Table of Contents

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, 20212022

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 4, 2022,3, 2023, the registrant had 7,486,120.12,908,520 shares of common stock outstanding.

Table of Contents

Applied DNA Sciences, Inc. and Subsidiaries

Form 10-Q for the Quarter Ended December 31, 20212022

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

1417

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

2127

Item 4 - Controls and Procedures

2128

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

2129

Item 1A – Risk Factors

2229

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

2229

Item 3 – Defaults Upon Senior Securities

2229

Item 4 – Mine Safety Disclosures

2229

Item 5 – Other Information

2229

Item 6 – Exhibits

2330

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

    

December 31, 

    

September 30, 

    

December 31, 

    

September 30, 

2021

2021

2022

2022

ASSETS

(unaudited)

(unaudited)

Current assets:

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

2,748,368

$

6,554,948

$

12,877,179

$

15,215,285

Accounts receivable, net of allowance of $39,821 and $29,821 at December 31, 2021 and September 30, 2021, respectively

 

3,857,275

 

2,804,039

Accounts receivable, net of allowance of $40,831 and $330,853 at December 31, 2022 and September 30, 2022, respectively

 

4,053,477

 

3,067,544

Inventories

 

1,300,629

 

1,369,933

 

477,014

 

602,244

Prepaid expenses and other current assets

 

593,149

 

568,881

 

924,682

 

1,058,056

Total current assets

 

8,499,421

 

11,297,801

 

18,332,352

 

19,943,129

Property and equipment, net

 

2,807,852

 

3,023,915

 

1,865,772

 

2,222,988

Other assets:

 

 

 

 

Deposits

 

95,040

 

95,040

 

98,987

 

98,997

Total Assets

$

11,402,313

$

14,416,756

Total assets

$

20,297,111

$

22,265,114

LIABILITIES AND EQUITY

 

  

 

  

 

  

 

  

Current liabilities:

 

  

 

  

 

  

 

  

Accounts payable and accrued liabilities

$

2,521,353

$

2,991,343

$

3,056,123

$

3,621,751

Deferred revenue

 

457,538

 

281,000

 

273,880

 

563,557

Total current liabilities

 

2,978,891

 

3,272,343

 

3,330,003

 

4,185,308

Long term accrued liabilities

 

31,467

 

31,467

 

31,467

 

31,467

Warrants classified as a liability

7,777,200

5,139,400

Total liabilities

 

3,010,358

 

3,303,810

 

11,138,670

 

9,356,175

Commitments and contingencies (Note F)

 

  

 

  

 

  

 

  

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, 2021 and September 30, 2021, respectively

 

0

 

0

Series A Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

 

0

 

0

Series B Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

 

0

 

0

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

 

 

Series A Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

 

 

Series B Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

 

 

Common stock, par value $0.001 per share; 200,000,000 shares authorized as of December 31, 2021 and September 30, 2021, 7,486,120 shares issued and outstanding as of December 31, 2021 and September 30, 2021

 

7,488

 

7,488

Common stock, par value $0.001 per share; 200,000,000 shares authorized as of December 31, 2022 and September 30, 2022, 12,908,520 shares issued and outstanding as of December 31, 2022 and September 30, 2022

 

12,909

 

12,909

Additional paid in capital

 

297,228,192

 

295,228,272

 

305,492,756

 

305,399,008

Accumulated deficit

 

(288,843,858)

 

(284,122,092)

 

(296,343,460)

 

(292,500,088)

Applied DNA Sciences, Inc. stockholders’ equity:

 

8,391,822

 

11,113,668

 

9,162,205

 

12,911,829

Noncontrolling interest

133

(722)

(3,764)

(2,890)

Total equity

8,391,955

11,112,946

9,158,441

12,908,939

Total liabilities and equity

$

11,402,313

$

14,416,756

$

20,297,111

$

22,265,114

See the accompanying notes to the unaudited condensed consolidated financial statements

1

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended December 31, 

Three Months Ended December 31, 

    

2021

    

2020

    

2022

    

2021

Revenues

 

  

 

  

 

  

 

  

Product revenues

$

826,311

$

550,097

$

516,396

$

826,311

Service revenues

 

139,273

 

293,274

232,061

139,273

Clinical laboratory service revenues

3,200,122

772,770

4,514,295

3,200,122

Total revenues

4,165,706

1,616,141

5,262,752

4,165,706

 

 

Cost of product revenues

434,929

 

270,688

365,378

434,929

Cost of clinical laboratory service revenues

 

2,621,639

 

245,093

2,519,691

2,621,639

Total cost of product and clinical laboratory service revenues

3,056,568

515,781

Total cost of revenues

2,885,069

3,056,568

Gross profit

1,109,138

1,100,360

2,377,683

1,109,138

Operating expenses:

Selling, general and administrative

 

4,662,173

 

3,309,654

2,625,357

4,735,619

Research and development

 

1,080,096

 

763,808

971,304

1,080,096

Total operating expenses

 

5,742,269

 

4,073,462

3,596,661

5,815,715

LOSS FROM OPERATIONS

 

(4,633,131)

 

(2,973,102)

(1,218,978)

(4,706,577)

 

  

 

  

 

  

  

Interest income (expense), net

273

(5,438)

Loss on extinguishment of debt

0

(1,774,662)

Other expense, net

(88,053)

 

(53,860)

Interest income, net

3,686

273

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

(2,637,800)

Other income (expense), net

8,846

(14,607)

 

 

Loss before provision for income taxes

(4,720,911)

 

(4,807,062)

(3,844,246)

(4,720,911)

Provision for income taxes

 

0

 

0

NET LOSS

(4,720,911)

(4,807,062)

(3,844,246)

(4,720,911)

Less: Net income attributable to noncontrolling interest

(855)

(2,494)

NET LOSS attributable to common stockholders

$

(4,721,766)

$

(4,809,556)

Less: Net loss (income) attributable to noncontrolling interest

874

(855)

NET LOSS attributable to Applied DNA Sciences, Inc.

$

(3,843,372)

$

(4,721,766)

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

$

(0.63)

$

(0.88)

$

(0.30)

$

(0.63)

Weighted average shares outstanding- basic and diluted

 

7,486,120

 

5,457,967

 

12,908,520

 

7,486,120

See the accompanying notes to the unaudited condensed consolidated financial statements

2

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three-Month Period Ended December 31, 2021

For the Three-Month Period Ended December 31, 2022

Common

Common

Additional

Accumulated

Noncontrolling

Total

Common

Additional

Shares

Stock

Paid in

Deficit

Interest

Common

Stock

Paid in

Accumulated

Noncontrolling

    

    

Amount

    

Capital

    

    

    

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Total

Balance, October 1, 2021

 

7,486,120

$

7,488

$

295,228,272

$

(284,122,092)

$

(722)

$

11,112,946

Balance, October 1, 2022

 

12,908,520

$

12,909

$

305,399,008

$

(292,500,088)

$

(2,890)

$

12,908,939

Stock based compensation expense

1,699,920

1,699,920

 

 

 

93,748

 

 

93,748

Options issued in settlement of accrued bonus

300,000

300,000

Net loss

(4,721,766)

855

(4,720,911)

(3,843,372)

(874)

(3,844,246)

Balance, December 31, 2021

7,486,120

$

7,488

$

297,228,192

$

(288,843,858)

$

133

$

8,391,955

Balance, December 31, 2022

12,908,520

$

12,909

$

305,492,756

$

(296,343,460)

$

(3,764)

$

9,158,441

For the Three-Month Period Ended December 31, 2020

For the Three-Month Period Ended December 31, 2021

Common 

Additional 

    

Common 

Additional 

    

Common 

Stock 

Paid in 

Accumulated 

Noncontrolling

Common 

Stock 

Paid in 

Accumulated 

Noncontrolling

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Total

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Total

Balance, October 1, 2020

 

5,142,779

$

5,144

$

275,548,737

$

(269,835,650)

$

(8,725)

$

5,709,506

Exercise of warrants

518,551

519

2,605,010

2,605,529

Fair value of warrants issued in connection with convertible note repayment

1,643,440

1,643,440

Balance, October 1, 2021

 

7,486,120

$

7,488

$

295,228,272

$

(284,122,092)

$

(722)

$

11,112,946

Stock based compensation expense

571,498

571,498

 

 

 

1,699,920

 

 

1,699,920

Options issued in settlement of accrued bonus

300,000

300,000

Net loss

(4,809,556)

2,494

(4,807,062)

 

 

 

(4,721,766)

855

 

(4,720,911)

Balance, December 31, 2020

5,661,330

$

5,663

$

280,368,685

$

(274,645,206)

$

(6,231)

$

5,722,911

Balance, December 31, 2021

 

7,486,120

$

7,488

$

297,228,192

$

(288,843,858)

$

133

$

8,391,955

See the accompanying notes to the unaudited condensed consolidated financial statements

3

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended December 31,

Three Months Ended December 31,

    

2021

    

2020

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

 

  

 

  

Net loss

$

(4,720,911)

$

(4,807,062)

$

(3,844,246)

$

(4,720,911)

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

 

 

 

 

