Applied DNA Sciences 10Q 2023 Q2 Quarterly report

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 March 31, 2023


☐	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 May 5, 2023, the registrant had 12,908,520 shares of common stock outstanding.

Table of Contents

Applied DNA Sciences, Inc. and Subsidiaries

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

Table of Contents

		Page
PART I - FINANCIAL INFORMATION

Item 1 - Condensed Consolidated Financial Statements (unaudited)		1

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3 - Quantitative and Qualitative Disclosures About Market Risk		33

Item 4 - Controls and Procedures		33

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		35

Item 1A – Risk Factors		35

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 3 – Defaults Upon Senior Securities		35

Item 4 – Mine Safety Disclosures		35

Item 5 – Other Information		35

Item 6 – Exhibits		36

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,		September 30,
	2023		2022
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	12,287,228	$	15,215,285
Accounts receivable, net of allowance of $40,831 and $330,853 at March 31, 2023 and September 30, 2022, respectively		1,967,710		3,067,544
Inventories		366,085		602,244
Prepaid expenses and other current assets		758,530		1,058,056
Total current assets		15,379,553		19,943,129

Property and equipment, net		1,575,309		2,222,988
Other assets:
Restricted cash		750,000		—
Right of use asset		1,470,615		—
Deposits		—		98,997
Total assets	$	19,175,477	$	22,265,114

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	2,895,578	$	3,621,751
Lease liability, current		476,502		—
Deferred revenue		283,298		563,557
Total current liabilities		3,655,378		4,185,308

Long term accrued liabilities		31,467		31,467
Lease liability, long term		994,111		—
Warrants classified as a liability		4,526,300		5,139,400
Total liabilities		9,207,256		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 March 31, 2023 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 March 31, 2023 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 March 31, 2023 and September 30, 2022, respectively		—		—

Common stock, par value $0.001 per share; 200,000,000 shares authorized as of March 31, 2023 and September 30, 2022, 12,908,520 shares issued and outstanding as of March 31, 2023 and September 30, 2022		12,909		12,909
Additional paid in capital		305,751,360		305,399,008
Accumulated deficit		(295,755,117)		(292,500,088)
Applied DNA Sciences, Inc. stockholders’ equity		10,009,152		12,911,829
Noncontrolling interest		(40,931)		(2,890)
Total equity		9,968,221		12,908,939

Total liabilities and equity	$	19,175,477	$	22,265,114

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended March 31,				Six Months Ended March 31,
	2023		2022		2023		2022
Revenues
Product revenues	$	297,454	$	408,351	$	813,850	$	1,234,662
Service revenues		169,058		248,690		401,119		387,963
Clinical laboratory service revenues		3,941,102		5,490,242		8,455,397		8,690,364
Total revenues		4,407,614		6,147,283		9,670,366		10,312,989

Cost of product revenues		369,563		469,981		734,941		904,910
Cost of clinical laboratory service revenues		2,230,616		3,188,817		4,750,307		5,810,456
Total cost of revenues		2,600,179		3,658,798		5,485,248		6,715,366

Gross profit		1,807,435		2,488,485		4,185,118		3,597,623

Operating expenses:
Selling, general and administrative		3,522,715		3,572,680		6,148,072		8,308,299
Research and development		988,744		1,070,041		1,960,048		2,150,137
Total operating expenses		4,511,459		4,642,721		8,108,120		10,458,436

LOSS FROM OPERATIONS		(2,704,024)		(2,154,236)		(3,923,002)		(6,860,813)

Interest income		3,639		5,540		7,325		5,813
Transaction cost allocated to warrant liabilities		—		(391,335)		—		(391,335)
Unrealized gain on change in fair value of warrants classified as a liability		3,250,900		782,500		613,100		782,500
Other income (expense), net		661		(2,266)		9,507		(16,873)

Income (loss) before provision for income taxes		551,176		(1,759,797)		(3,293,070)		(6,480,708)

Provision for income taxes		—		—		—		—

NET INCOME (LOSS)	$	551,176	$	(1,759,797)	$	(3,293,070)	$	(6,480,708)

Less: Net loss attributable to noncontrolling interest		37,167		1,112		38,041		257
NET INCOME (LOSS) attributable to Applied DNA Sciences, Inc.	$	588,343	$	(1,758,685)	$	(3,255,029)	$	(6,480,451)
Deemed dividend related to warrant modification		—		110,105		—		110,105
NET INCOME (LOSS) attributable to common stockholders	$	588,343	$	(1,868,790)	$	(3,255,029)	$	(6,590,556)
Net income (loss) per share attributable to common stockholders-basic and diluted	$	0.05	$	(0.23)	$	(0.25)	$	(0.85)

Weighted average shares outstanding- basic and diluted		12,908,520		8,084,680		12,908,520		7,783,747

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


Six-Month Period Ended March 31, 2023

		Common		Additional
	Common	Stock		Paid in		Accumulated		Noncontrolling
	Shares	Amount		Capital		Deficit		Interest		Total
Balance, October 1, 2022	12,908,520	$	12,909	$	305,399,008	$	(292,500,088)	$	(2,890)	$	12,908,939
Stock based compensation expense	—		—		93,748		—		—		93,748
Net loss	—		—		—		(3,843,372)		(874)		(3,844,246)
Balance December 31, 2022	12,908,520		12,909		305,492,756		(296,343,460)		(3,764)		9,158,441
Stock based compensation expense	—		—		258,604		—		—		258,604
Net income (loss)	—		—		—		588,343		(37,167)		551,176
Balance, March 31, 2023	12,908,520	$	12,909	$	305,751,360	$	(295,755,117)	$	(40,931)	$	9,968,221


