea DNA platform can be easily chemically modified to suit specific customer applications. In addition, the Linea DNA platform can produce a wide range of complex DNA sequences that are difficult to produce via plasmid-based DNA production platforms. These complex sequences include inverted terminal repeats (“ITRs”) and long homopolymers such as polyadenylation sequences (poly (A) tail) important for gene therapy and mRNA therapies, respectively. |
Preclinical studies conducted by us have shown that Linea DNA is substitutable for plasmid DNA in numerous nucleic acid-based therapies, including:
● | DNA vaccines; |
● | DNA templates to produce RNA, including mRNA therapeutics; and |
● | adoptive cell therapy (CAR-T) manufacturing. |
Further, we believe that Linea DNA is also substitutable for plasmid DNA in the following nucleic acid-based therapies:
● | viral vector manufacturing for in vivo and ex vivo gene editing; |
● | clustered regularly interspaced short palindromic repeats (“CRISPR”)-mediated gene therapy; and |
● | non-viral gene therapy. |
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Linea IVT Platform
The number of mRNA therapies under development is growing at a rapid rate, thanks in part to the success of the mRNA COVID-19 vaccines. mRNA therapeutics are produced via a process called in vitro transcription (“IVT”) that requires DNA as a starting material. As of the 1st quarter of calendar 2024, there were over 450 mRNA therapies under development, with the majority of these therapies (66%) in the preclinical stage (Source: ASGCT Gene, Cell & RNA Therapy Landscape: Q1 2024 Quarterly Report). The Company believes that the mRNA market is in a nascent stage that represents a large growth opportunity for the Company via the production and supply of DNA critical starting materials and RNAP to produce mRNA therapies.
In August 2022, we launched DNA IVT templates manufactured via its Linea DNA platform and have since secured proof of concept contracts with numerous mRNA manufacturing customers. In response to this demand, the continued growth of the mRNA therapeutic market, and the unique abilities of the Linea DNA platform, the Company acquired Spindle in July 2023 to potentially increase its mRNA-related total addressable market (“TAM”).
Through our acquisition of Spindle, we launched our Linea IVT platform in July 2023, which combines Spindle’s proprietary high-performance RNAP, now marketed by the Company as Linea RNAP, with our enzymatically produced Linea DNA IVT templates. We believe the Linea IVT platform enables our customers to make better mRNA, faster. Based on data generated by the Company, we believe the integrated Linea IVT platform offers the following advantages over conventional mRNA production to therapy developers and manufacturers:
● | The prevention or reduction of double stranded RNA (“dsRNA”) contamination resulting in higher target mRNA yields with the potential to reduce downstream processing steps. dsRNA is a problematic immunogenic byproduct produced during conventional mRNA manufacture; |
● | delivery of IVT templates in as little as 14 days for milligram scale and 30 days for gram scale; and |
● | reduced mRNA manufacturing complexities; and |
● | potentially enabling mRNA manufactures to produce mRNA drug substance in less than 45 days. |
According to the Company’s internal modeling, the ability to sell both Linea DNA IVT templates and Linea RNAP under the Linea IVT platform potentially increases the Company’s mRNA-related TAM by approximately 3-5x as compared to selling Linea DNA IVT templates alone, while also providing a more competitive offering to the mRNA manufacturing market. Currently, Linea RNAP is produced for the Company under an ISO 13485 quality system by Alphazyme, LLC a third-party CDMO located in the United States. The Company recently completed manufacturing process development work on its Linea RNAP to increase production scale of the enzyme and reduce unit costs.
Manufacturing Scale-up
We plan to offer several quality grades of Linea DNA, each of which will have different permitted uses.
Quality Grade | Permitted Use | Company Status |
GLP | Research and pre-clinical discovery | Currently available |
GMP for Starting Materials | DNA critical starting materials for the production of mRNA therapies | Planned availability in Q3 of CY2024 |
GMP | DNA biologic, drug substance and/or drug product | Planned availability second half of CY 2025 (1) |
(1) | Dependent on the availability of future financing. |
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We are currently manufacturing Linea DNA pursuant to Good Laboratory Practices (“GLP”) and, are creating a fit for purpose manufacturing facility within our current Stony Brook, NY laboratory space capable of producing Linea DNA IVT templates under Good Manufacturing Practices (“GMP”) suitable for use as a critical starting material for clinical and commercial mRNA therapeutics, with a planned completion date in the third quarter of calendar year 2024 (“GMP Site 1”). We also plan to offer additional capacity for Linea DNA IVT templates as well as capacity for Linea DNA materials manufactured under GMP suitable for use as, or incorporation into, a biologic, drug substance and/or drug product, with availability expected during the second half of calendar year 2025, dependent upon the availability of future funding (“GMP Site 2”). GMP is a quality standard used globally and by the U.S. Food and Drug Administration (“FDA”) to ensure pharmaceutical quality. Drug substances are the pharmaceutically active components of drug products.