Depreciation and amortization

 

320,751

 

97,412

 

338,918

 

320,751

Loss on extinguishment of convertible notes payable

0

1,774,662

Gain on sale of property and equipment

(6,083)

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

2,637,800

Stock-based compensation

 

1,699,920

 

571,498

 

93,748

 

1,699,920

Provision for bad debts

 

10,000

 

0

Change in provision for bad debts

 

(290,022)

 

10,000

Change in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(1,063,237)

 

(840,035)

 

(695,912)

 

(1,063,237)

Inventories

 

69,304

 

(46,096)

 

125,230

 

69,304

Prepaid expenses and other current assets and deposits

 

(24,268)

 

(121,850)

 

133,374

 

(24,268)

Accounts payable and accrued liabilities

 

(169,991)

 

(638,066)

 

(586,236)

 

(169,991)

Deferred revenue

 

176,538

 

(146,205)

 

(289,677)

 

176,538

Net cash used in operating activities

 

(3,701,894)

 

(4,155,742)

 

(2,383,106)

 

(3,701,894)

Cash flows from investing activities:

 

  

 

  

 

  

 

  

Proceeds from sale of property and equipment

45,000

Purchase of property and equipment

(104,686)

 

(329,542)

 

(104,686)

Net cash used in investing activities

 

(104,686)

 

(329,542)

Cash flows from financing activities:

Net proceeds from exercise of warrants

0

2,605,529

Repayment of convertible notes

 

0

 

(1,665,581)

Net cash provided by financing activities

0

 

939,948

Net cash provided by (used in) investing activities

 

45,000

 

(104,686)

Net decrease in cash and cash equivalents

 

(3,806,580)

 

(3,545,336)

 

(2,338,106)

 

(3,806,580)

Cash and cash equivalents at beginning of period

 

6,554,948

 

7,786,743

 

15,215,285

 

6,554,948

Cash and cash equivalents at end of period

$

2,748,368

$

4,241,407

$

12,877,179

$

2,748,368

Supplemental Disclosures of Cash Flow Information:

 

  

 

  

 

  

 

  

Cash paid during period for interest

$

0

$

0

$

$

Cash paid during period for income taxes

$

0

$

0

$

$

Non-cash investing and financing activities:

 

  

 

 

  

 

Interest paid in kind

$

0

$

35,625

Property and equipment acquired, and included in accounts payable

$

0

$

641,979

$

20,619

$

Issuance of stock options for payment of accrued bonus

$

300,000

0

$

$

300,000

FV of warrants issued

$

0

$

1,074,118

See the accompanying notes to the unaudited condensed consolidated financial statements

4

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20212022

(unaudited)

NOTE A — NATURE OF THE BUSINESS

Applied DNA Sciences, Inc. (“Applied DNA” or the “Company”) developsis a biotechnology company developing technologies to produce and markets DNA-based technology solutions utilizing its LinearDNATM large-scaledetect deoxyribonucleic acid (“DNA”). The Company uses the polymerase chain reaction (“PCR”) based manufacturing platform. The Company’s proprietary platform produces large quantitiesto enable both the production and detection of DNA, for use in three primary markets: (i) the manufacture of DNA for use in nucleic acid-based therapeutics (“Therapeutic DNA Production Services”); (ii) the detection of DNA in vitromolecular diagnostics testing services (“MDx Testing Services”); and preclinical nucleic-acid based drug development(iii) the manufacture and manufacturing markets (“Biotherapeutic Contract Research and Manufacturing”) anddetection of DNA for industrial supply chain security anti-counterfeitingservices (“DNA Tagging and anti-theft technology purposes (“Non-Biologic Tagging”Security Products and Services”). The Company also develops PCR-based molecular in vitro diagnostics for COVID-19 (the “COVID-19 Diagnostic Tests”). In addition, underUnder its MDx Testing Services, the Company’s wholly owned subsidiary, Applied DNA Clinical Labs, LLC (“ADCL”), the Company is offering a high-throughput turnkey solution for population-scale COVID-19 testing marketed as safeCircleTM. safeCircle utilizes the Company’s COVID-19 Diagnostic Tests and is designed to look for infection within defined populations or communities utilizing high throughput testing methodologies (the “COVID-19 Testing Services”).

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

Interim Financial Statements

The accompanying condensed consolidated financial statements as of December 31, 2021,2022, and for the three-month periods ended December 31, 2021,2022, and 20202021 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, 20212022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.2023. 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, 20212022 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 9, 2021,14, 2022, as amended. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation. The condensed consolidated balance sheet as of September 30, 2022 contained herein has been derived from the audited consolidated financial statements as of September 30, 2022 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, and Applied DNA Sciences India Private Limited, ADCL and its majority-owned subsidiary, LineaRx, Inc. (“LRx”). Significant inter-company transactions and balances have been eliminated in consolidation. The condensed consolidated balance sheet as of September 30, 2021 contained herein has been derived from the audited consolidated financial statements as of September 30, 2021 but does not include all disclosures required by GAAP.

Going Concern and Management’s PlanLiquidity

The Company has recurring net losses.losses, which have resulted in an accumulated deficit of $296,343,460 as of December 31, 2022. The Company incurred a net loss of $4,720,911$3,844,246 and generated negative operating cash flow of $3,701,894$2,383,106 for the three-month period ended December 31, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The ability of2022. At December 31, 2022, the Company to continue as a going concern is dependent on the Company's ability to further implement its business plan, raisehad cash and cash equivalents of $12,877,179 and working 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.of $15,002,349.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

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

Liquidity, 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.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Through December 31, 20212022, the Company has dedicated most of its financial resources to commercialization of its MDx Testing Services, specifically its COVID-19 Testing Services, as well as to research and development efforts,primarily in the Therapeutic DNA Production segment, including the development and validation of its own technologies as well as, advancing its intellectual property, and general and administrative activities. The Company estimates that it will have sufficient cash and cash equivalents to fund operations for the next twelve months from the date of filing of this quarterly report.

(unaudited)

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES,The Company may require additional funds to complete the continued development of its products, services, product manufacturing, and to fund expected additional losses from operations until revenues are sufficient to cover its operating expenses. If revenues are not sufficient to cover the Company’s operating expenses, and if the Company is not successful in obtaining the necessary additional financing, the Company will most likely be forced to reduce operations.

Use of Estimates

The preparation of the financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“GAAP”)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, allowance for doubtful accounts, recoverability of long-lived assets, including the values assigned to property and equipment, fair value calculations for stock-based compensation and 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 condensed 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 CodificationCodifications (“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.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

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

Revenue Recognition, continued

Product Revenues and Authentication Services

The Company’s PCR-produced linear DNA productsproduct revenues are manufacturedaccounted 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.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Revenue Recognition, continued

Clinical Laboratory Testing Services

The Company records revenue for its clinical laboratory testing service contracts, which includes its COVID-19 Testing Services, upon satisfying its promise to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time that Company services are complete, which in nearly all cases is when the testing results are released to the customer. For those customers with a fixed monthly fee, the revenue is recognized over-time as the services are provided.

Research and Development Services

The Company records revenue for its research and development contracts using the over-time revenue recognition model. Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation.

Revenues are recorded proportionally as costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred during a period until the remaining costs to complete a contract can be estimated. The Company has elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

Disaggregation of Revenue

The following table presents revenues disaggregated by our business operations and timing of revenue recognition:

Three Month Period Ended:

December 31, 

December 31, 

    

2021

    

2020

Research and development services (over-time)

$

105,695

$

263,713

Clinical laboratory testing services (point-in-time)

1,873,722

578,370

Clinical laboratory testing services (over-time)

1,326,400

194,400

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

 

 

Supply chain

 

411,547

 

32,942

Asset marking

 

105,522

 

151,758

Diagnostic test kits

342,820

394,958

Total

$

4,165,706

$

1,616,141

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20212022

(unaudited)

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

Revenue Recognition, continued

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, 

    

2022

    

2021

Research and development services (over-time)

$

126,058

$

105,695

Clinical laboratory testing services (point-in-time)

3,074,414

1,873,722

Clinical laboratory testing services (over-time)

1,439,881

1,326,400

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

 

 

Supply chain

 

411,765

 

411,547

Large Scale DNA Production

127,506

Asset marking

 

83,128

 

105,522

MDx test kits and supplies

342,820

Total

$

5,262,752

$

4,165,706

Contract balances

As of December 31, 2021,2022, 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, 

$

October 1, 

December 31, 

$

    

Balance sheet classification

    

2021

    

2021

    

change

    

Balance sheet classification

    

2022

    

2022

    

change

Contract liabilities

 

Deferred revenue

$

281,000

$

457,538

$

176,538

 

Deferred revenue

$

563,557

$

273,880

$

289,677

For the three-month period ended December 31, 2021,2022, the Company recognized $13,782$341,285 of revenue that was included in Contract liabilities as of October 1, 2021.2022.