Six-Month Period Ended March 31, 2022

		Common		Additional
	Common	Stock		Paid in		Accumulated		Noncontrolling
	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
Stock based compensation expense	—		—		1,699,920		—		—		1,699,920
Options issued in settlement of accrued bonus	—		—		300,000		—		—		300,000
Net loss	—		—		—		(4,721,766)		855		(4,720,911)
Balance, December 31, 2021	7,486,120	$	7,488	$	297,228,192	$	(288,843,858)	$	133	$	8,391,955
Stock based compensation expense	—		—		272,915		—		—		272,915
Deemed dividend - warrant repricing	—		—		110,105		(110,105)		—		—
Common stock issued in public offering, net of offering costs	748,200		748		4,091,085		—		—		4,091,833
Fair value of warrants issued in connection with public offering	—		—		(3,350,400)		—		—		(3,350,400)
Net loss	—		—		—		(1,758,685)		(1,112)		(1,759,797)
Balance, March 31, 2022	8,234,320	$	8,236	$	298,351,897	$	(290,712,648)	$	(979)	$	7,646,506

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(3,293,070)	$	(6,480,708)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		683,422		641,615
Gain on sale of property and equipment		(6,083)		—
Unrealized gain on change in fair value of warrants classified as a liability		(613,100)		(782,500)
Stock-based compensation		352,352		1,972,835
Change in provision for bad debts		(290,022)		10,000
Change in operating assets and liabilities:
Accounts receivable		1,389,855		206,227
Inventories		236,159		725,965
Prepaid expenses and other current assets and deposits		398,523		(842,071)
Accounts payable and accrued liabilities		(746,495)		472,201
Deferred revenue		(280,259)		112,656

Net cash used in operating activities		(2,168,718)		(3,963,780)

Cash flows from investing activities:
Proceeds from sale of property and equipment		45,000		—
Purchase of property and equipment		(54,339)		(170,217)

Net cash used in investing activities		(9,339)		(170,217)

Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants		—		4,091,833

Net cash provided by financing activities		—		4,091,833

Net decrease in cash, cash equivalents and restricted cash		(2,178,057)		(42,164)
Cash, cash equivalents and restricted cash at beginning of period		15,215,285		6,554,948
Cash, cash equivalents and restricted cash at end of period	$	13,037,228	$	6,512,784

Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest	$	—	$	—
Cash paid during period for income taxes	$	—	$	—

Non-cash investing and financing activities:
Property and equipment acquired, and included in accounts payable	$	20,321	$	76,178
Deemed dividend warrant modifications	$	—	$	110,105
Leased assets obtained in exchange for new operating lease liabilities	$	1,545,916	$	—
Fair value of warrants issued	$	—	$	3,350,400
Issuance of stock options for payment of accrued bonus	$	—	$	300,000

See the accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE A — NATURE OF THE BUSINESS

Applied DNA Sciences, Inc. (“Applied DNA” or the “Company”) is a biotechnology company developing technologies to produce and detect deoxyribonucleic acid (“DNA”). The Company uses the polymerase chain reaction (“PCR”) to 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 molecular diagnostics and genetic testing services (“MDx Testing Services”); and (iii) the manufacture and detection of DNA for industrial supply chain security services (“DNA Tagging and Security Products and Services”). Under its MDx Testing Services, the Company’s wholly owned subsidiary, Applied DNA Clinical Labs, LLC (“ADCL”), is offering a high-throughput turnkey solution for population-scale COVID-19 testing marketed as safeCircle^TM. 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 March 31, 2023, and for the three and six-month periods ended March 31, 2023, and 2022 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 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, 2022 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 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, Applied DNA Sciences India Private Limited, and ADCL and its majority-owned subsidiary, LineaRx, Inc. (“LRx”). Significant inter-company transactions and balances have been eliminated in consolidation.

Liquidity

The Company has recurring net losses, which have resulted in an accumulated deficit of $295,755,117 as of March 31, 2023. The Company incurred a net loss of $3,293,070 and generated negative operating cash flow of $2,168,718 for the six-month period ended March 31, 2023. At March 31, 2023, the Company had cash and cash equivalents of $12,287,228 and working capital of $11,724,175.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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. Through March 31, 2023, 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.

Historically, a majority of the Company’s revenue attributable to its MDx Testing Services has been derived from its safeCircle COVID-19 testing solutions. On April 11, 2023, the U.S. National Emergency in response to the COVID-19 pandemic was terminated. While the Company continues to support several safeCircle customers, it is currently observing a market decrease in demand for COVID-19 testing, which the Company believes will result in significantly lower revenues from its safeCircle COVID-19 testing solutions in subsequent quarters. Also, on May 1, 2023, the Company received notice from the City University of New York (“CUNY”), its largest safeCircle COVID-19 testing solution customer, that CUNY is terminating their COVID-19 testing contract with ADCL no later than June 30, 2023, subject to a wind-down plan to be negotiated by the parties These factors could also have a negative impact on the Company’s future liquidity.

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 GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates include revenue recognition, recoverability of long-lived assets, including the values assigned to property and equipment, fair value calculations for warrants, contingencies, and management’s anticipated liquidity. Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the consolidated financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.

Revenue Recognition

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications (“ASC”), Revenue Recognition (“ASC 606” or “Topic 606”).

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

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

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

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

Revenue Recognition, continued

Product Revenues

The Company’s PCR-produced linear DNA product revenues are accounted for/recognized in accordance with contracts with customers. The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. The Company invoices customers upon shipment, and its collection terms range, on average, from 30 to 60 days.

Authentication Services

The Company recognizes revenue for authentication services upon satisfying its promises to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company services are complete, which in nearly all cases is when the authentication report is released to the customer.

Clinical Laboratory Testing Services

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

Research and Development Services

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

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

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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:
	March 31,		March 31,
	2023		2022
Research and development services (over-time)	$	87,907	$	219,898
Clinical laboratory testing services (point-in-time)		3,003,022		4,331,867
Clinical laboratory testing services (over-time)		938,080		1,158,375
Product and authentication services (point-in-time):
Supply chain		27,636		115,463
Large Scale DNA Production		253,626		—
Asset marking		97,343		141,657
MDx test kits and supplies		—		180,023
Total	$	4,407,614	$	6,147,283


	Six Month Period Ended:
	March 31,		March 31,
	2023		2022
Research and development services (over-time)	$	213,964	$	325,591
Clinical laboratory testing services (point-in-time)		6,077,436		6,205,589
Clinical laboratory testing services (over-time)		2,377,961		2,484,775
Product and authentication services (point-in-time):
Supply chain		439,973		527,295
Large Scale DNA Production		381,131		—
Asset marking		179,901		246,895
MDx test kits and supplies		—		522,844
Total	$	9,670,366	$	10,312,989

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

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

Revenue Recognition, continued

Contract balances

As of March 31, 2023, the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received from a customer prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company satisfies the related performance obligations under the terms of the contract. The Company’s contract liabilities, which are reported as deferred revenue on the condensed consolidated balance sheet, consist almost entirely of research and development contracts where consideration has been received and the development services have not yet been fully performed.

