10-Q 1 apdn-20231231x10q.htm 10-Q
00000000744452--09-302024Q1false000000000P12Mhttp://fasb.org/us-gaap/2023#FairValueAdjustmentOfWarrantsP45D0000744452us-gaap:CommonStockMember2023-10-012023-12-310000744452us-gaap:RetainedEarningsMember2023-12-310000744452us-gaap:NoncontrollingInterestMember2023-12-310000744452us-gaap:AdditionalPaidInCapitalMember2023-12-310000744452us-gaap:RetainedEarningsMember2023-09-300000744452us-gaap:NoncontrollingInterestMember2023-09-300000744452us-gaap:AdditionalPaidInCapitalMember2023-09-300000744452us-gaap:RetainedEarningsMember2022-12-310000744452us-gaap:NoncontrollingInterestMember2022-12-310000744452us-gaap:AdditionalPaidInCapitalMember2022-12-310000744452us-gaap:RetainedEarningsMember2022-09-300000744452us-gaap:NoncontrollingInterestMember2022-09-300000744452us-gaap:AdditionalPaidInCapitalMember2022-09-300000744452us-gaap:MaterialReconcilingItemsMember2023-10-012023-12-310000744452us-gaap:MaterialReconcilingItemsMember2022-10-012022-12-310000744452apdn:PrivateCommonWarrantsMemberus-gaap:SubsequentEventMember2024-01-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMemberapdn:TherapeuticDnaProductionMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMemberapdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ProductMemberapdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberapdn:ClinicalLaboratoryServiceRevenuesMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ProductMember2023-10-012023-12-310000744452us-gaap:IntersegmentEliminationMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452apdn:ClinicalLaboratoryServiceRevenuesMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452us-gaap:ServiceMember2023-10-012023-12-310000744452apdn:SupplyChainMember2023-10-012023-12-310000744452apdn:ResearchAndDevelopmentServicesMember2023-10-012023-12-310000744452apdn:ClinicalLaboratoryTestingServicesPointInTimeMember2023-10-012023-12-310000744452apdn:ClinicalLaboratoryTestingServicesOverTimeMember2023-10-012023-12-310000744452apdn:AssetMarkingMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMemberapdn:TherapeuticDnaProductionMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMemberapdn:DnaTaggingAndSecurityProductsMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ProductMemberapdn:TherapeuticDnaProductionMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ProductMemberapdn:DnaTaggingAndSecurityProductsMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberapdn:ClinicalLaboratoryServiceRevenuesMemberapdn:MdxTestingServicesMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ServiceMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberus-gaap:ProductMember2022-10-012022-12-310000744452us-gaap:IntersegmentEliminationMemberapdn:MdxTestingServicesMember2022-10-012022-12-310000744452us-gaap:ServiceMember2022-10-012022-12-310000744452apdn:SupplyChainMember2022-10-012022-12-310000744452apdn:ResearchAndDevelopmentServicesMember2022-10-012022-12-310000744452apdn:LargeScaleDnaProductionMember2022-10-012022-12-310000744452apdn:ClinicalLaboratoryTestingServicesPointInTimeMember2022-10-012022-12-310000744452apdn:ClinicalLaboratoryTestingServicesOverTimeMember2022-10-012022-12-310000744452apdn:AssetMarkingMember2022-10-012022-12-310000744452us-gaap:NoncontrollingInterestMember2023-10-012023-12-310000744452us-gaap:RetainedEarningsMember2022-10-012022-12-310000744452us-gaap:NoncontrollingInterestMember2022-10-012022-12-310000744452us-gaap:SeriesBPreferredStockMember2023-12-310000744452us-gaap:SeriesAPreferredStockMember2023-12-310000744452us-gaap:SeriesBPreferredStockMember2023-09-300000744452us-gaap:SeriesAPreferredStockMember2023-09-300000744452us-gaap:OperatingSegmentsMemberapdn:TherapeuticDnaProductionMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberapdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMember2023-10-012023-12-310000744452us-gaap:OperatingSegmentsMemberapdn:TherapeuticDnaProductionMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberapdn:MdxTestingServicesMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMemberapdn:DnaTaggingAndSecurityProductsMember2022-10-012022-12-310000744452us-gaap:OperatingSegmentsMember2022-10-012022-12-310000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2024-03-312024-03-310000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2024-01-012024-01-010000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2021-10-292021-10-2900007444522017-11-0100007444522023-02-010000744452apdn:TherapeuticDnaProductionMember2023-10-012023-12-310000744452apdn:MdxTestingServicesMember2023-10-012023-12-310000744452apdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452apdn:TherapeuticDnaProductionMember2022-10-012022-12-310000744452apdn:MdxTestingServicesMember2022-10-012022-12-310000744452apdn:DnaTaggingAndSecurityProductsMember2022-10-