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.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. The estimated useful life for 8

computer equipment, lab equipment and furniture is 3 years and leasehold improvements are amortized over the shorterTable of their useful life or the remaining lease terms.Contents

Income TaxesAPPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In its interim financial statements, the Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income Taxes,” whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs from U.S. statutory rates primarily as a result of a valuation allowance related to the Company’s net operating loss carryforward as a result of the historical losses of the Company.December 31, 2022

(unaudited)

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

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 and warrants.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Net Loss Per Share, continued

For the three-month periods ended December 31, 20212022 and 2020,2021, common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.

Securities that could potentially dilute basic net income 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, 20212022 and 20202021 are as follows:

    

2021

    

2020

    

2022

    

2021

Warrants

 

743,563

 

778,118

 

7,295,588

 

743,563

Stock options

 

1,061,460

 

358,178

 

1,006,141

 

1,061,460

Total

 

1,805,023

 

1,136,296

 

8,301,729

 

1,805,023

Stock-Based Compensation

The Company accounts for stock-based compensation for employees, directors, and nonemployees in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based payments, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair value of the award, and are recognized as expense over the requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options is estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 740, excess tax benefits realized from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in the consolidated statements of operations.

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, 2021,2022, the Company had cash and cash equivalents of approximately $2.1$12.2 million in excess of the FDIC insurance limit.

NaNThe 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.

One customer from within the MDx Testing Services segment accounted for 48% of the Company’s revenues earned from sale of products and services for the three-month period ended December 31, 2021.

The Company’s revenues earned from sale of products and services for the three-month period ended December 31, 2020 included an aggregate of 26% and 10% from 2 customers, respectively.

NaN customersOne customer accounted for 74%88% of the Company’s accounts receivable at December 31, 20212022 and 2two customers accounted for 67%89% of the Company’s accounts receivable at September 30, 2021.2022.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20212022

(unaudited)

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

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 manufacture of DNA for use in nucleic acid-based therapeutics.

MDx Testing Services— Segment operations consist of performing and developing clinical molecular diagnostic and genetic tests and clinical laboratory testing services. Under our MDx testing services, ADCL provides COVID-19 testing for large populations marketed under its safeCircleTM trademark, as well as its pharamcogenimc testing services that are currently undergoing late-stage development. It also includes the sales of our MDx test kits and related supplies.

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

The Company evaluates the performance of its segments and allocates resources to them based on revenues and operating income (losses). Operating income (loss) includes intersegment revenues, as well as a charge allocating all corporate headquarters costs. Since each vertical has shared employee resources, payroll and certain other general expense such as rent, and utilities were allocated based on an estimate by management of the percentage of employee time spent in each vertical. Segment assets are not reported to, or used by, the CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

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, 2022, there were no transfersbetweenLevels1, 2 and 3 of the fair value hierarchy.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

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

Recent Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU-2016-13”), which changes the methodology for measuring credit losses on financial instruments and certain other instruments, including trade receivables and contract assets. The new standard replaces the current incurred loss model for measurement of credit losses on financial assets with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts. The new standard is effective for reporting periods beginning after December 15, 2022. The Company does not expect the adoption of ASU 2016-13 to have a significant impact on its condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The objective of this update is to simplify the accounting for convertible preferred stock by removing the existing guidance in ASC 470-20, “Debt: Debt with Conversion and Other Options,” that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. This amendment also further revises the guidance in ASU 260, “Earnings per Share,” to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company does not expect the adoption of ASU 2020-06 to have a significant impact on its condensed consolidated financial statements.

NOTE C — INVENTORIES

Inventories consist of the following:

December 31, 

September 30, 

December 31, 

September 30, 

    

2021

    

2021

    

2022

    

2022

(unaudited)

(unaudited)

Raw materials

$

1,194,571

$

786,938

$

366,116

$

471,947

Work-in-progress

0

35,786

55,817

Finished goods

 

106,058

 

582,995

 

75,112

 

74,480

Total

$

1,300,629

$

1,369,933

$

477,014

$

602,244

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are as follows:

December 31, 

September 30, 

December 31, 

September 30, 

    

2021

    

2021

    

2022

    

2022

(unaudited)

(unaudited)

Accounts payable

$

1,760,676

$

2,010,410

$

2,023,295

$

1,744,105

Accrued salaries payable

 

396,796

 

655,240

 

830,986

 

1,458,661

Other accrued expenses

 

363,881

 

325,693

 

201,842

 

418,985

Total

$

2,521,353

$

2,991,343

$

3,056,123

$

3,621,751

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

NOTE E —WARRANTS AND STOCK OPTIONS

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.

Transactions involving warrants are summarized as follows:

Weighted

Average

Exercise

Number of

Price Per  

    

Shares

    

Share

Balance at October 1, 2021

 

745,268

$

6.44

Granted

 

0

 

0

Exercised

 

0

 

0

Cancelled or expired

 

(1,705)

 

7.54

Balance at December 31, 2021

 

743,563

$

6.43

Stock Options

For the three-month period ended December 31, 2021, the Company granted 361,552 options to officers of the Company. These options have a ten-year term and vest immediately. Also, during the three-month period ended December 31, 2021, the Company granted 213,889 options to non-employee board of director members. The options granted to the non-employee board of directors have a ten-year term and vest on the one-year anniversary of the date of grant.

The fair value of options granted during the three months ended December 31, 2021, was determined using the Black Scholes Option Pricing Model. For the purposes of the valuation model, the Company used the simplified method for determining the granted options expected lives. The simplified method is used since the Company does not have adequate historical data to utilize in calculating the expected term of options. The fair value for options granted during the three months ended December 31, 2021 was calculated using the following weighted average assumptions: stock price $5.57; exercise price $5.90; expected term 5.16years; dividend yield 0; volatility 143%; and risk-free rate of 1.17%. The weighted average grant date fair value per share for the options granted during the three-month period ended December 31, 2021 was $5.90.

Weighted

Average

Exercise

Number of

Price Per

    

Shares

    

Share

Balance at October 1, 2022

 

7,313,963

$

3.68

Granted

 

 

Exercised

 

 

Cancelled or expired

 

(18,375)

 

17.60

Balance at December 31, 2022

 

7,295,588

$

3.65

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20212022

(unaudited)

NOTE F — 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 term of the lease commenced on June 15, 2013 and originally expired on May 31, 2017,2016, with the option to extend the lease for two additional three-year periods. The Company has exercised its option to extend the lease for one additional three-year period ending May 31, 2019. The base rent during the additional three-year period was $458,098 per annum. InDuring November 2019, the Company extended this lease until January 15, 2020. In addition to the office space, the Company also has 2,200 square feet of laboratory space. On January 20, 2020, the Company entered into an agreement to amend both of these leases, extending the term for the corporate headquarters as well as the laboratory space until January 15, 2021, with a one-year renewal option. InDuring October 2020, the Company exercised the one-year renewal option, extending the term for these leases until January 15, 2022. The leases were subsequently renewed for an additional one-year term commencing onOn February 1, 2022, andthe Company entered into a new lease agreement for the same facility for an one-year term, expiring January 31, 2023. The base rent during the additional twelve-month period iswas $589,056 per annum. The Company is currently negotiating a lease renewal with its landlord and is operating under the old lease on a month-to-month basis until the new lease is finalized. 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 September 2021,August 2022, the Company renewed this lease with a new expiration date of AugustJuly 31, 2022.2023. The base rent is approximately $6,500 per annum. The Company’s total short-term lease obligationfuture minimum rental payments (excluding real estate tax and maintenance costs as of December 31, 2021 is $644,059.

The2022 are $50,839 and are considered short-term lease obligations).The total rent expense for the three-month periods ended December 31, 2022 and 2021 were $148,826 and 2020 were $142,952, and $145,845, respectively.

Employment Agreement

The employment agreement with Dr. James Hayward, the Company’s President and Chief Executive Officer (“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 yearone-year terms, most recently as of June 30, 2021.2022. Under the employment agreement, the CEO is eligible for a special aggregate cash incentive bonus of up to $800,000, $300,000 of which is payable if and when annual revenue reaches $8 million, plus an additional $100,000 payable for each additional $2 million of annual revenue in excess of $8 million. Pursuant to the contract, the CEO’s annual salary is $400,000. 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.

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.

NOTE F — COMMITMENTS AND CONTINGENCIES, continued

Employment Agreement, continued

Upon termination due to death or disability, the CEO will generally be entitled to receive the same payments and benefits he would have received if his employment had been terminated by the Company without cause (as described in the preceding paragraph), other than salary continuation payments.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20212022

(unaudited)

NOTE F — COMMITMENTS AND CONTINGENCIES, continued

Employment Agreement, continued

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. For the fiscal year ended September 30, 2021, the CEO earned a $300,000 bonus as the Company’s annual revenue was greater than $8 million. On November 1, 2021, this $300,000 bonus was paid to the CEO by granting stock options with a fair value of $300,000 calculated using the Black Scholes Option Pricing Model.

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 G – 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.