The opening and closing balances of the Company’s contract balances are as follows:


		October 1,		March 31,		$
	Balance sheet classification	2022		2023		change
Contract liabilities	Deferred revenue	$	563,557	$	283,298	$	280,259

For the three and six-month periods ended March 31, 2023, the Company recognized $2,082 and $343,367 of revenue that was included in Contract liabilities as of October 1, 2022, respectively.

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.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

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

Net Income (Loss) Per Share

The Company presents income (loss) per share utilizing a dual presentation of basic and diluted income (loss) per share. Basic income (loss) per share includes no dilution and has been calculated based upon the weighted average number of common shares outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company’s stock options and warrants.

For the three and six-month periods ended March 31, 2023 and 2022, 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 income (loss) per share because to do so would have been anti-dilutive for the three and six-month periods ended March 31, 2023 and 2022 are as follows:


	2023	2022
Warrants	7,295,588	2,239,963
Restricted Stock Units	282,640	—
Stock options	2,206,336	1,067,614
Total	9,784,564	3,307,577

Cash and Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash flows:


	March 31,		September 30,
	2023		2022
Cash and cash equivalents	$	12,287,228	$	15,215,285
Restricted cash		750,000		—
Total cash, cash equivalents and restricted cash	$	13,037,228	$	15,215,285

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its February 2023 standby letter of credit agreement related to its new operating lease. See Note F for further details.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

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

Concentrations

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of March 31, 2023, the Company had cash and cash equivalents of approximately $11.6 million in excess of the FDIC insurance limit.

The Company’s revenues earned from sale of products and services for the three and six-month periods ended March 31, 2023 included an aggregate of 85% and 84%, respectively from two customers within the MDx Testing Services segment.

Two customers from within the MDx Testing Services segment accounted for 53% and 14%, respectively of the Company’s revenues earned from sale of products and services for the three-month period ended March 31, 2022. One customer from within the MDx Testing Services segment accounted for 51% of the Company's revenues earned from sales of products and services for the six-month period ended March 31, 2022.

Two customers accounted for 86% of the Company’s accounts receivable at March 31, 2023 and two customers accounted for 89% of the Company’s accounts receivable at September 30, 2022.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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 the Company’s MDx testing services, ADCL provides COVID-19 testing for large populations marketed under its safeCircle^TM trademark, as well as its pharmacogenetic testing services that are currently undergoing late-stage development. It also includes the sales of the Company’s 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 March 31, 2023, there were no transfers between Levels 1, 2 and 3 of the fair value hierarchy.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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 adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s 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:


	March 31,		September 30,
	2023		2022
	(unaudited)
Raw materials	$	305,775	$	471,947
Work-in-progress		26,425		55,817
Finished goods		33,885		74,480
Total	$	366,085	$	602,244

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are as follows:


	March 31,		September 30,
	2023		2022
	(unaudited)
Accounts payable	$	1,647,164	$	1,744,105
Accrued salaries payable		789,199		1,458,661
Other accrued expenses		459,215		418,985
Total	$	2,895,578	$	3,621,751

NOTE E —WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK UNITS

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, 2022	7,313,963	$	3.68
Granted	—		—
Exercised	—		—
Cancelled or expired	(18,375)		17.60
Balance at March 31, 2023	7,295,588	$	3.65

Options

For the three and six-month periods ended March 31, 2023, the Company granted 308,333 options to certain officers of the Company. These options have a ten-year term and vest 25% per year commencing on the first anniversary of the grant date. Also, during the three and six-month periods ended March 31, 2023, the Company granted 694,670 options to non-employee board of director members. The options granted to 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 and six-month periods ended March 31, 2023, 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 and six-month periods ended March 31, 2023 was calculated using the following weighted average assumptions: stock price $1.27; exercise price $1.27; expected term 5.74 years; dividend yield 0; volatility 157%; and risk-free rate of 3.64%. The weighted average grant date fair value per share for the options granted during the three and six-month periods ended March 31, 2023 was $1.20.

Restricted Stock Units

During the three and six-month periods ended March 31, 2023, the Company granted 282,640 restricted stock units (“RSUs”) to certain officers of the Company. These RSUs vest on the first anniversary of the grant date. The fair value of the RSUs granted was the closing stock price on the date of grant.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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 Company entered into an amended lease agreement on February 1, 2023. The initial term is for three years and expires on February 1, 2026. The lease for the corporate headquarters requires monthly payments of approximately $48,861, which is adjusted annually based on the US Consumer Price Index (“CPI). In lieu of a security deposit, the Company provided a standby letter of credit of $750,000. In addition, the Company also has 2,500 square feet of laboratory space, which it entered into an amended lease agreement for on February 1, 2023. The initial lease term for the laboratory space is one year from the commencement date. The lease requires monthly payments of $8,750. The Company also has a satellite testing facility in Ahmedabad, India, which occupies 1,108 square feet for a three-year term beginning November 1, 2017. During August 2022, the Company renewed this lease with a new expiration date of July 31, 2023. The base rent is approximately $6,500 per annum. The laboratory lease, as well as the testing facility in Ahmedabad are both considered short-term lease obligations. The total rent expense for the three and six-month periods ended March 31, 2022 were $165,871 and $314,697, respectively.