012022-12-310000744452us-gaap:FairValueInputsLevel3Memberapdn:SeriesWarrantsMemberus-gaap:MeasurementInputPriceVolatilityMemberus-gaap:MarketApproachValuationTechniqueMember2023-12-310000744452us-gaap:FairValueInputsLevel3Memberapdn:CommonWarrantsMemberus-gaap:MeasurementInputPriceVolatilityMemberus-gaap:MarketApproachValuationTechniqueMember2023-12-310000744452apdn:SeriesWarrantsMember2023-12-310000744452apdn:CommonWarrantsMember2023-12-310000744452apdn:SeriesWarrantsMember2023-09-300000744452apdn:CommonWarrantsMember2023-09-300000744452apdn:SeriesWarrantsMember2023-10-012023-12-310000744452apdn:CommonWarrantsMember2023-10-012023-12-310000744452apdn:EmploymentAgreementMember2024-01-192024-01-190000744452us-gaap:LetterOfCreditMember2023-02-010000744452us-gaap:ProductMember2023-10-012023-12-310000744452apdn:ClinicalLaboratoryServiceRevenuesMember2023-10-012023-12-310000744452us-gaap:ProductMember2022-10-012022-12-310000744452apdn:ClinicalLaboratoryServiceRevenuesMember2022-10-012022-12-310000744452apdn:ContractBalancesMember2023-12-310000744452apdn:ContractBalancesMember2023-10-010000744452apdn:OneCustomerMemberus-gaap:SalesMemberus-gaap:CustomerConcentrationRiskMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452apdn:OneCustomerMemberus-gaap:SalesMemberus-gaap:CustomerConcentrationRiskMemberapdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452apdn:TwoCustomerMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-10-012023-12-310000744452apdn:TwoCustomerMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2022-10-012023-09-300000744452apdn:TwoCustomerMemberus-gaap:SalesMemberus-gaap:CustomerConcentrationRiskMemberapdn:MdxTestingServicesMember2022-10-012022-12-310000744452us-gaap:CommonStockMember2023-12-310000744452us-gaap:CommonStockMember2023-09-300000744452us-gaap:CommonStockMember2022-12-310000744452us-gaap:CommonStockMember2022-09-300000744452srt:MinimumMemberapdn:PrivateCommonWarrantsMemberus-gaap:SubsequentEventMember2024-01-310000744452srt:MaximumMemberapdn:PreFundedWarrantsMemberus-gaap:SubsequentEventMember2024-01-310000744452srt:MinimumMemberus-gaap:SubsequentEventMember2024-01-310000744452srt:MaximumMemberus-gaap:SubsequentEventMember2024-01-310000744452apdn:PreFundedWarrantsMemberus-gaap:SubsequentEventMember2024-01-310000744452apdn:WarrantsIssuedInOctober2020Member2023-11-070000744452apdn:WarrantsIssuedInNovember2019Member2023-11-070000744452apdn:WarrantsIssuedInDecember2020OneMember2023-11-070000744452apdn:WarrantsIssuedInDecember2020Member2023-11-0700007444522022-12-3100007444522022-09-3000007444522023-12-030000744452us-gaap:WarrantMember2023-10-012023-12-310000744452us-gaap:RestrictedStockUnitsRSUMember2023-10-012023-12-310000744452us-gaap:EmployeeStockOptionMember2023-10-012023-12-310000744452us-gaap:WarrantMember2022-10-012022-12-310000744452us-gaap:EmployeeStockOptionMember2022-10-012022-12-310000744452us-gaap:AdditionalPaidInCapitalMember2022-10-012022-12-3100007444522024-02-050000744452us-gaap:SubsequentEventMember2024-01-312024-01-310000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2024-01-042024-01-0400007444522023-11-070000744452apdn:LaboratorySpaceMember2024-01-100000744452us-gaap:LandAndBuildingMember2023-02-010000744452apdn:LaboratorySpaceMember2023-02-0100007444522022-10-012022-12-310000744452us-gaap:SalesMemberus-gaap:CustomerConcentrationRiskMemberapdn:MdxTestingServicesMember2023-10-012023-12-310000744452us-gaap:SalesMemberus-gaap:CustomerConcentrationRiskMemberapdn:DnaTaggingAndSecurityProductsMember2023-10-012023-12-310000744452us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-10-012023-12-310000744452us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2022-10-012023-09-300000744452apdn:TwoCustomerMemberus-gaap:CustomerConcentrationRiskMemberapdn:MdxTestingServicesMember2022-10-012022-12-3100007444522023-09-300000744452us-gaap:SubsequentEventMember2024-01-310000744452apdn:WarrantsIssuedInOctober2020Member2023-11-072023-11-070000744452apdn:WarrantsIssuedInNovember2019Member2023-11-072023-11-070000744452apdn:WarrantsIssuedInDecember2020TwoMember2023-11-072023-11-070000744452apdn:WarrantsIssuedInDecember2020OneMember2023-11-072023-11-070000744452apdn:WarrantsIssuedInDecember2020Member2023-11-072023-11-0700007444522023-12-3100007444522017-11-012017-11-0100007444522023-10-012023-12-3100007444522023-02-012023-02-010000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2023-06-302023-06-300000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2017-07-282017-07-280000744452srt:ChiefExecutiveOfficerMemberapdn:EmploymentAgreementMember2016-07-012017-06-300000744452us-gaap:RetainedEarningsMember2023-10-012023-12-310000744452us-gaap:AdditionalPaidInCapitalMember2023-10-012023-12-31iso4217:USDutr:sqftxbrli:sharesiso4217:USDxbrli:sharesapdn:customerapdn:itemxbrli:pureapdn:segment