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)

NOTE G – SEGMENT INFORMATION, continued

Information regarding operations by segment for the three-month period ended December 31, 2021 is as follows:

Therapeutic DNA

MDx Testing

DNA Tagging and

    

    

Production

    

Services

    

Security Products

    

Consolidated

Revenues:

 

  

 

  

 

  

 

  

Product revenues

$

$

342,821

$

483,490

$

826,311

Service revenues

 

89,438

 

 

49,835

 

139,273

Clinical laboratory service revenues

 

 

3,349,658

 

 

3,349,658

Less intersegment revenues

 

 

(149,536)

 

 

(149,536)

Total revenues

$

89,438

$

3,542,943

$

533,325

$

4,165,706

Gross profit

$

89,438

$

820,690

$

199,010

$

1,109,138

(Loss) income from segment operations (a)

$

(924,778)

$

(334,988)

$

(896,399)

$

(2,156,165)

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

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

December 31, 

    

2022

    

2021

Loss from operations of reportable segements

$

(217,084)

$

(2,156,165)

General corporate expenses (b)

 

(1,001,894)

 

(2,550,412)

Interest income, net

 

3,686

 

273

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

 

(2,637,800)

 

Other income (expense), net

 

8,846

 

(14,607)

Consolidated loss before provision for income taxes

$

(3,844,246)

$

(4,720,911)

(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 consists of Selling, general and administrative expenses that are not specifically identifiable to a segment.

NOTE H – 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 on change in fair value of the warrants classified as a liability in the condensed consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note B.

The following table presents the fair value of the Company’s financial instruments as of December 31, 2022 and summarizes the significant unobservable inputs in fair value measurement of Level 3 financial assets and liabilities as of December 31, 2022. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of December 31, 2022.

Fair value at

Valuation

Unobservable

Weighted

 

    

December 31, 2022

    

Technique

    

Input

    

Average

 

Liabilities:

 

  

 

  

 

  

  

Common Warrants

$

2,187,000

Monte Carlo simulation

 

Annualized volatility

160.00

%

Series A Warrants

$

4,269,000

Monte Carlo simulation

Annualized volatility

160.00

%

Series B Warrants

$

1,321,200

Monte Carlo simulation

Annualized volatility

190.00

%

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

(unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

The change in fair value of the Common Warrants and the Series A and Series B Warrants for the three-month period ended December 31, 2022 is summarized as follows:

    

Common Warrants

    

 

Series A Warrants

    

Series B Warrants

Fair value at October 1, 2022

$

1,477,000

$

2,883,000

$

779,400

Change in fair value

 

710,000

1,386,000

541,800

Fair Value at December 31, 2022

$

2,187,000

$

4,269,000

1,321,200

NOTE I – SUBSEQUENT EVENTS

On January 25, 2023 the Company granted 694,670 options to non-employee board of director members that have a ten-year term and vest on the one-year anniversary of the date of grant.

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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”, “designated“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, including risks relating to the continuing outbreak of COVID-19.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, 2020,2022, 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 business strategy and the timing of our expansion plans;
our expectations concerning product candidatesdemand for our technologies;Therapeutic DNA Production Services;
demand for DNA Tagging Services
demand for MDx Testing Services
our expectations concerning existing or potential development and license agreements for third-party collaborations andor joint ventures;
regulatory approval and compliance for our expectations of when different phases of clinical activity may commence and conclude;Therapeutic DNA Production Services;
the effect of governmental regulations generally;

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our expectations of when regulatory submissions may be filed or when regulatory approvals may be received;
our expectations concerning product candidates for our technologies; and

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our expectations of when or if we will become profitable.

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;
our LineaTM COVID-19 Assay Kits and COVID-19 testing may become obsolete or suffer a decline in demand for a variety of reasons;
the inherent uncertainties associated with clinical trials of product candidates;
the inherent uncertainties associated with the process of obtaining regulatory clearance or approval to market product candidates;
the inherent uncertainties associated with commercialization of products and/or services that have received regulatory clearance or approval;
economic and industry conditions generally and in our specific markets;
Thewe may conduct a reverse stock split of our common stock to meet the requirements of Nasdaq, which may adversely impact the market price and liquidity of our common stock;
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, or in eachthe case of documents incorporated by reference, the original date of any such documents, based on information available to us as of thesuch date, hereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time.

Forward-looking statements may include our plans and objectives for future operations, including plans and objectives relating to our products and our future economic performance, projections, business strategy and timing and likelihood of success. Assumptions relating to the forward-looking statements included in this Quarterly Report involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, demand for our products and services, and the time and money required to successfully complete development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many of which are beyond our control.

Any of the assumptions underlying the forward-looking statements contained in this Quarterly Report could prove inaccurate and, therefore, we cannot assure you that any of the results or events contemplated in any of such forward-looking statements will be realized. Based on the significant uncertainties inherent in these forward-looking statements, the inclusion of any such statement should not be regarded as a representation or as a guarantee by us that our objectives or plans will be achieved, and we caution you against relying on any of the forward looking-statements contained herein.

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Trademarks, Trade Names and Service Marks

Our trademarks currently used in the United States include Applied DNA Sciences®, SigNature® molecular tags, SigNature® T molecular tags, fiberTyping®, DNAnet®, SigNify®, Beacon®, CertainT®, LinearDNA™, Linea™ COVID-19 Diagnostic Assay Kit and safeCircleTM COVID-19 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 or incorporated by reference in this Quarterly Report on Form 10-Q are the property of the respective owners.

Introduction

Applied DNA developsWe are a biotechnology company developing and markets DNA-based technology solutions utilizing its LinearDNATM large-scalecommercializing technologies to produce and detect DNA. Using the polymerase chain reaction (“PCR”) based manufacturing platform. Our proprietary PCR-basedto enable both the production and detection of DNA, LinearDNATM manufacturing platform produces large quantitieswe operate in three primary business markets: (i) the manufacture of synthetic DNA for use in nucleic acid-based therapeutics (“Therapeutic DNA Production Services”); (ii) the detection of DNA in vitro medicalmolecular diagnostics and preclinical nucleic acid-based druggenetic 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”).

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 marketsoperation (“Biotherapeutic Contract ResearchCDMO”) for the manufacture of synthetic DNA for use in nucleic acid-based therapies and Manufacturing”the development of our own product candidates in veterinary health.

Therapeutic DNA Production Services

Through LineaRx, Inc. (“LRx”) and for supply chain security, anti-counterfeiting and anti-theft technology purposes (“Non-Biologic Tagging”). We also have developed orsubsidiary we are developing multiple PCR-based molecular diagnostic testand commercializing the linearDNA (“linearDNA”) platform. The linearDNA platform enables the rapid, efficient, and large-scale cell-free manufacture of high-fidelity DNA sequences for COVID-19. Our Linea 1.0 COVID-19 Assay Kit was granted EUA byuse in nucleic acid-based therapeutics. The linearDNA platform enzymatically produces a linear form of DNA we call ‘linearDNA’ that is an alternative to plasmid-based DNA manufacturing technologies that have supplied the FDADNA used in May 2020. Our Linea 2.0 COVID-19 Assay currently holds conditional approval from NYSDOH as an LDT. An EUA requestbiotherapeutics for the Linea 2.0 COVID-19 Assaypast 40 years.

We believe our enzymatic linearDNA platform has numerous advantages over existing cell-based plasmid DNA manufacturing platforms. Plasmid-based DNA manufacturing is currently pending with FDA (the Linea 1.0based on the complex, costly and Linea 2.0 COVID-19 Assays are collectively referred to astime-consuming biological process of amplifying DNA in living cells. Once amplified, the “COVID-19 Diagnostic Tests”). In addition, under our wholly-owned subsidiary, ADCL, we offer a high-throughput turnkey solution for population-scale COVID-19 testing marketed as safeCircle. safeCircle is designed to look for infection within defined populations or communities utilizing high throughput PCR-based testing methodologies (the “COVID-19 Testing Services”).

Applied DNA’s LinearDNATM PCRDNA 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 linearDNA platform does not require living cells and instead amplifies DNA via the enzymatic process of PCR. The linearDNA platform is capablesimple, with only four ingredient inputs, and can rapidly produce very large quantities of producing large scale DNA which wewithout the need for complex purification steps.

We believe offers many benefits over the limitationskey advantages of other large scale DNA manufacturing systems, including:the linearDNA platform include:

Speed – Production of DNA via the LinearDNATM platformlinearDNA can be measured in terms of hours, not days and weeks like other large-scaleas is the case with plasmid-based DNA manufacturing platforms.
ScaleScalabilityThe LinearDNATM platform is flexible and can be adapted to encompass large quantity production.linearDNA 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 bacterially derivedplasmid backbone and antibiotic resistance genes, inherent to plasmid DNA, are not present.present in linearDNA.
CustomizationSimplicity – The production of linearDNA is streamlined relative to plasmid-based DNA production. linearDNA 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 PCRthe linearDNA platform can be easily chemically modified to suit specific customer applications. In addition, the linearDNA 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 polyadenylation sequences (poly (A) tail) important for gene therapy and messenger RNA (“mRNA”) therapies, respectively.