Segment Business Strategy
Our business strategy for our Therapeutic DNA Production Services is to capitalize upon the rapid growth of mRNA therapies in the near term via our planned near term future availability of Linea DNA IVT templates manufactured under GMP at our GMP Site 1, while at the same time laying the basis for additional clinical and commercial applications of Linea DNA with our future planned availability of Linea DNA manufactured under GMP suitable for use as, or incorporation into, a biologic, drug substance and/or drug product at planned GMP Site 2. Planned GMP Site 2 may also be used for additional Linea DNA IVT template manufacturing if customer demand exceeds capacity of GMP Site 1. Our current plan is: (i) through our Linea IVT platform and planned near term future GMP manufacturing capabilities for IVT templates at GMP Site 1 to secure commercial-scale supply contracts with clinical and commercial mRNA and/or self-amplifying mRNA (“sa-RNA”) manufacturers for Linea DNA IVT templates and/or Linea RNAP as critical starting materials; (ii) to utilize our current GLP production capacity for non-IVT template applications to secure supply and/or development contracts with pre-clinical therapy developers that use DNA in their therapy manufacturing, and (iii) upon our development of our planned future Linea DNA production under GMP suitable for use as, or incorporation into, a biologic, drug substance and/or drug product at planned GMP Site 2, to convert existing and new Linea DNA customers into large-scale supply contracts to supply Linea DNA for clinical and commercial use as, or incorporation into, a biologic, drug substance and/or drug product in a wide range of nucleic acid therapies. Until we complete our GMP Site 1 to produce DNA critical starting materials (DNA IVT templates) for mRNA manufacturing, we will not be able to realize significant revenues from this business. We estimate the cost of creating GMP Site 1 will be approximately $1.5 million. If we were to expand our facilities to enable GMP production of Linea DNA for use as, or incorporation, into a biologic, drug substance and/or drug product as planned for GMP Site 2, the cost may be up to approximately $10 million which would require additional funding. We are currently building GMP Site 1 within our existing laboratory space. We anticipate that a GMP Site 2 would require us to acquire additional space.
In addition, we plan to leverage our Therapeutic DNA Production Services and deep knowledge of PCR to develop and monetize, ourselves or with strategic partners, one or more Linea DNA-based therapeutic or prophylactic vaccines for high-value veterinary health indications (collectively “Linea DNA Vaccines”). We currently seek to commercialize our Linea DNA Vaccines in conjunction with lipid nanoparticle (“LNP”) encapsulation to facilitate intramuscular (“IM”) administration. We have recently demonstrated in vitro and in vivo (mice studies) expression of generic reporter proteins via Linea DNA encapsulated by LNPs. For the in vivo study, successful expression of the LNP-encapsulated Linea DNA was administered and achieved via IM injection. We believe that our Linea DNA Vaccines under development provide a substantial advantage over plasmid DNA-based vaccines for the veterinary health market.
MDx Testing Services
Through Applied DNA Clinical Labs, LLC (“ADCL”), we leverage our expertise in DNA and RNA detection via PCR to provide and develop clinical molecular diagnostics and genetic (collectively “MDx”) Testing Services. ADCL is a New York State Department of Health (“NYSDOH”) clinical laboratory improvement amendments (CLIA)-certified laboratory which is currently permitted for virology and genetics (molecular). In providing MDx Testing Services, ADCL employs its own or third-party molecular diagnostic tests.
We have successfully validated internally our pharmacogenomics testing services (the “PGx Testing Services”). Our PGx Testing Services utilizes a 120-target PGx panel test to evaluate the unique genotype of a specific patient to help guide the patient’s healthcare provider in making individual drug therapy decisions. Our PGx Testing Services are designed to interrogate DNA targets on over 33 genes and provide genotyping information relevant to certain cardiac, mental health, oncology, and pain management drug therapies.
On June 12, 2024 we received full approval from NYSDOH for our PGx Testing Services. Recently published studies show that population-scale PGx enabled medication management can significantly reduce overall population healthcare costs, reduce adverse drug events, and increase overall population wellbeing. These benefits can result in significant cost savings to large entities and self-insured
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employers, the latter accounting for approximately 65% of all U.S. employers in 2022.We plan to leverage our PGx Testing Services to provide PGx testing services to large entities, self-insured employers and healthcare providers, as well as concierge healthcare providers.