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number: 001-36745

Applied DNA Sciences, Inc.

(Exact name of registrant as specified in its charter)

Delaware

59-2262718

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

50 Health Sciences Drive

 

Stony Brook, New York

11790

(Address of principal executive offices)

(Zip Code)

631-240-8800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading
Symbol(s)

    

Name of each exchange on which
registered

Common Stock, $0.001 par value

APDN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

   Yes        No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

   Yes        No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

   Yes        No

On February 5, 2024, the registrant had 16,978,703 shares of common stock outstanding.

Applied DNA Sciences, Inc. and Subsidiaries

Form 10-Q for the Quarter Ended December 31, 2023

Table of Contents

    

Page

PART I - FINANCIAL INFORMATION

Item 1 - Condensed Consolidated Financial Statements (unaudited)

1

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

29

Item 4 - Controls and Procedures

29

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

30

Item 1A – Risk Factors

30

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3 – Defaults Upon Senior Securities

30

Item 4 – Mine Safety Disclosures

30

Item 5 – Other Information

30

Item 6 – Exhibits

31

Part I - Financial Information

Item 1 - Financial Statements

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

    

December 31, 

    

September 30, 

2023

2023

ASSETS

(unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

3,359,045

$

7,151,800

Accounts receivable, net of allowance of $75,000 at December 31, 2023 and September 30, 2023, respectively

 

450,757

 

255,502

Inventories

 

377,291

 

330,027

Prepaid expenses and other current assets

 

402,953

 

389,241

Total current assets

 

4,590,046

 

8,126,570

Property and equipment, net

 

539,319

 

838,270

Other assets:

 

 

Restricted cash

750,000

750,000

Intangible assets

2,698,975

2,698,975

Operating right of use asset

1,117,317

1,237,762

Capitalized transaction costs

217,553

Total assets

$

9,913,210

$

13,651,577

LIABILITIES AND EQUITY

 

  

 

  

Current liabilities:

 

 

  

Accounts payable and accrued liabilities

$

2,023,876

$

2,270,388

Operating lease liability, current

510,028

498,598

Deferred revenue

 

54,035

 

76,435

Total current liabilities

 

2,587,939

 

2,845,421

Long term accrued liabilities

 

31,467

 

31,467

Deferred revenue, long term

227,999

194,000

Operating lease liability, long term

607,288

739,162

Deferred tax liability, net

684,115

684,115

Warrants classified as a liability

1,646,000

4,285,000

Total liabilities

 

5,784,808

 

8,779,165

Commitments and contingencies (Note G)

 

  

 

  

Applied DNA Sciences, Inc. stockholders’ equity:

 

  

 

  

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- shares issued and outstanding as of December 31, 2023 and September 30 2023, respectively

 

 

Series A Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2023 and September 30, 2023, respectively

 

 

Series B Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2023 and September 30, 2023, respectively

 

 

Common stock, par value $0.001 per share; 200,000,000 shares authorized as of December 31, 2023 and September 30, 2023, 13,721,820 and 13,658,520 shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively

 

13,722

 

13,659

Additional paid in capital

 

307,848,612

 

307,384,647

Accumulated deficit

 

(303,630,004)

 

(302,447,147)

Applied DNA Sciences, Inc. stockholders’ equity

 

4,232,330

 

4,951,159

Noncontrolling interest

(103,928)

(78,747)

Total equity

4,128,402

4,872,412

Total liabilities and equity

$

9,913,210

$

13,651,577

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 December 31, 

    

2023

    

2022

Revenues

 

  

 

  

Product revenues

$

307,317

$

516,396

Service revenues

247,147

232,061

Clinical laboratory service revenues

336,700

4,514,295

Total revenues

891,164

5,262,752

 

Cost of product revenues

282,545

365,378

Cost of clinical laboratory service revenues

377,522

2,519,691

Total cost of revenues

660,067

2,885,069

Gross profit

231,097

2,377,683

Operating expenses:

Selling, general and administrative

3,084,348

2,625,357

Research and development

935,815

971,304

Total operating expenses

4,020,163

3,596,661

LOSS FROM OPERATIONS

(3,789,066)

(1,218,978)

 

  

  

Interest income

33,323

3,686

Unrealized gain (loss) on change in fair value of warrants classified as a liability

2,639,000

(2,637,800)

Other (expense) income, net

(13,538)

8,846

 

Loss before provision for income taxes

(1,130,281)

(3,844,246)

Provision for income taxes

NET LOSS

$

(1,130,281)

$

(3,844,246)

Less: Net loss attributable to noncontrolling interest

25,181

874

NET LOSS attributable to Applied DNA Sciences, Inc.

$

(1,105,100)

$

(3,843,372)

Deemed dividend related to warrant modifications

(77,757)

NET LOSS attributable to common stockholders

$

(1,182,857)

$

(3,843,372)

Net loss per share attributable to common stockholders-basic and diluted

$

(0.09)

$

(0.30)

Weighted average shares outstanding- basic and diluted

 

13,673,433

 

12,908,520

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)

Three-Month Period Ended December 31, 2022

Common 

Additional 

    

Common 

Stock 

Paid in 

Accumulated 

Noncontrolling

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Total

Balance, October 1, 2022

 

12,908,520

$

12,909

$

305,399,008

$

(292,500,088)

$

(2,890)

$

12,908,939

Stock based compensation expense

 

 

 

93,748

 

 

93,748

Net loss

(3,843,372)

(874)

(3,844,246)

Balance, December 31, 2022

 

12,908,520

$

12,909

$

305,492,756

$

(296,343,460)

$

(3,764)

$

9,158,441

Three-Month Period ended December 31, 2023

Common

Additional

Common

Stock

Paid in

Accumulated

Noncontrolling

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Total

Balance, October 1, 2023

 

13,658,520

$

13,659

$

307,384,647

$

(302,447,147)

$

(78,747)

$

4,872,412

Exercise of warrants, cashlessly

2,100

2

(2)

Stock based compensation expense

340,705

340,705

Common stock issued in ATM, net of offering costs

61,200

61

45,505

45,566

Deemed dividend - warrant repricing

77,757

(77,757)

Net loss

(1,105,100)

(25,181)

(1,130,281)

Balance, December 31, 2023

13,721,820

$

13,722

$

307,848,612

$

(303,630,004)

$

(103,928)

$

4,128,402

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)

Three Months Ended December 31, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net loss