Biotherapeutic Contract Research and Manufacturing

Our patented continuous flow PCR systems and other proprietary PCR-based production technology and post-processing systems that comprise the LinearDNATM platform allows for the large-scale production of specific DNA sequences. The LinearDNATM platform is currently being used for customers to manufacture DNA as components of in vitro diagnostic tests and for preclinical nucleic acid-based drug development in the fields of adoptive cell therapies (CAR T and TCR therapies), DNA vaccines (anti-viral and cancer), RNA therapies, clustered regularly interspaced short palindromic repeats (CRISPR) based therapies and gene therapies. We believe our LinearDNATM platform confers a distinct competitive advantage in cost, cleanliness, and time-to-market as compared to other DNA manufacturing systems.

The Company provides preclinical contract research and manufacturing services for the nucleic acid-based therapeutic markets. We work with biotech and pharmaceutical companies to convert plasmid-based and/or viral transduction-based preclinical biotherapeutics into PCR-produced linear DNA-based forms that can be produced on our LinearDNATM platform. In addition, we provide contract research services to RNA-based drug and biologic customers for preclinical studies. These services include the design, development and manufacture of PCR-produced DNA templates for RNA. In addition, we also use our LinearDNATM platform to produce very large gram-scale quantities of DNA for the in vitro diagnostic market where our DNA is used for both commercially available diagnostics and diagnostics under development.

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Preclinical studies have shown that linearDNA is substitutable for plasmid DNA in numerous nucleic acid-based therapies, including:

therapeutic and prophylactic DNA vaccines;
DNA templates for in vitro transcription to produce ribonucleic acid (“RNA”), including mRNA; and
adoptive cell therapy manufacturing.

Further, we believe that linearDNA 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 homology-directed repair (“HDR”); and
non-viral gene therapy.

As of the third quarter of calendar 2022, there were 3,694 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: Q3 2022 Quarterly Report). Due to what we believe are the linearDNA platform’s numerous advantages over legacy plasmid-based DNA manufacturing platforms, we believe this large number of therapies under development represents a substantial market opportunity for linearDNA to supplant plasmid DNA in the manufacture of nucleic acid-based therapies.

Our linearDNA is currently manufactured pursuant to Good Laboratory Practices (“GLP”) that we believe are sufficient for pre-clinical discovery and development of nucleic acid-based therapies. In addition, for indirect clinical use of linearDNA (i.e., where linearDNA is a starting material but is not incorporated into the final therapeutic product, as is the case with the production of mRNA or certain viral vectors), we believe that high-quality grade GLP linearDNA is sufficient for clinical and commercial stage customers of our Therapeutic DNA Production Services. For the direct clinical use of our linearDNA (i.e., nucleic acid-based therapies where our linearDNA is incorporated into the final therapeutic product, as in the production of DNA vaccines, adoptive cell therapies and certain gene therapies) we believe clinical and commercial stage customers of our Therapeutic DNA Production Services will generally require our manufacturing facilities to meet current Good Manufacturing Practices (“cGMP”). We also seekcurrently do not have any manufacturing facilities that meet cGMP. We will need to develop acquire, and commercialize,maintain manufacturing facilities that meet cGMP to support customers that wish to use our linearDNA for direct clinical use and for indirect clinical use customers who request linearDNA manufactured under cGMP. In the longer term, we believe that the development and maintenance of a cGMP manufacturing facility for linearDNA will benefit the entirety of our Therapeutic DNA Production Services business, in both direct and indirect clinical applications.

Our business strategy for the linearDNA platform is (i) to utilize our current GLP linearDNA Production capacity to secure CDMO contracts to supply linearDNA to pre-clinical therapy developers, as well as clinical and commercial therapy developers and manufacturers that are pursuing therapeutics that require the indirect clinical use of linearDNA; and (ii) upon our development of cGMP linearDNA Production facilities, to secure CDMO contracts with clinical stage therapy developers and commercial manufactures to supply linearDNA for direct clinical use.

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 linearDNA-based therapeutic or prophylactic vaccines for the veterinary health market. Currently, we have in-licensed a diverse portfoliotherapeutic DNA vaccine candidate against canine lymphoma, which accounts for up to 24% of nucleic acid-based therapeutics based on PCR-produced linear DNA to improve existing nucleic acid-based therapeutics or to create new nucleic acid-based therapeutics that address unmet medical needs. We are currently directly engagedall cancers in preclinical drugcanines. Our lymphoma vaccine candidate development activities focusing on therapeutically relevant DNA constructs manufactured via our LinearDNATM platform in the fields of DNA-based anti-viralwas licensed from Takis S.R.L and anti-cancer vaccines, RNA therapeutics, CAR T cell immunotherapy and the manufacture of rAAV vectorsEvviVax, S.R.L. for gene therapy. The Company is also engaged in preclinical animal drug candidate development activities focusing on therapeutically relevant DNA constructs manufactured via its LinearDNATM platform.

COVID-19 Diagnostic Testing

On May 13, 2020 and subsequently amended,exclusive use by the Company received an EUA fromin association with our linearDNA platform, and is subject to certain commercialization milestones. We currently seek to commercialize our canine lymphoma vaccine in conjunction with lipid nanoparticle (“LNP”) encapsulation to facilitate IM administration. We have recently demonstrated in vitro and in vivo (mice studies) expression of generic reporter proteins via linearDNA

encapsulated by LNPs. For the FDA for the clinical usein vivo study, successful expression of the LineaTM 1.0 Assay forLNP-encapsulated linearDNA was administered and achieved via IM injection. We believe the qualitative detection of nucleic acid from SARS-CoV-2 in respiratory specimens. Under the EUA, testing is limited to laboratories certified under CLIA, that meet requirements to perform high complexity tests. The intended use, under the EUA allows ADCL and other certified laboratory users of the LineaTM 1.0 Assay, to provide testing to individuals with the return of individual testing results. The EUA will be effective until the declaration that circumstances exist justifying the authorization of the emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 is terminated or until the EUA’s prior termination or revocation by FDA or the Company. Our LineaTM 1.0 Assay has not been FDA cleared or approved, and the EUA’s limited authorization is only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens.

DuelinearDNA platform provides a substantial advantage to the emergencedevelopment and spreadmonetization of the Omicron BA.1 SARS-CoV-2 Variant of Concern, which may result in false negative results with the Linea 1.0 Assay, the Company received notice from FDA in December 2021 that it must cease the use and sale of the Linea 1.0 Assay as a primary diagnostic for COVID-19 (the “Linea 1.0 FDA Notice”).

On November 15, 2021 FDA revised its guidance document titled “Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency (Revised)” (“FDA COVID-19 Testing Guidance”) to require all COVID-19 diagnostic assays conducted as Laboratory-Developed Tests (“LDTs”) to apply for EUA authorization within a 60-day period from the revised guidance’s issuance date. The FDA Guidance provides an exception for certain notified states, who can authorize in-state laboratories to develop and perform COVID-19 tests under the authority of their own State law in instances where the laboratory did not otherwise submit an EUA request to FDA. New York State is a notified state under the current FDA COVID-19 Testing Guidance.

In response to the impact of Omicron BA.1 and the Linea 1.0 FDA Notice, the Company, via its ADCL subsidiary, submitted data supporting the validation of the Linea 2.0 Assay as a laboratory developed test (LDT) to New York State Department of Health (NYSDOH) on December 2, 2021. This process complies with the current FDA COVID-19 Testing Guidance. Conditional approval for the Linea 2.0 Assay as a LDT from the NYSDOH was received on December 30, 2021. The NYSDOH conditional approval included single sample and up to 5-sample pooled testing. Use of the Linea 2.0 Assay under the NYSDOH conditional approval is limited to samples from New York State. The Linea 2.0 Assay has not been FDA cleared or approved. Linea 2.0 is currently used in the Company’s COVID-19 Testing Services.

The Company currently manufactures the COVID-19 Diagnostic Tests at its facilities in Stony Brook.

COVID-19 Testing Services and Clinical Laboratory

We offer high throughput COVID-19 testing services to customers as a Testing-as-a-Service (TaaS) offering branded under the safeCircleTM trademark. safeCircle is a turnkey testing solution that provides for all aspects of large population COVID-19 testing – from sample collection to results reporting – for institutes of higher education, K-12 schools, businesses, and healthcare facilities, among other institutions with large populations. safeCircle utilizes serial, high-sensitivity pooled RT-PCR testing to help prevent virus spread by quickly identifying infections within a community, school, or workplace. Testing is conducted utilizing the Company’s COVID-19 Diagnostic Tests or third-party EUA-authorized assays that provides rapid results using real-time PCR (RT-PCR testing) with results returned typically within 24 to 48 hours at the Company’s Clinical Laboratory Evaluation Program (“CLEP”) permitted, CLIA-certified laboratory. For the majority of safeCircle clients, test scheduling and testing result reporting is provided though the CLEARED4 digital health platform owned and operated by Chelsea Health Solutions, LLC.

We currently provide safeCircleTM pooled testing to primary/secondary/higher education institutions, private clients, local governments, and businesses and college athletic programs. The large majority of safeCircle customers are located within New York State.therapeutic DNA vaccine against canine lymphoma.

