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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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For the quarterly period ended December 31, 2021

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For the transition period from          to

Commission File Number: 001-36745

Applied DNA Sciences, Inc.

(Exact name of registrant as specified in its charter)

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631-240-8800

(Registrant’s telephone number, including area code)

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):

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

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

◻   Yes    ☒    No

On February 4, 2022, the registrant had 7,486,120. shares of common stock outstanding.

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Applied DNA Sciences, Inc. and Subsidiaries

Form 10-Q for the Quarter Ended December 31, 2021

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See the accompanying notes to the unaudited condensed consolidated financial statements

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See the accompanying notes to the unaudited condensed consolidated financial statements

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See the accompanying notes to the unaudited condensed consolidated financial statements

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Use of Estimates

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

Revenue Recognition

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

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

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

Product Revenues and Authentication Services

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

Authentication Services

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Revenue Recognition, continued

Clinical Laboratory Testing Services

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

Research and Development Services

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

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Revenue Recognition, continued

Contract balances

As of December 31, 2021, 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:

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

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Inventories

Inventories, which consist primarily of raw materials, work in progress and finished goods, are stated at the lower of cost or net realizable value, with cost determined by using the first-in, first-out (FIFO) method.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. The estimated useful life for computer equipment, lab equipment and furniture is 3 years and leasehold improvements are amortized over the shorter of their useful life or the remaining lease terms.

Income Taxes

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

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

Net Loss Per Share

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Net Loss Per Share, continued

For the three-month periods ended December 31, 2021 and 2020, 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 were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive for the three-month periods ended December 31, 2021 and 2020 are as follows:

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Stock-Based Compensation

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

Concentrations

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of December 31, 2021, the Company had cash and cash equivalents of approximately $2.1 million in excess of the FDIC insurance limit.

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

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

Two customers accounted for 74% of the Company’s accounts receivable at December 31, 2021 and two customers accounted for 67% of the Company’s accounts receivable at September 30, 2021.

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

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

Recent Accounting Standards

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

NOTE E —WARRANTS AND STOCK OPTIONS

Warrants

The following table summarizes the changes in warrants outstanding. These warrants were granted 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:

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Stock Options

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

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

NOTE F — COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office space under an operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The term of the lease commenced on June 15, 2013 and expired on May 31, 2017, with the option to extend the lease for two additional three-year periods. The Company has exercised its option to extend the lease for one additional three-year period ending May 31, 2019. The base rent during the additional three-year period was $458,098 per annum. In November 2019, the Company extended this lease until January 15, 2020. In addition to the office space, the Company also has 2,200 square feet of laboratory space. On January 20, 2020, the Company entered into an agreement to amend both of these leases, extending the term for the corporate headquarters as well as the laboratory space until January 15, 2021, with a one-year renewal option. In October 2020, the Company exercised the one-year renewal option, extending the term for these leases until January 15, 2022. The leases were subsequently renewed for an additional one-year term commencing on February 1, 2022 and expiring January 31, 2023. The base rent during the additional twelve-month period is $589,056 per annum. The Company also has a satellite testing facility in Ahmedabad, India, which occupies 1,108 square feet for a three-year term beginning November 1, 2017. During September 2021, the Company renewed this lease with a new expiration date of August 31, 2022. The base rent is approximately $6,500 per annum. The Company’s total short-term lease obligation as of December 31, 2021 is $644,059.

The total rent expense for the three-month periods ended December 31, 2021 and 2020 were $142,952 and $145,845, respectively.

Employment Agreement

The employment agreement with Dr. James Hayward, the Company’s President and Chief Executive Officer (“CEO”), entered into in July 2016 provides that he will be the Company’s CEO and will continue to serve on the Company’s Board of Directors. The initial term was from July 1, 2016 through June 30, 2017, with automatic one-year renewal periods. On July 28, 2017, the employment agreement was renewed for a successive one-year term and the employment agreement has been renewed for successive one year terms, most recently as of June 30, 2021. Under the employment agreement, the CEO is eligible for a special aggregate cash incentive bonus of up to $800,000, $300,000 of which is payable if and when annual revenue reaches $8 million, plus an additional $100,000 payable for each additional $2 million of annual revenue in excess of $8 million. Pursuant to the contract, the CEO’s annual salary is $400,000. The Board of Directors, acting in its discretion, may grant annual bonuses to the CEO. The CEO will be entitled to certain benefits and perquisites and will be eligible to participate in retirement, welfare and incentive plans available to the Company’s other employees.