$

(1,130,281)

$

(3,844,246)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Depreciation and amortization

 

298,951

 

338,918

Gain on sale of property and equipment

(6,083)

Unrealized (gain) loss on change in fair value of warrants classified as a liability

(2,639,000)

2,637,800

Stock-based compensation

 

340,705

 

93,748

Change in provision for bad debts

 

 

(290,022)

Change in operating assets and liabilities:

Accounts receivable

(195,254)

(695,912)

Inventories

(47,264)

125,230

Prepaid expenses, other current assets and deposits

(13,712)

133,374

Accounts payable and accrued liabilities

(383,423)

(586,236)

Deferred revenue

11,599

(289,677)

Net cash used in operating activities

 

(3,757,679)

 

(2,383,106)

Cash flows from investing activities:

 

 

  

Proceeds from sale of property and equipment

45,000

Net cash used in investing activities

45,000

Cash flows from financing activities:

Net proceeds from issuance of common stock

45,566

Capitalized transaction costs

(80,642)

Net cash used in financing activities

(35,076)

Net decrease in cash, cash equivalents and restricted cash

(3,792,755)

(2,338,106)

Cash, cash equivalents and restricted cash at beginning of period

7,901,800

15,215,285

Cash, cash equivalents and restricted cash at end of period

$

4,109,045

$

12,877,179

Supplemental Disclosures of Cash Flow Information:

Cash paid during period for interest

$

$

Cash paid during period for income taxes

$

$

Non-cash investing and financing activities:

Capitalized transaction costs included in accounts payable

$

136,911

$

Deemed dividend warrant modifications

$

77,757

$

Property and equipment acquired and included in accounts payable

$

$

20,619

See the accompanying notes to the unaudited condensed consolidated financial statements

4

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(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 polymerase chain reaction (“PCR”) to enable the production and detection of DNA and RNA, the Company currently operates 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 the Company’s recent acquisition of Spindle Biotech, Inc. (“Spindle”), the development and sale of a proprietary RNA polymerase (“RNAP”) for use in the production of messenger RNA (“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 chain security services (“DNA Tagging and Security Products and Services”). To date, the Company has continued to incur expenses in expanding its business to meet current and anticipated future demand and it has limited sources of liquidity.

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

Interim Financial Statements

The accompanying condensed consolidated financial statements as of December 31, 2023, and for the three-month periods ended December 31, 2023, and 2022 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-month period ended December 31, 2023 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 Securities and Exchange Commission (“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. (“LRx”). 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 $1,130,281 and generated negative operating cash flow of $3,757,679 for the three-month period ended December 31, 2023. At December 31, 2023, the Company had cash and cash equivalents of $3,359,045. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date of issuance of these financial statements.  The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues.  The financial statements do not include any adjustments that  might be necessary if the Company is unable to continue as a going concern.

5

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued

Going Concern and Management’s Plan, continued

The Company’s current capital resources include cash and cash equivalents, accounts receivable and inventories. Historically, the Company has financed its operations principally from the sale of equity and equity-linked securities.

Use of Estimates

The preparation of the financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“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

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, 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:

December 31, 

December 31, 

    

2023

    

2022

Research and development services (over-time)

$

77,535

$

126,058

Clinical laboratory testing services (point-in-time)

12,120

3,074,414

Clinical laboratory testing services (over-time)

324,580

1,439,881

Product and authentication services (point-in-time):

 

 

Supply chain

 

467,487

 

411,765

Large Scale DNA Production

127,506

Asset marking

 

9,442

 

83,128

Total

$

891,164

$

5,262,752

7

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES, continued

Revenue Recognition, continued

Contract balances

As of December 31, 2023, 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,

December 31, 

$

    

Balance sheet classification

    

2023

    

2023

    

change

Contract liabilities

 

Deferred revenue

$

270,435

$

282,034

$

11,599

For the three-month period ended December 31, 2023, the Company recognized $40,035 of revenue that was included in Contract liabilities as of October 1, 2023.

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 Loss Per Share

The Company presents loss per share utilizing a dual presentation of basic and diluted loss per share. Basic 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 loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive for the three-month periods ended December 31, 2023 and 2022 are as follows:

    

2023

    

2022

Warrants

5,213,213

7,295,588

Restricted Stock Units

282,640

Stock options

2,189,019

1,006,141

Total

7,684,872

8,301,729

8

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(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 December 31, 2023, the Company had cash and cash equivalents of approximately $3.1 million in excess of the FDIC insurance limit.

The Company’s revenues earned from sale of products and services for the three-month period ended December 31, 2023 included an aggregate of 25% from one customer within the MDx Testing Services segment and an aggregate of 22% from one customer within the DNA Tagging and Security Products and Services segment.

The Company’s revenues earned from sale of products and services for the three-month period ended December 31, 2022 included an aggregate of 83% from two customers within the MDx Testing Services segment.

Two customers accounted for 56% of the Company’s accounts receivable at December 31, 2023 and three customers accounted for 60% of the Company’s accounts receivable at September 30, 2023.

Warrant Liabilities

The Company evaluated the Common Warrants and the Series A and Series B Warrants (collectively 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 the warrant agreements, the instruments do not qualify for equity treatment. As such, the 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 three reportable segments. (1) Therapeutic DNA Production Services (2) MDx Testing Services, and (3) DNA Tagging and Security Products and Services. Resources are allocated by our CEO, COO, CFO and CLO whom, collectively the Company has determined to be our Chief Operating Decision Maker (“CODM”). The following is a brief description of our reportable segments.