Historically, the majority of our revenue attributable to our MDx Testing Services has been derived from our safeCircle® COVID-19 testing solutions, for which testing demand has significantly declined commencing in our fiscal third quarter of 2023, resulting in substantially reduced revenues. We expect future demand for COVID-19 testing to continue to be reduced and we may terminate COVID-19 testing services in the future.
DNA Tagging and Security Products and Services
By leveraging our expertise in both the manufacture and detection of DNA via PCR, our DNA Tagging and Security Products and Services allow our customers to use non-biologic DNA tags manufactured on our Linea DNA platform to mark objects in a unique manner and then identify these objects by detecting the absence or presence of the DNA tag. The Company’s core DNA Tagging and Security Products and Services, which are marketed collectively as a platform under the trademark CertainT®, include:
● | SigNature® Molecular Tags, which are short non-biologic DNA taggants produced by the Company’s Linea DNA platform, provide a methodology to authenticate goods within large and complex supply chains with a focus on cotton, nutraceuticals and other products. |
● | SigNify® portable DNA readers and SigNify consumable reagent test kits provide definitive real-time authentication of the Company’s DNA tags in the field. |
● | fiberTyping® and other product genotyping services use PCR-based DNA detection to determine a cotton species or cultivar, via a product’s naturally occurring DNA sequence for the purposes of product provenance authentication. |
● | Isotopic analysis testing services, provided in partnership with third-party labs, use cotton’s carbon, hydrogen and oxygen elements to indicate origin of its fiber through finished goods. |
To date, our largest commercial application for our DNA Tagging and Security Products and Services is in the tracking and provenance authentication of cotton.
Our business plan is to leverage consumer and governmental awareness for product traceability to expand our existing partnerships and seek new partnerships for our DNA Tagging and Security Products and Services with a focus on cotton.
FDA Publishes Final Rule on Laboratory Developed Tests
As an LDT, our MDx Testing Services are currently subject to enforcement discretion by the FDA. On April 29, 2024, however, the FDA published a final rule on LDTs, in which FDA outlines its plans to end enforcement discretion for many LDTs in five stages over a four-year period. In Phase 1 (effective May 6, 2025), clinical laboratories running LDTs will be required to comply with medical device (adverse event) reporting and correction/removal reporting requirements, as well as requirements for maintenance of complaint files under the FDA’s quality systems regulation (QSR). In Phase 2 (effective May 6, 2026), clinical laboratories will be required to comply with all other device requirements (e.g., registration/listing, labeling, investigational use), except for the remaining QSR requirements and premarket review. In Phase 3 (effective May 6, 2027), clinical laboratories will be required to comply with all remaining QSR requirements. In Phase 4 (effective ~November 6, 2027), clinical laboratories will be required to comply with premarket review requirements for high-risk tests (i.e., tests subject to the premarket approval (PMA) requirement). Finally, in Phase 5 (effective May 6, 2028), clinical laboratories will be required to comply with premarket review requirements for moderate- and low-risk tests (i.e., tests subject to the de novo or 510(k) requirement).
Under the final rule, several types of tests will be eligible for some degree of continued enforcement discretion, including LDTs approved by NYSDOH. FDA notes, however, that it retains discretion to pursue enforcement action for violations of the Federal Drug and Cosmetics Act at any time and intends to do so when appropriate. FDA further explains that it may update any of the enforcement discretion policies set forth in the final rule as circumstances warrant or if the circumstances that inform those policies change, consistent with FDA’s good guidance practices. Based on our current analysis of the FDA final rule, and assuming the final rule goes into effect without modification, we believe that ADCL’s current and future NYSDOH approved LDTs, which includes our under development
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PGx Testing Services, will be exempt from FDA premarket review requirements but will remain subject to the requirements of Phases 1 through 3.
Plan of Operations
General
Historically, a substantial portion of our revenues has been generated from our safeCircle COVID-19 testing solutions, for which testing demand has significantly dropped. While we continue to support several safeCircle customers, we are currently observing a marked decrease in market demand for COVID-19 testing, resulting in significantly reduced revenues. We expect future demand for COVID-19 testing to continue to be reduced. We expect future growth in revenues to be derived from our Therapeutic DNA Production Services and our MDx Testing Services, as the latter transitions to a focus on genetic testing. To a lesser extent, we expect to grow revenues from our DNA Tagging and Security Products and Services offerings as we work with companies and governments to secure supply chains for various types of products and product labeling throughout the world with a focus on cotton provenance. We have continued to incur expenses in expanding our business to meet current and anticipated future demand. We have limited sources of liquidity. We will continue to update our business strategy and monitor the use of our resources regarding our various business markets. In addition, we expect that based on available opportunities and our beliefs regarding future opportunities, we will continue to modify and refine our business strategy.