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

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

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APPLIED DNA SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

(unaudited)

NOTE F — COMMITMENTS AND CONTINGENCIES, continued

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Employment Agreement, continued

On October 29, 2021, the Board of Directors amended the existing compensatory arrangement with the CEO to increase his salary to $450,000, effective November 1, 2021. For the fiscal year ended September 30, 2021, the CEO earned a $300,000 bonus as the Company’s annual revenue was greater than $8 million. On November 1, 2021, this $300,000 bonus was paid to the CEO by granting stock options with a fair value of $300,000 calculated using the Black Scholes Option Pricing Model.

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. There is no pending litigation involving the Company at this time.

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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:

All forward-looking statements and risk factors included in this Quarterly Report are made as of the date hereof, in each case based on information available to us as of the date hereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. If we do update one or more forward-looking statements, no inference should be drawn that we will make updates with respect to other forward-looking statements or that we will make any further updates to those forward-looking statements at any future time.

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

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

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Trademarks, Trade Names and Service Marks

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

Introduction

Applied DNA develops and markets DNA-based technology solutions utilizing its LinearDNA^TM large-scale polymerase chain reaction (“PCR”) based manufacturing platform. Our proprietary PCR-based DNA LinearDNA^TM manufacturing platform produces large quantities of DNA for use in nucleic acid-based in vitro medical diagnostics and preclinical nucleic acid-based drug development and manufacturing markets (“Biotherapeutic Contract Research and Manufacturing”) and for supply chain security, anti-counterfeiting and anti-theft technology purposes (“Non-Biologic Tagging”). We also have developed or are developing multiple PCR-based molecular diagnostic test for COVID-19. Our Linea 1.0 COVID-19 Assay Kit was granted EUA by the FDA in May 2020. Our Linea 2.0 COVID-19 Assay currently holds conditional approval from NYSDOH as an LDT. An EUA request for the Linea 2.0 COVID-19 Assay is currently pending with FDA (the Linea 1.0 and Linea 2.0 COVID-19 Assays are collectively referred to as the “COVID-19 Diagnostic Tests”). In addition, under our wholly-owned subsidiary, ADCL, we offer a high-throughput turnkey solution for population-scale COVID-19 testing marketed as safeCircle. safeCircle is designed to look for infection within defined populations or communities utilizing high throughput PCR-based testing methodologies (the “COVID-19 Testing Services”).

Applied DNA’s LinearDNA^TM PCR platform is capable of producing large scale DNA, which we believe offers many benefits over the limitations of other large scale DNA manufacturing systems, including:

Biotherapeutic Contract Research and Manufacturing

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

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

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We also seek to develop, acquire, and commercialize, ourselves or with partners, a diverse portfolio of nucleic acid-based therapeutics based on PCR-produced linear DNA to improve existing nucleic acid-based therapeutics or to create new nucleic acid-based therapeutics that address unmet medical needs. We are currently directly engaged in preclinical drug candidate development activities focusing on therapeutically relevant DNA constructs manufactured via our LinearDNA^TM platform in the fields of DNA-based anti-viral and anti-cancer vaccines, RNA therapeutics, CAR T cell immunotherapy and the manufacture of rAAV vectors for gene therapy. The Company is also engaged in preclinical animal drug candidate development activities focusing on therapeutically relevant DNA constructs manufactured via its LinearDNA^TM platform.

COVID-19 Diagnostic Testing

On May 13, 2020 and subsequently amended, the Company received an EUA from the FDA for the clinical use of the Linea^TM 1.0 Assay for the qualitative detection of nucleic acid from SARS-CoV-2 in respiratory specimens. Under the EUA, testing is limited to laboratories certified under CLIA, that meet requirements to perform high complexity tests. The intended use, under the EUA allows ADCL and other certified laboratory users of the Linea^TM 1.0 Assay, to provide testing to individuals with the return of individual testing results. The EUA will be effective until the declaration that circumstances exist justifying the authorization of the emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 is terminated or until the EUA’s prior termination or revocation by FDA or the Company. Our Linea^TM 1.0 Assay has not been FDA cleared or approved, and the EUA’s limited authorization is only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens.

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

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

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

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

COVID-19 Testing Services and Clinical Laboratory

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

We currently provide safeCircle^TM pooled testing to primary/secondary/higher education institutions, private clients, local governments, and businesses and college athletic programs. The large majority of safeCircle customers are located within New York State.