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, through 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 provides COVID-19 testing solutions under its safeCircleTM trademark, as well as its pharmacogenomics testing services that are currently waiting for approval from the New York State Department of Health (“NYSDOH”).

DNA Tagging and Security Products and Services — Segment operations consist of the manufacture and detection of DNA for industrial supply chain security services.

9

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

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.

10

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(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 — 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 December 31, 2023, there were no transfers between Levels 1, 2 and 3 of the fair value hierarchy.

Recent Accounting Standards

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.

11

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE C — INVENTORIES

Inventories consist of the following:

December 31, 

September 30, 

    

2023

    

2023

(unaudited)

Raw materials

$

172,404

$

212,079

Work-in-progress

36,866

19,859

Finished goods

 

168,021

 

98,089

Total

$

377,291

$

330,027

NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are as follows:

December 31, 

September 30, 

    

2023

    

2023

(unaudited)

Accounts payable

$

1,017,057

$

1,072,161

Accrued salaries payable

 

907,777

 

1,138,235

Other accrued expenses

 

99,042

 

59,992

Total

$

2,023,876

$

2,270,388

NOTE E – CAPITAL STOCK

On November 7, 2023, the Company entered into an Equity Distribution Agreement (the “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, par value $0.001 per share, in an aggregate offering price of up to $6,397,939 (the “Shares”) through the Agent.

The offer and sales of the Shares made pursuant to the Agreement, will be made under the Company’s effective “shelf” registration statement on Form S-3.  Under the terms of the Agreement, the Agent may sell the Shares 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 December 31, 2023, the Company has issued 61,200 shares of its common stock for net proceeds of approximately $45,480 under this Agreement. Effective January 30, 2024, the Company terminated the Agreement by providing notice of termination to the Agent in accordance with the terms of the Agreement.  

As a result of the issuance of common stock under this Agreement, the exercise price of the 457,813 remaining warrants issued during November 2019 was reduced to $1.47 per share, the exercise price of 159,000 warrants issued during October 2020 was reduced to $1.51 per share and the exercise prices of 100,000 warrants issued during December 2020 was reduced to an exercise price of $1.31 per share for 50,000 and an exercise price of $1.29 per share for the remaining 50,000 warrants.  These exercise price adjustments are in accordance with the adjustment provision contained in their respective warrant agreements. The incremental change in fair value of these warrants as a result of the triggering event was $77,757 and is recorded as a deemed dividend in the condensed consolidated statement of operations for the three-month period ended December 31, 2023.

12

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(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

5,220,588

$

3.68

Granted

 

Exercised

(3,000)

 

5.60

Cancelled or expired

(4,375)

 

2.82

Balance at December 31, 2023

5,213,213

$

3.32

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 30,000 square foot building. The Company entered into an amended lease agreement on February 1, 2023. The initial term is for three years and expires on February 1, 2026. The lease for the corporate headquarters requires monthly payments of $48,861, which is adjusted annually based on the US Consumer Price Index (“CPI”). In lieu of a security deposit, the Company provided a standby letter of credit of $750,000. In addition, the Company also has 2,500 square feet of laboratory space, which it entered into an amended lease agreement for on February 1, 2023. The initial lease term for the laboratory space is one year from the commencement date. The lease requires monthly payments of $8,750. On January 10, 2024, the Company renewed this lease for another twelve-months, expiring on January 31, 2025.  The base rent for the new lease term will be monthly payments of $10,417 and the lease is now terminable by the Company upon one month’s written notice to the landlord. The Company also has a satellite testing facility in Ahmedabad, India, which occupies 1,108 square feet for a three-year term beginning November 1, 2017. During August 2023, the Company renewed this lease with a new expiration date of July 31, 2024. The base rent is approximately $6,500 per annum. The laboratory lease, as well as the testing facility in Ahmedabad are both considered short-term lease obligations. The total rent expense for the three-month periods ended December 31, 2023 and 2022 was $174,419 and $148,826, respectively.

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 one-year renewal periods. On July 28, 2017, the employment agreement was renewed for a successive one-year term and the employment agreement has been renewed for successive one-year terms, most recently as of June 30, 2023. The Board of Directors, acting in its discretion, may grant annual bonuses to the CEO. The CEO will be entitled to certain benefits and perquisites and will be eligible to participate in retirement, welfare and incentive plans available to the Company’s other employees.

13

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE G — COMMITMENTS AND CONTINGENCIES continued

Employment Agreement, continued

The employment agreement with the CEO also provides that if he is terminated before the end of the initial or a renewal term by the Company without cause or if the CEO terminates his employment for good reason, then, in addition to previously earned and unpaid salary, bonus and benefits, and subject to the delivery of a general release and continuing compliance with restrictive covenants, the CEO will be entitled to receive a pro rata portion of the greater of either (X) the annual bonus he would have received if employment had continued through the end of the year of termination or (Y) the prior year’s bonus; salary continuation payments for two years following termination equal to the greater of (i) three times base salary or (ii) two times base salary plus bonus; Company-paid COBRA continuation coverage for 18 months post-termination; continuing life insurance benefits (if any) for two years; and extended exercisability of outstanding vested options (for three years from termination date or, if earlier, the expiration of the fixed option term). If termination of employment as described above occurs within six months before or two years after a change in control of the Company, then, in addition to the above payments and benefits, all of the CEO’s outstanding options and other equity incentive awards will become fully vested and the CEO will receive a lump sum payment of the amounts that would otherwise be paid as salary continuation. In general, a change in control will include a 30% or more change in ownership of the Company.