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On May 10, 2021MDx Testing Services

Through Applied DNA Clinical Labs, LLC (“ADCL”), our clinical laboratory subsidiary, we leverage our expertise in DNA detection via PCR to provide and develop clinical molecular diagnostics and genetic (collectively “MDx”) testing services. ADCL received itsis a New York clinicalState Department of Health (“NYSDOH”) Clinical Laboratory Evaluation Program (“CLEP”) permitted, Clinical Laboratory Improvement Amendments (“CLIA”)-certified laboratory permit and its CLIA certification from the NYSDOH, CLEP, which is currently permitted for virology. As partIn providing MDx testing services, ADCL employs its own or third-party molecular diagnostic tests.

Under our MDx testing services, ADCL currently provides COVID-19 testing for large populations marketed under our safeCircleTM trademark. Leveraging ADCL’s customizable high-throughput robotically-pooled testing workflow and the Cleared4 digital health platform owned and operated by Cleared4 Inc. (the “Cleared4 Platform”), our safeCircle testing service is an adaptable turnkey large population COVID-19 testing solution that provides for all aspects of COVID-19 testing, including test scheduling, sample collection and automated results reporting. Our safeCircle testing service utilizes high-sensitivity robotically-pooled real-time PCR (“RT-PCR”) testing to help mitigate virus spread by quickly identifying COVID-19 infections within a community, school, or workplace. Our safeCircle COVID-19 testing is performed using either the Company’s internally developed Linea 2.0 RT-PCR Assay, a NYSDOH conditionally approved laboratory developed test (“LDT”) or third-party emergency use authorization (“EUA”)-authorized RT-PCR COVID-19 Testing Services its laboratory provides individualassays. Our safeCircle testing service also incorporates the Cleared4 Platform to enable large-scale digital test scheduling, in-field sample collection and registration, and results reporting. By leveraging the combination of our robotically-pooled workflows and the Cleared4 Platform, our safeCircle testing services typically return testing results within 24 to 48 hours. We currently provide safeCircle testing services to higher education institutions, private clients, and businesses located in New York State.

ADCL has also developed PCR-based MDx testing services for the Monkeypox virus, which are currently approved by NYSDOH. These services are designed to run on the same high-throughput platform utilized by our COVID-19 testing utilizingservices and provides ADCL with a substantial testing throughput. Demand for these types of services may vary greatly depending upon public health requirements, e.g., Monkeypox testing is now a lower public health priority, and we intend to pursue such opportunities on an opportunistic basis.

In addition to our infectious disease testing services, we are currently validating a genetic testing service in the Company’sform of pharmacogenetics (“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 35 genes and provide genotyping information relevant to certain cardiac, mental health and pain management drug therapies. We believe the economics of complex MDx testing services such as PGx are more favorable to the Company as compared to high volume, low complexity MDx tests such as COVID-19 Diagnostic Tests or third-party EUA-authorized COVID-19 diagnostic assays. testing. Our PGx testing services will require NYSDOH approval prior to initiating our patient testing services. If approved, we plan to commercialize our PGx testing services by offering PGx clinical reference laboratory testing services to other clinical laboratories and healthcare facilities nationwide.

Going forward, our business strategy for ADCL is to leverage our deep knowledge of PCR to develop and commercialize high complexity, high value and differentiated MDx testing services that will be offered to other clinical laboratories and healthcare facilities as clinical reference laboratory testing services and testing services for large enterprise customers. We believe operating as a clinical reference laboratory has several advantages when compared to operating as a typical clinical non-reference laboratory, including:

the ability to leverage our deep expertise in PCR to develop and perform high-value esoteric MDx testing services not performed by conventional clinical non-reference laboratories;
reduced sample acquisition costs;
reduced marketing costs; and
a national customer base that may lead to a larger total addressable market.

The Company’s COVID-19 Testing Services also includes pooled surveillanceclinical reference laboratory services market is forecasted to have incremental growth of $26.0B between 2020 and 2025 with a 6.71% compound annual growth rate (“CAGR”). We believe that the rapidly increasing number of specialized MDx tests for early disease detection, disease prognosis, disease risk, companion diagnostics, genetic testing that is not regulated by FDA, CDC or CMS.and personalized medicine will drive an increase in the demand for highly specialized MDx clinical reference laboratory services.

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Non-BiologicDNA Tagging and Security Products and Services

Our supply chain security business allowsBy 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 (molecular) tags manufactured on our LinearDNATMlinearDNA platform to mark objects in a unique manner and then identify these objects by detecting the absence or presence of the molecularDNA tag. We believe our molecularDNA tags are not economically feasible nor practical to replicate, and that our disruptive tracking platform offers broad commercial relevance across many industry verticals. The Company’s core productsDNA 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 LinearDNATMlinearDNA platform, provide an approacha methodology to authenticate goods within large and complex supply chains for materials such as cotton, and leather, in-home textiles and apparel, pharmaceuticals, and nutraceuticals cannabis and other products.
SigNify® IF portable DNA readers and SigNify consumable reagent test kits provide definitive real-time authentication of molecularthe Company’s DNA tags in the field, providing a front-line solution for supply chain integrity backed with forensic-level molecular tag authentication. Applied DNA’sThe Company’s software platform enables customers to track materials throughout a supply chain or product life.
CertainT trademark indicatesfiberTyping®, which uses PCR-based DNA detection to determine a cotton cultivar, and other product genotyping services that utilize PCR-based DNA detection to detect a product’s naturally occurring DNA sequences for the usepurposes of Applied DNA’s tagging, testingproduct provenance authentication and tracking platforms and solutions, enabling manufacturers, brands and trade organizations to convey proof of their product claims.supply chain security.

Recent Developments

In late November 2021, the SARS-CoV-2 Omicron Variant of Concern (B.1.1.529, sub-lineage BA.1) (the “Omicron VOC”) was detected. The Omicron VOC contains over thirty mutationsOur DNA Tagging and Security Products and Services are fully developed, highly scalable, and currently used in several commercial applications. To date, our largest commercial application for our DNA Tagging and Security Products and Services is in the Spike regiontracking and provenance authentication of cotton. Cotton home textile products utilizing our DNA Tagging and Security Products and Services are available in national retail chains including Costco® and Bed Bath & Beyond®.

We believe that the Uyghur Forced Labor Prevention Act (“UFLPA”), signed into law on December 23, 2021, may be helpful to increase demand for our DNA Tagging and Security Products and Services. The UFLPA establishes a rebuttable presumption that any goods mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region (“XUAR”) of the SARS-CoV-2 genome. The sensitivityPeople’s Republic of the Linea COVID-19 1.0 Assay Kit is impacted by the Omicron VOC, resulting in a unique detection pattern that may be specific for the Omicron variant. More specifically, the Linea COVID-19 Assay Kit unique detection pattern results in false negative results in patients infected with the Omicron variant when tested with the Linea 1.0 Assay as a primary diagnostic. As a result, the Company believes that the Linea COVID-19 Assay Kit may have utility as a reflex test for COVID-19 positive samples from third-party assaysChina are not entitled to detect whether a sample potentially contains the Omicron VOC. Specifically, the Linea 1.0 Assay may be potentially used as a reflex test to indicate the presence of Omicron in samples that have tested positive for COVID-19 via third-party assays that cannot discriminate for the new variant because these same samples will test negative on the Linea 1.0 Assay dueentry to the kit’s unique detection pattern.

In December 2021,United States. The presumption applies unless the Company, working in conjunctionimporter of record has complied with FDA, submitted data showing that the Linea 1.0 Assay produces false negative results with the Omicron VOC. As a result, the FDA issued the Linea 1.0 FDA Notice informing the company that is must cease use of the Linea 1.0 Assay as a primary diagnostic for COVID-19.

Linea 2.0 Assay LDT Conditional Approvalspecified conditions and, EUA Request to FDA

In response to the impact of the Omicron VOCby clear and the Linea 1.0 FDA Notice, the Company, via its ADCL subsidiary, submitted data supporting the validation of a new Linea 2.0 Assay as a laboratory developed test (LDT) to New York State Department of Health (NYSDOH) on December 2, 2021. The Linea 2.0 Assay was validated for the qualitative detection of COVID-19 in respiratory specimens and targets conserved regions of the E and N Genes of SARS-CoV-2. In silico analysis hasconvincing evidence, shown that the Linea 2.0 Assay can detect the Omicron VOC as well as all other known variants of concern and variants of interest. Conditional approvalgoods were not produced using forced labor. On June 17, 2022, an implementation strategy for the Linea 2.0 AssayUFLPA was published that listed DNA tagging as evidence that importers may present to potentially prove that a LDTgood did not originate in XUAR or did not benefit from the NYSDOH was received on December 30, 2021. The NYSDOH conditional approval included single sample and up to 5-sample pooled testing. Useforced labor. Approximately 20% of the Linea 2.0 Assay under the NYSDOH conditional approval is limited to samples from New York State.

Subsequently, on January 19, 2021, the Company through its ADCL subsidiary, submitted a request for EUA to FDA for the Linea 2.0 Assay. The EUA request includes single sample and up to 5-sample pooled testing, as well as an unsupervised at-home collection kit for use in conjunction with the Linea 2.0 Assay. The Linea 2.0 Assay as filedworld’s cotton garments contain cotton that originated in the EUA requestXUAR.