The components of lease expense are as follows:


	Three-month		Six-month
	period ended		period ended
Lease Cost	March 31, 2023		March 31, 2023
Finance lease cost:
Amortization of right-of-use assets	$	—	$	—
Interest on lease liabilities		—		—
Operating lease cost		97,722		97,722
Short-term lease cost		68,149		216,975
Variable lease cost		—		—
Total lease cost	$	165,871	$	314,697


Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	97,722
Right-of-use assets obtained in exchange for new operating lease liabilities		1,545,916
Weighted-average remaining lease term — operating leases		2.8 years
Weighted-average discount rate — operating leases		9.1	%

Maturities of operating lease liabilities as of March 31, 2023 were as follows:


	Six-month
	period ended
Maturity of Lease Liabilities	March 31, 2023
	Operating Leases
2023 (excluding the six months ended March 31, 2023)	$	293,167
2024		586,334
2025		586,334
2026		195,445
2027		—
Thereafter		—
Total lease payments		1,661,280
Less: interest		(190,667)
Present value of lease liabilities	$	1,470,613

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE F — COMMITMENTS AND CONTINGENCIES continued

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-year terms, most recently as of June 30, 2022. Under the employment agreement, the CEO is eligible for an annual special aggregate cash incentive bonus of up to $800,000 each fiscal year, $300,000 of which is payable if and when annual revenue reaches $8 million for such fiscal year, plus an additional $100,000 payable for each additional $2 million of annual revenue in excess of $8 million for such fiscal year. 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.

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

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.

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.

In accordance with the terms of his employment agreement, for the six-month period ended March 31, 2023, the CEO earned a $300,000 bonus as the Company’s year to date revenue was greater than $8 million. The bonus has not yet been paid and is included in accounts payable and accrued liabilities in the condensed consolidated balance sheet.

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 March 31, 2023 is as follows:


	Therapeutic DNA		MDx Testing		DNA Tagging and
	Production		Services		Security Products		Consolidated
Revenues:
Product revenues	$	255,626	$	—	$	41,828	$	297,454
Service revenues		83,906		—		85,152		169,058
Clinical laboratory service revenues		—		3,971,582		—		3,971,582
Less intersegment revenues		—		(30,480)		—		(30,480)
Total revenues	$	339,532	$	3,941,102	$	126,980	$	4,407,614
Gross profit	$	215,477	$	1,650,113	$	(58,155)	$	1,807,435
(Loss) income from segment operations (a)	$	(1,054,123)	$	492,288	$	(914,736)	$	(1,476,571)

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE G – SEGMENT INFORMATION, continued

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


	Therapeutic DNA		MDx Testing		DNA Tagging and
	Production		Services		Security Products		Consolidated
Revenues:
Product revenues	$	—	$	180,023	$	228,328	$	408,351
Service revenues		158,243		—		90,447		248,690
Clinical laboratory service revenues		—		5,623,922		—		5,623,922
Less intersegment revenues		—		(133,680)		—		(133,680)
Total revenues	$	158,243	$	5,670,265	$	318,775	$	6,147,283
Gross profit	$	158,243	$	2,335,169	$	(4,927)	$	2,488,485
(Loss) income from segment operations (a)	$	(1,049,207)	$	1,084,388	$	(1,292,632)	$	(1,257,451)

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


	Therapeutic DNA		MDx Testing		DNA Tagging and
	Production		Services		Security Products		Consolidated
Revenues:
Product revenues	$	383,132	$	—	$	430,718	$	813,850
Service revenues		205,649		—		195,470		401,119
Clinical laboratory service revenues		—		8,537,397		—		8,537,397
Less intersegment revenues		—		(82,000)		—		(82,000)
Total revenues	$	588,781	$	8,455,397	$	626,188	$	9,670,366
Gross profit	$	386,401	$	3,583,332	$	215,385	$	4,185,118
(Loss) income from segment operations (a)	$	(1,906,376)	$	1,602,172	$	(1,389,451)	$	(1,693,655)

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


	Therapeutic DNA		MDx Testing		DNA Tagging and
	Production		Services		Security Products		Consolidated
Revenues:
Product revenues	$	—	$	522,844	$	711,818	$	1,234,662
Service revenues		247,681		—		140,282		387,963
Clinical laboratory service revenues		—		8,973,580		—		8,973,580
Less intersegment revenues		—		(283,216)		—		(283,216)
Total revenues	$	247,681	$	9,213,208	$	852,100	$	10,312,989
Gross profit	$	247,681	$	3,155,859	$	194,083	$	3,597,623
(Loss) income from segment operations (a)	$	(1,973,984)	$	749,400	$	(2,189,032)	$	(3,413,616)

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE G – SEGMENT INFORMATION, continued

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


Three-Month Period Ended:	March 31,
	2023		2022
Loss from operations of reportable segments	$	(1,476,571)	$	(1,257,451)
General corporate expenses (b)		(1,227,453)		(896,785)
Interest income		3,639		5,540
Unrealized gain on change in fair value of warrants classified as a liability		3,250,900		782,500
Transaction cost allocated to warrant liabilities		—		(391,335)
Other income (expense), net		661		(2,266)
Consolidated income (loss) before provision for income taxes	$	551,176	$	(1,759,797)


Six-Month Period Ended:	March 31,
	2023		2022
Loss from operations of reportable segements	$	(1,693,655)	$	(3,413,616)
General corporate expenses (b)		(2,229,347)		(3,447,197)
Interest income		7,325		5,813
Unrealized gain on change in fair value of warrants classified as a liability		613,100		782,500
Transaction cost allocated to warrant liabilities		—		(391,335)
Other income (expense), net		9,507		(16,873)
Consolidated loss before provision for income taxes	$	(3,293,070)	$	(6,480,708)

(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 March 31, 2023 and summarizes the significant unobservable inputs in fair value measurement of Level 3 financial assets and liabilities as of March 31, 2023. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of March 31, 2023.