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 $450,000, effective November 1, 2021. On January 1, 2024, the CEO voluntarily reduced his salary to $250,000 until March 31, 2024.  On January 4, 2024, in connection with certain cost management efforts, the Company entered into a letter agreement with the CEO to amend the CEO’s employment agreement with the Company and to provide for a temporary 45% reduction to the CEO’s annual base salary, from $450,000 to $250,000, for a period of three months, effective as of January 1, 2024 through March 31, 2024. The CEO also agreed to waive any right to resign for “good reason” under his employment agreement with the Company as a result of the foregoing salary reduction. While the compensation committee determined that the CEO was eligible to receive a discretionary bonus in the amount of $500,000 with respect to his performance for fiscal 2023, on January 19, 2024, the CEO elected not to receive any cash incentive or other bonus for fiscal 2023, in light of the Company’s cash position.

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.

NOTE H – SEGMENT INFORMATION

As detailed in Note B above, the Company has three reportable segments; (1) Therapeutic DNA Production Services, (2) MDx Testing Services, and (3) DNA Tagging and Security Products and Services. Resources are allocated by our CEO, COO CFO and CLO whom, collectively the Company has determined to be our CODM.

14

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

Information regarding operations by segment for the three-month period ended December 31, 2023 is as follows:

Therapeutic DNA

MDx Testing

DNA Tagging and

    

    

Production

    

Services and Kits

    

Security Products

    

Consolidated

Revenues

 

  

 

  

 

  

 

  

Product revenues

$

$

$

307,317

$

307,317

Service revenues

 

77,535

 

 

169,612

 

247,147

Clinical laboratory service revenues

 

 

342,740

 

 

342,740

Less intersegment revenues

 

 

(6,040)

 

 

(6,040)

Total revenues

$

77,535

$

336,700

$

476,929

$

891,164

Gross profit

$

77,535

$

(62,958)

$

216,520

$

231,097

(Loss) from segment operations (a)

$

(1,259,046)

$

(496,512)

$

(784,303)

$

(2,539,861)

NOTE H – SEGMENT INFORMATION, continued

Information regarding operations by segment for the three-month period ended December 31, 2022 is as follows:

Therapeutic DNA

MDx Testing

DNA Tagging and

    

    

Production

    

Services

    

Security Products

    

Consolidated

Revenues:

 

  

 

  

 

  

 

  

Product revenues

$

127,506

$

$

388,890

$

516,396

Service revenues

 

121,743

 

 

110,318

 

232,061

Clinical laboratory service revenues

 

 

4,565,815

 

 

4,565,815

Less intersegment revenues

 

 

(51,520)

 

 

(51,520)

Total revenues

$

249,249

$

4,514,295

$

499,208

$

5,262,752

Gross profit

$

170,924

$

1,933,219

$

273,540

$

2,377,683

(Loss) income from segment operations (a)

$

(852,253)

$

1,109,884

$

(474,715)

$

(217,084)

Reconciliation of segment loss from operations to consolidated loss before provision for income taxes is as follows:

December 31, 

    

2023

    

2022

Loss from operations of reportable segments

$

(2,539,861)

$

(217,084)

General corporate expenses (b)

 

(1,249,205)

 

(1,001,894)

Interest income

 

33,323

 

3,686

Unrealized gain (loss) on change in fair value of warrants classified as a liability

 

2,639,000

 

(2,637,800)

Other (expense) income, net

(13,538)

8,846

Consolidated loss before provision for income taxes

$

(1,130,281)

$

(3,844,246)

(a)

Segment operating loss 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.

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.

15

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

The following table presents the fair value of the Company’s financial instruments as of December 31, 2023 and summarizes the significant unobservable inputs in fair value measurement of Level 3 financial assets and liabilities as of December 31, 2023. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of December 31, 2023.

Fair value at

Valuation

Unobservable

Volatility

 

    

December 31, 2023

    

Technique

    

Input

    

Input

 

Liabilities:

 

  

 

  

 

  

  

Common Warrants

$

581,000

Monte Carlo simulation

 

Annualized volatility

140.00

%

Series A Warrants

$

1,065,000

Monte Carlo simulation

Annualized volatility

140.00

%

16

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

(unaudited)

NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

The change in fair value of the Common Warrants and the Series A Warrants for the three-month period ended December 31, 2023 is summarized as follows:

    

 Common Warrants

    

Series A Warrants

    

Totals

Fair value at October 1, 2023

$

1,468,000

$

2,817,000

$

4,285,000

Change in fair value

(887,000)

(1,752,000)

(2,639,000)

Fair Value at December 31, 2023

$

581,000

$

1,065,000

$

1,646,000

NOTE J – SUBSEQUENT EVENTS

On January 31, 2024, the Company closed on a registered direct public offering (the “Offering”) of 3,228,056 shares (“Shares”) of the Company’s common stock, par value $0.001 (“Common Stock”) and pre-funded warrants (“Pre-Funded Warrants”) to purchase up to 2,416,005 shares of Common Stock, and in a concurrent private placement, unregistered common warrants (“Private Common Warrants”) to purchase up to 11,288,122 shares of Common Stock. The Company received gross proceeds from the Offering, before deducting placement agent fees and other estimated offering expenses payable by the Company, of approximately $3.4 million.

The Pre-Funded Warrants have an exercise price of $0.0001 per share and are immediately exercisable and can be exercised at any time after their original issuance until such Pre-Funded Warrants are exercised in full. Each Share was sold at an offering price of $0.609 and each Pre-Funded Warrant was sold at an offering price of $0.6089 (equal to the purchase price per Share minus the exercise price of the Pre-Funded Warrant). Pursuant to the Purchase Agreements, the Company also agreed to issue to the Purchasers, in a concurrent private placement, the Private Common Warrants. Each Private Common Warrant has an exercise price of $0.609 per share, will become exercisable upon Shareholder Approval, and will expire on the five-year anniversary of the Shareholder Approval. “Shareholder Approval” means the first trading day after the filing of a Form 8-K disclosing the approval pursuant to the applicable rules and regulations of Nasdaq from the shareholders of the Company with respect to the issuance of all of the shares underlying the Private Common Warrants and the reduction in exercise price and extension of expiration dates of the warrants described below.