Our business plan is to leverage growing consumer and governmental awareness for product traceability and the newly enacted UFLPA to expand our existing partnerships and seek new partnerships for our DNA Tagging and Security Products and Services with a non-distributed testfocus on cotton and synthetic fibers.

Intellectual Property

The proprietary nature of and protection for use onlyour various technologies and know-how are important to our business. Our success depends in ADCL’s laboratories. The EUA requestpart on our ability to protect the proprietary nature of our technologies and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. We seek and maintain patent protection in the United States and internationally for our various technologies associated with our three primary business markets. We endeavor to patent or in-license technology, inventions and improvements that we consider important to the development of our business. We also rely on trade secrets, know-how and continuing innovation to develop and maintain our competitive position.

Because the development of our Therapeutic DNA Production Services and certain aspects of our MDx Testing Services businesses are at an early stage, our intellectual property portfolio with respect to certain technologies associated with these businesses is currently pending.also at an early stage. As further described below, we have filed or intend to file patent applications on certain technologies associated with these business markets, and as we continue the development of our technologies, we intend to identify additional means of obtaining patent protection that would potentially enhance commercial success.

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Linea 1.0 AssayWe cannot be certain that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially useful in protecting our technology. Any of our intellectual property and Omicron VOC BA.2 Subvariantproprietary rights could be challenged, invalidated, circumvented, infringed or misappropriated, or such intellectual property and proprietary rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide competitive advantages.

On January 28,As of December 31, 2022, our patent portfolio included the Company announced thatfollowing issued and pending patent applications applicable to each of our three primary business segments:

Therapeutic DNA Production Services
o6 issued patents and 9 pending patent applications in the United States
o11 issued foreign patents and 2 pending foreign patent applications
MDx Testing Services
o5 issued patents and 1 pending patent applications in the United States
o4 issued foreign patents and 1 pending foreign patent applications
DNA Tagging and Security Products and Services
o28 issued patents and 5 pending patent applications in the United States
o47 issued foreign patents and 13 pending foreign patent applications

In addition to patent protection, we also rely on trademarks, trade secrets, know how, other proprietary information and continuing technological innovation to develop and maintain our competitive position. In our Therapeutic DNA Production Services, we currently rely heavily on trade secret protection. We seek to protect and maintain the Linea 1.0 Assay, when used as a reflex test for COVID-19 positive samples, may exhibit a unique detection signature that can identify SARS-CoV-2 mutationsconfidentiality of proprietary information to protect aspects of our business that are indicativenot amenable to, or that we do not consider appropriate for, patent protection. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees and consultants, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. Thus, we may not be able to meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information concerning our business or financial affairs developed or made known to the individual during the course of the BA.2 subvariantindividual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. Our agreements with employees also provide that all inventions conceived by the employee in the course of employment with us or from the Omicron VOC.employee’s use of our confidential information are our exclusive property. However, such confidentiality agreements and invention assignment agreements can be breached and we may not have adequate remedies for any such breach.

The patent positions of biotechnology companies like ours are generally uncertain and involve complex legal, scientific and factual questions. Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any third party patent would require us to alter our development or commercial strategies, or our manufacturing processes, obtain licenses or cease certain activities. Our breach of any license agreements or our failure to obtain a license to proprietary rights required to develop or commercialize our future products or services may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference or derivation proceedings in the United States Patent and Trademark Office, or USPTO, to determine priority of invention.

Plan of Operations

General

Historically, the substantial portion of our revenues has been generated from sales of our SigNature® and SigNature® T molecular tags, our principal supply chain security and product authentication solutions. However, especially during the last two fiscal years, most of our near-term growth in revenues has been derived from sales of our Linea™ COVID-19 Assay Kit, our validated COVID-19 pooled testing, under review by NYSDOH, and our COVID-19 Surveillance Testing.Testing, which are part of our MDx testing services segment. We also expect future growth in revenues to be derived from the manufacturing ofour Therapeutic DNA products for the biotechnologyProduction Services and in vitro diagnostic markets.our MDx testing services. To a lesser extent, we expect to grow revenues from the sale of SigNature® molecular tags, SigNature® T molecular tags, SigNify® and CertainT® offerings as we work with companies and governments to secure supply chains for various types of products and product labeling throughout the world. We are also seeking to establish a revenue stream from our iCTC Technology. We have continued to incur expenses in expanding our business to meet current and anticipated future demand. We have limited sources of liquidity.

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Critical Accounting Policies and Recently Issued Accounting PronouncementsTable of Contents

See Note B to the accompanying unaudited condensed consolidated financial statements for our critical accounting policies and recent accounting pronouncements.

Comparison of Results of Operations for the Three-Month Periods Ended December 31, 20212022 and 20202021

Revenues

Product revenues

For the three-month periods ended December 31, 2021,2022 and 2020,2021, we generated $826,311$516,396 and $550,097$826,311 in revenues from product sales, respectively. Product revenues increasedrevenue decreased by $276,214$309,315 or 50%38% for the three-month period ended December 31, 2021,2022 as compared to the three-month period ended December 31, 2020.2021. The increasedecrease in product revenues was primarily related to an increase of approximately $308,000 in Textiles related to the shipment of DNA concentrate to protect a cotton supply chain. This increase was offset by a decrease of approximately $52,000$342,000 in sales of our LineaTM COVID-19 Assay Kit.MDx test kits and supplies, which was attributable to sales pursuant to our former contract with Stony Brook University Hospital as well as a $52,000 decrease in our nutraceuticals market. Additional decreases include $18,000 in consumer asset marking and $23,000 in textile revenues. These decreases were offset by an increase in our Therapeutic DNA Production segment of $128,000.

Service revenues

For the three-month periods ended December 31, 2021,2022 and 2020,2021, we generated $139,273$232,061 and $293,274$139,273 in revenues from sales of services, respectively. The decreaseincrease in service revenues of $154,001$92,788 or 53%67% for the three-month period ended December 31, 2021,2022, as compared to the same period in the prior fiscal year is attributable to a decreaseincreases of approximately $110,000 and $63,000$33,000 for research and development projects in our pharmaceutical/nutraceuticalTherapeutic DNA Production segment, as well as increase of approximately $21,000, and biopharmaceutical$27,000 for authentication and isotopic testing service revenue in our nutraceutical/pharmaceutical, and textile markets, respectively.

Clinical laboratory service revenues

For the three-month periods ended December 31, 20212022 and 20202021, we generated $3,200,122$4,514,295 and $772,770$3,200,122 in revenues from our clinical laboratory testing services, respectively. Clinical laboratory testingThe increase in service revenues increased by $2,427,352,of $1,314,173 or 314%41% for the three-month period ended December 31, 2021,2022 as compared to the same period in the prior fiscal year. The increase in revenueyear is primarily dueattributable to an increase in demand for COVID-19 testing services during the first three months of fiscal 20222023 compared to the same period during fiscal 2021. Of this increase, approximately $2,000,000 in testing services related to our contract with the City University of New York.2022.

19Cost and Expenses

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Gross Profit

Gross profit for the three-month period ended December 31, 2021,2022, increased by $8,778$1,268,545 or 14%114% from $1,100,360$1,109,138, for the three-month period ended December 31, 20202021 to $1,109,138.$2,377,683. The gross profit percentage was 27%45% and 68%27% for the three-month periods ended December 31, 2021,2022 and 2020,2021, respectively. The declineincrease in the gross profit percentage was primarily from an improved gross profit percentage for our MDx testing services. This improvement was the result of a significant portion ofhigher testing volumes, coupled with cost management efforts for our clinical laboratory service revenues coming from the testing contracts where we also provide and staff the test collection centers, as these contract have higher costs associated with them as compared to our surveillance testing contracts. To a lesser extent this decrease in gross profit percentage was also due to product sales mix, as salescenters. Also, during the three-month period ended December 31, 2020 includedfirst three-months of fiscal 2022 the COVID-19 positivity rate was high, which resulted in our clinical laboratory having to reduce the test pooling size, which increased the cost of consumables per sample, therefore having a higher volume of sales of our LineaTM COVID-19 Assay Kit, which are at a highernegative impact on gross margin.

Costs and Expensesprofit.

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended December 31, 2021 increased2022 decreased by $1,352,519$2,110,262 or 41%45% to $4,662,173$2,625,357 as compared to $3,309,654$4,735,619 for the three-month period ended December 31, 2020.2021. The increasedecrease is primarily attributable to an increasea decrease in stock-based compensation expense of $1,128,422$1,606,172 primarily relating to officer stock option grants that vested immediately, as well as to the annual non-employee board of director grant that vests one-year from the date of grant.grant during fiscal 2022. The remainder of the increasedecrease relates to a decrease in bad debt expense of $300,000 for the collection of an increase in the Company’s Directors and Officers insurance policy premiums.outstanding receivable that was previously fully reserved for.