	Fair value at		Valuation	Unobservable	Weighted
	March 31, 2023		Technique	Input	Average
Liabilities:
Common Warrants	$	1,429,000	Monte Carlo simulation	Annualized volatility	160.00	%
Series A Warrants	$	2,768,000	Monte Carlo simulation	Annualized volatility	160.00	%
Series B Warrants	$	329,300	Monte Carlo simulation	Annualized volatility	175.00	%

Table of Contents

APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

The change in fair value of the Warrants classified as a liability for the three-month period ended March 31, 2023 is summarized as follows:


	Common Warrants			Series A Warrants		Series B Warrants
Fair value at January 1, 2023	$	2,187,000	$	4,269,000	$	1,321,200
Change in fair value		(758,000)		(1,501,000)		(991,900)
Fair Value at March 31, 2023	$	1,429,000	$	2,768,000		329,300

The change in fair value of the Warrants classified as a liability for the six-month period ended March 31, 2023 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		(48,000)		(115,000)		(450,100)
Fair Value at March 31, 2023	$	1,429,000	$	2,768,000		329,300

Table of Contents

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (including but not limited to this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to qualify for the “safe harbor” created by those sections. In addition, we may make forward-looking statements in other documents filed with or furnished to the Securities and Exchange Commission (“SEC”), and our management and other representatives may make forward-looking statements orally or in writing to analysts, investors, representatives of the media and others. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts and include, but are not limited to, statements using terminology such as “can”, “may”, “could”, “should”, “assume”, “forecasts”, “believe”, “designed to”, “will”, “expect”, “plan”, “anticipate”, “estimate”, “potential”, “position”, “predicts”, “strategy”, “guidance”, “intend”, “budget”, “seek”, “project” or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:

●

discuss our future expectations;

●

contain projections of our future results of operations or of our financial condition; and

●

state other “forward-looking” information.

We believe it is important to communicate our expectations. However, forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry and are subject to known and unknown risks, uncertainties and other factors. Accordingly, our actual results and the timing of certain events may differ materially from those expressed or implied in such forward-looking statements due to a variety of factors and risks, including, but not limited to, those set forth in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report, those set forth from time to time in our other filings with the SEC, including our Annual Report on Form 10-K, for the fiscal year ended September 30, 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;

●

our business strategy and the timing of our expansion plans;

●

demand for Therapeutic DNA Production Services;

●

demand for DNA Tagging Services;

●

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

●

our ability to develop our MDx Testing Services business;

●

our expectations concerning existing or potential development and license agreements for third-party collaborations or joint ventures;

●

regulatory approval and compliance for our Therapeutic DNA Production Services;

Table of Contents

●

the effect of governmental regulations generally;

●

our expectations of when regulatory submissions may be filed or when regulatory approvals may be received;

●

our expectations concerning product candidates for our technologies; and

●

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;

●

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 that have received regulatory clearance or approval;

●

economic and industry conditions generally and in our specific markets;

●

we 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 the case of documents incorporated by reference, the original date of any such documents, based on information available to us as of such date, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time.

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

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

Table of Contents

Our trademarks currently used in the United States include Applied DNA Sciences®, SigNature® molecular tags, SigNature® T molecular tags, fiberTyping®, SigNify®, Beacon®, CertainT®, LinearDNA™, Linea™ COVID-19 Diagnostic Assay Kit and safeCircle^TM COVID-19 testing and TR8^TM pharmacogenetic testing. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. All trademarks, service marks and trade names included or incorporated by reference in this Quarterly Report on Form 10-Q are the property of the respective owners.

Introduction

We are a biotechnology company developing and commercializing technologies to produce and detect DNA. Using the polymerase chain reaction (“PCR”) to enable both the production and detection of DNA, we 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 molecular diagnostics and genetic testing services (“MDx Testing Services”); and (iii) the manufacture and detection of DNA for industrial supply chain security services (“DNA Tagging and Security Products and Services”).

Our current growth strategy is to primarily focus our resources on the further development, commercialization, and customer adoption of our Therapeutic DNA Production Services, including the expansion of our contract development and manufacturing operation (“CDMO”) for the PCR-based manufacture of synthetic DNA for use in the manufacturing of nucleic acid-based therapies and the development of our own DNA-based product candidates in veterinary health.

Therapeutic DNA Production Services

Through our LineaRx, Inc. (“LRx”) subsidiary we are developing and commercializing the linearDNA (“linearDNA”) platform. The linearDNA platform enables the rapid, efficient, and large-scale cell-free manufacture of high-fidelity DNA sequences for use in the manufacturing of 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 DNA used in biotherapeutics for the past 40 years.

We believe our PCR-based enzymatic linearDNA platform has numerous advantages over existing cell-based plasmid DNA manufacturing platforms. Plasmid-based DNA manufacturing is based on the complex, costly and time-consuming biological process of amplifying DNA in living cells. Once amplified, the DNA must be separated from the living cells and other process contaminants via multiple rounds of purification, adding further complexity and costs. Unlike plasmid-based DNA manufacturing, the linearDNA platform does not require living cells and instead amplifies DNA via the enzymatic process of PCR. The linearDNA platform is simple, with only four ingredient inputs, and can rapidly produce very large quantities of DNA without the need for complex purification steps.

We believe the key advantages of the linearDNA platform include:

●

Speed – Production of linearDNA can be measured in terms of hours, not days and weeks as is the case with plasmid-based DNA manufacturing platforms.

●

Scalability – 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 plasmid backbone and antibiotic resistance genes, inherent to plasmid DNA, are not present in linearDNA.

●

Simplicity – 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 the 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

Table of Contents

(ITRs) and long homopolymers such as polyadenylation sequences (poly (A) tail) important for gene therapy and messenger RNA (“mRNA”) therapies, respectively.

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 fourth quarter of calendar 2022, there were 3,726 gene, cell and RNA therapies in development from preclinical through pre-registration stages, almost all of which use DNA in their manufacturing process. (Source: ASGCT Gene, Cell & RNA Therapy Landscape: Q4 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 currently do not have any manufacturing facilities that meet cGMP. We will need to develop and 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 the near term, we seek to leverage our high-quality grade GLP linearDNA production capacity to supply DNA in vitro transcription (“IVT”) templates to CDMOs and therapeutic developers that will be utilized to manufacture mRNA. We believe that our linearDNA platform provides numerous advantages over plasmid DNA for use as an IVT template, including more rapid manufacturing, the removal of several workflow steps from mRNA manufacturing and the ability to add a wide range of chemical modifications.

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 (collectively “linearDNA Vaccines”). We currently seek to commercialize our linearDNA Vaccines 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 in vivo study, successful expression of the LNP-encapsulated linearDNA was administered and achieved via IM injection. We believe that our linearDNA Vaccines under development provide a substantial advantage over plasmid DNA-based vaccines for the veterinary health market.