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 45 calendar days from the date of the Purchase Agreements, the Company agreed to file a registration statement on Form S-3 (or other appropriate form if the Company is not then S-3 eligible) providing for the resale by the Purchasers of the Shares issuable upon exercise of the Private Common Warrants. The Company agreed to use commercially reasonable efforts to cause such registration statement to become effective within 90 days following the closing date of the Purchase Agreements and to keep such registration statement effective at all times until no Purchaser owns any Private Common Warrants or Shares issuable upon exercise thereof.

In connection with the Offering and the Purchase Agreements, the Company agreed to reduce the exercise price of warrants previously issued to the Purchasers with exercise prices ranging from $1.29 to $4.00 per warrant to $0.609 per warrant. The Company also agreed to extend the expiration dates for such warrants to August 2028. In addition, 58,074 outstanding common stock warrants held by other investors who did not participate in the Offering will have their exercise price reduced to $0.609 per warrant share and will have their warrant expiration dates extended to August 2028. The foregoing reductions of the exercise price and extension of expiration dates of such warrants is subject to Shareholder Approval.

17

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, including in light of significantly decreasing demand for COVID testing services;

18

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;
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; and
our current non-compliance with Nasdaq’s minimum bid price requirements, which in the absence of a reverse split, may lead to delisting, potentially negatively impacting our business, our ability to raise capital, and the market price and liquidity of our common stock.

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;
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.

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

19

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®, LinearDNA™, Linea™ COVID-19 Diagnostic Assay Kit, safeCircleTM COVID-19 testing 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, all under our Therapeutic DNA Production Services; (ii) the detection of DNA and RNA in molecular diagnostics and genetic testing services under our MDx Testing Services; and (iii) the manufacture and detection of DNA to facilitate supply chance security under our 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

Through LRx we are developing and commercializing our Linea DNA and Linea IVT platforms.

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.

As of the fourth quarter of calendar year 2023, there were 3,951 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: Q4 2023 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.

20

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 the Company 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.

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 4th quarter of calendar 2023, there were almost 425 mRNA therapies under development, with the large majority of these therapies (67%) in the preclinical stage (Source: ASGCT Gene, Cell & RNA Therapy Landscape: Q4 2023 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.

21

In August 2022, the Company launched DNA IVT templates manufactured via its Linea DNA platform and has 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 recently launched our Linea IVT platform, 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.

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 3x 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 by a third-party CDMO located in the United States.

Manufacturing Scale-up

The Company plans 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 first half of CY2024

GMP

DNA biologic, drug substance and/or drug product

Planned availability first half of CY 2025 (1)

(1) Dependent on the availability of future financing.

The Company currently manufactures Linea DNA pursuant to Good Laboratory Practices (“GLP”) and, is 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 first half of calendar year 2024. The Company also plans to offer 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 first half of calendar year 2025, dependent upon the availability of future funding. 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.

22

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, 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. Our current plan is: (i) through our Linea IVT platform and planned near term future GMP manufacturing capabilities for IVT templates 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, 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 facility 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 the critical starting materials fit-for-purpose manufacturing facility will be approximately $1.5 million. We anticipate that the proceeds from the Offering should be sufficient to support the costs of this facility.  If we were to expand the facility to enable GMP production of Linea DNA for use as, or incorporation, into a biologic, drug substance and/or drug product, the cost may be up to approximately $7 million which would require additional funding. We anticipate that the fit-for-purpose manufacturing facility would be created within our existing laboratory space. We anticipate that a facility to enable GMP production of biologic, drug substances and/or drug products 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 ADCL, we leverage our expertise in DNA detection via PCR to provide and develop clinical molecular diagnostics and genetic (collectively “MDx”) testing services. ADCL is a NYSDOH clinical laboratory improvement amendments -permitted, clinical laboratory improvement amendments-certified laboratory which is currently permitted for virology. Permitting for genetics (molecular) is currently pending with the NYSDOH. 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 will utilize a 120-target PGx panel test to evaluate the unique genotype of a specific patient to help guide 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. Our PGx Testing Services cannot commence until we receive approval from the NYSDOH.

On March 22, 2023, we submitted our validation package to the NYSDOH for our PGx Testing Services. On September 21, 2023, we received a first set of comments from NYSDOH requesting additional data and clarifications. A response was submitted to NYSDOH on November 17, 2023.  On December 26, 2023, we received a second set of comments from NYSDOH requesting additional data and clarifications.  Currently, timing of any approval by NYSDOH for our PGx Testing Services is unclear. 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 employers, the latter accounting for approximately 65% of all U.S. employers in 2022. If and when approved by the NYSDOH, we plan to leverage our PGx Testing Services to provide PGx testing services to large entities and self-insured employers.

23

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 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 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.

The Uyghur Forced Labor Prevention Act (“UFLPA”) signed into law on December 23, 2021 establishes that any goods mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region (“XUAR”) of the People’s Republic of China are not entitled to entry to the United States. On June 17, 2022, the UFLPA additionally listed DNA tagging and isotopic analysis as evidence that importers may use to potentially prove that a good did not originate in XUAR.