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On May 10, 2021 ADCL received its New York clinical laboratory permit and its CLIA certification from the NYSDOH, CLEP, which is currently permitted for virology. As part of the Company’s COVID-19 Testing Services its laboratory provides individual COVID-19 testing utilizing the Company’s COVID-19 Diagnostic Tests or third-party EUA-authorized COVID-19 diagnostic assays. The Company’s COVID-19 Testing Services also includes pooled surveillance testing that is not regulated by FDA, CDC or CMS.

Non-Biologic Tagging and Security Products and Services

Our supply chain security business allows our customers to use non-biologic DNA (molecular) tags manufactured on our LinearDNA^TM platform to mark objects in a unique manner and then identify these objects by detecting the absence or presence of the molecular tag. We believe our molecular 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 products include:

Recent Developments

In late November 2021, the SARS-CoV-2 Omicron Variant of Concern (B.1.1.529, sub-lineage BA.1) (the “Omicron VOC”) was detected. The Omicron VOC contains over thirty mutations in the Spike region of the SARS-CoV-2 genome. The sensitivity of the Linea COVID-19 1.0 Assay Kit is impacted by the Omicron VOC, resulting in a unique detection pattern that may be specific for the Omicron variant. More specifically, the Linea COVID-19 Assay Kit unique detection pattern results in false negative results in patients infected with the Omicron variant when tested with the Linea 1.0 Assay as a primary diagnostic. As a result, the Company believes that the Linea COVID-19 Assay Kit may have utility as a reflex test for COVID-19 positive samples from third-party assays to detect whether a sample potentially contains the Omicron VOC. Specifically, the Linea 1.0 Assay may be potentially used as a reflex test to indicate the presence of Omicron in samples that have tested positive for COVID-19 via third-party assays that cannot discriminate for the new variant because these same samples will test negative on the Linea 1.0 Assay due to the kit’s unique detection pattern.

In December 2021, the Company, working in conjunction with FDA, submitted data showing that the Linea 1.0 Assay produces false negative results with the Omicron VOC. As a result, the FDA issued the Linea 1.0 FDA Notice informing the company that is must cease use of the Linea 1.0 Assay as a primary diagnostic for COVID-19.

Linea 2.0 Assay LDT Conditional Approval and EUA Request to FDA

In response to the impact of the Omicron VOC and the Linea 1.0 FDA Notice, the Company, via its ADCL subsidiary, submitted data supporting the validation of a new Linea 2.0 Assay as a laboratory developed test (LDT) to New York State Department of Health (NYSDOH) on December 2, 2021. The Linea 2.0 Assay was validated for the qualitative detection of COVID-19 in respiratory specimens and targets conserved regions of the E and N Genes of SARS-CoV-2. In silico analysis has shown that the Linea 2.0 Assay can detect the Omicron VOC as well as all other known variants of concern and variants of interest. Conditional approval for the Linea 2.0 Assay as a LDT from the NYSDOH was received on December 30, 2021. The NYSDOH conditional approval included single sample and up to 5-sample pooled testing. Use of the Linea 2.0 Assay under the NYSDOH conditional approval is limited to samples from New York State.

Subsequently, on January 19, 2021, the Company through its ADCL subsidiary, submitted a request for EUA to FDA for the Linea 2.0 Assay. The EUA request includes single sample and up to 5-sample pooled testing, as well as an unsupervised at-home collection kit for use in conjunction with the Linea 2.0 Assay. The Linea 2.0 Assay as filed in the EUA request is a non-distributed test for use only in ADCL’s laboratories. The EUA request is currently pending.

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Linea 1.0 Assay and Omicron VOC BA.2 Subvariant

On January 28, 2022, the Company announced that the Linea 1.0 Assay, when used as a reflex test for COVID-19 positive samples, may exhibit a unique detection signature that can identify SARS-CoV-2 mutations that are indicative of the BA.2 subvariant of the Omicron VOC.

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, most of our near-term growth in revenues has been derived from sales of our Linea™ COVID-19 Assay Kit, our validated COVID-19 pooled testing under review by NYSDOH, and our COVID-19 Surveillance Testing. We also expect future growth in revenues to be derived from the manufacturing of DNA products for the biotechnology and in vitro diagnostic markets. To a lesser extent, we expect to grow revenues from the sale of SigNature® molecular tags, SigNature® T molecular tags, SigNify® and CertainT® offerings as we work with companies and governments to secure supply chains for various types of products and product labeling throughout the world. We are also seeking to establish a revenue stream from our iCTC Technology. We have continued to incur expenses in expanding our business to meet current and anticipated future demand. We have limited sources of liquidity.