Table of Contents

MDx 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 is a New York State Department of Health (“NYSDOH”) Clinical Laboratory Evaluation Program (“CLEP”) permitted, Clinical Laboratory Improvement Amendments (“CLIA”)-certified laboratory which is currently permitted for virology. Permitting for genetics (molecular) is currently pending with NYSDOH. In providing MDx testing services, ADCL employs its own or third-party molecular diagnostic tests.

We have successfully validated our pharmacogenomics testing services (the “PGx Testing Services”). Our PGx Testing Services will utilize a 120-target PGx panel test to evaluate the unique genotype of a specific patient to help guide individual drug therapy decisions. Our PGx Testing Services are designed to interrogate DNA targets on over 33 genes and provide genotyping information relevant to certain cardiac, mental health, oncology, and pain management drug therapies. On March 22, 2023, we submitted our validation package to the NYSDOH for our PGx Testing Services, which is currently pending. Recently published studies show that population-scale PGx testing can significantly reduce overall population healthcare costs, reduce adverse drug events, and increase overall population wellbeing. These benefits can result in significant cost savings to large entities and self-insured employers, the latter accounting for approximately 65% of all U.S. employers in 2022. Once approved by NYSDOH, we plan to leverage our PGx Testing Services to provide PGx testing services to large entities and self-insured employers to potentially reduce population healthcare costs and increase overall population wellness. In addition, ADCL currently provides COVID-19 testing for large populations marketed under our safeCircle^TM 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 assays. 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.

Historically, a majority of our revenue attributable to our MDx Testing Services has been derived from our safeCircle COVID-19 testing solutions. On April 11, 2023, the U.S. National Emergency in response to the COVID-19 pandemic was terminated. While we continue to support several safeCircle customers, we are currently observing a market decrease in demand for COVID-19 testing, which we believe will result in significantly lower revenues from our safeCircle COVID-19 testing solutions in subsequent quarters. On May 1, 2023, we received notice from the City University of New York (“CUNY”), our largest safeCircle COVID-19 testing solution customer, that CUNY is terminating their COVID-19 testing contract with ADCL no later than June 30, 2023, subject to a wind-down plan to be negotiated by the parties. The CUNY COVID-19 contract represented 58% of our revenues for fiscal 2022.

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 services 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.

Table of Contents

DNA Tagging and Security Products and Services

By leveraging our expertise in both the manufacture and detection of DNA via PCR, our DNA Tagging and Security Products and Services allow our customers to use non-biologic DNA tags manufactured on our linearDNA platform to mark objects in a unique manner and then identify these objects by detecting the absence or presence of the DNA tag. We believe our DNA 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 DNA Tagging and Security Products and Services, which are marketed collectively as a platform under the trademark CertainT®, include:

●

SigNature® Molecular Tags, which are short non-biologic DNA taggants produced by the Company’s linearDNA platform, provide a methodology to authenticate goods within large and complex supply chains for materials such as cotton, leather, pharmaceuticals, nutraceuticals and other products.

●

SigNify® IF portable DNA readers and SigNify consumable reagent test kits provide definitive real-time authentication of the Company’s DNA tags in the field, providing a front-line solution for supply chain integrity backed with forensic-level molecular tag authentication. The Company’s software platform enables customers to track materials throughout a supply chain or product life.

●

fiberTyping®, 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 purposes of product provenance authentication and supply chain security.

Our 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 tracking 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^®.

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 People’s Republic of China are not entitled to entry to the United States. The presumption applies unless the importer of record has complied with specified conditions and, by clear and convincing evidence, shown that the goods were not produced using forced labor. On June 17, 2022, an implementation strategy for the UFLPA was published that listed DNA tagging as evidence that importers may present to potentially prove that a good did not originate in XUAR or did not benefit from forced labor. Approximately 20% of the world’s cotton garments contain cotton that originated in the XUAR.

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 focus on cotton and synthetic fibers.

Table of Contents

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 growth in revenues has been derived from our validated COVID-19 pooled testing, and our COVID-19 Surveillance Testing, which are part of our MDx testing services segment. We are currently observing a market decrease in demand for COVID-19 testing, which we believe will result in significantly lower revenues from our safeCircle COVID-19 testing solutions in subsequent quarters. On May 1, 2023, we received notice from CUNY, our largest safeCircle COVID-19 testing solution customer, that CUNY is terminating their COVID-19 testing contract with ADCL effective no later than June 30, 2023, subject to a wind-down plan to be negotiated by the parties. We expect future revenues to be derived primarily from our Therapeutic DNA Production Services and 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 have continued to incur expenses in expanding our business to meet current and anticipated future demand. We have limited sources of liquidity.

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

Revenues

Product revenues

For the three-month periods ended March 31, 2023 and 2022, we generated $297,454 and $408,351 in revenues from product sales, respectively. Product revenue decreased by $110,897 or 27% for the three-month period ended March 31, 2023 as compared to the three-month period ended March 31, 2022. The decrease in product revenues was primarily related to a decrease of approximately $180,000 in sales of our LineaTM COVID-19 Assay Kit, which was attributable to sales pursuant to our contract with Stony Brook University Hospital as well as a $85,000 decrease in our textile market, as well as other small decreases in both our Cash and Valuables In Transit (“CVIT”) and nutraceutical markets of approximately $20,000 and $16,000, respectively. These decreases were offset by an increase in biopharmaceuticals of $202,000 relating to our large-scale DNA manufacturing business.

Service revenues

For the three-month periods ended March 31, 2023 and 2022 we generated $169,058 and $248,690 in revenues from sales of services, respectively. The decrease in service revenues of $79,632 or 32% for the three-month period ended March 31, 2023, as compared to the same period in the prior fiscal year is primarily attributable to a decrease of approximately $57,000 for research and development projects in our biopharmaceutical market.

Clinical laboratory service revenues

For the three-month periods ended March 31, 2023 and 2022, we generated $3,941,102 and $5,490,242 in revenues from our clinical laboratory testing services, respectively. The decrease in clinical laboratory service revenues of $1,549,140 or 28% for the three-month period ended March 31, 2023 as compared to the same period in the prior fiscal year is attributable to a decrease in demand for COVID-19 testing services during the three-month period March 31, 2023 as compared to the same period during fiscal 2022.