Comparison of Results of Operations for the Three-Month Periods Ended June 30, 2024 and 2023
Revenues
Product revenues
For the three-month periods ended June 30, 2024 and 2023, we generated $246,644 and $316,950 in revenues from product sales, respectively. Product revenue decreased by $70,306 or 22% for the three-month period ended June 30, 2024 as compared to the three-month period ended June 30, 2023. The decrease in product revenues was primarily related to a decrease of approximately $60,000 within our DNA Tagging and Security Products and Services segment including a decrease in shipments for consumer asset marking of approximately $43,000 as well as decreased revenues from a nutraceutical customer totaling approximately $12,000. The decrease also related to a decrease within our Therapeutic DNA Production Services segment due to a slight decrease of approximately $12,000 in revenues for our large-scale DNA production.
Service Revenues
For the three month periods ended June 30, 2024 and 2023 we generated $226,145 and $425,694 in revenues from sales of services, respectively. The decrease in service revenues of $199,549 or 47% for the three-month period ended June 30, 2024, as compared to the same period in the prior fiscal year is attributable to decreases of $117,000 for research and development projects in our Therapeutic DNA Production Services segment and $73,000 for isotopic testing for textiles within our DNA Tagging and Security Products and Services segment, respectively.
Clinical Laboratory Service Revenues
For the three-month periods ended June 30, 2024 and 2023, we generated $324,730 and $2,174,697 in revenues from our clinical laboratory testing services, respectively. The decrease in service revenues of $1,849,967 or 85% for the three month period ended June 30, 2024 as compared to the same period in the prior fiscal year is attributable to a decrease from COVID surveillance testing. The three-month period ended June 30, 2023 included testing revenues under our contract with the City University of New York (“CUNY”), which terminated during June 2023.
Cost and Expenses
Gross Profit
Gross profit for the three-month period ended June 30, 2024, decreased by $1,024,086 or 81% from $1,269,318 for the three-month period ended June 30, 2023 to $245,232. The gross profit percentage was 31% and 44% for the three-month periods ended June 30,
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2024 and 2023, respectively. The decrease in gross profit percentage was primarily the result of a decline in gross profit percentage for our MDx Testing Services segment specifically related to significantly decreased testing volumes year over year, as well as MDx Testing Services comprising a smaller percentage of our total revenue for the three-month period ended June 30, 2024 compared to the same period in the prior fiscal year.
Selling, General and Administrative
Selling, general and administrative expenses for the three-month period ended June 30, 2024 decreased by $613,410 or 19% to $2,678,894 as compared to $3,292,304 for the three-month period ended June 30, 2023. The decrease is primarily attributable to a decrease in stock based compensation expense of approximately $310,000 for the annual option grant to the non-employee members of our board of directors and officer restricted stock unit grants becoming fully vested in January and March 2024, respectively. Additional decreases related to a decrease in consulting expense of $191,000. The decrease in consulting expense was from the closure of our APDN Europe subsidiary, as well as a decrease in consulting expense from our MDX Testing services segment. There was also a decrease in insurance expense of approximately $52,000 due to a decrease in our director and officer insurance premiums, as well as approximately a $34,000 decrease in provision for bad debts.
Research and Development
Research and development expenses increased to $913,031 for the three-month period ended June 30, 2024 from $836,123 for the three-month period ended June 30, 2023, an increase of $76,908 or 9%. This increase is primarily due to an increase of approximately $135,000 for the development of an enzyme for use in our Therapeutic DNA Production Services segment, as well as approximately $70,000 for consultants being utilized to further develop the technology acquired from the Spindle acquisition. These increases were offset by a decrease in depreciation expense costs associated with laboratory equipment becoming fully depreciated period over period of approximately $163,000.
Interest income
Interest income for the three-month period ended June 30, 2024 was $36,295 as compared to $26,783 in the three-month period ended June 30, 2023.
Unrealized gain (loss) on change in fair value of warrants classified as a liability
Unrealized gain (loss) on change in fair value of warrants classified as a liability was a gain of $5,160,000 and loss of $278,400 for the three-month periods ended June 30, 2024 and 2023, respectively. The primary driver of the change is the decrease in our stock price.
Other (expense) income, net
Other (expense) income, net for the three-month periods ended June 30, 2024 and 2023, was expense of $101 and $3,469, respectively.
Loss from operations
Loss from operations increased $487,584, or 17% to $3,346,693 for the three-month period ended June 30, 2024 compared to $2,859,109 for the three-month period ended June 30, 2023 due to the factors noted above.