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Research and Development

Research and development expenses increaseddecreased to $971,304 for the three-month period ended December 31, 2022 from $1,080,096 for the three-month period ended December 31, 2021, from $763,808 fora decrease of $108,792 or 10%. This decrease is primarily due a decrease in payroll and laboratory supplies associated with our ongoing research and development efforts of approximately $51,000 and $33,000, as well as a decrease of approximately $34,000 of costs incurred during the three-month period ended December 31, 2020, an increase of $316,288 or 41%. This increase is primarily due to increased outsourced service contracts of approximately $90,000, as well as increased payroll of approximately $96,000 and to a lesser extent depreciation expense and laboratory supplies. These increases were to support our continued research and2021 for development efforts, primarily related to our ongoing animal vaccine study, as well as next generation sequencing projects.  projects in the cannabis industry.

Interest expense,income, net

Interest income, (expense), net for the three-month period ended December 31, 2021, represented income of $2732022, was $3,686 as compared to an expense of $5,438$273 in the three-month period ended December 31, 2020.

Other income (expense)

Other income (expense) for the three-month periods ended December 31, 2021 and 2020, was expense of $88,053 and $53,860, respectively. The increase of $34,193 is due to an increase in royalty expense during the three-month period ended December 31, 2021.

Loss on Extinguishment of DebtOther income (expense), net

Loss on extinguishment of debt of $1,774,662Other income (expense), net for the three-monthsthree-month periods ended December 31, 20202022 and 2021, was income of $8,846 and expense of $14,607, respectively. The increase of $23,453 is due to a gain on sale of vehicles of $6,082 during the current quarter, offset by foreign exchange translation expenses of $4,757 in the three-month period during the prior fiscal year.

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

Unrealized loss on change in fair value of warrants classified as a liability for the three-month period ended December 31, 2022 of $2,637,800 relates to the repayment of the $1.5 million of secured convertible notes issuedchange in July 2019 pursuant to a letter agreement with Dillon Hill Capital, LLC (the “July 2019 Notes”). The loss on extinguishment represents the difference between the fair value of the July 2019 Notes, includingwarrants that are classified as a liability. The unrealized loss on change in fair value represents the difference in fair value of the Replacement Warrants issued, on the repayment datewarrants from September 30, 2022 compared to their carrying value.the fair value as of December 31, 2022. The primary driver of this change is the increase in our stock price during the period.

Net Loss

Net loss decreased $86,151,$876,665 or 2%,19% to $3,844,246 for the three-month period ended December 31, 2022 compared to $4,720,911 for the three-month period ended December 31, 2021 compared to $4,807,062 for the three-month period ended December 31, 2020 due to the factors noted above.

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Liquidity and Capital Resources

Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of December 31, 2021,2022, we had working capital of $5,520,530.$15,002,349. For the three-month period ended December 31, 2020,2022, we used cash in operating activities of $3,701,894$2,383,106 consisting primarily of our loss of $4,720,911$3,844,246 net with non-cash adjustments of $320,751$338,918 in depreciation and amortization charges, $1,699,920$2,637,800 in unrealized loss on change in fair value of warrants classified as a liability, $93,748 in stock-based compensation expense and $10,000$290,022 of bad debt expenses.recovery. Additionally, we had a gain on the sale of property and equipment of $6,083, a net increase in operating assets of $1,018,201$437,308 and a net increasedecrease in operating liabilities of $6,547.$875,913. Cash used inprovided by investing activities of $104,686 was for$45,000 from the purchasesale of property and equipment.

We have recurring net losses, whichlosses. We have resulted inincurred a net loss of $4,720,911 and generated negative operating cash flow of $3,701,894$3,844,246 for the three-month periodthree-months ended December 31, 2021. These factors raise substantial doubt about2022. Our current capital resources include cash and cash equivalents, accounts receivable and inventories. Historically, we have financed our ability to continue as a going concern for one yearoperations principally from the issuancesale of equity and equity-linked securities. Through December 31, 2022, we have dedicated most of our financial resources to commercialization of our MDx Testing Services, specifically our COVID-19 Testing Services, as well as to research and development efforts focused on the development of our Therapeutic DNA Productions Services, as well as, advancing our intellectual property, and general and administrative activities. We estimate that we will have sufficient cash and cash equivalents to fund operations for the next twelve months from the date of filing of this quarterly report.

We may require additional funds to complete the continued development of our products, services, product manufacturing, and to fund expected additional losses from operations until revenues are sufficient to cover our operating expenses. If revenues are not sufficient to cover our operating expenses, and if we are not successful in obtaining the necessary additional financing, we will most likely be forced to reduce operations.

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Critical Accounting Estimates and 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
Equity based compensation.
Warrant Liabilities

Critical Accounting Estimates

The preparation of the financial statements.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 abilitymost significant estimates include revenue recognition, recoverability of long-lived assets, including the values assigned to 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 condensed consolidated financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.

Revenue Recognition

We follow Financial Accounting Standards Board (“FASB”) issued accounting standard updates which clarify the principles for recognizing revenue arising from contracts with customers (“ASC 606” or “Topic 606”).

The Company measures revenue at the amounts that reflect the consideration to which it is expected to be entitled in exchange for transferring control of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. The Company’s contracts with customers may include multiple performance obligations (e.g. taggants, maintenance, authentication services, research and development services, etc.). For such arrangements, the Company allocates revenues to each performance obligation based on their relative standalone selling price.

Due to the short-term nature of the Company’s contracts with customers, it has elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts with an original expected duration of one year or less.

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 continuetransfer 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.

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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 going concern is dependentliability on the Company’s ability to further implement its business plan, raise capital,consolidated balance sheet and generate revenues. The financial statements do not include any adjustments that might be necessary ifmeasured 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 Company is unable to continue as a going concern.consolidated statement of operations in the period of change.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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.

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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). Based on the evaluation of these disclosureDisclosure controls and procedures the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosureare those controls and procedures were effectivedesigned to ensureprovide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under theour Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is(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, 2022, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting reported in our Annual Report on Form 10-K for the fiscal year ended September 30,2022. The material weakness is further described below.

Material Weakness in Internal Control Over Financial Reporting

In connection with the audit of our consolidated financial statements for the fiscal year ended September 30, 2022, and 2021, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. For the fiscal year ended September 30, 2022, the material weakness related to the controls around the accounting for complex financial instruments, as it relates to the accounting for our outstanding warrants and the related tax impact. Nonetheless, we have concluded that this material weakness does not require a restatement of or change in our consolidated financial statements for any prior interim period. We also developed a remediation plan for this material weakness which is described below.

Remediation of Material Weakness

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that this material weakness is remediated as soon as possible. We believe we have made progress towards remediation and continue to implement our remediation plan for the current material weakness in internal control over financial reporting. Specifically, we have identified practices and/or procedures to expand and improve the review process for complex financial instruments and the related tax impact that is performed by both our personnel, as well as by the third-party professionals with whom we consult regarding complex accounting and tax applications. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended December 31, 2021,2022, other than the plan discussed above under “Remediation of Material Weakness”, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II - Other Information

Item 1. — Legal Proceedings.

None.

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Item 1A. — Risk Factors.

None.

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.

None.

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Item 6. — Exhibits.

Incorporated by Reference to SEC Filing

Filed with

Incorporated by Reference to SEC Filing

Filed or Furnished with

Exhibit

Exhibit

this Form

Exhibit

this Form

No.

    

Filed Exhibit Description

    

Form

    

No.

    

File No.

    

Date Filed

    

10-Q

    

Filed Exhibit Description

    

Form

    

No.

    

File No.

    

Date Filed

    

10-Q

3.1

Conformed version of Certificate of Incorporation of Applied DNA Sciences, Inc., as most recently amended by the Fifth Certificate of Amendment, effective Thursday, September 17, 2020

S-8

4.1

333-249365

10/07/2020

Conformed version of Certificate of Incorporation of Applied DNA Sciences, Inc., as most recently amended by the Fifth Certificate of Amendment, effective Thursday, September 17, 2020

S-8

4.1

333-249365

10/07/2020

3.2

By-Laws

8-K

3.2

002-90539

01/16/2009

By-Laws

8-K

3.2

002-90539

01/16/2009

31.1**

Certification of Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2**

Certification of Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.1*

Certification of Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2*

Certification of Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1**

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

32.2**

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

101 INS*

XBRL Instance Document

X

Inline XBRL Instance Document

X

101 SCH*

XBRL Taxonomy Extension Schema Document

X

Inline XBRL Taxonomy Extension Schema Document

X

101 CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

X

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

101 DEF*

XBRL Taxonomy Extension Definition Linkbase Document

X

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

101 LAB*

XBRL Extension Label Linkbase Document

X

Inline XBRL Extension Label Linkbase Document

X

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)

X

* Filed herewith

** Furnished herewith

Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act or the Exchange Act, except as otherwise stated in any such filing.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Applied DNA Sciences, Inc.

Dated: February 10, 20229, 2023

/s/ JAMES A. HAYWARD

James A. Hayward, Ph.D.

Chief Executive Officer

(Duly authorized officer and principal executive officer)

/s/ BETH JANTZEN

Dated: February 10, 20229, 2023

Beth Jantzen, CPA

Chief Financial Officer

(Duly authorized officer and principal financial and accounting officer)

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