Cost and Expenses

Gross Profit

Gross profit for the three-month period ended March 31, 2023, decreased by $681,050 or 27% from $2,488,485, for the three-month period ended March 31, 2022 to $1,807,435. The gross profit percentage remained consistent at 41% and 40% for the three-month periods ended March 31, 2023 and 2022, respectively.

Table of Contents

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended March 31, 2023 decreased by $49,965 or 1% to $3,522,715 as compared to $3,572,680 for the three-month period ended March 31, 2022.

Research and Development

Research and development expenses decreased to $988,744 for the three-month period ended March 31, 2023 from $1,070,041 for the three-month period ended March 31, 2022, a decrease of $81,297 or 8%. This decrease is primarily due to a decrease in service contracts to support our continued research and development efforts, related to our ongoing animal vaccine study.

Interest income

Interest income for the three-month period ended March 31, 2023, was $3,639 as compared to $5,540 in the three-month period ended March 31, 2022.

Other income (expense), net

Other income (expense), net for the three-month periods ended March 31, 2023 and 2022, was income of $661 and expense of $2,266, respectively. The decrease of 2,927 is due to foreign exchange translation expenses.

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

Unrealized gain on change in fair value of warrants classified as a liability for the three-month period ended March 31, 2023 of $3,250,900 relates to the change in fair value of the warrants that are classified as a liability. The unrealized gain on change in fair value represents the difference in fair value of the warrants from January 1, 2023 compared to the fair value as of March 31, 2023. The primary driver of this change is the decrease in our stock price during the period.

Net Income (loss)

Net income (loss) increased $2,310,973 or 131% to net income of $551,176 for the three-month period ended March 31, 2023 compared to net loss of $1,759,797 for the three-month period ended March 31, 2022 due to the factors noted above.

Comparison of Results of Operations for the Six-Month Periods Ended March 31, 2023 and 2022

Revenues

Product revenues

For the six-month periods ended March 31, 2023 and 2022, we generated $813,850 and $1,234,662 in revenues from product sales, respectively. Product revenue decreased by $420,812 or 34% for the six-month period ended March 31, 2023 as compared to the six-month period ended March 31, 2022. The decrease in product revenues was primarily related to a decrease of $522,844 in sales of our LineaTM COVID-19 Assay Kit, which was attributable to sales pursuant to our contract with Stony Brook University Hospital as well as a decrease of approximately $108,000 in our textile market, and to a lesser extent decreases of approximately $72,000, $23,000 and $18,000 in our nutraceutical, consumer asset marking and CVIT markets, respectively. These decreases were offset by an increase in biopharmaceuticals of approximately $329,000 relating to our large-scale DNA manufacturing business.

Table of Contents

Service revenues

For the six-month periods ended March 31, 2023 and 2022 we generated $401,119 and $387,963 in revenues from sales of services, respectively. The increase in service revenues of $13,156 or 3% for the six-month period ended March 31, 2023, as compared to the same period in the prior fiscal year is attributable to an increase of approximately $22,000 for authentication service revenue for a nutraceutical customer, as well as an increase of $14,000 for textile development projects. These increases were offset by a decrease of approximately $24,000 for research and development projects in our biopharmaceutical market and a decrease of approximately $13,000 for services provided in our CVIT market.

Clinical laboratory service revenues

For the six-month periods ended March 31, 2023 and 2022, we generated $8,455,397 and $8,690,364 in revenues from our clinical laboratory testing services, respectively. The decrease in service revenues of $234,967 or 3% for the six-month period ended March 31, 2023 as compared to the same period in the prior fiscal year is attributable to a decrease in demand for our COVID testing services.

Cost and Expenses

Gross Profit

Gross profit for the six-month period ended March 31, 2023, increased by $587,495 or 16% from $3,597,623 for the six-month period ended March 31, 2022 to $4,185,118. The gross profit percentage was 43% and 35% for the six-month periods ended March 31, 2023 and 2022, respectively. The increase in the gross profit percentage was primarily from an improved gross profit percentage for our MDx testing services. This improvement was the result of cost management efforts for our COVID-19 testing services contracts where we also provide and staff the test collection centers. Also, during the first six-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 negative impact on gross profit.

Selling, General and Administrative

Selling, general and administrative expenses for the six-month period ended March 31, 2023 decreased by $2,160,227 or 26% to $6,148,072 as compared to $8,308,299 for the six-month period ended March 31, 2022. The decrease is primarily attributable to a decrease in stock-based compensation expense of $1,620,000 primarily relating to officer stock option grants that vested immediately during the prior fiscal year to date of approximately $1.5 million, as well as to the timing of the annual non-employee board of director grant that vests one-year from the date of grant. Additional decreases include $290,000 in bad debt expense for a fully reserved accounts receivable balance that was subsequently fully collected.

Research and Development

Research and development expenses decreased to $1,960,048 for the six-month period ended March 31, 2023 from $2,150,137 for the six-month period ended March 31, 2022, a decrease of $190,089 or 9%. This decrease is primarily due to decreased outsourced service contracts and laboratory supplies of approximately $110,000. These costs were to support our continued research and development efforts, primarily related to our ongoing animal vaccine study, as well as next generation sequencing projects.

Interest income

Interest income for the six-month period ended March 31, 2023, was $7,325 as compared to $5,813 in the six-month period ended March 31, 2022.

Other income (expense), net

Other income (expense), net for the six-month periods ended March 31, 2023 and 2022, was income of $9,507 and expense of $16,873, respectively. The change of $26,380 is due to a gain on sale of vehicles of $6,083 during the current fiscal year, offset by foreign exchange translation expenses during the prior fiscal year to date.

Table of Contents

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

Unrealized gain on change in fair value of warrants classified as a liability for the six-month periods ended March 31, 2023 and 2022 of $613,100 and $782,500, respectively relates to the change in fair value of the warrants that are classified as a liability. The primary driver of this change is the decrease in our stock price during the period.

Net Loss

Net loss decreased $3,187,638 or 49% to $3,293,070 for the six-month period ended March 31, 2023 compared to $6,480,708 for the six-month period ended March 31, 2022 due to the factors noted above.