Comparison of Results of Operations for the Nine-month Periods Ended June 30, 2024 and 2023
Revenues
Product revenues
For the nine-month periods ended June 30, 2024 and 2023, we generated $947,086 and $1,130,800 in revenues from product sales, respectively. Product revenue decreased by $183,714 or 16% for the nine-month period ended June 30, 2024 as compared to the nine-month period ended June 30, 2023. The decrease in product revenues was primarily due to a decrease of approximately $119,000 within our DNA Tagging and Security Products and Services segment due to decreased revenue from our consumer asset marking and textile customers of approximately $103,000 and $65,000, respectively. These decreases were offset by an increase in shipments to a
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nutraceutical customer of approximately $49,000. The remainder of the decrease in product revenue was within our Therapeutic DNA Production Services segment related to a decrease in shipments for our large scale DNA production of approximately $83,000.
Service revenues
For the nine-month periods ended June 30, 2024 and 2023 we generated $678,777 and $826,813 in revenues from sales of services, respectively. The decrease in service revenues of $148,036 or 18% for the nine-month period ended June 30, 2024, as compared to the same period in the prior fiscal year is attributable to a decrease of approximately $231,000 related to research and development projects within our Therapeutic DNA Production Services segment, offset by an increase of approximately $132,000 for isotopic testing for textiles within our DNA Tagging and Security Products and Services segment.
Clinical laboratory service revenues
For the nine month periods ended June 30, 2024 and 2023, we generated $992,450 and $10,630,094 in revenues from our clinical laboratory testing services, respectively. The decrease in service revenues of $9,637,644 or 91% for the nine-month period ended June 30, 2024 as compared to the same period in the prior fiscal year is attributable to a decrease from COVID-19 testing services. The nine-months ended June 30, 2023 included testing revenues under our contract with CUNY, which terminated during June 2023.
Cost and Expenses
Gross Profit
Gross profit for the nine-month period ended June 30, 2024, decreased by $4,682,456 or 86% from $5,454,436 for the nine-month period ended June 30, 2023 to $771,980. The gross profit percentage was 29% and 43% for the nine-month periods ended June 30, 2024 and 2023, respectively. The decrease in gross profit percentage was primarily the result of a decline in gross profit percentage for our MDx Testing Services segment specifically related to significantly decreased testing volumes year over year.
Selling, General and Administrative
Selling, general and administrative expenses for the nine-month period ended June 30, 2024 decreased by $677,284 or 7% to $8,763,450 as compared to $9,440,734 for the nine-month period ended June 30, 2023. The decrease is primarily attributable to a decrease in payroll for bonuses paid to officers of approximately $746,000 during fiscal 2023,as well as a decrease in stock based compensation of approximately $151,000 primarily relating to the timing of the annual grants of options to non-employee members of the board of directors and restricted stock units issued to officers. These decreases were offset by increases relating to the prior nine-month period having a credit balance in bad debt expense of approximately $256,000, from a customer balance that was fully reserved during a prior period and was subsequently collected during the nine-month period ended June 30, 2023,
Research and Development
Research and development expenses decreased to $2,762,040 for the nine-month period ended June 30, 2024 from $2,796,171 for the nine-month period ended June 30, 2023, a decrease of $34,131 or 1%. This decrease is primarily due to decreased depreciation expense with laboratory equipment becoming fully depreciated year over year of approximately $369,000, offset by an increase in consulting
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expense of approximately $204,000 for consultants being utilized to further develop the technology acquired from the Spindle acquisition.
Interest income
Interest income for the nine -month period ended June 30, 2024 was $84,972 as compared to $34,108 in the nine -month period ended June 30, 2023.
Transaction costs allocated to warrant liabilities
Transaction cost allocated to warrant liabilities for the nine-month period ended June 30, 2024 was $633,198. These transaction costs represent the closing costs from the February 2024 financing transaction. These costs were expensed as it would have resulted in negative additional paid in capital.
Unrealized gain on change in fair value of warrants classified as a liability
Unrealized gain on change in fair value of warrants classified as a liability for the nine -month period ended June 30, 2024 and 2023 was $9,564,000 and $334,700, respectively, and relates to the change in fair value of the warrants that are classified as a liability. The primary driver of the change is the decrease in our stock price, as well as the issuance of new warrants as part of the February 2024 registered direct offering.
Unrealized loss on change in fair value of warrants classified as a liability-warrant modifications
Unrealized loss on change in fair value of warrants classified as a liability-warrant modifications of $394,000 for the nine-month period ended June 30, 2024 represents the change in fair value for the modifications made to certain warrants as a result of the February 2024 financing.
Loss on issuance of warrants
The loss on issuance of warrants of $1,633,767 for the nine-month period ended June 30, 2024 relates to the February 2024 financing transaction and is the result of the fair value of the warrants being greater than the cash received from the financing.