Critical Accounting Policies and Recently Issued Accounting Pronouncements

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

Comparison of Results of Operations for the Three-Month Periods Ended December 31, 2021 and 2020

Revenues

Product revenues

For the three-month periods ended December 31, 2021, and 2020, we generated $826,311 and $550,097 in revenues from product sales, respectively. Product revenues increased by $276,214 or 50% for the three-month period ended December 31, 2021, as compared to the three-month period ended December 31, 2020. The increase in product revenues was primarily related to an increase of approximately $308,000 in Textiles related to the shipment of DNA concentrate to protect a cotton supply chain. This increase was offset by a decrease of approximately $52,000 in sales of our Linea^TM COVID-19 Assay Kit.

Service revenues

For the three-month periods ended December 31, 2021, and 2020, we generated $139,273 and $293,274 in revenues from sales of services, respectively. The decrease in service revenues of $154,001 or 53% for the three-month period ended December 31, 2021, as compared to the same period in the prior fiscal year is attributable to a decrease of approximately $110,000 and $63,000 for research and development projects in our pharmaceutical/nutraceutical and biopharmaceutical markets, respectively.

Clinical laboratory service revenues

For the three-month periods ended December 31, 2021 and 2020 we generated $3,200,122 and $772,770 in revenues from our clinical laboratory testing services, respectively. Clinical laboratory testing service revenues increased by $2,427,352, or 314% for the three-month period ended December 31, 2021, as compared to the same period in the prior fiscal year. The increase in revenue is primarily due to an increase in demand for COVID-19 testing services during the first three months of fiscal 2022 compared to the same period during fiscal 2021. Of this increase, approximately $2,000,000 in testing services related to our contract with the City University of New York.

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Gross Profit

Gross profit for the three-month period ended December 31, 2021, increased by $8,778 or 14% from $1,100,360 for the three-month period ended December 31, 2020 to $1,109,138. The gross profit percentage was 27% and 68% for the three-month periods ended December 31, 2021, and 2020, respectively. The decline in the gross profit percentage was the result of a significant portion of our clinical laboratory service revenues coming from the testing contracts where we also provide and staff the test collection centers, as these contract have higher costs associated with them as compared to our surveillance testing contracts. To a lesser extent this decrease in gross profit percentage was also due to product sales mix, as sales during the three-month period ended December 31, 2020 included a higher volume of sales of our Linea^TM COVID-19 Assay Kit, which are at a higher gross margin.

Costs and Expenses

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended December 31, 2021 increased by $1,352,519 or 41% to $4,662,173 as compared to $3,309,654 for the three-month period ended December 31, 2020. The increase is primarily attributable to an increase in stock-based compensation expense of $1,128,422 primarily relating to officer stock option grants that vested immediately, as well as to the annual non-employee board of director grant that vests one-year from the date of grant. The remainder of the increase relates to an increase in the Company’s Directors and Officers insurance policy premiums.

Research and Development

Research and development expenses increased to $1,080,096 for the three-month period ended December 31, 2021 from $763,808 for the three-month period ended December 31, 2020, an increase of $316,288 or 41%. This increase is primarily due to increased outsourced service contracts of approximately $90,000, as well as increased payroll of approximately $96,000 and to a lesser extent depreciation expense and laboratory supplies. These increases were to support our continued research and development efforts, primarily related to our ongoing animal vaccine study, as well as next generation sequencing projects.  

Interest expense, net

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

Other income (expense)

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

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $1,774,662 for the three-months ended December 31, 2020 relates to the repayment of the $1.5 million of secured convertible notes issued in July 2019 pursuant to a letter agreement with Dillon Hill Capital, LLC (the “July 2019 Notes”). The loss on extinguishment represents the difference between the fair value of the July 2019 Notes, including the fair value of the Replacement Warrants issued, on the repayment date compared to their carrying value.

Net Loss

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

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Liquidity and Capital Resources

Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of December 31, 2021, we had working capital of $5,520,530. For the three-month period ended December 31, 2020, we used cash in operating activities of $3,701,894 consisting primarily of our loss of $4,720,911 net with non-cash adjustments of $320,751 in depreciation and amortization charges, $1,699,920 in stock-based compensation expense and $10,000 of bad debt expenses. Additionally, we had a net increase in operating assets of $1,018,201 and a net increase in operating liabilities of $6,547. Cash used in investing activities of $104,686 was for the purchase of property and equipment.

We have recurring net losses, which have resulted in a net loss of $4,720,911 and generated negative operating cash flow of $3,701,894 for the three-month period ended December 31, 2021. These factors raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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.

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