Our business plan is to leverage growing consumer and governmental awareness for product traceability catalyzed by the UFLPA to expand our existing partnerships and seek new partnerships for our DNA Tagging and Security Products and Services with a focus on cotton.

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 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.

24

Comparison of Results of Operations for the Three-Month Periods Ended December 31, 2023 and 2022

Revenues

Product revenues

For the three-month periods ended December 31, 2023 and 2022, we generated $307,317 and $516,396 in revenues from product sales, respectively. Product revenue decreased by $209,079 or 40% for the three-month period ended December 31, 2023 as compared to the three-month period ended December 31, 2022. The decrease in product revenues was primarily related to a decrease of approximately $127,000 within our Therapeutic DNA Production Services segment for large scale DNA production.  Shipments under the related contract are expected to commence again during the second quarter of fiscal 2024.  Additional decreases were $92,000 in our DNA Tagging and Security Products and Services segment due to a decline in cotton DNA tagging revenue.

Service Revenues

For the three-month periods ended December 31, 2023 and 2022, we generated $247,147 and $232,061 in revenues from sales of services, respectively.  The increase in service revenues of $15,086 or 7% for the three-month period ended December 31, 2023, as compared to the same period in the prior fiscal year is attributable to increases of $98,000 for isotopic testing for textiles within our DNA Tagging and Security Products and Services segment offset by decreases of  $45,000 for research and development projects in our Therapeutic DNA Production Services segment as well as approximately $29,000 in our  DNA Tagging and Security Products and Services segment.

Clinical Laboratory Service Revenues

For the three-month periods ended December 31, 2023 and 2022, we generated $336,700 and $4,514,295 in revenues from our clinical laboratory testing services, respectively. The decrease in service revenues of $4,177,595 or 93% for the three-month period ended December 31, 2023 as compared to the same period in the prior fiscal year is attributable to a decrease from COVID surveillance testing.  The three-months ended December 31, 2022 included testing revenues under our contract with CUNY, which terminated during June 2023.

25

Cost and Expenses

Gross Profit

Gross profit for the three-month period ended December 31, 2023, decreased by $2,146,586 or 90% from $2,377,683 for the three-month period ended December 31, 2022 to $231,097. The gross profit percentage was 26% and 45% for the three-month periods ended December 31, 2023 and 2022, 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 decreased testing volumes year over year.   To a lesser extent, the decline in gross profit percentage was due to lower product revenues during the three-month period ended December 31, 2023 as compared to the same period in the prior fiscal year. The lower volume of product revenues in the current period were not able to fully absorb the fixed costs that are included in cost of product revenues.

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended December 31, 2023 increased by $458,991 or 17% to $3,084,348 as compared to $2,625,357 for the three-month period ended December 31, 2022. The increase relates to the prior three-month period having a credit balance in bad debt expense of approximately $290,000, from a customer balance that was fully reserved during a prior period and was subsequently collected during the three-month period ended December 31, 2023.  The remainder of the increase is attributable to an increase in stock-based compensation expense of $247,000.  The increase in stock-based compensation expense primarily relates to the timing of the annual non-employee board of director grant that vests one-year from the date of grant, which was granted during the second quarter of fiscal 2023.  These increases were offset by a decrease in payroll of approximately $107,000.

Research and Development

Research and development expenses decreased to $935,815 for the three-month period ended December 31, 2023 from $971,304 for the three-month period ended December 31, 2022, a decrease of $35,489 or 4%. This decrease is primarily due to decreased depreciation expense costs for the three-month period December 31, 2023 associated with laboratory equipment becoming fully depreciated year over year.

Interest income

Interest income for the three-month period ended December 31, 2023 increased to $33,323 as compared to $3,686 in the three-month period ended December 31, 2022.

Other (expense) income, net

Other (expense) income for the three-month periods ended December 31, 2023 and 2022, was expense of $13,538 and income of $8,846, respectively.

Unrealized gain (loss) on change in fair value of warrants classified as a liability

Unrealized gain (loss) on change in fair value of Common Warrants for the three-month periods ended December 31, 2023 and 2022 was a gain of $2,639,000 and a loss of $2,637,800, respectively 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 Series B Warrants expiring during September 2023.  

Loss from operations

Loss from operations increased $2,570,088, or 211% to $3,789,066 for the three-month period ended December 31, 2023 compared to $1,218,978 for the three-month period ended December 31, 2022 due to the factors noted above.

26

Liquidity and Capital Resources

Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of December 31, 2023, we had working capital of $2,002,107. For the three-month period ended December 31, 2023, we used cash in operating activities of $3,757,679 consisting primarily of our loss of $1,130,281 net with non-cash adjustments of $298,951 in depreciation and amortization charges, $2,639,000 in unrealized gain on change in fair value of warrants classified as a liability, and $340,705 in stock-based compensation expense. Additionally, we had a net increase in operating assets of 256,230 and a net decrease in operating liabilities of $371,824. At December 31, 2023, we had cash and cash equivalents of $3,359,045.

We have recurring net losses. We incurred a net loss of $1,130,281 and generated negative operating cash flow of $3,757,679 for the three-month period ended December 31, 2023. 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 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 J, on February 2, 2024, we closed on a registered direct public offering and received gross proceeds from the Offering, before deducting placement agent fees and other estimated offering expenses payable by us, of approximately $3.4 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”).

27

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.

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 evaluated the Common Warrants and the Series A and Series B Warrants (collectively 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 the warrant agreements, the instrument does not qualify for equity treatment. As such, the Warrants were recorded as a liability on the 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 consolidated statement of operations in the period of change.

28

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.

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 December 31, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended December 31, 2023, 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.

29

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.

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.

N