Other (expense) income, net
Other (expense) income, net for the nine -month periods ended June 30, 2024 and 2023, was expense of $9,060 and income of $6,396, respectively.
Loss from operations
Loss from operations increased $3,971,041 or 59% to $10,753,510 for the nine-month period ended June 30, 2024 compared to $6,782,469 for the nine-month period ended June 30, 2023 due to the factors noted above.
Liquidity and Capital Resources
Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of June 30, 2024, we had working capital of $8,816,648. For the nine-month period ended June 30, 2024, we used cash in operating activities of $10,462,332 consisting primarily of our loss of $3,774,563 net with non-cash adjustments of $619,440 in depreciation and amortization charges, $9,564,000 in unrealized gain on change in fair value of warrants classified as a liability, $394,000 in unrealized loss on change in fair value of warrants classified as liability-warrant modification, $633,198 in registered direct offering costs, $1,633,767 on loss on issuance of warrants, and $542,045 in stock-based compensation expense. Additionally, we had a net increase in operating assets of $425,398 and a net decrease in operating liabilities of $520,821. At June 30, 2024, we had cash and cash equivalents of $10,442,131.
We have recurring net losses. We incurred a net loss of $3,774,563 and generated negative operating cash flow of $10,462,332 for the nine-month period ended June 30, 2024. These factors raise substantial doubt about our ability to continue as a going concern for one year from the issuance of these financial statements. The ability of the Company to continue as a going concern is dependent on our
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ability to further implement our business plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Our current capital resources include cash and cash equivalents, accounts receivable and inventories. Historically, we have financed our operations principally from the sale of equity and equity-linked securities.
As discussed in Note E, on May 29, 2024, we closed on a public offering and received net proceeds, after deducting placement agent fees and other estimated offering expenses payable by us, of approximately $10.5 million.
Critical Accounting Estimates and Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our condensed consolidated results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
● | Revenue recognition; and |
● | Warrant Liabilities |
Critical Accounting Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most critical estimates include recoverability of long-lived assets, including the values assigned to intangible assets, fair value calculations for warrants, and contingencies. Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the consolidated financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
Revenue Recognition
We follow FASB issued accounting standard updates which clarify the principles for recognizing revenue arising from contracts with customers (“ASC 606” or “Topic 606”).
The Company measures revenue at the amounts that reflect the consideration to which it is expected to be entitled in exchange for transferring control of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. The Company’s contracts with customers may include multiple performance obligations (e.g. taggants, maintenance, authentication services, research and development services, etc.). For such arrangements, the Company allocates revenues to each performance obligation based on their relative standalone selling price.
Due to the short-term nature of the Company’s contracts with customers, it has elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less.
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Product Revenues and Authentication Services
The Company’s PCR-produced linear DNA product revenues are accounted for/recognized in accordance with contracts with customers. The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. The Company invoices customers upon shipment, and its collection terms range, on average, from 30 to 60 days.
Authentication Services
The Company recognizes revenue for authentication services upon satisfying its promises to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company services are complete, which in nearly all cases is when the authentication report is released to the customer.
Clinical Laboratory Testing Services
The Company records revenue for its clinical laboratory testing service contracts, which includes its COVID-19 testing services, upon satisfying its promise to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time that Company services are complete, which in nearly all cases is when the testing results are released to the customer. For those customers with a fixed monthly fee, the revenue is recognized over-time as the services are provided.
Research and Development Services
The Company records revenue for its research and development contracts using the over-time revenue recognition model. Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation.
Revenues are recorded proportionally as costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred during a period until the remaining costs to complete a contract can be estimated. The Company has elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Warrant Liabilities
The Company evaluates its warrants issued the “Warrants) in accordance with ASC 480 “Distinguishing Liabilities from Equity” and ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity” and concluded that due to the terms of certain of its warrant agreements, the instruments do not qualify for equity treatment. As such, the Common Warrants, Series A Warrants and Private Common Warrants were recorded as a liability on the condensed consolidated balance sheet and measured at fair value at inception and at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in fair value recognized in the condensed consolidated statement of operations in the period of change.
Off-Balance Sheet Arrangements
As requirement of our lease agreement for our corporate headquarters entered into during January 2023, in lieu of security deposit, we provided a standby letter of credit of $750,000. The letter of credit is effective through January 2025.
Inflation
The effect of inflation on our revenue and operating results was not significant.
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Item 3. — Quantitative and Qualitative Disclosures About Market Risk.
Information requested by this Item is not applicable as we are electing scaled disclosure requirements available to smaller reporting companies with respect to this Item.