Liquidity and Capital Resources

Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of March 31, 2023, we had working capital of $11,724,175. For the six-month period ended March 31, 2023, we used cash in operating activities of $2,168,718 consisting primarily of our loss of $3,293,070 net with non-cash adjustments of $683,422 in depreciation and amortization charges, $613,100 in unrealized gain on change in fair value of warrants classified as a liability, $352,352 in stock-based compensation expense and $290,022 of bad debt recovery. Additionally, we had a gain on the sale of property and equipment of $6,083, a net decrease in operating assets of $2,024,537 and a net decrease in operating liabilities of $1,026,754. Cash used in investing activities of $9,339, comprised of proceeds from the sale of property and equipment of $45,000, offset by $54,339 for the purchase of property and equipment.

Historically, a majority of our revenue attributable to our MDx Testing Services has been derived from our safeCircle COVID-19 testing solutions. On April 11, 2023, the U.S. National Emergency in response to the COVID-19 pandemic was terminated. While we continue to support several safeCircle customers, we are currently observing a market decrease in demand for COVID-19 testing, which we believe will result in significantly lower revenues from our safeCircle COVID-19 testing solutions in subsequent quarters. On May 1, 2023, we received notice from CUNY, our largest safeCircle COVID-19 testing solution customer, that CUNY is terminating their COVID-19 testing contract with ADCL no later than June 30, 2023 subject to a wind-down plan to be negotiated by the parties. The CUNY COVID-19 testing contract represented 58% of our revenue for fiscal year 2022. These factors could also have a negative impact on the Company’s future liquidity.

We have recurring net losses. We have incurred a net loss of $3,293,070 for the six-month period ended March 31, 2023. Our current capital resources include cash and cash equivalents, accounts receivable and inventories. Historically, we have financed our operations principally from the sale of equity and equity-linked securities. Through March 31, 2023, 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.

Critical Accounting Estimates and Policies

Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our condensed consolidated results of operations, financial position or liquidity for the periods presented in this report.

Table of Contents

The accounting policies identified as critical are as follows:

●

Revenue recognition;

●

Equity based compensation; and

●

Warrants classified as a liability

Critical Accounting Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most 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”).

Product Revenues

Authentication Services

Clinical Laboratory Testing Services

Table of Contents

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

Table of Contents

Warrants classified as a liability

The Company evaluated the Common Warrants and the Series A and Series B Warrants (collectively the “Warrants”) in accordance with ASC 480 “Distinguishing Liabilities from Equity” and ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity” and concluded that due to the terms of the warrant agreements, the instrument does not qualify for equity treatment. As such, the Warrants were recorded as a liability on the condensed consolidated balance sheet and measured at fair value at inception and at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in the estimated fair value recognized as a non-cash gain or loss in the condensed 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.

Item 4. — Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, 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.

Table of Contents

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 March 31, 2023 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.

Table of Contents

Part II - Other Information

Item 1. — Legal Proceedings.

None.

Item 1A. — Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K of the Company filed with the SEC on December 14, 2022, as amended, and as updated and supplemented below and in subsequent filings. These risk factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition or future results.

Potential FDA regulation of our pharmacogenetic testing could be disruptive to our business.

As described further above, the FDA has long claimed authority to regulate laboratory-developed tests but has exercised its “enforcement discretion” and not enforced its usual array of in vitro diagnostic regulatory requirements on this category of products. The FDA has from time to time appeared to increase its attention to the marketing of pharmacogenetic tests offered as LDTs. For example, in late 2018, the FDA issued a safety communication regarding “genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications.” The FDA reached out to several firms marketing such pharmacogenetic tests where the FDA believed the relationship between genetic variations and a medication’s effects had not been established, and sent a warning letter to one pharmacogenetic testing laboratory. In response to public letters from the national laboratory trade association and patient groups, on February 20, 2020, the FDA announced a new “collaboration between FDA’s Center for Devices and Radiological Health and Center for Drug Evaluation and Research intended to provide the agency’s view of the state of the current science in pharmacogenetics.” Although the announcement again asserted that some pharmacogenetic test offerings may be potentially dangerous, the agency also acknowledged that pharmacogenetic testing “offers promise for informing the selection or dosing of some medications for certain individuals.” In conjunction with the announcement, the FDA also released an updated “Table of Pharmacogenetic Associations,” which lists pharmacogenetic associations for which the data support therapeutic management recommendations, a potential impact on safety or response, or potential impact on pharmacokinetic properties only, respectively. While we see these developments as signaling a positive shift in the FDA’s approach to regulating pharmacogenetic tests offered as LDTs, we cannot predict with certainty the outcome of how the FDA chooses to regulate pharmacogenetic tests performed by certified laboratories and what, if any, such outcome will have on our revenues from pharmacogenetic testing.

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.

Table of Contents

Item 6. — Exhibits.

Incorporated by Reference to SEC Filing

Filed or Furnished with

Exhibit

this Form

No.

Filed Exhibit Description

Form

No.

File No.

Date Filed

10-Q

10.1

Amended and Restated Lease Agreement, dated February 24, 2023, by and between Long Island High Technology Incubator, Inc. and Applied DNA Sciences, Inc. (Office Lease)

8-K

10.1

001-36745

2/28/2023

10.2

Amended and Restated Lease Agreement, dated February 24, 2023, by and between Long Island High Technology Incubator, Inc. and Applied DNA Sciences, Inc. (Laboratory Lease).

8-K

10.2

001-36745

2/28/2023

10.3

Form of Restricted Stock Unit Award Agreement

8-K

10.1

001-36745

3/28/2023

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

3.2

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

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

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

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

101 INS*

Inline XBRL Instance Document

101 SCH*

Inline XBRL Taxonomy Extension Schema Document

101 CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101 DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

101 LAB*

Inline XBRL Extension Label Linkbase Document

104

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

* 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.

Table of Contents

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: May 11, 2023		/s/ JAMES A. HAYWARD
		James A. Hayward, Ph.D.
		Chief Executive Officer
		(Duly authorized officer and principal executive officer)

		/s/ BETH JANTZEN
Dated: May 11, 2023		Beth Jantzen, CPA
		Chief Financial Officer
		(Duly authorized officer and principal financial and accounting officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Applied DNA Sciences (APDN) 10-Q2023 Q2 Quarterly report

Content analysis