Item 4. — Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2024, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended June 30, 2024, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. — Legal Proceedings.
None.
Item 1A. — Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K of the Company filed with the SEC on December 7, 2023, as amended, and as updated and supplemented below and in subsequent filings. These risk factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition or future results.
We have received written notice from Nasdaq that we are not in compliance with Nasdaq’s minimum bid price requirements and if we are unable to regain compliance with Nasdaq continued listing standards we could be delisted from The Nasdaq Stock Market, which would negatively impact our business, our ability to raise capital, and the market price and liquidity of our Common Stock.
The Nasdaq Stock Market LLC (“Nasdaq”) Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) requires that the Company’s Common Stock maintain a closing bid price for 30 consecutive business days of $1.00 per share. On July 12, 2024, we received a letter (the “Notice”) from Nasdaq notifying us that, because the closing bid price for our Common Stock has been below $1.00 per share for 30 consecutive business days, we no longer comply with the Minimum Bid Price Requirement for continued listing on The Nasdaq Capital Market. There is no assurance that we will be able to regain compliance with the Minimum Bid Price Requirement. The Notice had no immediate effect on the listing of the Company’s Common Stock on The Nasdaq Capital Market. The Company has been provided an initial compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. During the compliance period, the Company’s shares of Common Stock will continue to be listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of the Company’s Common Stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180-day compliance period. We intend to effect a reverse stock split of its shares of Common Stock to enable it to regain compliance with the Minimum Bid Price Requirement.
If our Common Stock is delisted by Nasdaq, our Common Stock may be eligible for quotation on an over-the-counter quotation system or on the pink sheets but will lack the market efficiencies associated with Nasdaq. Upon any such delisting, our Common Stock would become subject to the regulations of the SEC relating to the market for penny stocks. A penny stock is any equity security not traded on a national securities exchange that has a market price of less than $5.00 per share. The regulations applicable to penny stocks may severely affect the market liquidity for our Common Stock and could limit the ability of stockholders to sell securities in the secondary market. In such a case, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of our Common Stock, and there can be no assurance that our Common Stock will be eligible for trading or quotation on any alternative exchanges or markets.
Delisting from Nasdaq could adversely affect our ability to raise additional financing through public or private sales of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our Common Stock. Delisting could also have other negative results, including the potential loss of confidence by employees and customers, the loss of institutional investor interest and fewer business development opportunities.
The exercisability of the May 2024 Series Warrants is contingent upon us obtaining the Warrant Stockholder Approval. If we do not obtain such Warrant Stockholder Approval, the Series Warrants may never become exercisable.
On May 29, 2024, the Company closed on such date a public offering of Common Stock, series A common stock purchase warrants (the “ May 2024 Series A Warrants”) and series B common stock purchase warrants (the “ May 2024 Series B Warrants”, and, with the May 2024 Series A Warrants, the “ May 2024 Series Warrants”), pursuant to that certain Placement Agency Agreement, with Craig-Hallum Capital Group LLC and Laidlaw & Company (UK) Ltd. (the “Placement Agency Agreement”).
The May 2024 Series Warrants are not immediately exercisable, as their exercisability is contingent upon us obtaining receipt of such stockholder approval as may be required by the applicable rules and regulations of the Nasdaq Capital Market (the “Warrant Stockholder Approval”). The May 2024 Series Warrants will become exercisable upon Warrant Stockholder Approval and will expire on the five-
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year anniversary of such date with respect to the May 2024 Series A Warrants, and on the one-year anniversary of such date with respect to the May 2024 Series B Warrants.
On August 2, 2024, the Company held a special meeting of stockholders to obtain Warrant Stockholder Approval for the May 2024 Series Warrants (the “August 2024 Special Meeting”). At the August 2024 Special Meeting, an aggregate of 4,056,202 shares of the Company’s Common Stock were present in person or by proxy and entitled to vote, which did not constitute a quorum determined in accordance with the Company’s By-Laws, which requires a majority of the Company’s issued and outstanding shares of Common Stock. Accordingly, no action was taken with respect to the proposal presented at the Special Meeting, and the Special Meeting was adjourned.
Pursuant to the terms of the May 2024 Series Warrants, since the Company did not obtain Warrant Stockholder Approval at the August 2024 Special Meeting, it is obligated to call a subsequent stockholder meeting to seek to obtain Warrant Stockholder Approval within 90 days from the date of the August 2024 Special Meeting. While we intend to promptly seek Warrant Stockholder Approval for these mechanisms, there is no guarantee that it will ever be obtained. In the event that we cannot obtain Warrant Stockholder Approval, the May 2024 Series Warrants may never become exercisable. If we are unable to obtain the Warrant Stockholder Approval, the May 2024 Series Warrants will have no value.
Stockholders may suffer substantial dilution if certain provisions in the May 2024 Series Warrants are utilized.
If the May 2024 Series B Warrants are exercised by way of an alternative cashless exercise, assuming receipt of Warrant Stockholder Approval, such exercising holder will receive three shares of Common Stock for each May 2024 Series B Warrant they exercise, without any cash payment to us.
In addition, and subject to certain exemptions, if we sell, enter into an agreement to sell, or grant any option to purchase, or sell, enter into an agreement to sell, or grant any right to reprice (excluding Exempt Issuances, as defined in the Placement Agency Agreement), or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any shares of common stock, at an effective price per share less than the exercise price of the Series A Warrants then in effect, the exercise price of the May 2024 Series A Warrants will be reduced to the lower of such price or the lowest volume weighted average price (VWAP) during the five consecutive trading days immediately following such dilutive issuance or announcement thereof, and the number of shares issuable upon exercise will be proportionately adjusted such that the aggregate exercise price will remain unchanged.
If any of the above provisions in the May 2024 Series Warrants are utilized, our stockholders may suffer substantial dilution.
A reverse stock split may decrease the liquidity of the shares of our common stock and the resulting market price of our common stock may not attract or satisfy the investing requirements of new investors, including institutional investors.
As noted in the risk factor above, we intend to effect a reverse stock split of our shares of Common Stock to enable us to regain compliance with the Minimum Bid Price Requirement The liquidity of the shares of our Common Stock may be affected adversely by a reverse stock split given the reduced number of shares outstanding following a reverse stock split. Additionally, a reverse stock split may increase the number of shareholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty affecting such sales. Moreover, there can be no assurance that a reverse stock split will result in a share price that will attract new investors, including institutional investors, and there can be no assurance that the market price of our common stock will satisfy the investing requirements of these investors. Consequently, the trading liquidity of our common stock may not necessarily improve as a result of a reverse stock split.
There is substantial doubt relating to our ability to continue as a going concern.
We have recurring net losses, which have resulted in an accumulated deficit of $306,376,012 as of June 30, 2024. We have incurred a net loss of $3,774,563 for the nine months ended June 30, 2024. At June 30, 2024, we had cash and cash equivalents of $10,442,131. We have concluded that these factors raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the financial statements. We will continue to seek to raise additional working capital through public equity, private equity or debt financings. If we fail to raise additional working capital, or do so on commercially unfavorable terms, it would materially and adversely affect our business, prospects, financial condition and results of operations, and we may be unable to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms, if at all.
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Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. — Defaults Upon Senior Securities.
None.
Item 4. — Mine Safety Disclosures.
Not applicable.
Item 5. — Other Information.
During the three-month period ended June 30, 2024, none of our directors or officers have
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Item 6. — Exhibit.
Incorporated by Reference to SEC Filing | Filed or Furnished with | |||||||||||
Exhibit | Exhibit | this Form | ||||||||||
No. |
| Filed Exhibit Description |
| Form |
| No. |
| File No. |
| Date Filed |
| 10-Q |
3.1 | S-1 | 3.1 | 333-278890 | 2024 | ||||||||
3.2 | 8-K | 3.2 | 002-90539 | 01/16/2009 | ||||||||
4.1 | 8-K | 4.1 | 001-36745 | 05/29/2024 | ||||||||
4.2 | 8-K | 4.2 | 001-36745 | 05/29/2024 | ||||||||
4.3 | 8-K | 4.3 | 001-36745 | 05/29/2024 | ||||||||
4.4 | 8-K | 4.4 | 001-36745 | 05/29/2024 | ||||||||
10.1 | 8-K | 10.1 | 001-36745 | 05/29/2024 | ||||||||
31.1** | X | |||||||||||
31.2** | X | |||||||||||
32.1** | X | |||||||||||
32.2** | X | |||||||||||
101 INS* | Inline XBRL Instance Document | X | ||||||||||
101 SCH* | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||
101 CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
101 DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
101 LAB* | Inline XBRL Extension Label Linkbase Document | X | ||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101) | X |
* Filed herewith
** Furnished herewith
Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act or the Exchange Act, except as otherwise stated in any such filing.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Applied DNA Sciences, Inc. | |
Dated: August 8, 2024 | /s/ JAMES A. HAYWARD | |
James A. Hayward, Ph.D. | ||
Chief Executive Officer | ||
(Duly authorized officer and principal executive officer) | ||
/s/ BETH JANTZEN | ||
Dated: August 8, 2024 | Beth Jantzen, CPA | |
Chief Financial Officer | ||
(Duly authorized officer and principal financial and accounting officer) |
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